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17 Corpus Juris Secundus (1939)

CONTRACTS

Excuses for Nonperformance

§ 459. In General

The general rule is that, in the absence of apt provisions in the contract itself, a party thereto is not excused from performing it according to its terms.

The general rule is that, where a person by his contract charges himself with an obligation possible to be performed, he must perform it, unless its performance is rendered impossible by the act of God, see infra §463, by the law, see infra §467, or by the other party, see infra §468, it being the rule that in case the party desires to be excused from performance in the event of contingencies arising, it is his duty to provide therefor §459 in his contract. Hence, performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expense, by danger, by inevitable accident, by the breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits to be had under the contract, by weather conditions, by financial stringency, or by stagnation of business. Neither is performance excused by the fact that the contract turns out to be hard and improvident, unprofitable or impracticable, ill advised, or even foolish, or less profitable, or unexpectedly burdensome. Likewise, the party from whom the performance is due cannot assert that performance would be of no benefit to the other party.

Among other matters which have been held not to excuse performance are: Legal advice; unfounded claims of the adverse party; the unlawful conduct or interference of a third person; the promise of a third person to pay the compensation due the party under the contract; the defalcation of an agent; failure to determine measure of work actually performed; possible infringement of patents; profane language on the part of the adverse party; recalcitrance of the party’s wife; ignorance of conditions; belief that the other party will be unable to perform; failure of adverse party to perform independent contract; performance by copromisor of independent contract with same promisee and the default of a third person.

Act of party himself. The promisor’s breach of an unconditional contract cannot be excused by any act of his own or of those in privity with him which prevents performance or renders it impossible.

Exercise of ordinary care and good faith. It is not sufficient that the party shall have exercised ordinary care to perform, but nevertheless failed. So, the fact that a party has acted in good faith and exercised due diligence will not excuse delay. The absence of bad faith, in failure to perform, may, however, be a material factor in determining whether nonperformance by the opposite party is excused.

Where a contract is made with a corporation, the disgraceful and criminal act of the person whose name the corporation bears is not an excuse for a refusal on the part of the person contracting to perform.

Building and construction contracts. In accordance with general rules governing other types of contracts, considered in previous paragraphs of this section, by the strict common-law rule, a builder who has improvidently assumed an absolute liability when he might have undertaken a qualified one only, is not excused from performing his engagement, unless he is prevented from doing so by reason of performance becoming impossible by a change in the law, see infra §467, by the destruction of the specific thing which is essential to the performance of the contract, see infra §466, or by the nonexistence of conditions essential to performance. No hardship, no unforeseen hindrance, no difficulty will excuse him from doing what he has expressly agreed to do. Thus, a contractor is not excused from performing, according to the terms of the contract, because of defective or mistaken plans, of failure to agree on plans and specifications at the outset, of mere difficulty in performing, or of unusual or unexpected expense; or because of his inability to perform, not due to any wrongful act or omission of the owner; or because the contract would not be profitable to the owner, or would be useless under the existing conditions; nor is he excused because of latent defects in the soil conditions, unless the testing of the soil is exclusively within control of the owner or architect. So, also, the mere fact that after the builder has failed to perform his contract the owner notifies him that he will himself complete it does not show that the contractor was justified in his failure to perform. The fact that the builder has employed a competent person under him, and the person the owner expected him to employ, does not excuse nonperformance. A contractor’s mistake in supposing that no license was required to work where he desired to is no excuse for his failure to perform. A claim for liquidated damages made by the owner for a delay in construction, but not allowed by the court, is no excuse for nonperformance on the part of the builder. One agreeing to furnish material for the construction of a building cannot excuse his own nonperformance of contract by letting out his work, or selling material to be used therein, to a subcontractor.

In the absence of express stipulations specifying matters which shall excuse performance by the owner, he is not excused. Thus, he is not excused by conditions or contingencies which merely render performance more difficult than he expected. The happening of unforeseen and unexpected contingencies rendering performance of the contract impossible may, however, excuse the owner from nonperformance on his part, where such a condition may be implied as a part of the contract.

§ 460. Stipulations in Contract

Only contingencies expressly provided for are covered by stipulations in a contract specifying when performance shall be excused.

A provision in a contract that performance shall be excused in the event of certain contingencies cannot be extended to cover contingencies not specifically provided for. So, where a contract contains a general stipulation providing for exemptions from liability, followed by an enumeration of specific causes, the rule of ejusdem generis will be applied. A provision for the extension of time for performance, in case there are reciprocal obligations, inures to the benefit of both parties.

§ 472. Renunciation or Repudiation before Time for Performance; Anticipatory Breach

1. In General

On repudiation of an executory contract, the promisee may rescind the contract, or treat the contract as binding until the time for performance arrives, or sue immediately for the anticipatory breach.

Strictly an “anticipatory breach” of a contract is one committed before the time has come when there is a present duty of performance, and it is the outcome of words or acts evincing an intention to refuse performance in the future. Where a party bound by an executory contract repudiates his obligation before the time for performance, the promisee has, according to the great weight of authority, an option to treat the contract as ended so far as further performance is concerned, and to maintain an action at once for the damages occasioned by such anticipatory breach. The rule is the same whether the contract is wholly executory or has been partially executed.

Minority view. In a few jurisdictions the rule allowing an immediate action for an anticipatory breach of contract is not recognized.

Election of remedies. Where there has been a renunciation of an executory contract by one party, the other party has a right to pursue one of three remedies (1) rescind the contract and pursue the remedies based on such a rescission, as is explained in §429 supra. (2) To treat the contract as still binding and wait until the time arrives for its performance, and at such time to bring an action on the contract for breach, as is observed in §472b(3) infra. (3) To treat the renunciation as an immediate breach and sue at once for any damages which he may have sustained.

While suit on the anticipatory breach amounts to an election, where a party elects to regard the contract as at an end on the refusal of the other party to perform, it is not necessary that he bring his action at once, but he may evidence his election by other acts. A willingness and readiness to perform on the part of one party to a contract, without any demand on the other party who has wrongfully refused performance, or without doing anything which places the latter in a worse condition or increases the rights or immunities of the wrongdoer, does not show that he has not accepted the other’s renunciation as final.

Other party need not perform. As a general rule, sometimes by reason of express statutory provision, where one party renounces the contract and refuses to perform, the other party is excused from performance on his side. It should be noted, however, that the repudiation of the contract by one party cannot be held equivalent to performance, or a legal excuse for nonperformance by the other party of conditions precedent, so as to authorize a recovery as for performance of such conditions.

Successive conditions precedent. The rule just stated is applicable, although the party seeking to take advantage of the renunciation may have several conditions precedent to fulfill which are of periodical recurrence.

§ 479. Sufficiency

A timely demand conforming to the contract and informing the other party that performance is expected is ordinarily sufficient.

In harmony with the general rules regarding the requisites and sufficiency of a demand as a condition precedent to the maintenance of an action, which are discussed in Actions §27c, a demand for performance of a contract is sufficient where it informs the opposite party that performance is expected. It need not be in writing unless the contract so provides, and, if written, will not be invalidated by clerical error or omissions where the intent is obvious. The demand must conform to the terms of the contract, and combining a lawful demand with one not required by contract generally renders the demand insufficient. A personal demand is not required in the case of a contract to deliver specific articles, and demand may be made at any reasonable hour. In the absence of a stipulated time within which the contract must be fulfilled, the demand may be made within the time limited by statute for maintenance of an action for breach of the contract or for termination thereof, and, if no period of time is required for the performance of the next step by the defaulting party, the other may demand performance immediately. A demand by letter sent by mail to which no answer is received has been held insufficient to show a compliance with the provisions of a contract which is to be performed by the adverse party upon request. The beginning of a suit has been held a sufficient demand in some cases, as where the promise is to perform on demand in writing made of another, or where a transaction involving an agreement for the conveyance of land amounted merely to a loan payable on demand. Where a demand and refusal must be shown, it is unnecessary to show a definite refusal. The fact that the party has responded to an improper demand at one time does not constitute a waiver of a proper demand at another.

§ 481. Excuses for Nontender

Nontender is excused where it is apparent that a tender would be a vain and idle ceremony.

A formal tender is unnecessary if the party to whom performance is due is absent from the place of performance, in those cases where his presence is necessary; nor is a formal tender necessary if, at the time for performance, the party to whom performance is due fails or refuses to perform on his part, or demands that a request which he has no right to make be complied with, or if he is unable to perform. Similarly a tender is waived where the tenderee makes any declaration which amounts to a repudiation of the contract, or takes any position which would render a tender, so long as the position taken by him is maintained, a vain and idle ceremony, as where he expressly declares that he will not accept the tender if it is made, or where he has placed it beyond his power to perform or has prevented performance, or has evaded tender, or in any way obstructs or prevents a tender, as by declaring positively that nothing is due him, by admitting that a tender would be fruitless, by declaring the contract to be at an end, or in a threatening tone ordering plaintiff off the premises.

Ignorance of the creditor’s place of residence, however, is no excuse for not making a tender; it is the debtor’s duty to make inquiries for the creditor of those most likely to know his whereabouts. So the nonresidence of the party to whom tender is to be made will not excuse a tender where his nonresidence was known when the contract was entered into. In any case before it can be said that a formal tender is waived, the tenderee must have placed himself in such position as would make a tender an unnecessary act. Nothing short of a positive and unequivocal refusal to perform a contract will excuse a tender, and a mere request to suspend performance until an existing controversy is settled is not sufficient. Moreover, before he can recover damages for the breach, or for what he has parted with under the contract, plaintiff must show not only the facts constituting the waiver of the formal tender, but that he was able and willing, at the time fixed, to perform on his part, except in those cases where a tender is rendered unnecessary by the previous declaration, act, or omission of the other party. A formal technical tender is not dispensed with by a mere assertion, without more, of a lien or claim in excess of the actual amount due, for a tender of the proper sum might be accepted.

There cannot be a waiver unless the tenderee is present and has an opportunity to object to the tender, nor can there be a waiver when he is present, if the facts are not disclosed to him.

Where the contract is illegal, a party is under no duty to tender performance.

Waiver of further tender. Where a tender is made and a reason is given for its rejection which shows that a further tender would be fruitless, none other need be made.

Acceptance and Waiver

§ 490. Acceptance of Performance

If performance is substantially defective, acceptance is necessary to render the party liable for the contract price; and opportunity for reasonable examination must be afforded.

While an acceptance of a work or structure as in compliance with the contract will, as shown infra §514b(1), ordinarily constitute a waiver of a full performance or defective performance of the contract, and, in the manner described infra §514b(4), will accordingly affect the accepting party’s right to refuse to pay the contract price or his right to recover damages, one who has not accepted a substantially defective performance is not liable for the contract price. Before accepting, the party is entitled to make a reasonable examination. Acceptance is shown by a written instrument signed by an authorized agent reciting that the work had been done to his entire satisfaction, but, under a contract whereby plaintiff agreed to give valuable information to increase defendant’s profits, the mere fact that defendant increased the prices of his products after being advised to do so by plaintiff does not necessarily constitute an adoption of plaintiff’s plan, as market conditions may have required such increase independently.

§ 491. Waiver

A party to a contract may waive provisions for his benefit; and likewise there may be a waiver of conditions precedent or severable stipulations.

While he may not waive stipulations in favor of the other party, a party to a contract may waive its provisions for his benefit and may elect not to take advantage of a breach. So, although there may have been repeated violations of a contract by either party, yet, if either party elects to consider it unbroken and proceeds under it, the other cannot be considered as having been in default. Where a contract is conditioned on the existence of a contract between the promisee and a third person, a condition in the latter contract cannot be waived by the promisee as against the rights of the promisor. The theory of waiver necessarily presupposes the existence of a valid contract.

A party to a contract may bind himself to waive a legal right and there is no repugnancy between a provision in a contract giving a legal right and a provision in the same contract that in a certain event the right will be waived.

Conditions precedent. As stated in Corpus Juris, which has been quoted and cited with approval by the courts, a party to a contract, who is entitled to demand performance of a condition precedent, may waive the same, either expressly or by acts evidencing such intention and performance of a condition precedent to taking effect of the contract may be waived by the acts of the parties in treating the agreement as in effect.

Severable stipulations. A party may waive performance of one dependent stipulation in a contract without affecting the character of other provisions in the agreement. Where a contract contains concurrent severable covenants, one may be waived without waiving the others.

Building and construction contracts. A provision of a building and construction contract as to a detail of performance may be legally waived.

§ 492. Sufficiency

1. In General

A waiver may be express or implied, but to constitute one an intentional relinquishment of a known right is essential.

Whether there is a waiver depends upon the acts and conduct of the parties subsequent to the making of the contract. A waiver may be express, or may be inferred from actions or conduct. Thus, acting on the theory that the contract is still in force, as by continuing performance, demanding further performance, or permitting the other party to perform and accepting benefits under the contract may constitute waiver of a breach; but all the attendant facts, taken together, must amount to an intentional relinquishment of a known right, in order that a waiver may exist, and it has been held not a waiver for a party not in default to make an honest effort to induce the party who has breached his contract to withdraw the repudiation and perform the contract. Acts relied on as constituting a waiver must be inconsistent with an intention to insist on the rights of the party under the contract.

It has been said that waiver is a voluntary act and does not depend on estoppel, nor require or depend upon a new contract or a new consideration, at least where the doctrine is invoked to prevent a forfeiture, or where a party elects to abandon some provision or condition inserted in a contract for his benefit, or where some element of estoppel is presented. It is not true in all cases, however, that waiver does not require the support of a consideration, and it has been held that waiver must contain the elements of an estoppel or there must be a consideration, and that subsequent assent to a breach, not based on consideration, does not amount to a waiver, unless the adverse party has been led to act thereon to his detriment.

A waiver may be by subsequent contract, but the right to damages for a breach has been held not waived by entering into a new contract with the same party covering the same subject and a prior course of conduct under previous contracts will not operate as a waiver of an express stipulation in a new contract.

The giving of security as a condition precedent is not waived by the fact that the security, when tendered, is declined until such time as the party shall have had an opportunity to examine it. The mere fact that one party to the contract does not terminate it on a breach by the other party of its provisions does not establish a waiver thereof, and his failure to protest against previous breaches is not a waiver of his right to sue on a cause of action arising thereafter; a waiver of past failures does not necessarily constitute a waiver of future defaults. A waiver is not established by the mere failure of one party to notify the other party that he has knowledge of the breach or by his failure to seek out the other and inform him that he should not do what he has agreed not to do. An unaccepted offer to rescind does not constitute a waiver of the offerer’s right to enforce the contract. Long delay in demanding payment, if properly explained, does not defeat recovery; and a mere consent to delay in the performance of a condition precedent, given at the request of the person from whom performance is due, will not constitute a waiver.

Intent. An actual or express intent to waive is unnecessary.

Knowledge. To constitute a waiver, the acts or circumstances relied on to constitute it must have been performed or have transpired after the party against whom the waiver is urged knew, or should have known, the facts constituting the breach. So, too, if he has been put off his guard or misled by the conduct of the other party, a waiver induced by such deception will not be charged against him.

Silence. While parties to a contract may by their silence waive stipulations in their favor, where there is a duty to speak or act, the mere silence of the party entitled to insist on performance of a condition will not amount to a waiver thereof, unless inconsistent with any other explanation. Hence a waiver cannot be implied from silence where there is no obligation to speak. Rights under an acceleration clause may, however, be waived by mere passive acquiescence.

Payment or part payment under the contract is not of itself, and without regard to the circumstances under which it was made, conclusive evidence of a waiver, nor does the acceptance of part payment necessarily constitute a waiver of the payer’s breach.

Change of attitude. Where a party advances a particular reason for his conduct or decision concerning a controversy arising under a contract, he cannot afterward advance another reason to the detriment of the opposite party.

Written contracts. Except in such cases as fall within the prohibition of the statute of frauds, stipulations in a written contract may be waived by parol.

Sealed contracts. Conditions of sealed contracts may be waived by parol.

§ 494. In General

1. Contracts Generally

The question of what constitutes a sufficient performance of a contract is ordinarily one dependent on its proper construction.

Performance of a contract has been defined to be such a fulfillment of its duties as puts an end to its obligation by leaving nothing more to be done. Conversely, a breach of the contract must arise after the making of the contract from some act in disregard of its mandates. Hence, the party is guilty of the first breach who first fails to do what he is contractually bound to do. The question of what constitutes a sufficient performance of a contract or, conversely, of what amounts to a breach, will therefore ordinarily depend on the construction to be given the particular contract involved. It is self-evident that whatever the parties see fit to accept as a performance will be so regarded by the Courts. The fact that one party to a contract lessens the burdens of the other does not constitute a breach. Either party to a contract may perform his part and charge the other with liability under the contract without the consent or acquiescence of the other.

Mode of performance. Where the parties agree on a particular method for performing the contract between them, such method of performance will be binding in the absence of reasonable grounds for departing therefrom. Thus, where an article is to be made in accordance with plans or drawings, the person making the article must make it so that it will reasonably comply in all respects to the plans or drawings and what is a reasonable compliance depends on the facts and circumstances of each case.

Good faith. Where the manner of performance is left more or less to the discretion of one of the parties to the contract, he is bound to the exercise of good faith.

Care or negligence in attempting to perform is immaterial, the only question being whether there has been performance.

Fraud need not exist as an essential element of the breach of a contract

Warranties must be complied with strictly and be as true as stated at all hazards.

Implied terms. A contract may be broken in terms which arise from reasonable implication as well as in express terms.

Personal performance. A contract for the performance of ordinary labor or the rendition of ordinary services need not be performed by the promisor personally, but where the contract requires personal performance such performance is essential.

Performance of services. Contracts for the performance of services require the exercise of good faith and integrity, and such special skill as the promisor has contracted to render. The promisor must be reasonably competent and reasonably diligent, but he is not liable for mere mistakes or errors causing incidental losses.

Interference by third person. An unauthorized interference by a third person with a right conferred by contract does not in the absence of an express stipulation render the promisor liable for a breach.

§ 495. Satisfaction of Party

Contracts for performance to the satisfaction of a party, usually the promisor, are divided into those involving sensibility or judgment and those involving operative or mechanical fitness or value.

Contracts in which one party agrees to perform to the satisfaction of the other are ordinarily divided into two classes: Where fancy, taste, sensibility, or judgment are involved; and where the question is merely one of operative fitness or mechanical utility. “Satisfactory” in cases of the character under consideration means satisfactory to the promisor, if the contract is silent as to the person to whom the work, etc., shall be satisfactory.

No provision for satisfaction. Where the contract does not in any form of words require that the performance of the work to be done or the services to be performed shall be to the personal satisfaction of the promisor, the mere fact that the promisor is not satisfied is not conclusive against a right of recovery; there is read into such a contract the rule that that which the law says a party should be satisfied with, the law will say he is satisfied with.

Potestative condition. Under the civil code, a condition in a contract, the performance of which requires skill, whereby one party has absolute power to determine whether or not the other party has performed is potestative and unenforceable.

A party contracting to satisfy the fancy, taste, or judgment of another makes the latter sole judge of his satisfaction.

In contracts involving matters of fancy, taste, or judgment, when one party agrees to perform to the satisfaction of the other, he renders the other party the sole judge of his satisfaction, and this ordinarily without regard to the justice or reasonableness of his decision, and a court or jury cannot say that such party should have been satisfied where he asserts that he is not. Whether or not this dissatisfaction must be actual or honest is considered infra in subdivision d of this section. The rule also applies to a contract providing that security for its performance shall be satisfactory. While, however, the dissatisfaction of the promisor entitles him to refuse payment or performance on his part, it does not entitle him to require the promisee to continue to endeavor to perform until the promisor is satisfied, under penalty, in case he ceases such effort, of being liable for a breach.

Contracts involving operative or mechanical fitness requiring performance to the satisfaction of a party usually make him the judge of his satisfaction.

Where a contract involving operative fitness or mechanical utility clearly provides that performance shall be satisfactory to the promisor, he is generally held to be the sole judge of his own satisfaction in the matter, if, as seen infra in subdivision d of this section, he acts in good faith. Not a few courts, however, have apparently been reluctant to apply this rule literally, and conclusions contrary to it have been reached by the courts in some cases not always clearly distinguishable on the facts from those supporting the rule; these decisions are, however, often based on the ground that the question is one of construction, and that there were qualifying words in the contract or circumstances showing that it was not the intention to leave the question of satisfaction entirely to the promisor. Others of them have been predicated on the ground that there was not merely an executory contract of sale, but an executed contract under which material had been furnished and work done, on the ground that the work had been accepted, or on the ground that the provision in the contract had been treated as a warranty. Still other decisions, as shown in subdivision d of this section, require a reasonable as well as a genuine dissatisfaction.

The decisions are not entirely harmonious as to the propriety of inquiring into the good faith or reasonableness of an expressed dissatisfaction.

It would seem that, where the subject matter of the contract involves a question of individual taste or sentiment rather than of utility, neither the good faith or genuineness, nor the reasonableness, of the expressed dissatisfaction can be inquired into. There is, however, authority for the proposition that the dissatisfaction must be honestly entertained even in such a case.

Where the subject matter of the contract relates to a thing which is ordinarily desirable only because of its commercial value or its mechanical fitness, it is held that the party must act in good faith and must be honestly dissatisfied. He may, of course, make a test to satisfy himself. Furthermore, before he can terminate the contract, he must, if a test is necessary to determine fitness, give that test or allow it to be made. The dissatisfaction should be expressed within a reasonable time when no time is fixed in the contract.

In many of these cases involving commercial value or mechanical fitness the good faith and not the reasonableness of the dissatisfaction is held to be the proper test of the right. Numbers of other cases, however, involving similar contracts hold a performance to be sufficient if it reasonably ought to satisfy or should be satisfactory to a reasonable man.

Where he has decided that performance is not satisfactory, the promisor is not obliged to give the promisee an opportunity to make it so, unless the contract expressly so provides.

The general rules governing the performance of contracts to the satisfaction of a party apply to building and construction contracts containing such provisions.

Where the contract merely requires the builder to perform the work according to certain plans and specifications, it is not necessary, in case the work is so performed, that it also be performed to the satisfaction of the owner. Where, however, the contract so provides, the work must be performed to the owner’s satisfaction in the absence of a waiver or estoppel. The dissatisfaction of the owner must be in good faith. It has been held that bad faith is not conclusively shown even by unreasonable dissatisfaction, and that the promisee cannot recover where the promisor is not satisfied, even though he should be satisfied. Nevertheless, such a provision is more often construed as not making the owner’s declaration of dissatisfaction conclusive, but as requiring merely the performance of the work by the builder in such a substantial manner as ought reasonably to satisfy the owner. Thus, a contract to build a house or garage to the satisfaction of a person has been held to mean to his reasonable satisfaction. A contract to install a plumbing, ventilating, or heating plant, or an elevator, in a manner satisfactory to the owner, has been held merely to require its installation in such a manner as should reasonably satisfy the owner, and not to permit the owner to express dissatisfaction as a matter of mere caprice; and the same has been held true with regard to a contract to do the polishing on the woodwork of a building to the satisfaction of the owner, to sink a well to the satisfaction of the landowner, and to do railroad construction work to the “full satisfaction” of the railroad company. Where the work is being done by a subcontractor, the general contractor is entitled to determine whether it is being done according to the contract and direct the manner of performance, and his directions in good faith under an honest sense of dissatisfaction are conclusive.

Clearly for good cause the owner may in good faith refuse to accept the work. Written notice of the owner’s dissatisfaction must be given, however, if the contract so prescribes.

§ 496. Approval of Third Person

A contract may provide that the sufficiency of its performance shall be determined by some third person.

The test of the sufficiency of the performance of a contract may be made to depend on the will of a third person, as where one of the parties stipulates for the approval of his attorney, or, sometimes, in the case of prize and athletic contests of various kinds. However, the right to have the approval of a third person as the test of performance must rest on a provision therein.

Provisions of building or construction contracts for the approval of the work by an architect or other third person as a prerequisite to the payment of compensation to the contractor are valid and irrevocable.

The most frequent example of contracts stipulating for the approval of a third person arises in the case of building contracts where the approval of the architect or some third person is required before payment is due. Such provisions are valid, and cannot be revoked by either party.

The rights, powers, and duties arising from a provision for approval of performance of the contract by a third person are determined by the contract. The provision does not prevent a resort to the courts to determine rights thereunder.

The rights, powers, and duties under a provision in a building or construction contract for approval by, or the obtaining of certificates or estimates from, an architect, engineer, or other third person are determined and limited by the terms of the contract. Such a provision does not apply where the plans and specifications are substantially changed, without any reference to the first contract or certificates; nor does it apply to the question of damages caused by the owner in wrongfully breaking the contract, nor as between the contractor and a subcontractor. The architect or arbiter has no power to change or abrogate the terms of the contract or make a new contract between the owner and the contractor, unless authorized by the parties to do so; nor may he interpret the contract arbitrarily or adopt his own understanding of the meaning of the terms used, but he may, when authorized by the contract, make minor changes. An owner is not responsible for the mistaken reliance of the contractor on the supposed authority of the architect.

A stipulation requiring the approval, decision, or certificate of an architect, etc., as a condition to a recovery by the contractor generally does not bar the parties of their right to resort to the courts for determination of their rights under the contract. An engineer is, in some cases, authorized, if in his opinion the work is not progressing rapidly enough to be completed within the time specified, to declare the contract abandoned or to employ others to execute any part of the work and to charge the same to the contractor. Where the owner proceeds with the completion of a building after the contractor’s abandonment of the contract, a provision requiring the work to be certified or approved by the architect has no application.

Whether the duty to procure a decision or certificate of a third person rests on the owner or on the contractor, depends on the intent of the parties as indicated by the terms of the contract.

Unless it is in terms, or by fair implication from the nature or language of a building agreement, made the duty of the owner to procure a certificate, decision, or estimate of an architect, etc., the responsibility rests solely on the contractor to obtain it, unless the requirement is waived, is discussed infra §497a(3). It has been held, however, that such duty is not on the contractor, where, by the terms of the contract, the architect’s decision or estimate is to be made solely for the benefit of the owner.

§ 497. Settlement of Disputes

A contract may lawfully provide that disputes between the parties shall be referred to a referee or arbitrators, but the question referred must be a matter of dispute within the meaning of the arbitration agreement.

The agreement for arbitration may be waived. A method fixed in the contract for the settlement of disputes is in the absence of fraud usually regarded as valid and binding on the parties, as where it is agreed to submit such question to a referee or arbitrators. The parties to such agreement must live up to their engagement according to its spirit, and are bound by the terms of the submission. The question referred to arbitration must be a matter of dispute within the meaning of the arbitration agreement. When a controversy is settled by an agreement of the parties, no resort to the contract method of adjusting it by arbitration is necessary.

Waiver of arbitration. The parties may waive an agreement for arbitration and settle their differences in the courts.

Statutory proceedings to enforce agreements for arbitration, including the right to enforce and waiver thereof, matters arbitrable under the statutes, and the procedure thereunder, are discussed infra §501.

Where the contract makes the arbiter’s decision or certificate final, it is ordinarily conclusive as to the rights of the parties in the absence of fraud, bad faith, or mistake; but where the contract does not so provide- it does not as a rule have that effect.

The force and effect of the decision, estimate, or certificate of an architect, engineer, or other third person in approving or disapproving the work as a performance of the contract, or in passing on questions relating thereto, are to be determined from the terms of the contract. A provision that the decision, etc., shall be final and conclusive does not entirely oust the jurisdiction of the courts, but is valid and binding according to its terms, and such provision cannot be revoked by the owner after a decision has been made and communicated.

Where the contract expressly so provides, or in plain language shows that it was the intention of the parties that the person to whom the question is submitted should be the final arbiter thereof the decision, certificate, or estimate is conclusive and binding on the parties in the absence of fraud, bad faith, or mistake, or unless it is waived, as by subsequently submitting the matter to arbitration and obtaining a ruling thereon. So, where the engineer has made a decision on a matter as to which by the contract his decision is to be final and conclusive, and this decision has been accepted and acted on, he cannot subsequently change it; nor can the contractor, if he has with knowledge of the facts expressed his satisfaction therewith, subsequently impeach it as erroneous or improper. Likewise, where the contract provides that failure of the contractor to file a written protest against a ruling within a specified time shall be construed as an acceptance thereof, the ruling becomes conclusive and binding where no protest is filed, unless such requirement is waived. However, the certificate, while conclusive that the contract has been fully performed, does not bar a claim for damages for breach of an express warranty.

The decision or certificate, when made final, is binding in its legal operation and effect on the owner, the contractor, and the other parties, if any, to the contract, including those guaranteeing its faithful performance, but not as between either party and the architect, or a third person, although, on the other hand, it has been held that such certificate is binding on the judgment creditors of the contractor. Where the contract does not make, or show an intention to make, the decision, estimate, or certificate final and conclusive, it does not have that effect, as where the provision for approval or rejection by the architect or engineer is intended merely as an additional safeguard against defects not ascertainable by an unskilled person; but in such case the decision or certificate is prima facie, and only prima facie, evidence that the work has been performed according to the contract, and in an action by the contractor for compensation the owner can, without regard to such approval, show nonperformance of the work according to the contract; and that is particularly true where the contract provides that the certificate shall not lessen the final responsibility of the contractor, or exempt him from liability to replace defective work. So, although the contract does not provide that the engineer’s estimate shall be conclusive, yet, in the absence of fraud or mistake, they may become binding on one or the other of the parties by his accepting and acting on them; and, in any event, if a supervisory architect issues a certificate that the contractor has substantially complied with the plans and specifications, it cannot lightly be disregarded.

Where the owner has a right to review a final decision but does not exercise it, his approval or disapproval of an estimate is immaterial.

Suspension of work. Under a provision which entitles the architect to suspend work, his suspension of the work is not subject to review by the courts except for fraud or gross negligence; and, under a provision that suspension of the work shall not entitle the contractor to damages, a suspension in good faith will not relieve him from an undertaking to abide by the award of an engineer as to the quantity and quality of the work done.

An actual controversy need not exist and be decided by the architect in order to make his decision binding between the parties, except where the provision confines his actions to disputes.

That question may be decided in some other manner does not affect the binding character of the decision.

Refusal of decision or certificate. Where the contract is to be performed to the satisfaction of the architect or engineer who is to issue a certificate of approval, the refusal of the architect or engineer to approve the work is, unless he acts unreasonably, arbitrarily, or fraudulently, binding on the contractor and where the architect has not passed on a matter left to his determination, it will not be passed on by the courts, where there is no proof of fraud or unreasonableness on his part.

Account stated has force of estimate. Where a contract stipulates that an official is to determine the amount of work to be paid for and that his estimate is to be final, and the builder has received payment of the amount audited as due on final settlement and receipted for payment in full, the transaction constitutes an account stated and is, in the absence of fraud, conclusive. Conversely, under a contract providing that the architect’s final certificate of the amount due the contractor shall be conclusive evidence of his performance, his final certificate is in effect an account stated, or a liquidation of the amount due the contractor who is not required in the first instance to introduce evidence to sustain his claim.

Reversal. An approval of work by an architect who is sole arbiter between the parties as to the character of the materials used cannot be reversed to the injury of the contractor.

Appeal to arbitrators. Where the contract provides that either party, if dissatisfied with the architect’s decision, may appeal to arbitrators, the architect’s decision is conclusive unless such an appeal is duly taken.

The arbiter decision is not conclusive where it concerns matters outside of those authorized by the contract or not within the scope of the submission, where it is not an exercise of the arbiter’s honest judgment, where the contract is void, and for various other reason depending on the terms of the contract or the particular circumstances of the case.

The architect’s or other person’s decision, estimate, or certificate may have a conclusive and binding effect only where it concerns matters within the scope of the submission to him and within his knowledge at the time of giving it, and only where it is made in the exercise of an honest judgment and is not the result of fraud, bad faith, or mistake, as hereinafter discussed infra (c) of this subdivision. Such a decision, estimate, or certificate is not binding as to matters outside of those authorized by the contract to be passed on, if not provided for in the contract, or if the contract is void; and a provision that the estimates of the engineer shall be binding does not apply where no claim is made for work done under the contract, and the contract itself has been rescinded, and the contractor is claiming to recover for the loss of the contract. A provision that the decision of the architect as to the interpretation of the contract shall be final refers to instances of repugnant or ambiguous provisions of the contract, and does not make his decision interpreting the contract contrary to its clear and distinct terms final.

It has been held that a certificate showing the cost of the completion of the work by the owner, on the contractor’s default under a contract provision for such completion, making the contractor liable for the excess of the cost over the balance due him, in order to be conclusive, must be founded on a thorough audit of such expense that the architect’s approval of the completed work as a compliance with the contract is not binding on the owners where, at the time of acceptance and final payment, they were ignorant of the contractor’s failure to follow plans and specifications that a certificate of approval is not conclusive when obtained from the architect upon a mere statement made to him by the contractor and subsequently revoked, or where the certificate provided that it should not be considered as an acceptance of the work; that, where there is no conflict between the provision for a final certificate and a provision for an express warranty, a final certificate is not conclusive of the right to recover for a breach of the warranty.

Decisions or estimates by subordinates. Where a railroad construction contract provided that the decisions of the chief engineer in case of a dispute should be conclusive, a finding by him on a disputed point was not conclusive if he paid no personal attention to the matter but acted solely on statements of his subordinates. So, where the contract provided that the measurements were to be made by the chief engineer, measurements made by an assistant engineer, although approved by the chief engineer, will not be final and conclusive, although admissible in evidence in an action on the contract. On the other hand, a similar provision has been held not to contemplate that the chief engineer himself should make the measurements or estimates, but that estimates made by an assistant and forming the basis for the final estimate by the chief engineer were sufficient; and it has been held that, where the contract merely provided for estimates by “the engineer,” they need not, in order to be conclusive, be made by the chief engineer. An architect’s allowance of a contractor’s preliminary estimate does not fix the actual, but only the approximate, value of the materials covered by the estimate.

Dismissal of contractor. Although where the contract authorizes a dismissal of the contractor upon a certificate of the architect that the work is not being prosecuted with diligence the architect’s certificate to that effect is conclusive that a cause for termination of the contract then exists, yet if the owner allows the contractor to proceed with the work he waives the right to dismiss and a subsequent dismissal without any further certificate is unwarranted and decisions made by an architect to correct an error of his own, and not for the contractor’s benefit, are not binding on the contractor to cause his dismissal, since he is not responsible for the architect’s error.

Other cases in which the decision, certificate, or estimates of the architect, engineer, or other arbiter have been held not final and conclusive on the parties are collected in the note.

Who may question certificate; public contracts. A statute providing that, notwithstanding the architect’s certificate as to the correctness of a claim against the county under a construction contract, the county commissioners must inform themselves as to whether the money is due and owing was held intended to prevent the commissioners from being bound as a matter of law by the architect’s certificate and to place on the commissioners the ultimate responsibility for the allowance of the claim. Where a city charter vests in the city title to school buildings and provides for payment therefor of money of the city derived from bonds issued, the city comptroller has the power and duty to question the architect’s certificate for payment to the building contractor because of the inclusion of an item not authorized under the contract, although the board of education is a separate corporation.

The decision, certificate, or estimates may be impeached for fraud, bad faith, gross mistake, or gross negligence, but not for error of judgment. The defenses may be interposed in an action at law, but in some states equity alone has jurisdiction to give relief.

It may be stated generally that a certificate, estimate, determination, or decision of an architect, engineer, or other person, may be impeached for fraud, want of good faith, or such gross mistake as would imply bad faith or a failure to exercise honest judgment, as where he has knowingly and willfully disregarded his duty. Either party may allege and prove in avoidance of the certificate that the architect acted fraudulently or in bad faith. Thus, where the work is approved by the architect or engineer, and his certificate is issued in performance of a fraudulent agreement or understanding between him and the contractor, the certificate is not conclusive as against the owner, and the latter may, after establishing such fraud, show that the work was not in fact properly performed.

So also collusion between the architect and the owner may constitute fraud against the contractor; but the owner is not liable to the contractor for the fraud of the architect in the preparation of the specifications, in the absence of collusion between the architect and the owner, or a change in the specifications after the execution of the contract which provided that the contractor agreed to perform according to specifications.

While the decision of the architect, engineer, or other arbiter may be impeached for mistake, it has been held that a mere error of judgment, or the rendition of a defective judgment, is not sufficient to impeach the decision, in the absence of fraud or bad faith, although some errors may be corrected in equity, or by the appellate court. A provision making the decision conclusive as to some matters does not apply to a decision which is based on a misconstruction of the contract.

If the architect or the engineer is grossly negligent in certifying the execution of the work, justifying the inference of fraud or bad faith, his decision or certificate is not conclusive; but it cannot be impeached for negligence not amounting to fraud or bad faith.

Remedy. In some states the decision or estimate of an architect or engineer may be impeached and relieved against in the case of fraud or gross mistake only by proceedings in a court of equity but under the codes and practice acts in other states the jurisdiction of equity is not exclusive and such defenses may be interposed in an action at law.

Certificates and estimates given during the progress of the work may or may not be conclusive, depending on the terms of the contract and the circumstances of the particular case.

Where the compensation is payable in installments as the work progresses, the final payment becoming due on the completion of the work, and certificates of approval are required as a condition precedent to the right to demand payment, the certificates given during the progress of the work are not regarded as conclusive that the work therein certified to was properly performed, and the architect may properly refuse a final certificate on the ground that the work has not been properly done; and in the absence of such a certificate the owner may claim damages for defects, notwithstanding the progress certificates. So, where the right of final inspection is reserved, the party in whose favor the reservation is made is not bound by partial settlements and acceptances made during the progress of the work. Where the contract calls for payment according to periodical estimates, it has been held to import accurate and final estimates, and, when made and acquiesced in they will be binding and not subject to change by future measurements unless it was understood by both parties that they were to be considered as mere approximations to be subsequently corrected; but it has been held that in making the final estimate the previous periodical estimates are to be regarded merely as approximate estimates of the relative value of the work completed and not conclusive, and that the contractor cannot, before the final estimate is made, sue for the balance due on the basis of the last periodical estimate, and that on the final estimate the owner is entitled to show that the engineer, for the accommodation of the contractor, has increased the periodical estimates beyond the amount actually due, with the understanding that the proper reduction should be made on the final estimate. Where, under a contract for hauling stone, it was the duty of the contractor to roll the stone after it was placed on the surface of the road, in his action for stone hauled and for damages for breach of contract the contractor was not concluded by monthly settlements based on the engineer’s estimates if they included only stone which had been hauled and placed on the road but not rolled. It has also been held that an architect’s estimates made during the progress of the work do not create any absolute liability on the owner to pay, if the contract provides that he may retain any amount which may become due for liens or claims of laborers or materialmen, it appearing that when the estimate was given there were claims which might be made valid liens largely in excess of the amount of the estimate.

A certificate of approval is not conclusive against the owner with respect to latent defects in the performance of the work which could not have been discovered.

The architect’s or engineer’s certificate of approval is not conclusive against the owner as regards latent defects in the performance of the work, which defects could not have been discovered by the architect or engineer; but this rule does not apply to defects which the architect might have discovered by the application of well known tests.

The decision, certificate, or estimates given by the arbiter in good faith are binding on the subcontractor or materialman if the provision for approval of the work by the arbiter is a part of the contract between such subcontractor or materialman and the principal contractor; otherwise not.

Where a provision that the approval of the work by an architect or engineer shall be final is made a part of the contract between the principal contractor and a subcontractor or materialman, a decision made in good faith is conclusive as between the principal contractor and the subcontractor or materialman. However, a subcontractor is not bound by such decision unless the provision therefor is made a part of his contract; nor is the principal contractor absolved from liability to a materialman where, after the material was delivered and approved by the architect, the latter, pursuant to a change in the original contract, arbitrarily rejected the material. On the other hand, it has been held that where it was agreed that materials furnished to the contractor should be subject to the approval of a third person, and such person rejected material arbitrarily and in bad faith, the materialman could refuse to proceed with his contract, but could not recover against the principal contractor unless there was collusion between the latter and the arbiter.

Public work. Where a contract was made by a city with plaintiff for heating and ventilating a public building to be erected by a general contractor, and plaintiff fully performed his contract, the fact that the public building inspector, to plaintiffs knowledge, disapproved of the heating plans for which the general contractor was responsible, did not deprive plaintiff of his right to recover, even though the statute declared that the inspector’s certificate should be conclusive evidence of compliance with the statute. A general contractor cannot defend an action on his guaranty of compensation to a subcontractor on the ground of unsatisfactory work by the latter, who had received the architect’s certificate of approval.

A certificate which shows that the work was performed to the satisfaction of the arbiter is sufficient where no special form is provided by the contract, and it may be conditional. The certificate must be final and complete as to the matters decided. Partial invalidity will not invalidate it as a whole, and objections as to form may be waived.

The certificate of the architect, engineer, or other arbiter, as constituting the decision of the arbiter, including its production as a condition precedent to action, waiver of its production and excuses for its nonproduction, and its conclusiveness and effect, have already been discussed, see supra §§ 496, 498, 499. This section deals only with the formal requisites of the certificate.

Where no specific form of certificate is prescribed, any certificate that is in substance all that the contract requires, or which is so treated by the parties interested, is sufficient, and the architect may adopt his own form, although the approval, estimate; or certificate must at least substantially contain such recitals as the contract calls for. The courts do not require that technical accuracy be followed in the form and wording of the certificate of approval, and such certificate will be deemed sufficient where it conveys the meaning that the work has been performed to the satisfaction of the architect or engineer certifying; and it is not in fact necessary that it should state in terms that the work has been done to his satisfaction where such fact can reasonably be implied. Thus it is sufficient that the certificate states that the payment is due as per contract, that the contractor is entitled to payment according to the contract, and that the amount of the payment is a certain sum; that the final payment is “now due” to the contractor; that the contractor is entitled to a settlement from the owner or that the work has been completed, as this implies that it was done according to the contract and to the satisfaction of the architect. Merely giving to the contractor an order on the owner for a certain sum is insufficient, and an estimate or opinion of the arbiter as a witness is likewise insufficient.

The certificate, decision, or estimate of the architect must be both final and complete as to the matters decided, although it is not essential, in order to constitute a certificate a final one, that it is therein declared to be such; if it is apparently in balance and satisfaction of all claims, it is sufficient. Where the engineer named in a building contract as the arbiter has given a certificate stating that the contract has not been completed or complied with, no recovery can be had on the contract.

Conditional certificate will be sufficient only where it is shown that the condition has been complied with; but where the work must be performed to the satisfaction of the architect and the owner a certificate from the architect that payment is due the builder “subject to owner’s approval” entitles the owner to refuse payment if the work is not satisfactory to him.

Partial invalidity. The invalidity of a decision or certificate in part will not necessarily invalidate it in toto, unless it is given as an entirety. Thus an estimate or decision partly within and partly without the matters submitted by the contract is not void in toto, but only as to matter improperly decided by the architect.

Waiver of objections to form. Where the owner has repeatedly made payments on certificates of a peculiar form without objection, he cannot raise objections to the form for the first time on the trial.

When the contract so requires, the certificate must be in writing signed by the arbiter. In the absence of such requirement actual approval of the work is sufficient.

The certificate must be in writing, signed by the arbiter, where the contract expressly so requires, or shows that a writing was contemplated by the parties, and it has been held that a formal approval and acceptance, without a certificate, is insufficient. Where, however, the contract merely requires the work to be performed subject to the approval or satisfaction of the architect, engineer, etc., and does not expressly require that the contractor shall procure a certificate of approval, actual approval of the work is sufficient, and the procurement of a certificate of approval is not necessary, and in such a case the approval may be implied as well as express.

The certificate must be delivered to the contractor.

Where the contract requires the presentation by the contractor of a certificate of approval to be issued to him by the architect, there must be a delivery of the certificate to the contractor; but it has been held that, where a certificate is delivered by the architect to the contractor who returns it to the architect, the validity of the certificate is not affected thereby, and that a recovery may be had by the contractor without the actual presentation of the certificate to the owner.