Material breach: when the other side's failure lets you stop

Michigan, nineteen fifty three. A sign company builds and installs, for a dry cleaner, a neon pylon sign eighteen feet nine inches high with an electric clock and flashing lamps. The dry cleaner agrees to pay one hundred and forty eight dollars fifty a month for thirty six months. The sign company agrees to maintain and service the sign, and to clean and repaint it as often as it deems necessary to keep it in first class advertising condition.
The sign goes up in late July. The dry cleaner pays the first month, and that first payment is also the last. Shortly after installation, someone hits the sign with a tomato. There is rust on the chrome, the owner says, and little spider cobwebs in the corners, and some children's sayings written down in here. He calls the sign company for the maintenance he believes he is owed. It is not forthcoming. He calls again and again.
In his own words at trial, I was getting, you might say, sorer and sorer. Occasionally, when I started calling up, I would walk around where the tomato was and get mad again. Then I would call up on the phone again. On the eighth of October he sends a telegram. You have continually voided our rental contract by not maintaining signs as agreed as we no longer have a contract with you do not expect any further remuneration.
About a week after the telegram, the sign company sends a crew and cleans the sign. Then it sues for the whole balance of the contract, five thousand one hundred and ninety seven dollars fifty, under an acceleration clause. The dry cleaner says the sign company broke the contract first, by not maintaining, and that its breach let him walk away.
So here is the question. Both sides broke a promise. The sign company was slow to clean. The dry cleaner stopped paying and declared the contract over. Which breach counts? Think about it before I go on, because it is the question every business client asks in the first five minutes. They did not do what they promised. Can I stop?
And now the question I keep asking. What exactly did these people promise each other? A sign, thirty six months of payments, and maintenance as often as the company deemed necessary. Last module, each side's performance was an implied condition of the other's, satisfied by substantial performance. Today is the mirror image. When is the other side's failure so serious that my own duty is switched off?
Here is the first line for the board. Every unexcused failure to perform when performance is due is a breach, and it always gives damages. But only a material breach, one that goes to the essence of the bargain, excuses the other party from performing. A minor breach gives damages and nothing more. The injured party must keep performing and sue for the shortfall.
Second line. Materiality has no single touchstone. The Restatement lists the factors. How far the injured party is deprived of the benefit he reasonably expected. How far damages can compensate him. How far the breaching party would forfeit what he has done. How likely the breaching party is to cure. And whether the breaching party behaved in good faith or wilfully.
Third line, and it is the sting. A party who treats a minor breach as material, and walks away, has himself committed a material breach. The law does not grade on good intentions. If you call it wrong, you are the one in breach. Businesses lose more money on this line than on any other in the module.
Now the case. Walker and Company against Harrison, Supreme Court of Michigan, nineteen fifty seven. The court granted the dry cleaner's legal proposition. Repudiation is one of the weapons available to an injured party in event the other contractor has committed a material breach. Then it drew the sting. But the injured party's determination that there has been a material breach, justifying his own repudiation, is fraught with peril.
Here is why. For should such determination, as viewed by a later court in the calm of its contemplation, be unwarranted, the repudiator himself will have been guilty of material breach and himself have become the aggressor, not an innocent victim. That is the whole lecture in a sentence. The dry cleaner made the call in October, angry and alone. A court reviewed it years later, calm, with the whole record.
How does the court decide? What is our criterion for determining whether or not a breach of contract is so fatal to the undertaking of the parties that it is to be classed as material? There is no single touchstone. Many factors are involved. And the court copied out the six factors of the First Restatement, section two seventy five.
The extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated. The extent to which the injured party may be adequately compensated in damages for lack of complete performance.
The extent to which the party failing to perform has already partly performed or made preparations for performance. The greater or less hardship on the party failing to perform in terminating the contract. The willful, negligent or innocent behavior of the party failing to perform. The greater or less uncertainty that the party failing to perform will perform the remainder of the contract.
Then the trial judge's findings, which the Supreme Court adopted. The cobwebs are within easy reach of Mr. Harrison and so would the rust be. I really can't believe in the face of all the testimony that there was a great deal of rust seven days after the installation of this sign. And that really brings it down to the tomato. And, of course, when a tomato has been splashed all over your clock, you don't like it.
But a tomato is not a material breach. Granting that Walker's delay in rendering the service requested was irritating, the court was constrained to agree with the trial court that it was not of such materiality as to justify repudiation of the contract. And the sting followed. There was no valid ground for defendants' repudiation and their failure thereafter to comply with the terms of the contract was itself a material breach, entitling Walker, upon this record, to judgment.
Notice the shape. A stained clock, a crew a week late. Irritating, the court said, but the dry cleaner still had a working neon sign with his name on it. The benefit of the bargain was almost entirely intact. Damages, a small credit for the delay, would have compensated him. The sign company had fully performed the expensive part, building and installing. And it did in fact cure within a week. Every factor pointed the same way.
Now the second case, where the factors point the other way, and where the injured party made the right call. Maryland, nineteen fifty eight. A general contractor building a housing subdivision hires a subcontractor for excavating and earth-moving. All work shall be performed in a workmanlike manner, and in accordance with the best practices. Progress payments are due by the tenth of each month for the previous month's requisition.
On the ninth of August a bulldozer operator drove his machine too close to the contractor's house while grading the yard, causing the immediate collapse of a wall and other damage to the house. Three thousand four hundred dollars of damage. The subcontractor and its insurer deny liability. On the tenth of August a progress payment of about fifteen hundred dollars falls due. The contractor refuses to pay it, because the wall has not been repaired or paid for.
The subcontractor keeps working for a month, then stops on the twelfth of September, saying it will come back only on payment. The contractor hires someone else, at four hundred and fifty dollars more than the contract price. Each sues the other. Who broke the contract? The subcontractor says, you did, you missed a progress payment. The contractor says, you did, you knocked down my wall.
The Court of Appeals of Maryland, in K and G Construction against Harris, nineteen sixty, started where Module Nine started. The modern rule, which seems to be of almost universal application, is that there is a presumption that mutual promises in a contract are dependent and are to be so regarded, whenever possible. The subcontractor's promise to work in a workmanlike manner was precedent to the contractor's promise to pay each month.
Then the materiality call. When the subcontractor's employee negligently damaged the contractor's wall, this constituted a breach of the subcontractor's promise to perform his work in a workmanlike manner. And there can be little doubt that the breach was material. The damage to the wall amounted to more than double the payment due on August tenth.
So the contractor was entitled to withhold the August payment. And here is the consequence for the man who walked off. Quoting Corbin, the court said that where the refusal to pay an instalment is justified, the subcontractor is not justified in abandoning work by reason of that refusal.
His abandonment of the work will itself be a wrongful repudiation that goes to the essence, even if the defects in performance did not. The subcontractor lost his fifteen hundred dollars, his lost profit, and owed four hundred and fifty besides.
One more point from the Maryland court, because it tells you the injured party has choices. In permitting the subcontractor to proceed with work on the project after August ninth, the contractor, obviously, treated the breach by the subcontractor as a partial one. A material breach gives an option. The injured party may end the contract, or keep it alive, withhold what he is owed in damages, and insist on the rest. The contractor chose the second, and that was allowed.
Put the two cases side by side. Michigan, a tomato and a week's delay, the whole benefit of the sign still flowing. The dry cleaner walked away and became the aggressor. Maryland, a collapsed wall worth double the instalment. The contractor withheld payment and was upheld. Same rule in both. Only a material breach excuses performance, and the party who guesses wrong pays.
Now let's change one fact. The sign company never sent a crew. The tomato stain, the rust and the cobwebs stayed on the sign for eight months, through two more telegrams, and by spring the clock had stopped and the flashing lamps had failed. Does the dry cleaner's repudiation hold? Choose an answer before I go on.
Now the factors turn. The benefit of the bargain, a first class advertising sign, is gone. A dark, stained sign advertises nothing. Damages are hard to measure. The sign company has shown, over months, that it will not perform the rest. The sixth factor, the greater or less uncertainty that the party failing to perform will perform the remainder of the contract, now weighs heavily. Most courts would call that material, and the dry cleaner could stop paying.
Change one fact again. The bulldozer accident in Maryland caused two hundred dollars of damage to a fence, and the contractor withheld the whole fifteen hundred dollar instalment. Choose.
Now the contractor is the one in peril. The Maryland court called the wall breach material because it was double the instalment. A two hundred dollar fence is not. The contractor may deduct the fence, or sue for it, but withholding fifteen hundred to recover two hundred is not a proportionate response to a minor breach. His refusal to pay is itself a breach, and if the subcontractor walks off, the walk-off is justified.
Change one fact a third time. The dry cleaner in Michigan, instead of the telegram, had sent a letter. Your maintenance has been unsatisfactory, and unless the sign is cleaned within ten days I will treat the contract as ended. Then he waited. Choose.
This is the lawyer's answer, and it is the one to learn. The letter does not repudiate. It gives notice and a reasonable time to cure. If the sign company cleans the sign, the contract lives and the dry cleaner has lost nothing.
If it does not, the dry cleaner has built a record that the breach is continuing and uncured. The factors that worried the Michigan court, cure and good faith, now favour him. Notice and an opportunity to cure turn a doubtful case into a clear one.
Here is what people get wrong here, and why it is tempting. The first mistake is treating every breach as an exit. Most breaches are minor, and a minor breach gives damages only. The second mistake is the opposite. Thinking that because the other side breached first, anything you do is justified. The Michigan dry cleaner believed exactly that, and he became the aggressor.
The third mistake is forgetting the option. A material breach does not force you out. You may stay, withhold what you are owed, and hold the other side to the rest, as the Maryland contractor did. Choosing is the client's decision. Telling him the risk on each side is yours.
Here is the rule, in one breath. Every unexcused failure to perform is a breach and gives damages, but only a material breach, judged by the benefit lost, the adequacy of damages, the breaching party's forfeiture, his prospects of cure and his good faith, excuses the other party from performing. A party who treats a minor breach as material and walks away has himself committed a material breach. Now, five questions.