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Delay in the Performance of Contractual Obligations, 2nd Edition by Stannard, John (8th February 2018)

10 Withholding Performance

John E. Stannard

From: Delay in the Performance of Contractual Obligations (2nd Edition)

John Stannard

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 30 May 2020

(p. 269) 10  Withholding Performance

10.01  Very often a contract provides that one of the parties shall not be liable to perform unless or until some event occurs. Where this is so, the occurrence of the event in question is, as we have seen,1 a ‘condition precedent’ to the duty to perform in the sense used by Corbin,2 namely ‘some operative fact subsequent to acceptance and prior to discharge, a fact upon which the rights and duties of the parties depend’.3 Where the condition precedent in question is something to be done by the promisor, we have an inbuilt remedy for delay, namely the right of the promisee to withhold his or her own performance until the act in question is done. Thus a building contract may provide for part of the price to be withheld until the work is completed.4 In such a case it is not in the interest of the promisor to perform in a tardy manner, for this only puts off the time when he or she can obtain the balance of the price.5 Again, in a charterparty the charterer is not obliged to load the ship so long as it remains in an unseaworthy state.6 This provides an incentive for the owner to correct any defects that there might be as soon as possible. From this it can be seen that the right to withhold performance is similar to the right to (p. 270) sue for liquidated damages for the delay; both can act as an incentive to prompt performance, the former being the carrot and the latter the stick.

10.02  The situation presently under discussion involves the same factors as those involved in setting the order of performance; there, too, it is necessary to ask whether the performance of one party’s obligation was intended to constitute a condition precedent to that of the other.7 However, whereas in that context we were looking at the situation from the point of view of the promisor, we are now looking from that of the promisee. In that context we were concerned with the time of performance and the order of performance; but here we consider the matter from a different angle: assuming that the promisor has failed to perform on time, can the promisee in turn withhold his or her performance? This depends on a number of factors.

A.  Withholding Performance and Termination

10.03  The right of a promisee to withhold performance bears many similarities to the right to terminate performance, but they are by no means the same.8 For instance, most contracts of employment provide for the payment of wages a week or a month in arrear;9 this means that the employer is entitled to withhold performance until the end of the week or the month, as the case may be, but dismissing the employee is a different matter altogether. Again, if prior to the time set for delivery a seller tenders goods to the buyer that are not in conformity with the contract, the buyer may withhold performance by refusing to accept the goods, but this does not mean that the buyer may terminate the contract altogether; the seller may still have time to make a proper tender before the due date for delivery is past.10 A charterer need not load the goods if the ship is in an unseaworthy state,11 but this does not mean that he or she can throw up the charter altogether; indeed, as we shall see, a charterer is not entitled to terminate for unseaworthiness unless its effects are severe enough to frustrate the contract.12 So a promisee who is entitled to withhold performance in response to a delay by the promisor may (p. 271) not necessarily be entitled to cancel the contract altogether without giving the promisor a reasonable chance to perform. Conversely, there may be cases where the promisee may terminate performance altogether without necessarily being entitled to withhold performance.13

10.04  That said, the right to withhold performance and the right to terminate performance are closely related, for a number of reasons. First of all, there is a clear historical connection between the two; the rule whereby a promisee can terminate performance for breach of condition has its roots in the older doctrines concerning conditions precedent and the order of performance.14 Secondly, where the promisor is no longer ready or willing to perform the obligation on which the promisee’s own obligation depends, the promisee’s right to withhold performance becomes a right to terminate performance.15 Thirdly, where timely performance of an obligation by the promisor, as opposed to performance simpliciter, constitutes a condition precedent to performance by the promisee, the promisee will again have the right to terminate performance rather than just withholding it; this is because by its very nature a failure to perform on time is not capable of remedy.16

10.05  The relationship between the right to withhold performance and the right to terminate performance can give rise to some tricky problems of analysis. In The Aktion,17 a contract for the sale of a ship provided for the price to be paid on delivery and no later than three days from notice of delivery, and that the ship was to be delivered in the same condition as when inspected. The seller gave notice of delivery and the buyer then inspected the ship, but refused to accept it on account of various defects. The seller, while denying that the defects affected the contractual deliverability of the ship, promised to repair the defects. This was done, but it was then discovered that one of the defects in question, a fault in the ship’s anti-corrosion system, required dry docking, and the seller was not willing to go to the expense of this without an assurance from the buyer that the ship would be accepted when the work was done. At this point the buyer threw up the contract, arguing that it was a condition precedent to his obligation to accept and pay for the ship that she be in good condition when the notice of delivery was given. However, this argument was rejected by the court, which accepted the contention of the seller that it was not likely that the parties could have intended (p. 272) that the whole contract could be thrown over for a slight defect in the ship. This result may have been right at the end of the day, but all the parties involved seem to have thought that the choice lay between compelling the buyer to take a ship that was not up to scratch and allowing him to cancel the contract for any defect. But there was another possibility, namely that the buyer had the right to reject the ship but was obliged to give the seller a reasonable time to remedy the defects before finally terminating the contract.18

B.  The Normal Rule

10.06  In general terms, the question whether the promisee can withhold his or her own performance in response to delayed performance by the promisor depends on the agreed order of performance set out in the contract.19 There are three possibilities here. The first is that the obligations in question are ‘independent’; thus, for instance, it has been held that a tenant’s obligation to pay rent is totally independent of the landlord’s covenant to repair.20 Here neither party can withhold performance on the basis of the other’s failure to perform. In the second case the obligations are said to be ‘concurrent’, as in a sale of goods, where it is provided by statute that unless otherwise agreed payment and delivery are ‘concurrent conditions’;21 here the buyer cannot demand delivery of the goods without being ready and willing to pay the price, and the seller cannot demand payment of the price without being ready and willing to deliver the goods.22 Finally, one party’s obligation to perform may be dependent on performance by the other party; thus in a contract of employment wages are generally not due until work has been done.23 It is in the last of these cases that the right to withhold performance arises.

10.07  If the promisee’s obligation to perform is dependent on prior performance by the promisor, the promisee can withhold performance until the promisor’s performance is complete, and if the promisor has not completed performance, the promisee’s obligation to perform does not arise. It is not for the court to rewrite the contract made by the parties, who may decide to make the literal fulfilment of some requirement a condition precedent even though it might appear to be of little importance.24 The same is true where the condition is imposed by statute. Thus in Arcos Ltd v Ronaasen & Son25 buyers of wood staves used for making (p. 273) barrels were held to be entitled to reject the staves on the ground that they were not of the exact thickness specified in the contract.26 There was no suggestion that the staves tendered were any less fit for the purpose, and the real reason for rejection was probably that the market had fallen,27 but all of this was neither here nor there; the crucial point was that the buyer had promised to accept and pay for goods of a certain description, and these goods were not of that description.28

10.08  This is all very well as far as the right to withhold performance is concerned, but this approach can cause problems in cases where the relevant condition precedent is no longer capable of fulfilment. In Cutter v Powell29 a seaman agreed with the defendant to serve as second mate on the defendant’s ship, the defendant agreeing in his turn to pay a lump sum of 30 guineas to the seaman on completion of the voyage ‘provided he proceeds, continues and does his duty as second mate in the said ship from hence to the Port of Liverpool’. The seaman having died before the ship reached its final destination, it was held that his widow could recover nothing; the wages were payable on completion of the voyage, and the voyage had not been completed.30 In Sumpter v Hedges31 a building contract provided for payment in a lump sum on completion of the work. The builder abandoned the work when it was half done, after which the owner of the land finished it off using materials left behind by the builder. It was held that the builder could recover for the materials but not for the work; payment was due on completion, and the work had not been completed. Both these cases are clearly right in so far as the order of performance is concerned; in both of them the work was due before the payment. But the result may be unfair; since payment is due only on completion, and the work will never be completed, that work which is done is done for nothing.

10.09  The courts have not been unaware of these problems, and have devised various means of avoiding an unfair result in this sort of case. One is by construing the obligation as severable, so that payment becomes due in stages rather than in a lump sum for the entire work.32 Another is to allow recovery in (p. 274) equity.33 A third approach is to make use of the law of restitution, so that recovery is due on a quantum meruit basis in cases where the promisee has a choice whether or not to accept the benefits of the incomplete performance.34 However, all of these approaches have their limitations; not all obligations can be severed in this way; the equitable jurisdiction in these cases is obsolete and uncertain in scope; recovery on a quantum meruit is not allowed where this would contradict the express provisions of the contract.35 The courts have therefore developed a more radical approach to the problem in the shape of the doctrine of ‘substantial performance’.

C.  Doctrine of Substantial Performance

10.10  Under the doctrine of substantial performance, the promisor may demand performance from the promisee notwithstanding his or her own failure to perform as agreed. The leading case here is Hoenig v Isaacs,36 where the claimant agreed to do some decorating work on the defendant’s house, the price to be paid ‘net cash as the work proceeds, balance payable on completion’. The defendant refused to pay the final balance because of a number of defects in the work, but the claimant was held to be entitled to recover this, less the cost of making good the defects.

10.11  How does the result reached in this case square with the rules relating to conditions precedent and the intended order of performance? One way out is to say that there is no conflict: in a case where the doctrine of substantial performance applies, the condition precedent to the promisor’s right to demand performance from the promisee being not the complete carrying out of the relevant contractual obligation by the promisor, but only the substantial carrying out of it.37 This resolves the logical dilemma, but at the cost of other difficulties. For one thing, it makes it difficult to say when the time for the promisee’s performance has arrived, for it will not be clear when the promisor’s performance becomes ‘substantial’. More importantly, it does violence to the intention of the parties, since the promisee will generally have agreed to pay for the whole work, not for (p. 275) part of it. For this reason other commentators prefer to cut the Gordian knot by admitting the illogicality but saying that the order of performance is one matter and the question of recovery for a defective performance another.38

10.12  Much of the difficulty in this context arises because the doctrine of substantial performance fails to distinguish between those defects that are still capable of remedy and those that are not. Where the promisor can still remedy the defect, it is not reasonable to allow him or her to insist on payment of the contract price since this deprives the promisee of one of the best weapons in his or her armoury: the right to withhold performance until the work is completed properly.39 But where the promisor is no longer able or willing to put matters right, or where the promisee does not wish the promisor to do so, the issue is effectively no longer one of withholding performance but of termination.40 In this situation allowing the promisor to recover the price less the cost of remedying the defects is a not unreasonable way of doing justice between the parties.

D.  Timely Performance as a Condition Precedent

10.13  Problems arise in connection with the right to withhold performance when a time is set for the performance of the promisor. Say that the promisor agrees to paint the promisee’s house on a certain day for a certain price. Is the promisor’s performance a condition precedent to his or her right to recover the price, or is it not? At first glance it would seem that there were only two possible results here. If the promisor’s performance is a condition precedent, the case would seem to be effectively one of termination, since the promisee need pay nothing if performance is not rendered on time. If it is not, the promisor can claim the price without having finished the work. In neither case would the right to withhold performance come into play.

(p. 276) 10.14  However, it is a fallacy to suppose that there are only two possible results. In fact there are three. The first is that performance by the promisor is not a condition precedent at all. In that case, as we have seen, the promisor can recover the price without finishing the work on time —indeed, without finishing it at all. The second is that timely performance by the promisor is a condition precedent. If that is so, the promisor cannot recover the price until the work is done, and if it is not finished on time the promisor can recover nothing. The third possibility involves severing the obligation to perform generally from the obligation to perform on time. In this case the promisor cannot recover the price until the work is done, but does not lose the right to be paid simply because he or she fails to meet the agreed deadline. Which of these three situations apply to any given case is of course a question of construction. To insist on timely performance as a condition precedent is to convert what would be a right to withhold performance into a right to terminate performance; in effect, time is of the essence. This may lead the court to ‘sever’ the obligation in the way described above,41 but this will not be done where it is obvious that timely performance by the promisor was intended as a precondition to his or her right to demand the agreed counter-performance by the promisee.42

Footnotes:

1  Above, para 3.01.

2  Corbin, Arthur, ‘Conditions in the law of contract’ (1918) 28 Yale LJ 739.

3  Ibid at 743. The event in question may also be a promise under the contract, but need not necessarily be so: Vold, L, ‘Express conditions in contracts’ (1925) 4 Nebraska Law Bulletin 213; Willis, H E, ‘Promissory and non-promissory conditions’ (1941) 16 Indiana LJ 349; Patterson, Edwin W, ‘Constructive conditions in contracts’ (1942) 42 Columbia LR 903; Burchell, E M, ‘ “Condition” and “warranty” ’ (1954) 71 South African LJ 333; Ferson, Merton G, ‘Conditions in the law of contracts’ (1955) 8 Vanderbilt LR 537.

4  As in Hoenig v Isaacs [1952] 1 TLR 1360 (CA) at 1361 (‘net cash, as the work proceeds; and balance on completion’).

5  Beale, Hugh, Remedies for Breach of Contract (1980) (‘Beale’), pp 18–19.

6  The Europa [1908] P 84 (DC); Kish v Taylor [1912] AC 604 (HL).

7  Above, paras 3.07–3.22.

8  Beale, above n 5, pp 20–1.

9  Ibid, p 29.

10  Borrowman, Phillips & Co v Free & Hollis (1878) 4 QBD 500 (CA); Tetley v Shand (1871) 25 LT 658; Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at 399 (Lord Goff); Hyundai Merchant Marine Co Ltd v Karander Maritime Inc (The Niizuru) [1996] 2 Lloyd’s Rep 66. In this sort of case the buyer can only refuse to accept a fresh tender if the defective tender was such as to amount to a repudiation of the contract: Apps, A, ‘The right to cure defective performance’ [1994] LMCLQ 525.

11  Above, para 10.01.

12  Stanton v Richardson (1872) LR 7 CP 421; Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hongkong Fir) [1962] 2 QB 26 (CA).

13  As in Steelwood Carriers Inc of Monrovia v Evimeria Compania Naviera SA of Panama (The Agios Giorgis) [1976] 2 Lloyd’s Rep 192, where it was said that in a time charterparty the owner’s right to withdraw the ship for late payment of hire did not necessarily carry with it the right to refuse to load until the hire was paid.

14  Above, paras 2.14–2.38.

15  As in Cutter v Powell (1795) 6 TR 320, 101 ER 373 and in Sumpter v Hedges [1898] 1 QB 673 (CA).

16  Below, paras 10.12–10.13.

17  Aktion Maritime Corp of Liberia v S Kasmas & Bros Ltd [1987] 1 Lloyd’s Rep 283.

18  As in Kish v Taylor [1912] AC 604 (HL).

19  See above, paras 3.07–3.22.

20  Taylor v Webb [1937] 2 KB 283 (CA).

21  Sale of Goods Act 1979, s 28.

22  Beale, above n 5, p 29.

23  Above, para 10.03.

24  Bettini v Gye (1876) 1 QBD 183 at 187 (Blackburn J); Beale, above n 5, p 21.

25  [1933] AC 470 (HL).

26  But the right of rejection in cases such as this is now limited by s 15A of the Sale of Goods Act 1979.

27  Beale, above n 5, pp 36–7.

28  Sale of Goods Act 1979, s 13; see now s 15A of the Act, as inserted by the Sale and Supply of Goods Act 1994, s 4(2).

29  (1795) 6 TR 320, 101 ER 373; above, para 2.19.

30  On the facts this may have been justified on the ground that the defendants had agreed to a higher rate of pay in return for an undertaking to work the entire voyage: Stoljar, Samuel, ‘The great case of Cutter v Powell’ (1956) 34 Canadian Bar Review 288.

31  [1898] 1 QB 673 (CA); Ellis v Hamlen (1810) 3 Taunt 52, 128 ER 21; Sinclair v Bowles (1829) 9 B & C 92, 109 ER 35; Rolt v Cozens (1856) 18 CB 673, 139 ER 1534; Munro v Butt (1858) 8 E & B 739, 120 ER 275; Appleby v Myers (1865) 2 CP 651; Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 (CA); Small & Sons v Middlesex Real Estates Ltd [1921] WN 245; Bolton v Mahadeva [1972] 1 WLR 1009 (CA).

32  Roberts v Havelock (1832) 3 B & Ad 404, 110 ER 145; Taylor v Laird (1856) 1 H & N 266, 156 ER 1203; Regent ohG Aisestadt & Barig v Francesco of Jermyn Street Ltd [1981] 3 All ER 327; Apportionment Act 1870, s 2; Beale, above n 5, pp 31–2.

33  Westland v Robinson (1667) Eq Cas Abr 376, 21 ER 1113; Edwin and Stafford v East India Co (1690) 2 Vern 210, 23 ER 738; Wiggins v Ingleton (1705) 2 Ld Raym 1211, 92 ER 300; Edwards v Child (1716) 2 Vern 727, 23 ER 1077.

34  Farnsworth v Garrard (1807) 1 Camp 38, 170 ER 867; Dakin & Co Ltd v Lee [1916] 1 KB 566.

35  Cutter v Powell (1795) 6 TR 320, 101 ER 373; Sumpter v Hedges [1898] 1 QB 673 (CA); Appleby v Myers (1865) 2 CP 651.

36  [1952] 1 TLR 1360 (CA); Ritchie v Atkinson (1808) 10 East 295, 103 ER 787; Cutler v Close (1832) 5 C & P 337, 172 ER 1001; Lucas v Godwin (1837) 3 Bing NC 738, 132 ER 595; Bettini v Gye (1876) 1 QBD 183.

37  Cowans, Daniel R, ‘Contracts: Is it possible to contract for an exact performance?’ (1949) 37 California LR 498.

38  Beck, Anthony, ‘The doctrine of substantial performance’ (1975) 38 MLR 413; Fischer, J W, ‘Rights of recovery by a building contractor on contracts partially or substantially performed’ (1937) 11 University of Cincinnati LR 379; Childres, R, ‘Conditions in the law of contracts’ (1970) 45 New York University LR 33.

39  Law Commission Report No 121, Pecuniary Restitution for Breach of Contract (1983), Note of Dissent by Brian Davenport QC. ‘Entire’ obligations are less common in commercial construction contracts: Smales v Lea [2011] EWCA Civ 1325, [2012] PNLR 8 at [43].

40  Above, para 10.04. Thus there is a suggestion in some of the American authorities that where a condition precedent becomes impossible of fulfilment it can be dispensed with and the relevant party called on to perform in cases where otherwise there would be an unjust forfeiture: Goldfarb v Cohen 92 Conn 277, 102 A 649 (1917) (Connecticut); Kram v Losito 105 NJL 588, 147 A 465 (1929) (New Jersey); Lippincott v Content 123 NJL 277, 8 A 2d 362 (1939) (New Jersey); Harris v Pacific Mutual Life Insurance Co 137 F 2d 272 (1943) (USCC); Richard v Falleti 13 NJ Super 534, 81 A 2d 17 (1951) (New Jersey).

41  This is akin to the result reached in the rent review cases concerning the interpretation of a provision that the landlord’s power to set the machinery in motion is contingent on the service of a ‘trigger notice’ by a certain date. The courts have interpreted the serving of the notice in itself as a condition precedent, in the sense that the machinery cannot be set in motion until it is served, while not necessarily insisting that it be served by the stipulated date: United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (HL); below, paras 11.34–11.37. See also Alfred McAlpine plc v BAI (Run-off) Ltd [2000] 1 Lloyd’s Rep 437 (CA).

42  Busk v Spence (1815) 4 Camp 329, 171 ER 105; Maryon v Carter (1830) 4 C & P 295, 172 ER 711; Rae v Hackett (1844) 12 M & W 724, 152 ER 1390; Graves v Legg (1854) 9 Ex 709, 156 ER 304; Scandinavian Trading Co A/B v Zodiac Petroleum SA (The Al Hofuf) [1981] 1 Lloyd’s Rep 81.