Late notice of a contract breach is a recipe for disaster

“Seinfeld” was a great television show, maybe the greatest of all time. I could make the case for “Taxi,” but I digress.  One of my favorite Seinfeld episodes is when Jerry makes a reservation for a car rental, only to get to the rental counter and find out that they have his reservation but do not have a car for him. But “that’s why you have the reservation”: to hold the car.

Just like having a reservation without a car is worthless, so is having an agreement to buy a business but not taking advantage of its provisions. Failing to assert your contractual rights in a timely fashion may lead to a waiver of those rights.

Consider the saga of Jack, who retired as a successful banker but missed the thrill of helping his clients build successful businesses. One day over lunch at his favorite local pizza place, he struck up a conversation with Eddie, the owner, who told Jack that he was looking to sell the restaurant. Jack had been coming to the pizza place for years and it was always crowded. Jack always thought the pizza sauce was delicious and contained a special ingredient that he could not identify.

Jack and Eddie, with the help of their attorneys, negotiated a deal where Jack (through a company he would form) would buy the restaurant from Eddie’s company pursuant to the asset sale agreement, where one half of the payment would be paid at the closing and the balance paid pursuant to a note requiring monthly payments over five years. Jack personally guaranteed the note. The agreement specifically required Eddie to provide the recipes used in the restaurant and to spend no less than four weeks training Jack and his new staff in the operation of the business. The agreement did not preclude Eddie (or his family) from owning or managing competing restaurants.

All went well as first, the pizza restaurant continued to be popular and the first six months of payments were made. Then, the crowds starting to diminish and Jack failed to make the note payments. After several months of non-payment, Eddie provided notice of the payment default and gave Jack the required opportunity to cure the default. When payments were still not made, Eddie started a lawsuit for the full amount of the note.

In opposition to the lawsuit, Jack, for the first time, claimed that Eddie had not given him the real recipe for the pizza sauce and had not provided the agreed-upon amount of training. He also noted that Eddie’s son had opened a pizza restaurant in the neighborhood. Jack claimed that these breaches by Eddie were the reason that the restaurant had lost its popularity and were defenses to his failure to pay the amounts due under the note.

When a party materially breaches a contract, the non-breaching party must choose between two remedies: it can elect to terminate the contract or continue it. If is chooses to continue the contract, it loses its right to terminate the contract. However, if the non-breaching party continues the contract, it does not lose its right to sue for damages based on the breach, if it gives timely notice of the breach to the other party. Failing to give prompt notice of the claimed breaches acts as a waiver of those breaches, both as a basis for damages or as a defense to one’s own nonperformance.

Jack has to pay the full amount of the note, and is the owner of a unpopular pizza restaurant with a mediocre sauce. Jack should have stayed retired.

The lesson: Assert your contractual rights at the earliest time possible, and avoid any later claim that you have waived your rights.

This article appeared in the July 19-25, 2019 issue of Long Island Business News. ©2019 Long Island Business News.