Contractual breaches are serious and require an appropriate response. Sometimes the parties to a contract can work though a performance hiccup, however, there are many instances in which a party simply walks away from its obligations entirely and attempts to terminate the agreement.
The 14th Court of Appeals confirmed this week in Earth Power A/C and Heat Inc. v. John Page that under these challenging circumstances, the materiality of a party’s breach determines whether their performance can be excused and the extent of damages to be awarded. The decision highlights the importance of determining whether a material breach has occurred when deciding whether to terminate a contract, and the need for careful drafting and negotiating of agreements from the outset.
The Texas Supreme Court has held that a contractor’s material breach excuses the non-breaching party from making further payments under the contract. Conversely, a non-material breach only provides the non-breaching party a claim for damages and does not render the contract irreparably broken. Therefore, in cases of a material breach, the parties’ agreement can be cancelled completely or the non-breaching party can recover all damages for foreseeable injuries.
What is a Material Breach?
Unfortunately, it is not always clear whether a breach is material. What constitutes a material breach is one of clients’ most frequently asked questions in the course of drafting contracts. Citing the Restatement (Second) of Contracts, section 241 (1981), the Texas Supreme Court noted five key factors in determining whether a material breach occurred:
- The extent to which the injured party will be deprived of the reasonably expected benefit;
- The extent to which the injured party can be adequately compensated for the part of that benefit of which they will be deprived;
- The extent to which the party failing to perform or to offer to perform will suffer forfeiture;
- The likelihood that the party failing to perform or to offer to perform will cure their failure, taking account of the circumstances including any reasonable assurances; and
- The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
Mustang Pipeline Co. v. Driver Co., 134 S.W.3d 195,199 (Tex. 2004).
Details of the Case
In rendering its decision in Earth Power v. Page, which involved a contractual dispute between an HVAC contactor and a homeowner, The Fourteenth Court of Appeals in Houston highlighted the significance of a material breach. The appellate court found that the trial court erred in awarding damages to a homeowner after the homeowner stopped payments to the HVAC contractor during the course of the project. The homeowner alleged the HVAC contractor repudiated the contract through defective work and failure to complete the project. The HVAC contractor argued that it was denied access to the homeowner’s property and unable to perform under the contract.
At trial, the jury determined both parties were in breach of the contract, but that the homeowner’s breach was not excused by a “repudiation” of the contract by the HVAC contractor. Nonetheless, the trial court inferred from the jury’s findings that the contractor’s breach was material and rendered judgment and damages to the homeowner. The HVAC contractor appealed and the appellate court held that because there was no finding that the contractor’s breach was material, the homeowner was not excused from performing.
Whenever termination of a contract is being considered, materiality of parties’ breach must be weighed. It ultimately determines whether a party’s performance is excused and the damages that can be recovered in litigation.