Brief Fact Summary.
Partners of a company entered into a contract with Defendant to replace another partner who was retiring. Defendant was required to purchase a certain amount of stock to become partner. Since Defendant did not have all the funds, the partners allowed him to get a promissory note for the rest of the stock amount. After Defendant proved to be unsatisfactory in his job duties as a partner, the partners discharged him.
Synopsis of Rule of Law.
If a contracting party materially breaches a contract, the other contracting party may rescind the contract as a result of this material breach.
Braymen, Jacques, and Hughes were three partners who owned B&B Equipment Co. (Plaintiff). Since Braymen wanted to retire, Jacques and Hughes tried to find a replacement partner. Jacques and Hughes entered into an agreement with Bowen (Defendant) to replace Braymen as partner. Since Bowen did not have the necessary $15,000 to buy Braymen’s 100 shares of stock, Plaintiff bought the stock from Braymen on Defendant’s behalf. In return, Defendant gave $2,500 and a promissory note for $12,500 to Plaintiff. Defendant and Plaintiff agreed that he would be entitled to the dividends on the shares, but that he would turn over the dividends until the promissory note was paid. Under the agreement, Defendant was in charge of corporate recordkeeping and bookkeeping. He was responsible to take care of anything else that needed to be accomplished for the company. After Defendant’s performance proved to be unsatisfactory to the partners, the partners informed Defendant that he was discharged from the company. Defendant agreed to surrender his interest in the corporation for a certain amount of money. Plaintiff’s attorney responded that the agreement had been rescinded. As such, Plaintiff was repaid the original $2,500 and any other amount he invested towards purchasing stock. The parties continued to dispute this matter. As a result, Plaintiff sought declaratory judgment and Defendant filed a counterclaim seeking declaratory judgment as well. After the trial court ruled that Plaintiff had the right to rescind the contract, Defendant appealed to the Missouri Court of Appeals.
If a contracting party materially breaches a contract, may the other party rescind the contract as a result of this material breach?
Yes. A contracting party has the right to rescind a contract for a material breach by the other contracting party. A breach is considered material if it relates to an important provision of the contract or goes to the very root of the contract. In this case, the agreement was Defendant’s employment as a partner, not Defendant’s purchase of the 100 shares of stock. His performance as partner went to the very root of the contract. Defendant claims that the contract should not be rescinded because he never had notice that his performance was unsatisfactory; however, Jacques gave Defendant fair warning of his unsatisfactory performance. There is no evidence to support that Jacques and Hughes did not act in good faith and fair dealing. Therefore, the trial court’s judgment is affirmed.
To determine whether a breach is material, courts consider the following factors: (1) the extent the injured party gets substantial benefit; (2) the extent the injured party could be adequately compensated; (3) the extent the breaching party has performed in part or prepared to perform under the contract; (4) the degree of hardship suffered by the breaching party as a result of the breach; (5) whether the breaching party’s breach was willful, negligent, or innocent; and (6) the degree of uncertainty that the breaching party is willing to perform the rest of the contract. In this case, since Defendant’s performance was unsatisfactory, Plaintiff did not receive the substantial benefit from the contract. Although Defendant partly performed under the contract, his performance was unsatisfactory. Since the factors favor the fact that Defendant’s breach was material, the Court held that the contract could be rescinded