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Legal - Material breaches of contract: What they are and why they matter

image West W. Winter, Attorney The Winter Law Firm, PLLC San Antonio, TX

SAN ANTONIO - The area of construction law is complex, wide ranging and encompasses many different areas of the law (such as torts, contract law, property law, and common law). One construction law concept about which every contractor should have some awareness is the concept of material breach of contract and how material breaches may impact respective duties, obligations, and remedies in a contractual relationship.

 


What is a Material Breach

    A material breach of contract is the non-performance of a contractual duty that is so significant that it discharges the non-breaching party from its duties under the contract.  Whether a breach is material is a question of fact.  The Restatement of Contracts lists five circumstances significant in determining whether a failure to perform is material:

    (1)  the extent to which the injured party will be deprived of the benefit which he reasonably expected;
    (2)  the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
    (3)  the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
    (4)  the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of the circumstances including any reasonable assurances;
    (5)  the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

    Although dependent upon the facts involved, some common examples of material breaches of contract include significant delays, failure to pay for work properly performed, and wrongful termination.

Material Breach By a Contracting Party Excuses Further Performance by Other Party

    It is well established that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance.  In many construction contract disputes, one party will terminate the contract or refuse to pay due to alleged breaches by the other party.  In these situations involving competing breach of contract claims, juries can and do commonly find that both sides failed to comply with the contract.  In the face of competing material breach of contract claims, it should be determined which party committed the first material breach, which such first material breach acts to discharge the other party from further performance under the contract.

    In the Texas Supreme Court opinion Mustang Pipeline Company, Inc. v. Driver Pipeline Company, Inc., Mustang, a pipeline owner, sued Driver, the pipeline builder, for breach of the construction contract due to delays in construction, and the builder asserted counterclaims for wrongful termination.  Both parties asserted that the other’s material breach as an affirmative defense.  The Texas Supreme Court reversed the lower court rulings and held that, since time was “of the essence” and a material element of the contract under the facts involved, the builder’s delays constituted a material breach of the contract.  The Court stated: “At the point at which Mustang terminated the contract, there was virtually no chance that Driver would be able to cure its breach and complete the construction on time.” Because of Driver’s material breach, Mustang was thereafter discharged from its duties under the contract, and the findings on Driver’s wrongful termination counterclaim should have been disregarded.

Election to Continue After A Material Breach
    However, when one party materially breaches a contract, generally the non-breaching party must elect to either terminate the contract and cease performance (as Mustang did in the above referenced court case) or treat it as continuing and thereafter continue its own performance.  If the non-breaching party treats the contract as continuing and demands performance from the other party, then the non-breaching party must fully perform as well, because the contract continues in force for the benefit of both parties.  Stated differently, a party who elects to treat a contract as continuing, after a material breach, deprives itself of any excuse for ceasing performance on its own part. 

    By way of example and as set out in the recent holding in C&C Road Construction, Inc. v. Saab Site Contractors, L.P., C&C was confronted with an alleged material breach by Saab, and it had to decide whether to continue with Saab or terminate and replace Saab.  C&C contended that the contract had a “time is of the essence” clause and that any delay by Saab was a material breach as a matter of law.  But in this case, when C&C was aware of Saab’s alleged delay, C&C elected to require Saab to complete the contract rather than terminate.  The evidence showed that Saab tried to walk off the job for nonpayment, but C&C prevailed on it to return to the job.  The court stated that C&C might have used any non-performance issues by Saab as a basis to offset what it owed, but it could not declare its obligations to Saab extinguished because of a pre-existing material breach.

Get Help
    You are encouraged to consult with your construction attorney in the event any breach of contract arises or is alleged.  Legal counsel is also strongly encouraged when making business decisions which are impacted by these concepts. 

West W. Winter, a LEED Green Associate, serves on the board of the Construction Law Section of the San Antonio Bar Association and has been listed as one of the Best Lawyers in San Antonio for Construction Litigation.  The Winter Law Firm represents general contractors, subcontractors, and suppliers, in all phases of the construction process, from contract formation through dispute resolution, litigation, and collection.  West may be reached via email:  west@thewinterlawfirm.com.


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