A contract is an exchange of promises that the law will enforce. Contract law provides that promises are enforceable, under what circumstances, and the available remedies. Although application may vary by jurisdiction, there are some principles of contract law that have been widely adopted. One of those is the principle of “first material breach.” Generally, under this principle, courts may refuse to provide a remedy to the party who commits the first material breach of the parties’ contract. Once one party materially breaches the contract, any subsequent breaches by the other party may be excused under the so-called “no recovery” rule. As with almost every legal rule, there are exceptions, and the rule may be applied more or less strictly depending on the jurisdiction and the factual context of a particular dispute.
This question of who committed the first material breach — and whether an exception applies — arises frequently in the construction context. The answer is not always clear and is often decided by the finder of fact only after expensive and time-consuming litigation (see Studio 76, LLC v. Guo, Case No. 1227-24-4, 2026 WL 135997 (Ct. App. Va. January 20, 2026)). The Studio 76 decision released last month is a good example of how this often plays out. In that case, dissatisfied homeowners withheld final payment claiming the builder’s work was defective and incomplete. The builder contended that the homeowners breached first by interfering with the work and refusing to pay as promised under the contract. The homeowners contended they only withheld the amount needed to pay another contractor to correct the work and finish the job plus delay liquidated damages under the contract. The trial court, and then the appellate court, sided with the homeowner.
On the issue of first material breach, the court determined that the amount withheld (13% of the total contract price) was not material but a “minor part of the consideration.” Even if the amount withheld was material, the court noted an exception to or relaxation of Virginia’s “no recovery” rule in the construction context: “where the contractor and owner assert offsetting claims against each other, or where the departures from the contract do not involve real instances of bad faith.” Here, the homeowner had competing claims and had only withheld funds that appeared necessary to complete or correct the work plus contractual late fees. As such, and because there was no evidence of bad faith, the homeowner’s withholding of the contract balance was not a first material breach that precluded recovery. The court further concluded that the homeowners’ “unwelcome” oversight during the project did not constitute a separate material breach of the implied condition, present in every contract, that one party will not materially impede or hinder performance by the other party. The trial court’s decision in favor of the homeowner was therefore affirmed.
A full copy of the court’s decision is available here.
