Generally, the specific terms of a contract will govern rights to cure breaches prior to termination, but in certain circumstances the law will imply a short grace period to allow cure of certain contract breaches.

Generally, if an agreement provides specific and exclusive methods for termination, the non-breaching party is required to follow the requirements of the agreement in order to validly terminate based upon the breach of the other party. Sometimes, however, a party in material breach of contract will be allowed a reasonable time to cure the material breach, even where the agreement contains no express cure of breach provision.

In Queiroz v. Harvey, 204 P.3d 390 (Ariz. App. 2008), vacated, 220 Ariz. 273, 205 P.3d 1120 (2009), the Arizona Court of Appeals reminded us that:

Our cases teach that when a breach occurs and the contract provides an exclusive procedure for cancellation upon breach, the non-breaching party's failure to follow that procedure leaves the contract intact and allows the breaching party to cure the breach. [citations omitted] [I]f the agreement is not canceled as required by its terms, it may continue to be viable and a party who originally was not in compliance may later comply and force specific performance.

In the Queiroz case, Ivo Queiroz entered into a written contract with Daniel Harvey to buy 20 acres of land in Tonopah. Queiroz's real estate agent failed to deposit earnest money and Harvey's agent orally canceled the contract. Queiroz's agent raced to the escrow company and deposited the earnest money prior to Harvey's real estate agent sending a facsimile letter canceling the contract according to its terms.

The court noted:

[T]he contract likewise provided for an exclusive method of cancellation, one which required written notice that expressly was effective only upon delivery either to "the Escrow Company" or the breaching party. Buyer's failure to promptly deposit the earnest money entitled Seller to cancel the contract, but cancellation could be effective only if performed in the manner specified in the contract. Pursuant to the contract, cancellation was "effective immediately upon delivery of the written notice of cancellation," and not until that time.

So, because the cancellation notice required by the contract was not delivered until after the late deposit of the earnest money, Queiroz had cured the breach before the contract was canceled.

Harvey argued that the contract did not have a provision allowing for the cure of any breach. The court noted, however, "the general rule is that a party that has materially breached a contract is given a reasonable period of time in which to cure, even if the contract contains no express cure provision." Moreover, "an uncured material breach suspends the non-breaching party's duty to perform and may also discharge the non-breaching party from the contract." The Restatement (Second) of Contracts provides:

Ordinarily, there is some period of time between suspension and discharge, and during this period a party may cure his failure.

The court also noted:

Although a material breach justifies the injured party in exercising a right to self-help by suspending performance, it does not necessarily justify the injured party in exercising such a right by terminating the contract. Fairness ordinarily dictates that the party in breach be allowed a period of time-even if only a short one-to cure the breach if it can.

The Court of Appeals thought that Queiroz might still have a claim for specific performance of the contract to purchase the land. The Arizona Supreme Court decided otherwise because "specific performance, although a routine remedy in actions involving contracts for the sale of real property, may be properly refused on the basis of unclean hands." The trial court had determined that Queiroz's agent had lied. The Supreme Court said Queiroz could not enforce the contract because: "Principals may not benefit from the inequitable conduct of their agents."

Nevertheless, there are valid lessons to be learned from the opinion of the Court of Appeals, in any event.

1. Always follow the express requirements of the contract when attempting to terminate the contract.

2. Generally, if you properly terminate a contract according to its terms after a breach by the non-performing party, that termination will be valid, so long as it was properly completed before the breach was cured.

3. Even if there is no express provision for curing a breach of contract, courts may not allow the enforcement of a termination where the breach has been cured prior to an effective termination of the agreement.

4. Even where there are no provisions allowing for the cure of the contract, a reasonable cure period may be implied by the court, perhaps even including some notice of breach in certain circumstances.

5. The main lesson to be learned is that if you breach a contract, try to remedy the breach as soon as possible. If you are the non-breaching party, terminate the agreement in accordance with the strict requirements of the contract, including the notice provisions.
Please let me know if you need assistance in either curing contract breaches or terminating breaching parties for non-performance.

If you have questions or concerns about contracts or breaches of a contract, please do not hesitate to call me.

Michael R. King is a partner with the law firm of Gammage and Burnham which is a sponsor of the Phoenix CEO-CFO Group.