Key Takeaways

  • Substantial performance allows a party to recover payment despite minor deviations from a contract if the essential purpose has been fulfilled.
  • Courts assess substantial performance based on the intent, the extent of deviation, and the ability to compensate for any deficiencies.
  • The doctrine is especially relevant in construction, property, and service contracts, but may also apply in certain employment contexts.
  • Material breaches — failures that affect the core purpose of the contract — will prevent a party from claiming substantial performance.
  • Specific contract language (e.g., “time is of the essence” or “complete performance required”) can limit or exclude the application of this doctrine.
  • Remedies typically involve cost-of-repair damages or the difference in value between contracted and actual performance.

Substantial performance is a doctrine, whereby one party under a contract can still recover for damages if he substantially performed his duties under the contract even though that individual failed to comply with the contract in some way. Keep in mind that this doctrine doesn’t usually apply to the sale of goods. Rather, it is applied to building, property, and construction contracts. With that said, it could also apply to employment contracts, particularly if an employee might have to substantially perform in order to receive a certain benefit, i.e., working at a company for 5 years before his 401(k) is vested.

Substantial Performance: An Overview

This doctrine is used to evaluate the performance in a contract. In order for a party to use this as an argument in a legal dispute, he must prove that he met the standard of substantial performance. If there is a material breach by either party, then substantial performance is not met. The fulfillment of one’s obligations can be met if there is only a slight difference in the exact terms and provisions that are identified in the contract. The test that is used to determine substantial performance is whether the difference or omission in the performance can be compensated for.

Some examples of substantial performance include the following:

  1. A contract wherein one party must supply 100 pumps but only 95 were delivered
  2. The property being purchased was supposed to be 50 acres, but was only 48 acres

Both of these examples constitute substantial performance unless the pumps weren’t delivered on the date indicated in the contract. Additionally, so long as the 2 missing acres in the property contract weren’t crucial, then selling 48 acres as opposed to 50 acres would still be considered substantial performance under the contract.

How Courts Evaluate Substantial Performance

Courts do not apply the doctrine of substantial performance mechanically; instead, they consider several factors to determine whether a party’s performance satisfies the doctrine. Key elements often include:

  • Purpose of the Contract: If the main objective of the contract is fulfilled, minor defects or omissions typically do not bar recovery.
  • Degree of Deviation: Courts assess how far the actual performance deviates from the agreed terms. A small, unintentional omission is more likely to be excused than a significant failure.
  • Benefit Received by the Non-Breaching Party: If the non-breaching party has received most of what was bargained for, substantial performance is more likely to be found.
  • Good Faith: Evidence that the performing party acted honestly and made a genuine effort to fulfill obligations supports the application of this doctrine.
  • Cost to Remedy Defects: If the deficiency can be easily remedied with a relatively small expense, courts are more likely to consider the performance substantial.

For example, a contractor who builds a home as specified but uses slightly different materials that do not affect quality may still be entitled to payment. However, if the substitution results in a major loss of functionality or value, the performance may fall short of the substantial standard.

When Has a Party Substantially Performed?

As previously noted, a party has substantially performed if there is no material breach in the contract. A material breach simply means that the party either failed to perform under the contract or altered his performance in such a way that the material terms of the contract were not met. For example, if you paid someone to paint your walls blue but instead the painter used red paint, then the painter cannot make an argument for substantial performance since the contract clearly specifies that you wanted the walls to be painted blue. Therefore, the painter must fix it by repainting the walls blue; he cannot be paid twice since he materially breached the contract the first time around when he painted the walls red.

Even if the painter inadvertently painted the walls red with no intent, he still acted negligently by not remembering or paying attention to what his customer wanted. Another example would be if someone enters into a contract to buy a piece of property that has a 3-car garage and guest house. Thereafter, if the seller gives only the house to the buyer and not the 3-car garage or guest house, then that is a clear material breach of the contract since the purchaser price is for the home, 3-car garage, and guest house as noted in the contract.

The Role of “Time Is of the Essence” Clauses

One critical factor affecting whether substantial performance applies is whether “time is of the essence” is explicitly stated in the contract. When such a clause is included, timely performance becomes a material term, and any delay — even minor — can constitute a breach that prevents reliance on substantial performance.

If no such clause is present, courts generally evaluate whether the delay caused meaningful harm or deprived the non-breaching party of the contract’s essential benefits. For instance, finishing a construction project two days late without significant consequences may still qualify as substantial performance. But if the delay causes financial loss or renders the work useless, it is more likely to be considered a material breach.

Exceptions

The below are some exceptions to the doctrine of substantial performance:

  1. If the contract states that specific and complete perforce is required as a condition, then the party must completely fulfill their obligations. Therefore, if the contract specifies that 150 barrels of oil be delivered, and only 145 barrels are delivered, then the seller must continue his obligation of providing the additional 5 barrels of oil.
  2. If the performance can be completed by slightly altering the conduct, then the party cannot use the doctrine of substantial performance and must correct the mistake.

When Substantial Performance Does Not Apply

While substantial performance offers flexibility, there are circumstances where it is explicitly rejected:

  • Precise Performance Required: Contracts that demand strict adherence (e.g., quantity, delivery date, or specifications) often preclude the doctrine’s application.
  • Intentional or Willful Breach: A party who deliberately deviates from contract terms cannot claim substantial performance.
  • Material Quality Defects: If the performance significantly affects safety, quality, or the value of the subject matter, it will not meet the substantial standard.
  • Express Conditions Precedent: If the contract specifies conditions that must occur before payment, failing those conditions eliminates reliance on substantial performance.

For example, if a contractor knowingly uses lower-quality materials than agreed upon to cut costs, they cannot invoke substantial performance to recover payment.

What Damages Can Be Recovered?

Generally, damages that are awarded are for the work that is complete, which is the actual value of the service minus what it will cost to fix the mistake. If this isn’t the appropriate remedy, then the party receiving the service or benefit must pay for the value of the service received. However, when it comes to determining the actual amount to be recovered, the court will have to look at the facts and circumstances regarding the issue.

Cost-of-Completion vs. Diminution-in-Value

When substantial performance is found, courts typically calculate damages based on either:

  1. Cost of Completion: The cost to remedy defects or complete the missing elements of performance.
  2. Diminution in Value: The difference between the value of the product or service as delivered and the value it would have had if fully performed.

The chosen measure depends on the circumstances. Courts prefer the cost-of-completion approach when the defect is easily correctable. However, when the cost of fixing a minor defect is disproportionate to the benefit gained (for example, tearing down and rebuilding a nearly perfect wall to match a minor design feature), diminution-in-value may be applied instead.

Frequently Asked Questions

  1. What is substantial performance in contract law?
    Substantial performance occurs when a party fulfills the essential purpose of a contract, even if minor terms are unmet, allowing them to recover payment.
  2. Can a party still be liable for damages after substantial performance?
    Yes. While substantial performance allows recovery, the performing party may owe damages for any deficiencies or omissions.
  3. Does substantial performance apply to all contracts?
    No. It generally applies to service, construction, and property contracts, but not typically to contracts for the sale of goods governed by the Uniform Commercial Code.
  4. How do courts determine if performance is substantial?
    Courts assess the purpose of the contract, degree of deviation, benefit conferred, good faith, and cost to correct deficiencies.
  5. What happens if “time is of the essence” is in the contract?
    If timely performance is a material condition, even a slight delay may prevent a party from invoking substantial performance.

If you need help learning more about substantial performance, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.