Breach of Contract Gives Rise to Damages, but Not a Free Lunch!

In this industrial construction dispute, both parties complained of the other. The contractor said that the owner did not pay all of what was due.  The owner said that the equipment installed by the contractor did not work properly, so that the owner had to pay another company for repairs.

The jury seemed to think that both were at fault; that the owner failed to pay what was owed and that the contractor’s poor performance necessitated further repairs. The trial judge ruled that only the owner should recover.  An intermediate appellate court ruled that only the contractor should recover.  In Bartush-Schnitius Foods v Cimco Refrigeration, the Texas Supreme Court ruled that both lower courts were wrong.

Breach Excuses Future Performance, Not Past Performance

The jury ruled that the owner was not justified in failing to pay the contractor what was owed. The contractor argued that the owner’s material breach excused the contractor’s performance, and thus the contractor had no responsibility for the repair costs.

While a material breach excuses future performance, it does not absolve a party for damages that arose prior to the breach. In other words, if the contractor’s work caused the need for repairs, the subsequent failure of the owner to pay does not relieve the contractor of responsibility for the repairs that its work caused.  The Supreme Court ruled that both parties had claims for damages.

Modern Trend: Damages, Yes; Free Lunch, No

In contract disputes, courts are increasingly reluctant to allow aggrieved parties to obtain results far more favorable than actual damages. For example, in construction cases, owners are not allowed to withhold payments when the contractor has substantially performed, even if the contractor fails to achieve certain components of the contract.  However, the contractor must be willing to determine and pay for any damages caused by its substantial, but not fully complete, performance.

As another example, if market conditions have made a long term supply contract unfavorable, a party will not be allowed to use “non-material” failures of performance as a reason to terminate the contract. Non-material breaches can cause significant damages, which the breaching party must be willing to pay, but willingness to pay for the damages and to continue good faith performance will generally keep the contract legally enforceable.

Allowing a contractor that has substantially performed to sue on the contract, and maintaining a long term contract despite a non-material breach, are examples of courts trying to prevent aggrieved parties from getting a “free lunch.”

For a copy of the Court’s opinion click here.

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