Don't Bet the Business

Like most responses to legal questions: it depends. A first-year law student learns that a breach of contract action requires the party claiming breach to prove that a valid contract existed, that the other party breached the contract, and that the party asserting breach suffered damages as a result of the breach. Often, a defense to a breach of contract claim is that that the other party breached the contract first.

A contracting party “who first breaches a contract cannot maintain an action against the other contracting party for his subsequent breach or failure to perform.” Able Demolition v Pontiac, 275 Mich App 577, 585 (2007). Nevertheless, this first-breach rule only applies if the initial breach was “substantial.” Id. In other words, not every “partial failure to comply” or “technical” breach justifies repudiation or rescission of the contract. Rosenthal v Triangle Dev Co, 261 Mich 462, 463 (1933).

What does it mean for a breach to be “substantial” or “material?” The Michigan Supreme Court explained that for the first-breach rule to apply, the breach must have caused “such a change in essential operative elements of the contract that further performance by the other party is thereby rendered ineffective or impossible.” McCarty v Mercury Metalcraft Co, 372 Mich 567, 574 (1964). “One consideration in determining whether a breach is material is whether the nonbreaching party obtained the benefit which he or she reasonably expected to receive.” Holtzlander v Brownell, 182 Mich App 716, 722 (1990).

To illustrate the first-breach rule, imagine that Paul and Tyler entered a contract where Paul agreed to shovel the snow off Tyler’s driveway every Friday at 2 p.m. Tyler agreed to pay Paul $20 each time Paul shoveled his driveway.

Last Friday, Paul shoveled Tyler’s driveway at 4 p.m. instead of at 2 p.m. Tyler then refused to pay Paul for this job. Consequently, Paul filed a breach of contract claim against Tyler, seeking $20 in damages.

As a defense, Tyler claimed that Paul breached the contract first because Paul shoveled Tyler’s driveway at 4 p.m. instead of at 2 p.m.. Here, Tyler is defending himself against Paul’s breach of contract claim based on the first-breach rule.

Tyler would be unsuccessful in his defense because the first-breach rule is not actionable on technical breaches. Paul still performed under the contract—instead of shoveling Tyler’s driveway at 2 p.m., he shoveled his driveway two hours later.

Is this a substantial breach? No, this is a technical breach.  Although Paul shoveled Tyler’s driveway two hours late, Tyler still obtained the benefit which he reasonably expected to receive, in that his driveway was ultimately shoveled.

In scenarios like this one, the breaching party cannot defend himself against a breach of contract action based on a prior technical breach of the party asserting the claim. Understanding the difference between a substantial breach and a technical breach is paramount when determining whether one can assert the first-breach rule as a defense.