FORFEITURES/REINSTATEMENT OF CONTRACT
[The following article was excerpted from John T. Blanchard's law school textbook,
California Remedies: Commentary, Materials and Problems (3d ed. ©1997)]
The question dealt with here is whether, and (if so) when, a nondefaulting party may be prevented from taking advantage of the optional remedies that the breaching party's default usually presents.
Before plunging headlong into a discussion of equitable remedies in contractual
disputes, a brief review of basic contract law principles is in order. A
contract has four elements: parties capable of contracting; the consent of
those parties; a lawful object; and sufficient consideration. Each of these
elements is, of course, historically freighted with an accretion of sub-elements,
prerequisites, qualifications and the like. A cause of action for Breach of
Contract also has four elements: the existence of an enforceable contract;
the plaintiff's performance; the defendant's breach; and damages or loss
proximately caused by that breach. Here, again, each of these elements is
also connected to a vast body of analysis.
"It is axiomatic that a breach of a contract, regardless of
how patent or serious, does not by itself terminate the
contract. Instead, a material breach of contract permits
the nonbreaching party to select among a number of options."
It is axiomatic that a breach of a contract, regardless of how patent or serious, does not by itself terminate the contract. Instead, a material breach of contract permits the nonbreaching party to select among a number of options. One of those options is to ignore the breach and to continue to treat the contract as binding. Of course, such conduct will result at some point in a waiver of the breach. Whether and when a waiver arises depends on principles of waiver; whether any such waiver may be retracted depends on principles of estoppel. Other options include declaration of breach embodied in, or followed by, a lawsuit for restitution, specific performance, damages or other remedies.
At the outset it must also be noted that, unless the additional elements needed
to make out a claim for Specific Performance (considered elsewhere in these
articles) are pleaded and proved it is not the policy of the law to force parties
to perform their contractual obligations. Instead, it is the policy of the law
that one who breaches a contract should suffer the consequences the nonbreaching
party elects to visit upon the defaulting party. The selection among the various
remedial alternatives is given to the nonbreaching party for obvious reasons.
As a general rule, assuming the requisite elements of a claim for the relief
elected by the nonbreaching party are present, the nonbreaching party is free
to select the most advantageous option (and, likely, most disadvantageous to
the defaulting party). A party contemplating breach can estimate the likely
consequences of breach; for example, if a party sees that he has made a poor
bargain - and will be ruined if he fully performs - he may chose to default
and suffer known (at least, within practical limits) losses that may, in the
estimation of the party contemplating breach, at least allow for his financial
survival. It is relatively easy at this level to blast that defaulting party
with moral rectitude and say that he should suffer the consequences of the
breach he consciously decided to effect.
"The problem becomes more difficult when the default is not
shrewdly calculated but is, instead, accidental - particularly
when it was also, either in whole or in large part, innocent...
The theoretical problem is even more perverse."
The problem becomes more difficult when the default is not shrewdly calculated but is, instead, accidental - particularly when it was also, either in whole or in large part, innocent. It is difficult to enforce a stern principle with rigor when its object is a sympathetic figure, when illness or accident temporarily incapacitated such a tragic soul at a time for contractual performance.
The theoretical problem is even more perverse. Defaults under contracts calling for a series of performances (e.g., periodic payments) can effectively operate to impose "forfeitures" in a direct, rather than an inverse, proportion to the breaching party's performance. That is, the greater the performance by the party who ultimately defaults (e.g., the greater the number of periodic payments made) the greater the loss suffered by that party. For example, if a contract is to unfold over five years with a payment due in each of those sixty months then a default in making the monthly payment toward the end of the contract's life will almost surely result in a far greater loss to the defaulting party than one occurring early in the contract's life; enforcement of the nondefaulting party's election to terminate the contract and to reassume possession of a property after a Buyer's default in making the 58th payment - often after the value of the property has risen dramatically - will result is a far more sizeable loss of equity to the good and honorable Buyer than the minimal loss visited on a greedy speculator who defaults after making only a few payments. In short, the greater the good faith performance before default, the greater the loss to the defaulting party. Such a result runs against most accepted notions of justice.
For that reason, conventional analysis of these issues usually begins with consideration of nature of the defaulting party's nonperformance. Not surprisingly, under currently accepted approaches to these issues, if the defaulting party's breach was relatively minor and free of calculation the courts often attempt to justify relief on grounds that the breach was "immaterial". Moreover, even if the nonperformance in issue is plainly material the courts are vastly more forgiving of innocent breaches than intentional defaults (defaults for which relief is sought though they were founded in, for example, uncertainty as to a fluctuating market). Finally, and most controversially, relief (though not generally full reinstatement - that is, recommencement - of a continuing contract) is occasionally granted even in cases of intentional, willful default. This last category raises the most serious question because relief in such cases goes well beyond imposing fairness on the parties' dealings - the accepted province of equity - and enters the realm of nullification of the parties' reasonable expectations. The precedents set by such cases inject a substantial element of unpredictability in what should be stable legal relations.