Don't Bet the Business

To prevail on a breach of contract claim you must be able to establish that a contract existed, that the other side breached the contract and that this breach caused your damages. This is pretty straight forward stuff. But what happens when the breaching party’s defense is that you, the aggrieved party, actually breached the contract first?

In Michigan, and elsewhere, it has long been the law that the party committing the first substantial contractual breach cannot sue for the other party’s failure to perform. This rule of law is important because contract litigation is often a slugfest with each side blaming the other when promises are broken.

When such claims arise it often is left to the judge or jury to sort out facts and to decide who breached first. This is not to say that every ding and dent is actionable. To the contrary, slight performance deviations may not amount to an actionable breach, and certainly may not amount to a substantial or material breach sufficient to amount to a defense.

So, how do you tell the difference, and how does the fact finder sort this out? With contract principles, of course.  Recall that to prevail on a contract claim the moving party must prove a breach and resulting damages.  If the moving party can plead sufficient facts to establish these elements, the defending party, nonetheless, may be able to show that the moving party failed to fulfill its own contractual promise and did so first. 

To determine if the moving party’s claimed failure amounts to a “substantial or material” breach, the non-moving party must show that it did not obtain the benefit of the bargain that it reasonably expected to receive.

For example, assume a simple contract provided that Party A would build a patio deck for Party B using Brazilian mahogany and that the deck would comply with all applicable city ordinances. When the deck was completed, Party B refused to pay because Party A used African mahogany instead of Brazilian mahogany.

Party A sues Party B for breach of contract to recover payment for the deck. When defending Party A's claims, the substitution of materials without Party B”s consent might be deemed a contractual breach, but Party B may be hard pressed to show that the “breach” was substantial or material. However, if it also turned out that Party A, when building the deck, failed to obtain the city’s required permit, that failure may be deemed a substantial breach particularly if the city demands that the deck be removed.

Contract litigation is a bit like a thunderstorm; we have all seen them, they all have common elements, but each one is a bit unique. Thus, when a contract claim is filed, and when the “he breached first” defense is raised, take some solace in knowing that it’s still a contract case. Burdens may shift and proofs may change, but to settle the storm, someone still needs to prove a contract, a breach and resulting damages.