By Brad Nakase, Attorney
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The term failure of consideration refers to a situation where one party to a contract fails to fulfill their agreed-upon obligations, causing the contract’s purpose or the exchange of value to collapse. This occurs after a contract has been formed with valid consideration, but one party does not perform or provide the promised goods, services, or payment. As a result, the other party may seek remedies for breach of contract based on this failure of consideration. It’s important to distinguish a failure of consideration from situations where there was never any consideration to begin with, as a valid contract must initially have some form of consideration to be enforceable.
Where a party to a contract fails to perform in accordance with the contract, or if the consideration he is required to give otherwise fails in whole or in part through his fault, the other party may invoke this failure as a basis for rescinding or terminating the contract, as long as the failure or refusal to perform constitutes such a material breach as to justify rescission or termination. (Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga (2009) 175 Cal.App.4th 1306.)
In cases of anticipatory breach, the non-breaching party may assert a failure of consideration if they can demonstrate that the other party has clearly indicated their intention not to fulfill the contractual obligations. The difference between Anticipatory breach vs repudiation also becomes relevant when one party’s future performance hinges on the continuation of the consideration provided by the other side.
Example of failure of consideration
An example of failure of consideration would be a situation where two parties enter into a contract for the sale of a car. Let’s say Party A agrees to sell a car to Party B for $10,000. Initially, there is valid consideration on both sides: Party A’s promise to deliver the car, and Party B’s promise to pay $10,000. If Party A fails to deliver the car after receiving the payment, this constitutes a failure of consideration on Party A’s part. As a result, Party B would be entitled to remedies, such as a refund or damages, due to this breach of the contract.
If Party B anticipates that Party A will not deliver the car based on explicit statements or actions by Party A, Party B may claim an anticipatory breach of the contract. Here, the distinction between Anticipatory breach vs repudiation is crucial because Party B would need to establish that Party A’s conduct clearly indicated a refusal to perform, leading to a failure of consideration in the agreed contract.
Total failure of consideration occurs when a party to a contract receives none of the promised performance or benefits under the agreement. In this scenario, the non-breaching party does not receive the goods, services, or value that formed the basis of the contract, leading to a complete breakdown of the contractual obligations. Essentially, a total failure of consideration happens when the purpose of the contract is entirely defeated due to one party’s failure to perform.
For example, let’s say Party A pays Party B $5,000 in advance for Party B to build a website. If Party B fails to perform any work or deliver the website, this results in a total failure of consideration because Party A received absolutely no benefit in return for the payment. In such cases, Party A could claim that Party B’s complete lack of performance led to a total failure of consideration and seek remedies, such as rescission of the contract or recovery of the paid amount.
In cases involving an anticipatory breach, if Party B indicates in advance that they will not perform their obligations, Party A could argue that a total failure of consideration will occur due to the impending non-performance. Here, the distinction between Anticipatory breach vs repudiation can play a role, as it affects Party A’s legal strategy in handling the breach.
The difference between absence of consideration and failure of consideration lies in the formation and subsequent performance of a contract. Here’s a detailed explanation that includes the term failure of consideration and addresses its context with anticipatory breach and Anticipatory breach vs repudiation:
In cases involving an anticipatory breach, the non-breaching party can claim that the anticipated non-performance would lead to a failure of consideration. In the context of Anticipatory breach vs repudiation, the issue is whether the anticipated actions or refusal by one party amount to a total refusal to perform, thereby leading to a situation where the promised exchange of value is not fulfilled, constituting a failure of consideration.
A plea of failure of consideration is a legal defense raised by a defendant in response to a claim for breach of contract. In this plea, the defendant argues that the contract’s consideration, which was a key element in the formation of the agreement, has completely or partially failed. Essentially, the defendant is asserting that they are not obligated to perform their contractual obligations because the consideration they were supposed to receive either was not delivered at all or was insufficient.
For example, if Party A sues Party B for non-payment of goods delivered, Party B could raise a plea of failure of consideration by asserting that the goods received were defective or not delivered as agreed. This defense suggests that Party B is excused from payment because the promised consideration—the delivery of goods—was not properly provided. A plea of failure of consideration challenges the plaintiff’s claim by highlighting the non-existence or inadequacy of the agreed-upon consideration.
In cases involving an anticipatory breach, if a party claims that there was an indication of non-performance, a plea of failure of consideration may be used to argue that the non-breaching party cannot be expected to perform their obligations due to the other party’s failure to provide the agreed benefits. This defense strategy is relevant when exploring Anticipatory breach vs repudiation, as the focus on consideration highlights the basis of the contractual obligations in dispute.
Yes, failure of consideration is considered a real defense in contract law. A real defense is one that challenges the fundamental validity of a contract or the enforceability of a contractual obligation. When a party raises a defense of failure of consideration, they are asserting that the agreed-upon exchange of value in the contract either did not occur or was fundamentally incomplete, thereby undermining the validity of the contract itself.
For instance, if Party A entered into a contract to receive specific services from Party B, but Party B did not perform any services as promised, Party A can claim failure of consideration as a defense against Party B’s demand for payment. This defense highlights that Party B’s non-performance effectively nullifies the obligation for Party A to pay under the agreement. The concept of failure of consideration becomes crucial in cases where one party claims that they have not received the benefit they were entitled to.
When dealing with an anticipatory breach, the non-breaching party can raise the defense of failure of consideration if they can demonstrate that the other party’s anticipated non-performance would result in a lack of the promised exchange of value. The analysis of Anticipatory breach vs repudiation often involves considering whether the threatened breach would lead to a total or partial failure of consideration, impacting the enforceability of the contract.
Yes, failure of consideration is an affirmative defense in contract law. An affirmative defense is a legal argument that, if proven, can defeat or mitigate the plaintiff’s claim even if the plaintiff’s allegations are true. When a defendant raises failure of consideration as an affirmative defense, they are asserting that the agreed exchange of value in the contract was never received or that the other party failed to perform their contractual obligations, thereby invalidating the defendant’s duty to fulfill their part of the contract.
For instance, if Party A sues Party B for failing to make a payment under a contract, Party B could raise the affirmative defense of failure of consideration by showing that Party A did not deliver the goods or services as agreed. By establishing this, Party B would argue that their obligation to pay is excused due to the breakdown in the exchange of value.
In situations involving an anticipatory breach, the non-breaching party could use the defense of failure of consideration to demonstrate that their obligations should be discharged because the other party has indicated they will not perform their contractual duties. Understanding the distinction between Anticipatory breach vs repudiation is relevant here, as the defense may hinge on whether the other party’s actions amounted to a clear refusal to perform, resulting in a failure of consideration for the contract as a whole.
Element 1: Failure to Execute a Promise
Element 2: Breach Must Be Material
For a breach to justify abandonment of the contract, the promise must “go to the root of the contract,” so that a failure to perform it would render the performance of the rest of the contract different in substance from what was contracted. (Boston LLC v. Juarez (2016) 245 Cal.App.4th 75.)
Requirements of a Material Breach: For a breach to be considered material, the plaintiff must have fulfilled significant obligations required by the contract. Additionally, the contract’s obligations should be dependent, meaning that the parties agreed that the failure to perform one key obligation would relieve the other party from their duty to perform. (CACI 303)
Willful Failure to Perform: A partial failure of consideration due to a willful failure by one party to perform a material part of the contract can justify rescission by the opposing party. (Dcm Constr. & Servs. v. Mohammadian (2010))
Example:
In a case where the defendant deliberately failed to correct property issues, resulting in breaches of the warranty of habitability and various statutory violations, this was deemed a material breach. (Shapiro v. Neman (2018))
Example:
If a defendant fails to start construction within a contractually required timeframe without excuse, this would be a breach justifying recovery of losses by the other party. (Hidden Glen Partners, LLC v. City of Napa (2016))
Lack of Economic Loss Does Not Render Default Immaterial: A default can still be deemed material even if the non-breaching party does not experience economic loss. For instance, an owner was justified in rescinding an exclusive listing agreement because the broker did not bring prospective buyers and made minimal efforts to advertise the property. (Coleman v. Mora (1968))
Delay in Performance/Time is of the Essence: A delay in performance is not automatically a failure of consideration unless the contract explicitly states that time is of the essence. In the absence of such a provision, delays do not invalidate the contract. (Kreizenbeck v. Dan Gamel’s Rocklin Rv Ctr. (2011))
Time is of the Essence Expressly Stated in Contract: If the contract explicitly states that prompt performance is vital, time is of the essence, and any delay in performance becomes a material failure of consideration. (Kreizenbeck v. Dan Gamel’s Rocklin Rv Ctr. (2011))
Time of Breach: The timing of the breach plays a significant role in assessing its materiality. A breach at the outset of performance may justify rescission, whereas a similar breach later in the contract might not be significant enough to warrant termination. When the breach occurs early, the court considers whether releasing the injured party from their obligations is more just. (Whitney Inv. Co. v. Westview Dev. Co. (1969))
Demand for Performance Necessary: When a contract does not specify a timeframe for performing an act other than paying money, a demand for performance is necessary to place the promisor in default. (Kirschenmann v. Bender (2014))
Rescission
Failure of consideration in a material respect is a sufficient basis for a party to unilaterally rescind the contract. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221.)
Restitution
A claim for restitution may be based on unjust enrichment if the contract is void or rescinded due to failure of consideration. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221.)
Compensatory Damages
Under Civil Code section 1692, compensatory damages can be sought in breach of contract cases involving failure of consideration. For example, a court affirmed an award of damages when a seller failed to honor instructions to sell a residence, even though rescission was not granted. (Guan v. Hu (2018) 19 Cal.App.5th 495)
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