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With Financing in Doubt, Contractor Was Entitled to Demand Adequate Assurances of Performance from Homeowners, Court Holds
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April 12, 2010
By Brienne Wesolek
Homeowners and a contractor entered into a contract for construction of a modular home in April 2004. The eventual price of the contract was $359,042.
On September 30, 2004, the homeowners’ construction lender informed the contractor that it would not be disbursing any more funds for the project because the homeowners were two months behind in their interest payments. The terms of the homeowners’ construction loan required that the loan be paid off by September 30, 2004, and the home was not ready for occupancy by then.
The contractor informed the homeowners that he would not continue construction unless he was assured of payment for work done after October 1, 2004. The contractor requested that the homeowners place the funds in an escrow account. The homeowners refused to do so, and on October 7, 2004, the contractor stopped work on the home.
The homeowners sued the contractor for breach of contract. The contractor counterclaimed for amounts due under the contract and for work performed but not paid. The trial court awarded the homeowners $9,250 on their breach of contract claim against the contractor and awarded the contractor $14,521.64 on his counterclaim.
The homeowners appealed. They argued that they had committed no breach of contract but that the Contractor had materially breached the contract by leaving the job before completing the work and after insisting on conditions (placing funds in escrow and assurance of end financing) that were not contemplated in the contract. They asserted that the contractor’s action constituted a material breach of the contract that relieved them of their contractual obligations.
The trial court had found that the contractor “performed his work in accordance with the contract until funding was withdrawn by the finance company” and that the homeowners’ “unwillingness to escrow sufficient funds to enable [the contractor] to complete the project was unreasonable.” The New Hampshire Supreme Court affirmed this part of the Superior Court’s decision. McNeal v. Lebel, 157 N.H. 458, 953 A.2d 396 (2008).
The Supreme Court read the trial court’s order as implicitly ruling that the homeowners were in anticipatory breach or repudiation of their contract obligations. This occurs, the Supreme Court wrote, when a promising party repudiates its contractual obligations through its words or voluntarily disables itself from performing its contractual obligations.
Accordingly, the Supreme Court held, the contractor was entitled to seek assurance of payment before continuing his performance.
While acknowledging that a right to demand adequate assurance of performance under general contract law had not previously been recognized for service contracts, the Supreme Court cited to the Uniform Commercial Code, which governs contracts for goods. The UCC provides a right to demand adequate assurance of due performance “[w]hen reasonable grounds for insecurity arise” and declares a failure to provide such assurances within a reasonable time to be a repudiation of the contract. The Supreme Court also cited to Restatement (Second) of Contracts, §251 (1981) and a New York Court of Appeals decision in support of its holding. (Click here to view a summary of that decision.)
The New Hampshire Supreme Court noted that when an anticipatory breach occurs, the non-breaching party may treat it as an immediate breach of contract and sue at once. However, the Supreme Court recognized, if the situation is equivocal or uncertain, this puts the non-breaching in a dilemma. It quoted the New York court:
If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if [a later] court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying nonperformance.
If, on the other hand, the promisee continues to perform after perceiving an apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid those expenses as part of a reasonable effort to mitigate damages after the repudiation.
The Supreme Court held that the trial court correctly applied the doctrine of adequate assurances of performance. “Because the record reveals sufficient grounds for [the contractor] to seek adequate assurances of future performance, which [the homeowners] did not supply, neither [the contractor’s] request for the escrow of funds, nor his cessation of work pending such assurance was a material breach relieving [the homeowners] of further obligation under the contract.”
The Supreme Court found no basis to reverse the trial court’s finding that any defects in the contractor’s workmanship were not material breaches that would excuse further performance by the homeowners. Thus, the court wrote, the homeowners were contractually obligated to let the contractor finish its work.
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