Construction Alert: "When Is It Cool Not to Pay? Fridge Dispute at Texas Supreme Court Addresses Prior Material Breach Doctrine"
The Texas Supreme Court recently issued an opinion that could impact the next construction project where multiple parties complain about who breached (and who breached first) and whether the parties must continue performing their contractual obligations.
In Bartush v. Cimco, No. 16-0054, 2017 WL 1534053 (Tex. 2017) (April 28, 2017), Bartush, the owner (“Owner”) of a food manufacturing plant, hired Cimco (“Contractor”) to install a new refrigeration system. The system did not properly cool, and the Owner refused to pay the contract balance. The Contractor sued for the contract balance. The Owner countersued and argued that it did not have to pay the contract balance because the Contractor breached first. At trial, the jury and trial court found that both parties breached the contract but that the Contractor breached first. The trial court therefore awarded the Owner its repair damages and denied the Contractor’s claim for the contract balance.
The Contractor took its case to the court of appeals, and won. The appellate court awarded: (i) the Contractor the unpaid contract balance; and (ii) the Owner nothing. Basically, the appellate court concluded that the Contractor’s breach was not “material” and that the Owner was still on the hook for the contract balance.
The case then went to the Texas Supreme Court. Relying on Mustang Pipeline Co. v. Driver Co., 134 S.W.3d 195 (Tex. 2004), the Court concluded 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 affirmed the trial and appellate courts' decisions that the Contractor’s breach was not material, such that the Owner’s failure to pay was not excused. However, the Court also found that the Owner’s material breach (failure to pay the contract balance) did not retroactively discharge the Contractor’s obligation to provide a usable refrigeration system. In the Court’s words, “while a party’s nonmaterial breach does not excuse further performance by the other party, neither does the second breach excuse the first…In other words, a material breach excuses future performance, not past performance.” Thus, the Court held that the Owner’s repair damages should have been offset against the Contractor’s claim for the contract balance.
Applying the reasoning in Cimco to other projects results in uncertainty with respect to an owner’s recovery, due to the Court’s distinction between material and non-material breach. This case also highlights the difficulties that arise when two parties have competing breach claims. When deciding whether to withhold future performance on an ongoing project, it is important to work through these issues with an attorney to maximize recovery or reduce losses for later claims.