Time Of Essence Clauses and Installment Payments: How Late Is Too Late?

Speaking of Too Late?  How ’bout a gratuitious Motorhead reference?

In Handler v. Johnson, 2015 WL  4506712 (N.D.Ill. 2015), a bankrupt debtor’s adversary moved to reopen a case after the debtor was late on two installment payments under a settlement agreement.

The creditor, a lawyer who previously represented the debtors in unrelated litigation, sued to recover about $21K in attorneys’ fees owed from the prior representation.  The debtors previously agreed to pay the lawyer $7,500 in monthly installments of $100, payable on the 15th of each month.  When the debtors missed the deadline, the attorney creditor moved to reopen the bankruptcy and enter judgment for the full amount of his claim.

The court denied the motion on the basis that the breach was immaterial.  The creditor appealed.

Affirming, the Northern District provides a useful discussion of contractual time is of the essence clauses and the level of breach required to void a settlement agreement calling for payments over time.

Only a material breach will excuse the non-breaching party’s performance under a contract.  A technical or immaterial breach usually doesn’t merit the wholesale undoing of a contract.   If the contract would not have been made absent the disputed provision, then the breach is considered material.  While a party can recover damages in some situations for only a minor breach, he must prove how those damages flowed specifically from the minor breach.

Timely performance of a contract can be considered a material term, especially if the parties say so in the contract.  But even where parties have a time is of the essence provision and a party technically breaches, a court can still inquire into the circumstances underlying the delay in performance to determine whether the delay equals a material breach.  If timely performance is viewed as a material term, a court can still refuse to enforce the contract when to do so would work an unfairness to breaching party or provide a windfall to the non-breaching one.  (*3).

To determine whether a given contract term is material, the court considers several factors including (i) whether the breach defeats the bargained-for objective of the parties, (ii) whether the non-breaching party suffered disproportionate prejudice; (iii) whether economic inefficiency or waste will result by enforcing the subject contract term; and (iv) whether the non-breaching party would receive an inflated, unfair advantage if the court found a material breach.

Here, the equities pointed in the debtors’ favor.  While they did miss the payment deadline by a few days, the breach was tempered by the fact that one of the debtors was hospitalized around the time the payment was due.  Moreover, the lawyer adversary failed to establish any prejudice by having to wait a few days for payment.  Considered in their totality, the circumstances weighed in favor of finding that the tardy payment was not a material breach.  As a result, the District Court affirmed the bankruptcy court’s denial of the plaintiff’s motion to reopen the case.

Afterwords:

(1) Only a material breach will justify abandonment of a contract;

(2) Materiality in the breach context is a fact-specific inquiry that focuses on whether a contract would be made if the breached provision was excised;

(3) A court won’t undo an installment payment contract if payment is made a few days late and no prejudice is shown resulting from the late payment.

“Never Ending”(?) Contract Still Definite Enough to Be Enforced – 7th Circuit

Burford v. Accounting Practice Sales, Inc. 2015 WL2261108 (7th Cir. 2015), deftly handles some tricky and recurring contract interpretation and enforcement issues that arise where a business agreement lacks a clear end date.

In the case, the plaintiff sued defendant for terminating a written year-to-year (and automatically renewing) contract for the plaintiff to market defendant’s accounting practice sales services in various states throughout the Southern U.S.  The agreement provided that the defendant could not terminate the contract “unless it is violated by [plaintiff].”  The district court found this language signaled an indefinite (and therefore, at-will) contract and granted summary judgment for the defendant.  The plaintiff appealed.

Held: Reversed.

Q: How Come?

A: Because in Illinois, indefinite contracts – contracts with no objective termination date – aren’t favored but can still be enforced in certain cases.  This is because parties should be free to order their business affairs as they see fit and unless there is fraud, duress or undue influence, a written contract should be enforced as written.

Parties can get around indefinite duration provisions by specifically spelling out grounds for termination of a contract.  A contract that lacks a fixed duration and that can only be cancelled for a specific event or “for cause” can be enforced and won’t be treated as an at-will contract (one that can be ended at any time for any reason) so long as the event or cause can be objectively gauged.

Here, the contract language negated its at-will character.  It could only be terminated if the plaintiff breached (“unless” he violated it).  Otherwise, the contract kept renewing every year.  The court found this termination provision specific enough to be enforceable by the plaintiff.  Since there was no evidence that the plaintiff breached the contract – defendant unilaterally ended the contract – summary judgment for the defendant was improper.

Policy concerns also supported the court’s decision.  It noted that if the defendant was allowed to freely terminate the contract like it did here, it would deprive the plaintiff of the economic basis of his bargain.  Meaning the plaintiff could spend a lot of time and money developing and marketing the defendant’s brand and then once terminated, he could be replaced by someone who could capitalize on all his work.

Conversely, the defendant would suffer if the plaintiff could escape the contract with impunity since the plaintiff could leverage the good will and relationships he fostered over a several-year period and take that good will to another company or use it himself and against the defendant.  The defendant was protected from this contingency by inserting a one-year non-compete and by allowing for “good cause” termination; defined as poor sales performance.

Since the parties contracted around the indefinite duration problem by allowing for termination only if the plaintiff violated the contract, it wasn’t an at-will contract.

Afterwords:

1/ The case gives a good illustration of the problems that arise where parties don’t specify when and in what situation a contract ends.  By taking some pains at the outset to make clear when a contract starts and ends, and establishing what constitutes a breach of “cause” for termination, the contract participants can likely avoid future litigation when one side decides to walk away;

2/  Substantively, the case amplifies that a contract lacking an objective termination date will be treated as at-will contract and can be terminated by any party at any time;

3/ If a contract can be terminated for a single specified reason, this will likely make the contract enforceable even though the contract lacks an objective termination date.

 

 

Contractor’s Material Breach of Construction Contract Dooms Mechanics’ Lien and Breach of Contract Claims

In Kasinecz v. Duffy, 2013 IL App (2d) 121329-U, an August 2013 Second District case, a contractor suffered a three-pronged defeat in his lawsuit against a homeowner.  The Court affirmed the lower court’s bench trial judgment for the homeowner on the contractor’s breach of contract, mechanics’ lien and quantum meruit claims.

Facts: This is the second appeal involving the parties.  In 2004, defendant hired plaintiff to build a house pursuant to a verbal agreement which was later formalized in a written contract.  The contract required the plaintiff to submit invoices to defendant before defendant was obligated to pay plaintiff.  Kasinecz, ¶ 20.  Over several months, the plaintiff and his crew built part of the house until a payment dispute arose.  Plaintiff walked off the job and sued for breach of contract, mechanics lien foreclosure and quantum meruit.  The trial court entered a directed finding for the homeowner half-way through the first bench trial (because the contractor materially breached by failing to furnish a statutory lien waiver, among other reasons) and plaintiff appealed. 

In the first appeal, the Second District reversed on the ground that it was unclear whether defendant homeowner requested a sworn statement and because the factual record was too scant to uphold judgment in total for the defendant.  Kasinecz, ¶ 6.  On remand, the trial court received additional witness testimony and written submissions and again entered judgment for defendant.  This time, the Second District affirmed.

Reasoning: The Court sided with the homeowner on all three of the contractor’s claims. 

(1) Breach of Contract: the contractor materially breached (and therefore, couldn’t prove that he performed) the contract by not providing invoices to the defendant as required by the contract.  Kasinecz, ¶¶ 21-23.  The contractor admitted at trial that he didn’t supply invoices until after he walked off the job.  Since the contractor breached, he couldn’t prevail on his breach of contract claim.   

(2) Mechanics’ Lien claim:  The contractor lost his lien claim because he didn’t substantially perform.  A necessary condition to mechanics lien recovery is substantial completion of the contract.  Id., ¶ 25; Fieldcrest Builders, Inc. v. Antonucci, 311 Ill.App.3d 597 (1999)(note: Fieldcrest provides a thorough discussion of substantial completion/quantum meruit issues in the context of a construction case).  Here, the Court found there were holes in the roof, no windows or doors were installed, and the house lacked interior mechanical systems and finishes.  Id., ¶¶ 25-26.  Because the house was so incomplete when plaintiff and crew stopped work, plaintiff couldn’t show substantial performance.  This doomed his mechanics’ lien count.  Id., ¶ 25.

(3) Quantum meruit – the Court also rejected plaintiff’s quantum meruit claim based on the black-letter principle that quantum meruit recovery won’t apply where an express contract governs the parties’ relationship.  Kasinecz, ¶ 29; Installco Inc. v. Whiting Corp., 336 Ill.App.3d 776 (2002).  Since plaintiff and defendant had a written (express) contract for plaintiff to build defendant’s house, this defeated plaintiff’s quantum meruit count.  The fact that plaintiff couldn’t enforce the contract (since he breached it) doesn’t matter: the contract’s existence alone defeats the quantum meruit claim.  Kasinecz, ¶ 29.

Law of the Case.  The plaintiff contractor argued that the Second District’s reversal in his favor on the first appeal was law of the case to the trial court on remand and even moved for summary judgment immediately upon remand.  Id., ¶¶ 7, 14-15.  The law of the case doctrine provides that questions of law actually determined in a prior appeal are binding on the trial court on remand as well as on subsequent appeals. Id., Kreutzer v. Illinois Commerce Comm’n, 2012 IL App (2d) 110619.  Both the trial and appeals court found that the law of the case rule didn’t apply because the issues decided in the first appeal (whether the parties had an oral contract and whether the contractor provided statutory lien waivers) differed from the second appeal’s salient issues (whether plaintiff submitted invoices to defendant and whether plaintiff substantially performed).  Kasinecz, at ¶¶ 15, 20.  

Take-aways: A material breach will preclude contractual recovery; a contractor’s failure to substantially perform will doom a mechanics’ lien suit; and quantum meruit and a breach of express contract claim are mutually repugnant: they can’t co-exist.  The Court did appear to express surprise that the contractor didn’t argue that the homeowner waived strict compliance with the contract’s invoicing requirement.  The defendant made several progress payments to the plaintiff without first receiving invoices.  This would seem to give rise to a waiver of strict compliance argument.  However, since the contractor never argued waiver, the Court didn’t tip its hand as to how it would rule on the issue.