The appellant’s brief in Scheck Industrial Corp. v. Tarlton Corp., 2014 WL 832773 (Mo. App. E.D.), in part raises an issue of contract that creates some difficulty. An obligor renders allegedly defective performance. The obligee says nothing at the time. Has the obligee released the right to damages arising from the inadequacy of performance?
The brief states:
Even assuming arguendo, that Tarlton believed Scheck’s work was somehow defective, by failing to notify Scheck of those defects, Tarlton effectively accepted Scheck’s work and waived its right to later complain that it was non-conforming. See Havens, 613 F.Supp. at 527 (where a contractor accepts work of its subcontractor without complaining, within a reasonable time, of defects or contract deviations which are known to him or which are open, obvious and apparent, the contractor is precluded from later asserting those defects or deviations).
Id. at *42 (emphasis added).
Let’s put this question in context. An obligor initially is required to provide a particular performance. Would an express agreement releasing the obligor from some of its duties be enforceable? Ordinarily not. Why? That is an attempt to modify the contract. Where a modification is not supported by consideration, at common law the modification is unenforceable.
The Restatement goes wobbly on this (as it goes wobbly in a number of places)….
More after the break …
The Restatement allows a party to renounce contractual rights by writing, even without consideration, and it allows an oral renunciation upon acceptance of some performance to be effective as to an immaterial breach. The UCC would allow such a modification, because it abolishes the pre-existing duty rule. And some other statutory changes may change the result.
However, what about the mere retention of benefits? Would that operate as a renunciation of the right to damages for the defective performance. Even the excessively lenient Restatement would state, No. “Mere silent acceptance, however, is not a renunciation.” R2d § 277, cmt. c.
Courts that should know better sometimes get this wrong. E.g., ESPN, Inc. v. Office of the Commissioner of Baseball, 76 F. Supp. 2d 383 (S.D.N.Y. 1999).
If silent retention of benefits does not operate to release a claim even under the liberal Restatement’s view, it certainly would not in those jurisdictions still giving effect to the pre-existing duty rule.
Note the traditional rule is in harmony with another aspect of the law of contracts, under which a party is not entitled, as a default, to a list of all defects in its performance. See Cawley v. Weiner, 140 N.E. 724 (N.Y. 1923). The Restatement (§ 237, cmt. c) provides a complementary approach:
[O]ne party’s material failure of performance has the effect of the non-occurrence of a condition of the other party’s remaining duties … even though that other party does not know of the failure.
The cause of the deviant authority underlying the Restatement’s approach appears to be a conflation of the definitions of “waiver” and a “release”.
Calamari and Perillo state:
A waiver is generally defined as a voluntary and intentional relinquishment of a known right. There are few, if any, more erroneous definitions known to the law…. [I]t is totally misleading…. [C]ontractual rights are not waivable, conditions are. … A waiver is a manifestation of willingness to perform despite the non-occurrence of a condition. A waiver of a condition under an existing contract after the failure of condition is also called an election.
Joseph M. Perillo, Calamari and Perillo on Contracts § 11.29(c), at 398 (6th ed. 2009). Effectiveness of a waiver does not require consideration (unless the waiver would result in too large a reallocation of bargained-for exchange–See Restatement 2d § 84(1)). So, the deviant authority appears to reflect a misunderstanding of the nature of a waiver. Williston provided a cautionary note about the misleading definition:
First, it[—the problematic, common definition—]is likely to be understood as implying that any intentional relinquishment of a known right is necessarily effective. That is, of course, unsound. A contract right … as a rule can no more be relinquished than created without consideration or a sealed instrument. A release or an accord and satisfaction is the ordinary way by which contractual rights are effectively relinquished.
Samuel Williston, A Treatise on the Law of Contracts § 678, at 240 (3d ed., Walter H.E. Jaeger, ed., 1961).
So, now it’s clear. The brief uses the erroneous definition of “waiver” literally and inaccurately. The way Calamari and Perillo describe as “misleading”; the way Williston describes as “unsound”.
There are good reasons why mere receipt of defective performance should not operate to extinguish the right to damages for the skimped performance. If the breach is not material, the obligee, of course, cannot suspend performance. The obligee would in that case need to accept the performance (at common law) and continue performing.
If the breach is material, the obligee can suspend performance and sue for total breach. Of course, understanding the imprecision of the definition of materiality, it is too onerous to require an obligee to undertake the risk that it has miscalculated whether the breach is material. Hence, an obligee’s continued performance even in light of an obligor’s material breach should not, by itself, operate to release the obligor for skimped performance.
Estoppel as a Substitute
Should an obligor always lose? Well, No. It is, of course, possible that an estoppel could work against a party who received defective performance. Among other elements, successful assertion of an estoppel should require reliance.
The brief also discusses whether an “account stated” was formed. We will turn to that in a future post.