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October 07, 2010

The Right to Cure a Contract Breach

Under Wisconsin law, many contracts and statutes give parties an opportunity to cure mistakes before the other party can exercise some remedial action. The language of the governing contract or statute may define the extent of a cure and the actions that must be taken to effect it. Here the authors survey various contractual and statutory cure rights available in Wisconsin.

Joseph P. Wright

The Common Law Right to Cure Before the Time of Performance

The common law right to cure is premised on a basic tenet of contract law: only a material breach of contract existing at the nonbreaching party’s time of performance will excuse that party’s refusal to perform.³ If there is no material breach at the time of performance, either because the breach was not material to begin with or was sufficiently corrected to no longer be material – that is, “cured” – then the nonbreaching party has no right to refuse to perform.

For example, in Bridgkort Racquet Club Inc. v. University Bank,⁴ the bank acted too hastily when it refused to attend a closing after learning that the borrower had not yet secured signatures from all the requisite guarantors or obtained satisfactory insurance policies. There was evidence that the remaining two guarantors could have signed the guaranties later on the day of closing if a few telephone calls had been made. Likewise, the bank’s objections to the insurance policies were minor and could have been fixed, at least to the point of substantial compliance with the loan contract, if the bank had attended the closing and made its objections known. Because Bridgkort could have corrected its mistakes, the court concluded that Bridgkort substantially performed its obligations under the loan contract.⁵

The common law right to cure ends at the time of performance. Common law judges did not allow for a grace period after the time of performance. That work was taken up by contracting parties and by state and federal legislators. The following sections survey cure provisions commonly found in Wisconsin.

Volvo and the Right to Cure a Material Breach

In Volvo, the Wisconsin Supreme Court examined a type of cure right found in the motor-vehicle-dealer statute and many contracts: the right to cure a material breach of the contract. In Volvo, a truck dealer virtually abandoned the sale of one brand of trucks (Volvo) to focus on the sale of another brand (Peterbilt).⁶ In fact, the dealer went so far as to label its plan the “Volvo Elimination Plan.”⁷ The plan included “changing the business name to ‘Peterbilt Wisconsin-Wausau’; not using the Volvo logo on business cards; attempting to convince longtime Volvo customers to switch to Peterbilt; giving Volvo quotes only on request; requiring that all Volvo quotes be accompanied by a Peterbilt quote; and focusing marketing efforts on Peterbilt.”⁸ And the plan apparently worked, because the dealer’s sales of Volvo trucks dropped significantly.

When Volvo learned about the actions taken by the dealer under the plan, Volvo served the dealer with a notice of breach under Wis. Stat. section 218.0116, which governs motor vehicle dealers. Volvo claimed that the dealer was in material breach of the dealer agreement provision requiring the dealer to aggressively sell Volvo trucks.⁹ Upon receiving Volvo’s notice of breach, the dealer had the statutory right¹⁰ to cure the alleged breach within a reasonable time before Volvo could terminate the dealer.¹¹

After receiving the notice of breach, the dealer dropped most of the Volvo Elimination Plan and adopted several measures to show its recommitment to Volvo. The dealer claimed it had thus cured the breach.¹² However, the dealer refused to compensate Volvo for its alleged losses while the plan was in place. Volvo responded by terminating the dealer, asserting that the failure to compensate Volvo was a failure to cure the breach.

The dealer conceded that its abandonment of the Volvo contract constituted a material breach of the dealership agreement.¹³ The issue before the supreme court was whether “to cure” the breach meant that the dealer had to repair all harm done by the breach or simply had to resume substantial performance of the contract. Volvo argued that it was the former. Volvo relied on a Seventh Circuit case discussing the dictionary definition of cure – “to remedy, restore, remove, or rectify” – in the context of a right to cure a default of a loan agreement.¹⁴

The supreme court disagreed with the dictionary approach. The court observed that “[t]he word ‘cured’ may have different meanings in different contexts.”¹⁵ The court turned to several treatises discussing what it means to cure a material breach in the contract context. For example, the court noted that “Corbin on Contracts explains that allowing for a ‘cure’ of the breach gives a party ‘another chance to perform substantially’ and ‘a second chance to perform according to the contract.’ The cure is performance to the level of substantial performance.”¹⁶ Put another way, if the dealer was substantially performing at the end of the cure period, then there is no material breach: the material breach has thus been cured.

Joseph P. Wright, U.W. 1988, is a partner with Stafford Rosenbaum LLP, Madison. His practice emphasizes business litigation, including dealership and franchise law.

Thomas B. Aquino, Boston College 2002, is a senior associate with the firm, focusing on business litigation.

The supreme court then deferred to the factual conclusion reached by the administrative body, that the dealer had indeed cured the material breach.¹⁷ The court held that there was substantial evidence that the dealer had “recommit[ed]” to selling Volvo products, pointing to the 10 separate actions and policy changes undertaken by the dealer.¹⁸ Accordingly, the court held that Volvo improperly terminated the dealership.

The Volvo court also relied on Anacapa Technology Inc. v. ADC Telecommunications.¹⁹ Anacapa claimed that ADC materially breached the confidentiality provision of its technology licensing agreement when ADC sublicensed the technology without adequate confidentiality protections. Anacapa sent ADC notice that if the breach was not cured within 30 days, Anacapa would terminate the contract. ADC instituted additional confidentiality protocols in response but did not make any effort to compensate Anacapa for the prior breach. ADC then terminated the agreement, arguing that the failure to compensate was a failure to cure the material breach.

However, the Anacapa court held that the termination was improper. Using the rationale later adopted in Volvo, the court concluded that substantial performance will cure a material breach. The court further held that confidentiality controls instituted by ADC constituted substantial compliance with the contract. The court reasoned that if Anacapa suffered any damages as result of the period of noncompliance, it could bring a suit against ADC for damages. However, Anacapa could not terminate the agreement.

Volvo and Anacapa teach that the test for whether a breaching party has cured a material breach is simple: At the end of the cure period, is the party still in material breach of the contract for any of the reasons of which it was notified? If the party has “stop[ped] the offending conduct and [is] substantially perform[ing] the contract,” then there is no longer a material breach and the party has satisfied its cure obligations.²⁰ But this raises an additional question: When is a breach material?

Material Breach Defined

In short, a breach is material when it is “so serious a breach of the contract … as to destroy the essential objects of the contract.”²¹ The Restatement (Second) of Contracts, cited approvingly by the Wisconsin Supreme Court, suggests five factors for consideration when determining materiality:²²

The extent to which the injured party will be deprived of the benefit that it reasonably expected;
The extent to which the injured party can be adequately compensated for the part of that benefit of which it will be deprived;
The extent to which the party failing to perform or to offer to perform will suffer forfeiture;
The likelihood that the party failing to perform or to offer to perform will cure its failure, taking account of all the circumstances, including any reasonable assurances; and
The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

Courts have found a material breach in the following circumstances:

failure to complete construction project phases at specified dates;²³
conversion of a gym to a “women’s facility,” where a lease required the tenant to maintain an “athletic club”;²⁴
competitive and disruptive actions engaged in by a retired dental partner who had the right to enjoy “reasonable office space” at his former dental practice; ²⁵
repeated operation outside of a franchise territory;²⁶and
failure of a redevelopment authority to hire a full-time liaison between the authority and a contractor.²⁷

The court also will consider the nonbreaching party’s actions in determining materiality. A “non-breaching party may waive the claim of materiality through its actions.”²⁸ For example, the fact that a car manufacturer did not object to a dealer’s failure to file certain reports and keep certain models in stock for a four-year period suggested that the dealer’s failures were not material.²⁹ Finally, whether a breach is material is usually a question of fact,³⁰ but courts have occasionally determined materiality as a matter of law.³¹

Curing a Default

Defaults are a special type of breach of contract. They most often consist of the failure to make a required payment, usually under a loan or lease agreement.³² Loan agreements usually provide specific remedies for the lender, such as acceleration of the loan, the right to collect on collateral, and so on, for the borrower’s default. Likewise, default cures are usually specifically defined and are usually defined as the amount owed plus costs and interest – in other words, perfect performance. Thus, the Seventh Circuit said in Clark that “[t]he common meaning of ‘cure’ is to remedy, restore, remove, or rectify … and as the term relates to defaults, ‘cure’ means to restore matters to the status quo ante.”³³ The Seventh Circuit was careful not to confuse the right to cure defaults found in loan contracts with the right to cure that might be found in other contracts.

The Wisconsin Supreme Court examined the default and cure provisions of a commercial lease in Walters v. National Properties LLC.³⁴ The landlord mailed a 30-day default notice, citing the tenant’s failure to make certain rent payments, pay real estate taxes, and provide monthly and annual sales information as required by the lease. The tenant later provided the landlord with a check for the missed rent. At issue was whether the payment was timely and whether it resolved the defaults, as the lease’s cure provision required.

Much of the opinion focused on reconciling the conflicting cure periods set forth in the lease and the notice. The court concluded that the tenant would receive the benefit of the ambiguity created by the notice. However, the court still calculated that the 30-day cure period had expired before payment was tendered. The court also observed that even if the payment had been timely, the tenant had not attempted to cure the other breaches of the lease.

“By mailing the past due rent, National attempted to cure only one of the four parts of its default. It also did not cure timely its failure to provide monthly or annual sales figures, or its failure to pay property taxes. It was in default long past thirty days, and we cannot say that it ‘resolved’ all the defaults.”³⁵

Thus, even if the payment was timely, because the tenant had not cured the other defaults, the eviction was proper.

Similarly, the Wisconsin Consumer Act (WCA) defines both default and cure for consumer-credit transactions. For example, when “the interval between scheduled payments is 2 months or less,” a consumer will be in default if he or she has “outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates.…”³⁶ Once a default occurs (but not before³⁷) the merchant must give the consumer notice of his or her right to cure.³⁸ The “customer may cure a default under a consumer credit transaction by tendering the amount of all unpaid installments due at the time of the tender, without acceleration, plus any unpaid delinquency or deferral charges….”³⁹ Only after the cure period has expired may the merchant accelerate the amount due, demand or take possession of collateral, or commence a lawsuit.⁴⁰

Likewise, Wis. Stat. section 704.17 provides the notice and cure requirements for failure to make rent payments (and other breaches) of leases of varying lengths. For example, when the lease is for longer than one year, the tenant has 30 days to cure any alleged breach.⁴¹ The statute defines the cure requirement as follows:

“A tenant is deemed to be complying with the [cure] notice if promptly upon receipt of the notice the tenant takes reasonable steps to remedy the default and proceeds with reasonable diligence, or if damages are adequate protection for the landlord and the tenant makes a bona fide and reasonable offer to pay the landlord all damages for the tenant’s breach; but in case of failure to pay rent, all rent due must be paid on or before the date specified in the notice.”⁴²

Thus, the statute requires perfect performance – all rent due – to cure a default based on the tenant’s failure to pay rent.

In sum, when a contract or statute specifically requires perfect performance to cure, the courts will enforce that requirement. But as seen in Volvo, when the cure right is the more general right to cure a material breach, the court will require only substantial performance.

Cure Rights Under the WFDL

The WFDL protects Wisconsin dealers by providing that “[n]o grantor … may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause.”⁴³ Good cause is defined as “(a) [f]ailure by a dealer to comply substantially with essential and reasonable requirements imposed upon the dealer by the grantor, or sought to be imposed by the grantor, which requirements are not discriminatory as compared with requirements imposed on other similarly situated dealers either by their terms or in the manner of their enforcement; or (b) [b]ad faith by the dealer in carrying out the terms of the dealership.”⁴⁴

The cure requirements depend on the reason for the proposed termination.⁴⁵ “If the reason for termination … is nonpayment of sums due under the dealership, the dealer shall be entitled to written notice of such default, and shall have 10 days in which to remedy such default from the date of delivery or posting of such notice.”⁴⁶ Although the cure period is just 10 days, the notice period remain 90 days.⁴⁷ For example, a notice given on day 0 must give the dealer through day 10 to cure the nonpayment. If not cured, termination is effective on day 90.

When the dealer is being terminated or nonrenewed for any other reason, the dealer must be given 90 days’ notice of the change, with the notice stating all the reasons for termination or nonrenewal. The dealer then has 60 days to rectify any claimed deficiency.⁴⁸ But when is a deficiency “rectified”? Must the dealer achieve perfect performance, as in the default cases? Or would something less, like substantial compliance, suffice?

Surprisingly, there is no case law directly on point. Al Bishop Agency Inc. v. Lithonia – Division of National Service Industries Inc., a 1979 federal district court preliminary injunction case, comes closest.⁴⁹ In that case, the court held that the cure requirements set forth in the 90-day notice must be reasonable. Because the grantor had set an impossible goal – increasing the dealer’s annual sales performance to the company’s average within 60 days – the notice was defective. The court did not examine whether the dealer’s actual performance within the 60-day period otherwise rectified the deficiency.

When the courts do examine whether the WFDL’s cure requirement has been met, they are likely to employ a similar analysis as that used in Volvo. In Volvo, the court concluded that because a material breach gave rise to the right to termination, the proper question for determining whether a cure was effected was whether there was still a material breach at the end of the cure period. Likewise, because good cause is what allows a grantor to terminate a dealer under the WFDL, the courts are likely to decide whether a dealer has rectified the deficiency that gave rise to the termination right by asking whether there is still good cause at the end of the cure period.

And again, under the WFDL a grantor has good cause when there is a “[f]ailure by a dealer to comply substantially with essential and reasonable requirements imposed upon the dealer by the grantor, or sought to be imposed by the grantor….”⁵⁰ Thus, it appears that a dealer would be able to stave off termination or avoid nonrenewal if it can comply substantially with the dealership agreement.

In fact, this seems to be the court’s view in Brown Dog Inc. v. Quizno’s Franchise Co.⁵¹ The Quizno’s franchisee was consistently below its store quota, even after being given more than a year to cure, and was terminated as a consequence. In determining whether the termination was proper under the WFDL, the court did not address whether the franchisee had to achieve perfect or just substantial performance to meet its cure obligations. However, the court did hold that “six straight quarters [during the cure period] of missing the quota by a low number constitutes a failure to comply substantially with [the dealership agreement].”⁵² The implication is that if the franchisee had complied substantially with the dealership agreement during the cure period, it would have satisfied its cure obligations. Based on this holding (and others), the court ruled that the franchisee was properly terminated.

Conclusion

In the legal world, a cure is not necessarily a remedy for all that ails you. A general right to cure a material breach is exercised when the breaching party “stops the offending conduct and … substantially performs the contract.”⁵³ In other words, the breaching party need not compensate the nonbreaching party for all damages flowing from the breach to successfully exercise its cure right (although the breaching party may still be liable for money damages on a breach of contract claim). However, when a contract specifically defines what actions must be taken to effect a cure (such as lease agreements providing for a right to cure a default), the courts will enforce the specific requirement. Lawyers are thus well-advised to be mindful of the specific contractual or statutory language that creates the cure right at issue.⁵⁴

Endnotes

¹2010 WI 15, ¶ 47, 323 Wis. 2d 294, 779 N.W.2d 423.

²Id. ¶ 45.

³See, e.g., Restatement (Second) of Contracts § 237 (1981).

⁴85 Wis. 2d 706, 271 N.W.2d 165 (Ct. App. 1978).

⁵Id. at 709-10.

⁶Volvo, 2010 WI 15, ¶¶ 21-22, 323 Wis. 2d 294.

⁷Id. ¶ 21.

⁸Id.

⁹Id. ¶¶ 22-25.

¹⁰Wis. Stat. § 218.0116(1)(i)1.b.

¹¹Volvo, 2010 WI 15, ¶ 25, 323 Wis. 2d 294.

¹²Id. ¶ 28.

¹³Id. ¶ 22.

¹⁴Id. ¶ 32 (citing In re Clark, 738 F.2d 869, 872 (7th Cir. 1984)).

¹⁵Id. ¶ 31.

¹⁶Id. ¶ 43 (quoting 8 Catherine M.A. McCauliff, Corbin on Contracts, § 36.7 at 349 (1999)).

¹⁷Id. ¶¶ 52-55.

¹⁸Id. ¶ 55.

¹⁹241 F. Supp. 2d 1016 (D. Minn. 2002).

²⁰Volvo, 2010 WI 15, ¶ 47, 323 Wis. 2d 294.

²¹Management Computer Servs. Inc. v. Hawkins, Ash, Baptie Co., 206 Wis. 2d 158, 183-84, 557 N.W.2d 67 (1996) (quoting Appleton State Bank v. Lee, 33 Wis. 2d 690, 692, 148 N.W.2d 1 (1967)).

²²Restatement (Second) of Contracts § 241 (1981) (cited with approval by Management Computer Servs., 206 Wis. 2d at 184).

²³International Prod. Specialists Inc. v. Schwing Am. Inc., 580 F.3d 587, 597-98 (7th Cir. 2009).

²⁴44 Assocs. Ltd. P’ship v. Capital Fitness LLC, No. 2005AP3091, 2007 WL 704179, ¶¶ 9-11 (Wis. Ct. App. Mar. 8, 2007).

²⁵Donald L. Delebo D.D.S. v. Community Dental, No. 2006AP1525, 2007 WL 189133, ¶¶ 25-26 (Wis. Ct. App. Jan. 25, 2007).

²⁶Manpower Inc. v. Mason, 405 F. Supp. 2d 959, 970-73 (E.D. Wis. 2005).

²⁷Designer Direct Inc. v. DeForest Redevelopment Auth., 313 F.3d 1036 (7th Cir. 2002).

²⁸Management Computer Servs., 206 Wis. 2d at 184.

²⁹Entzminger v. Ford Motor Co., 47 Wis. 2d 751, 755, 177 N.W.2d 899 (1970).

³⁰Management Computer Servs., 206 Wis. 2d at 184.

³¹People’s Trust & Sav. Bank v. Wassersteen, 226 Wis. 249, 276 N.W. 330 (Wis. 1937); Gende v. Cannon & Dunphy S.C., No. 2006AP1323, 2007 WL 2043839, ¶ 17 (Wis. Ct. App. July 18, 2007) (unpublished).

³²“Default: … The omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due.” Black’s Law Dictionary 480 (9th ed. 2010).

³³738 F.2d at 872.

³⁴2005 WI 87, 282 Wis. 2d 176, 699 N.W.2d 71.

³⁵Id. ¶ 22.

³⁶Wis. Stat. § 425.103.

³⁷Indianhead Motors v. Brooks, 2006 WI App 266, 297 Wis. 2d 821, 726 N.W.2d 352.

³⁸Wis. Stat. § 425.104.

³⁹Wis. Stat. § 425.105(2).

⁴⁰Wis. Stat. § 425.105(1).

⁴¹Wis. Stat. § 704.17(3).

⁴²Id. (emphasis added).

⁴³Wis. Stat. § 135.03.

⁴⁴Wis. Stat. § 135.02(4).

⁴⁵While the WFDL refers to the termination, cancellation, failure to renew, and substantial change of the competitive circumstances of a dealership agreement, for the sake of clarity the remainder of the article will refer to all four situations just as “termination.”

⁴⁶Wis. Stat. § 135.04.

⁴⁷White Hen Pantry v. Buttke, 100 Wis. 2d 169, 301 N.W.2d 216 (1981).

⁴⁸Wis. Stat. § 135.04.

⁴⁹474 F. Supp. 828, 833-34 (E.D. Wis. 1979).

⁵⁰Wis. Stat. § 135.02(4)(a).

⁵¹No. 04-C-18, 2005 WL 3555425 (W.D. Wis. Dec. 27, 2005) (unreported).

⁵²Id. at *11 (emphasis added).

⁵³Volvo, 2010 WI 15, ¶ 47, 323 Wis. 2d 294, 779 N.W.2d 423.

⁵⁴As a survey, this article does not attempt to address all the statutory and contractual cure provisions found in Wisconsin law. Other important statutory cure provisions include Wis. Stat. section 402.508(2), which grants sellers a limited right to cure the delivery of nonconforming goods, and Wis. Stat. section 895.07, which grants residential contractors a limited right to cure defective construction before the homeowner may file a lawsuit.

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