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Part performance by part payment: when will the part payment be recoverable by the defaulting party?

This article was written by Michael Dew, a Vancouver lawyer who practices civil litigation. Click here for contact information and further details about Michael’s practice. This article provides only information, not legal advice. If you require legal advice you should consult a lawyer. 

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Under the “entire contract rule”, a party to a contract who performs only part of their obligations is not entitled to any payment, and the work done in part performance is forfeited. But what about a party who makes a part payment under a contract and then decides they would rather not go ahead with the rest of the contract, and wants their part payment back? This article considers the circumstances in which part payments will be recoverable, and those in which they will not.
The entire contract rule
In the famous case of Cutter v. Powell (1795), 6 T.R. 320 a seaman was hired to work on a ship during a voyage. The seaman died before the end of the voyage and so failed to complete his obligations under the contract. His estate sued for part compensation for his part performance, but the court refused the claim confirming the rule that unless the parties agree otherwise, there is no compensation for part performance of executory contracts.
The rule in Cutter v. Powell is subject to a de minimus exception. If the uncompleted or defectively completed portion is relatively minor (not “material”) in the context of the entire contract, the contract will be found to be substantially performed and the innocent party will not be entitled to terminate the contract, but will be able to claim a reduction in contract price. See Dakin v Lee, [1916] 1 K.B. 566 (C.A.) for an example where a building contract was found to be substantially performed despite significant defects, and see Bolton v. Mahadeva, [1972] 1 W.LR. 1009 (Eng. C.A.) for an example where the court was far stricter on the defaulting contractor. See Kemp v. McWilliams ( 1978), 87 D.L.R. (3d) 544 (Sask. C.A.) for a Canadian case in which a painting contractor was compensated on a quantum meruit basis despite having completed only three quarters of a painting job.
Contracts for the payment of money
If a party is obliged under a contract to make payments of money, and after making part payment that party breaches the contract by refusing to complete its payment obligations, the rule in Cutter v. Powell does not apply. The innocent party is not entitled to retain the benefit received thus far, but is obliged to return the part payments to the part performer: Dies v British International Mining Corporation, [1939] 1 K.B. 724 applied in Peters v. Altex International Investments Ltd. [1973] B.C.J. No. 318 (QL) and, more recently, in Morell v. Nedoma, 2007 BCSC 431.
According to the rule of contract law from Dies v British International Mining Corporation, the part payment is refundable unless the parties agreed that it would be forfeited in the event complete payment was not tendered. The part payment will also be forfeited if the part payment was described by the parties as a deposit i.e. courts consider the word deposit to be equivalent to a forfeiture clause.
The rule from Dies v British International Mining Corporation was explained by Lord Denning in Stockloser v. Johnson, [1954] 1 All E.R. 630 at 637 as follows:
When there is no forfeiture clause, if money is handed over in part payment of the purchase price, and then the buyer makes default as to the balance, then, so long as the seller keeps the contract open and available for performance, the buyer cannot recover the money, but once the seller rescinds the contract or treats it as at an end owing to the buyer's default, then the buyer is entitled to recover his money by action at law, subject to a cross-claim by the seller for damages.
The above confirms that the defaulting payor does not have an unrestricted right to the return of the part payment. If the innocent party has suffered damages as a result of the default by the payor, it will have the right to retain the part payment and may also sue for any additional damages it suffered in excess of the value of the part payment.
It is important to emphasize that where there is no forfeiture clause the defaulting payor does not need to resort to equity to recover the part payment. Rather, the defaulting payor is entitled to the return of its part payment under the rule of contract law from Dies v British International Mining Corporation. However, where there is a forfeiture clause, or the parties described the part payment amount as a deposit, the defaulting payor will have to make an equitable claim for relief from forfeiture to recover the part payment.
Whether a defaulting payor will be able to recover part payments under a contract it has defaulted on depends on how the part payment was characterised when the contract was formed. If the part payment was agreed to be subject to forfeiture, or the parties described the part payment as a deposit, it will be forfeited. If there was no forfeiture clause, and the part payment was not called a deposit, the defaulting payor can obtain the return of the deposit subject to a claim for damages by the innocent payee.