Prior Material Breach May Excuse Performance, but the Factfinder Must Agree It Was a Material Breach

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Prior Material Breach May Excuse Performance, but the Factfinder Must Agree It Was a Material BreachIn most jurisdictions, a party may be excused from any future performance under a contract by the prior material breach of the other party. A “prior material breach” is typically defined as conduct that deprives the injured party of the benefit that it reasonably could have anticipated from the breaching party’s full performance. This excuse may serve as a complete defense in a breach of contract action. It is a potent defense, but the devil is in the details: Was it a “material breach?”

Because determination of whether a breach is material is typically a question for the jury, or judge or arbitrators, depending on the forum, failure properly to raise the issue of “prior material breach” may invalidate an otherwise valid defense to a breach of contract action. A homeowner recently learned this hard lesson from the Texas Court of Appeals’ decision in Earth Power A/C and Heat, Inc. v. Page published on June 23, 2020.

In Earth Power, an HVAC contractor alleged a homeowner breached its contract for installation of a geothermal HVAC system by failing to make multiple progress payments. The homeowner asserted an affirmative defense of “repudiation” arguing that the contractor repudiated the contract by not installing the HVAC system in a workmanlike manner.

At trial, the jury found that both parties breached the contract, but that the contractor breached first. The jury also found that the homeowner’s payment obligations were not excused by any repudiation and awarded the contractor damages for nonpayment. The homeowner did not raise the affirmative defense of “prior material breach” or present to the jury the question of whether the contractor’s breach was material or whether the breach excused the homeowner from paying the contractor.

After the jury verdict, the homeowner moved to set aside the judgment and to enter judgment as a matter of law in its favor. The homeowner argued that the jury’s finding that the contractor breached the agreement first should be treated as a finding of “prior material breach,” and the court should vacate the jury award of damages. The trial judge accepted this argument and amended the final judgment in favor of the homeowner.

On appeal, the contractor argued that the trial court erred because there was no finding of “prior material breach” as that question was never properly raised before the jury. The Texas Court of Appeals agreed. The homeowner “failed to secure findings necessary to support the assertion that his failure to perform was excused” by the contractor’s prior material breach. According to the court, although the jury found that the contractor breached the contract first, it was not asked whether that breach was material, and the homeowner submitted no question or instruction to the jury regarding “prior material breach.” Under Texas law, the failure to request a jury question or instruction on “prior material breach” waived the homeowner’s affirmative defense.

An exception to this waiver rule applies if the affirmative defense is “conclusively established,” but the homeowner did not argue this exception on appeal. Absent a prior material breach, the contractor was entitled to recover damages for the homeowner’s failure to pay amounts due under the contract. The Court of Appeals, therefore, reversed the trial court judgment and ordered the homeowner to pay the contractor the damages awarded by the jury, plus attorneys’ fees.

What is the takeaway from this decision?

As we are sure you’ve heard, “it’s complicated.” Prior material breach is a common affirmative defense in construction contract disputes, but it requires more than a mere showing of which party was the first to breach an agreement. If the homeowner in Earth Power had properly submitted “prior material breach” as a defense for its non-payment to the jury, a finding in its favor would have likely survived appellate scrutiny.

However, when materiality is not proven, the party responsible for the first-in-time breach may still recover for subsequent (material) breaches by the other party to a contract. As stated above, this allegation, like the decision to quit performing a contract, may be a “nuclear option” in construction contracts. It should be approached with solid advice and with caution. If you have any questions about “prior material breach” or construction contract disputes generally, please feel free to contact David Pugh, Ian Faria, or Aman Kahlon.