“But They Breached First”… Why You May Still Be Obligated To Peform

It is not uncommon for a general contractor or subcontractor to stop working on a project when they are not paid for work previously performed and invoiced. However, professionals in this situation should be careful to make sure their contract does not have any provision that forbids them from stopping their work.  They should also make sure that they are in compliance with the Texas Property Code.

According to Sec. 28.009 of the Texas Property Code:

(a)  If an owner fails to pay the contractor the undisputed amount within the time limits provided by this chapter, the contractor or any subcontractor may suspend contractually required performance the 10th day after the date the contractor or subcontractor gives the owner and the owner’s lender written notice:

(1)  informing the owner and lender that payment has not been received;  and

(2)  stating the intent of the contractor or subcontractor to suspend performance for nonpayment

The code makes it clear that work can be stopped only after giving notice. Failure to provide this notice could result in a court finding that stopping work resulted in a breach of Contract. Generally speaking, under traditional contract principles if both parties breach a contract, the first party to breach is the party that will be responsible for damages. However, it is critical that the non-breaching party determine whether the initial breach was “material”.

The Texas Supreme Court recently addressed this issue in Bartush v. Cimco, No. 16-0054, 2017 WL 1534053 (Tex. 2017) (April 28, 2017). In that case Bartush hired Cimco to install a new refrigeration system in its manufacturing plant. They system that Cimco installed failed to properly cool. Bartush refused to pay the remaining contract balance alleging that Cimco had breached and the breach excused Bartush’s performance.

At trial, the jury found that both parties breached the contract but that Cimco breached first and awarded Bartush damages for the cost of repairing the system. Cimco appealed and won. The appellate court held Bartush for the contract balance because the court held that Cimco’s breach was not material.

The Texas Supreme Court affirmed the appellate court’s decision that Cimco’s breach was not material. Relying on Mustang Pipeline Co. v. Driver Co., 134 S.W.3d 195 (Tex. 2004), the Court explained that: (i) a contractor’s material breach excuses the owner from making further payments; but (ii) a non-material breach simply gives rise to a claim for damages. The Court stated that “while a party’s nonmaterial breach does not excuse further performance by the other party, neither does the second breach excuse the first.”

In applying the principle above, the Court concluded that although Cimco was the first to breach, the breach was not material and did not excuse Bartush’s obligation to pay the remaining contract balance. The Court also stated that, Bartush’s subsequent breach did not excuse Cimco’s obligation to install a working refrigeration system. Consequently, Cimco’s contract balance should have been offset by Bartush’s repair balance.

Clearly, parties to a contract have a great deal to consider before deciding to forego performing their obligations under a contract. It is best to consult counsel with actual contract litigation experience before refusing to perform. However, if a party has breached and it is too difficult to determine whether the breach is material, it is best to continue to fulfill any contractual obligations so long as the breaching party is not insolvent. This is because the party that fully performs, has clean hands, presents well to a court or jury, and is generally entitled to damages.

Nothing in this article is to be considered legal advice. If you have questions or need representation concerning a construction matter, please call 832-930-0529 or email us at info@stephenspllc.com

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