What is meant by 'substantial performance' in a contract?

Substantial performance in a contract refers to the situation where a party has completed most of their contractual obligations, which satisfies the essential purpose of the agreement, despite some minor defects or omissions. The key aspect of substantial performance is that the overall objective of the contract has been met, allowing the other party to derive the intended benefits from the contract.

In practical terms, if the performance is deemed substantially complete, the party may still be entitled to compensation, albeit potentially adjusted to account for any minor failures or deficiencies. This concept is especially significant in construction contracts, where a builder might complete a structure with some minor deficiencies. The contractor can seek payment while the homeowner may retain some liability until those minor matters are resolved.

The other options do not accurately capture the meaning of substantial performance. Performing all parts of the contract perfectly would represent complete performance, while a minor failure to perform doesn't reach the threshold of "substantial." A complete failure to perform any obligations at all would indicate a breach of the contract, contradicting the principle of substantial performance. Thus, the concept of substantial performance balances the need for completion of contractual duties with the acknowledgment that perfection is not always necessary for the contractual purpose to be fulfilled.