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.
What are the three requirements of consideration?
Element 1: Failure to Execute a Promise
- Definition of Failure of Consideration
Failure of consideration occurs when one party does not fulfill a promise that was the basis for the other party’s performance. This can result from a willful breach of the promise. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221.)
- Breach of Implied Promise
A breached promise does not need to be explicitly stated in the contract. For example, even without an express contract, courts may imply a promise based on the circumstances, such as an implied promise by a university not to increase educational fees for continuing students. (Kashmiri v. Regents of University of California (2007) 156 Cal.App.4th 809.)
- Failure of Consideration as Grounds for Rescission, Not Voidness
A failure of consideration differs from a lack of consideration in that it arises due to events occurring after the contract is made, which result in one party’s substantial non-performance. This condition does not render the contract void but provides grounds for rescission, remaining in effect until rescinded or terminated. (Civ. Code § 1689(b)(2))
- Total Failure of Consideration
A total failure of consideration happens when one party receives nothing of value from the contract. For instance, if a seller fails to transfer a deed to a real estate buyer who has already paid, it constitutes a total failure of consideration. (Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221.)
- Delay in Performance is Not a Failure of Consideration
A delay in performance does not amount to a failure of consideration unless the contract specifies that time is of the essence. If time is not expressly critical, the delay does not nullify the consideration. (Kreizenbeck v. Dan Gamel’s Rocklin Rv Ctr. (2011))
- Partial Failure of Consideration as Grounds for Rescission
A party can rescind a contract for partial failure of consideration, even if the opposing party has partially performed. (Galaz v. Oshita (2006))
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))
Remedies
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)