Does a Prior Breach Excuse a Counter Breach

Jaburg Wilk
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Jaburg Wilk

As any parent with more than one child can attest, most people, including not only children but also adults, believe that if another person commits the first offense, then a counter, or retaliatory offense is justified. Such behavior is often criticized with the age-old adage that “two wrongs don’t make a right” (which we know is mathematically incorrect, in that when two negative numbers are multiplied, it yields a positive number, but that is beyond the scope of this article).This issue arises in the context of contracts when a party asserts that their conduct, which would otherwise be deemed to be a breach of the contract, was legally “excused” by virtue of the other side having breached first.

Let’s say that Buyer enters into a standard real estate contract with Seller for the purchase of Seller’s property, and that the contract includes a financing contingency, making Buyer’s obligation to complete the purchase conditional upon obtaining financing on specified terms during the “financing contingency period.” Let’s now consider three different scenarios, as follows:

  1. Prior to the expiration of the financing period, Buyer assigns its contractual rights to Buyer No. 2.Seller does not like Buyer No. 2, and therefore advises Buyer that Seller will not complete the sale unless Buyer withdraws the assignment.
  2. Buyer is unable to obtain the specified financing during the financing period, and advises Seller that it is terminating the contract.
  3. After Buyer does obtain the specified financing, Seller advises Buyer that Seller will not, under any circumstances, complete the sale, and Buyer fails to give a “cure notice” to Seller.

The rule of law that applies to each of these three scenarios is that the failure of a party to a contract to perform its obligations under the contract excuses the other party’s obligation to perform. In #1, the first question that needs to be answered is whether a Seller can refuse to sell to a Buyer’s assignee. Because under Arizona law, contracts for the purchase of real estate are freely assignable, unless the contract provides otherwise, by refusing to sell to the assignee, the Seller has breached the contract. Such a breach would entitle Buyer to pursue a breach of contract action against Seller, even though it had not yet obtained the required financing, or taken any other action to complete its contractual obligations, although in order to prevail in such action, Buyer will need to prove that “but for” Seller’s prior breach, Buyer could have obtained such financing, and could have otherwise fully performed its contractual obligations.

In #2, the inability of Buyer to obtain the financing is not a “breach” by Buyer, but is rather the failure of a condition, which will allow Buyer to terminate the contract, and gives no right of action to Seller. It should be noted that the financing contingency is for the benefit of Buyer, Buyer may, if it wishes, waive the contingency and complete the purchase of the property.

Although perhaps not a clear cut, in #3, the declaration by Seller that it will not complete the sale “under any circumstances,” would seemingly excuse the requirement for Buyer to give a “cure notice,” or to take any other action to complete its contractual obligations, in that it is clear that doing so would be a “futile act,” which is not legally required. The Seller’s declaration constitutes an “anticipatory repudiation” of the contract, which excuses any further performance by Buyer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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