April 23, 2015 Practice Points

    Washington Court Strictly Enforces Default Provision; Material Breach Can Still Excuse Performance

    Recently, Division III of the Washington Court of Appeals strictly enforced a default provision requiring notice and the opportunity to cure, but found that the non-breaching party can still contend a material breach occurred that excused its performance

    by Paul R. Cressman Jr.

    Recently, Division III of the Washington Court of Appeals strictly enforced a default provision requiring notice and the opportunity to cure, but found that the non-breaching party can still contend a material breach occurred that excused its performance, see DC Farms LLC v. Conagra Foods Lamb Weston, Inc., 179 Wn. App. 205, 317 P.3d 543 (Div. 3, January 30, 2014). A food processor was not excused from providing a contractually-required notice of default and opportunity to cure because it maintained that a farmer’s breach was incurable. Failure to provide the notice of default and opportunity to cure was a breach of contract by the food processor.

    DC Farms, an Idaho potato grower, brought a legal action for breach of contract and other claims against Lamb Weston, a processor of frozen potato products, after Lamb Weston claimed to terminate and then refused to perform under a strategic potato supply agreement.

    The situation arose after Lamb Weston discovered a broken light bulb in one of DC Farms’ cellars when removing potatoes, and two days later found a broken light bulb in a Tuff-Skin membrane on its potato processing line while DC Farms’ potatoes were being processed. There was a substantial factual dispute as to the extent of glass contamination in the eight cellars of potatoes that were the subject of the parties’ agreement.

    The parties’ agreement contained the following default provision that required notice and opportunity to cure:

    Default by [DC Farms]: Any of the following events that remain uncured after receipt of seven (7) days written notice of default, which notice shall describe the nature of the default, shall be considered a material breach and default by [DC Farms]:

    * * *

    (c)        The negligence or misconduct of [DC Farms], its employees or agents resulting in the loss of, or damage to, a material portion of the Crop.

    * * *

    7.2.2    [Lamb Weston]’s Remedies.

    Upon any event of default … [Lamb Weston], in addition to any other remedy afforded it by law or by this Agreement:

    • May terminate this Agreement and may hire a farmer to fulfill [DC Farms]’s obligations under this Agreement or take such other measures as [Lamb Weston] deems are in its best interest to preserve and protect the Crop and [Lamb Weston]’s rights hereunder.

    (Emphasis in original.)

    Lamb Weston delivered a letter to DC Farms terminating their agreement, but did not provide a notice of default. The letter provided that:

    DC Farms should “take this [letter] as notice that [Lamb Weston] hereby exercises its rights, pursuant to Section 7.2(c) of our Strategic Potato Supply Agreement dated January 29, 2009, to terminate that agreement with DC Farms for breach.”

    (Emphasis in original.)

    The trial court, on Lamb Weston’s motion for summary judgment, concluded that Lamb Weston was excused from providing the contractually-required notice of default and opportunity to cure because DC Farms’ breach was incurable. The court of appeals reversed. The court found that Lamb Weston was required to honor the notice and opportunity to cure provision despite its belief that the breach could not be cured, and found that a genuine issue of fact existed as to whether DC Farms remained able to substantially perform.

    The court refused to accept Lamb Weston’s contention that service of an otherwise-required notice of default is excused if the breach is incurable. Lamb Weston contended that Washington law does not require someone to do a useless act, and relied upon a Missouri case that supported its position. In its opinion, the court pointed out that Washington courts have explicitly refused to apply the maxim that “the law does not require the performance of an idle or useless act” to excuse a party from providing a notice of default and opportunity to cure required by a notice-and-cure provision.

    In rendering its opinion, the court set forth a number of general contract principles:

    • The general rule with respect to compliance with the terms of a bilateral contract is not strict compliance, but substantial compliance.

    • The doctrine of substantial performance is intended for the protection and relief of those who have faithfully endeavored to perform their contract in all material and substantial particulars, so that their right to compensation may not be forfeited by, e.g., inadvertent omissions or defects.

    • Although a plaintiff who has substantially performed a contract may maintain an action on the contract, the action is without prejudice to any showing of damage on the part of the defendant for the failure to receive a full and complete performance.

    • Substantial performance is said to be the antithesis of material breach; if it is determined that a breach is material, or goes to the root or essence of the contract, it follows that substantial performance has not been rendered, and further performance by the other party is excused.

    • Only a breach or nonperformance of a promise by one party to a bilateral contract so material as to justify a refusal of the other party to perform a contractual duty discharges that duty.

    • The materiality of a breach, and thereby the issue of substantial performance, is a question of fact.

    • The question of materiality depends on the circumstances of each particular case.

    • While the general rule is that a party who has substantially performed may maintain an action on a contract, the parties may contract for literal performance. Where the parties have not made it clear that literal and exact compliance are necessary, however, substantial performance will suffice, especially if requiring literal performance will result in forfeiture.

    • Where the parties’ contract includes a notice-and-cure provision, generally, a clear and unambiguous notice, timely given, and in the form prescribed by the contract is essential to the exercise of an option to terminate the contract.

    • As a general proposition, if a party who has the power of termination fails to give notice in the form and the time required by his reservation, it is ineffective as a termination.

    The court went on and found that whether DC Farms committed a material, incurable breach was genuinely disputed, and Lamb Weston could still defend on the basis that the glass contamination could not be cured and caused it to refuse to further perform under the parties’ agreement. The court stated that mere proof that there was a breach of contract by a defendant, in this case Lamb Weston, without more, will not support a verdict in favor of a plaintiff, even for nominal damages.

    The court advised that a genuine issue of fact remained as to whether Lamb Weston’s refusal to accept the crop, or much of it, complied with its obligations. In addition, genuine issues of fact remained concerning whether the location of the potatoes to be accepted by Lamb Weston under the agreement was material. In other words, could Lamb Weston refuse to accept potatoes from other cellars or refuse to accept delivery of potatoes from other sources provided by DC Farms? If DC Farms delivered substitute potatoes, would that constitute substantial performance of the parties’ agreement?

    The court went on and stated that a material breach sufficient to allow rescission of a contract is one that substantially defeats the purpose of the contract. The court stated that a jury could find that even if DC Farms breached the contract, its breach was only partial. A breach need not be material to give rise to a cause of action for damages.

    It is noteworthy that evidence existed that Lamb Weston had contracted for more potatoes in the specific crop year in question than it could use, that the market price for potatoes had dropped below the price set by Lamb Weston in its contracts with growers, and that Lamb Weston was looking for ways to refuse to honor contracts, and thereby limit its losses from excess potatoes.

    Keywords: notice of default, opportunity to cure, material breach

    Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.

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