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Western District of Pennsylvania Bankruptcy Judge Bernard Markovitz provides, in a recent opinion, In re Wolfe, No. 05-34052-BM (Bankr. W.D.Pa. 11/6/07), what we think is a useful case study of the elements of an action for damages for a breach of a bilateral contract.

The case involved a claim, by the buyers, for a breach of an installment sale agreement for a personal care facility. The agreement was entered into in August 2001. The agreement provided for the buyers to pay $200,000, $20,000 down and another $2,049.04 per month for 156 months, along with the real estate taxes and insurance. The seller could declare a default in the event buyers: (1) failed to pay any monthly installment within thirty-one days of its due date; (2) failed to pay property taxes or assessments as they became due; and (3) failed to maintain adequate insurance. In the event buyers defaulted on these obligations, the seller could retain all installment payments made up to the time of the default as liquidated damages and also demand possession of the premises and surrender of the business. Upon their compliance with all of the above terms of the agreement pertaining to them, debtor agreed to deliver to buyers a general warranty deed to the premises.

Buyers were unaware of the fact that there was a mortgage on the facility. In June of 2004 the seller ceased making payments on the mortgage, and a foreclosure action was commenced a year later. The buyers continued to make their monthly payments through June of 2005 when they learned of the foreclosure action.

The opinion was silent on the disposition of the mortgage foreclosure action and it is assumed that there was no dispute that the seller was not going to be able to deliver a general warranty deed. The buyers asserted a breach of contract claim against the seller for the downpayment and installment payments along with the cost of some repairs they had made to the facility. The seller defended on the basis that it was the buyers who had breached by stopping the installment payments and by failing to purchase insurance for the property and the business and by failing to pay certain of the property taxes that had accrued back in 2002.

The Court's analysis began:

The primary objective when interpreting a contract is to ascertain and give effect to the intent of the parties. Murphy v. Duquesne University, 565 Pa. 571, 590-91, 777 A.2d 418, 429 (2001). In the case of a written contract, their intent is embodied in the writing itself. Insurance Adjustment Bureau, Inc. v. Allstate Insurance Co., 588 Pa. 470, 480, 905 A.2d 462, 468 (2006). When the language of the contract is clear and unambiguous, its meaning must be determined solely from the content of the contract itself. Crawford Central School District v. Commonwealth of Pennsylvania, 585 Pa. 131, 143, 888 A.2d 616, 623 (2005).

This does not, however, mean that a court construing a written contract is limited in every instance to considering only terms that are expressly set forth in the written instrument. Substantive laws in effect at the time and place a contract is entered into are incorporated into the contract as though they were expressly included therein. DePaul v. Kauffman, 441 Pa. 386, 398, 272 A.2d 500, 506 (1971).

The doctrine of necessary implication is an example of such law. In the absence of an express provision to that effect in a contract, the doctrine implies that the contracting parties have agreed to do and perform whatever is necessary to accomplish the purpose of the contract and will refrain from doing anything that is injurious to the other party’s right “to receive the fruits of the contract”. Glasmere Fuel Service, Inc. v. Clear, 900 A.2d 3987, 402-03 (Pa. Super. 2006).

A term is implied only if it is manifestly clear that the contracting parties contemplated but did not expressly include it in the written agreement or, alternatively, if it is necessary for the law to imply the term to give effect to the intention of the parties. Slater v. Pearle Vision Center, Inc., 376 Pa. Super. 580, 587, 546 A.2d 676, 680 (1988).

The doctrine of necessary implication applies only in limited circumstances. Implied terms, for instance, cannot trump express contractual terms. Conomos, Inc. v. Sun Oil Co., Inc. (R&M), 831 A.2d 696, 706 (Pa. Super. 2003).

To successfully maintain an action for breach of contract, one must establish: (1) the existence of a contract and its essential terms; (2) breach of a duty imposed by the contract; and (3) resulting damages. Hart v. Arnold, 884 A.2d 316, 332 (Pa. Super. 2005), appeal denied, 587 Pa. 695, 897 A.2d 458 (2006). [Emphasis added.]

The agreement in the case provided that the seller would deliver a warranty deed to the property to buyers once they had paid the purchase price in full. Implicit in that provision was an agreement by the parties that debtor would pay off the mortgage lien by the time buyers had paid debtor in full. This obligation on seller's part was necessary to effectuate the sale agreement. Without it, the agreement would make no sense. Having found that the seller's obligation to keep the mortgage current was an implied term of the agreement (and the agreement was bilateral), the Court went on:

It is the law in Pennsylvania that a party to a bilateral contract . . ., breaches a contract when she fails to do something she expressly or impliedly agreed to do. Johnson v. Finestra, Inc. (Construction Division), 305 F.2d 179, 181 (3d Cir. 1965). If the breach amounts to a material failure of performance, the other party is discharged from any liability under the contract. Borough of Greentree v. Tortorette, 205 Pa. Super. 532, 533, 211 A.2d 76, 77 (1965).

. . .

[The seller had] no basis under the law to complain, as she does here, about buyers’ decision to stop making payments to her when they did. A party to a contract will not be heard to accuse the other party of breaching the contract when the other party’s actions are the result of the former’ party’s breach of the agreement. Archer v. State Farm Insurance Co., 419 Pa. Super. 558, 569, 615 A.2d 779, 785 (1992).

The conclusion that it was [seller] who breached the sale agreement by discontinuing payments to [the mortgagee] in June of 2004 depends on the proposition that buyers had not materially breached the sale agreement first. If they had, the outcome of this matter well might be different.

The Court then turned its attention to the seller's argument that the buyers failure to pay the 2002 real estate taxes was a breach that excused her performance and the issue of whether a particular default is "material."

Strictly speaking, it might be said that buyers breached the sale agreement when they failed to perform their contractual obligations. When performance of an obligation arising under a contract is due, any failure on the part of the party charged with that obligation amounts to a breach. Widmer Engineering, Inc. v. Dufalla, 827 A.2d 459, 467 (Pa. Super. 2003).

It does not, however, follow from the above that debtor was discharged from her obligation to continue making mortgage payments. . . . If a party to a contract fails to perform its obligations and its breach amounts to an immaterial failure,that party still may recover in an action on the contract. Borough of Greentree, 205 Pa. Super. at 533. Perfect performance, in other words, is not required in an imperfect world.

The doctrine of substantial performance was devised as an “instrument of justice”. Its purpose is to avoid forfeiture on account of a technical, inadvertent or unimportant failure to perform. It is designed to protect and provide relief for one who has faithfully and honestly endeavored to perform the contract in all material and substantial particulars. Atlantic LB, Inc. v. Vrbicek, 905 A.2d 552, 558 (Pa. Super. 2006).

Substantial performance is an equitable doctrine. Equity abhors forfeiture, which should not be undertaken lightly. Williams v. Vesley, 290 Pa. Super. 192, 196, 434 A.2d 196, 198 (1981).

There is no bright-line test for determining if a failure to perform is material or immaterial. Whether a breach is “substantial enough” to justify the other contracting party to consider the entire transaction “at an end” is a matter of degree. It must be determined “by weighing the consequences in the custom of men in the performance of contracts similar to the one that is involved in the specific case”. Widmer Engineering, 827 A.2d at 468 (quoting Gray v. Gray, 448 Pa. Super. 456, 468, 671 A.2d 1166, 1172 (1996)).

The following considerations, among others, may be probative for determining materiality in specific instances: (1) the extent to which the other party will be deprived of the benefit she reasonably expected; (2) the extent to which the party that has failed to perform will suffer forfeiture; and (3) the extent to which the party that did not perform comported with standards of good faith and fair dealing. Widmer Engineering, 827 A.2d at 468.

Comparing the amount of the unpaid 2002 taxes (which the Court estimated at $1,000) to the damages suffered by the buyers (over $114,000), the Court concluded that the failure to pay the 2002 taxes was immaterial. [Although not stated, the sellers delay in raising the default while the buyers continued to make the monthly payments likely contributed to the Court's conclusion that the default was immaterial.]

Every case is different and decisions usually turn on the facts. However, Wolfe provides an nice outline of issues and elements that need to be addressed in a breach of contract lawsuit.

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Dated: 2007