Winning the first breach battle

Editor’s note: This article is for general educational purposes only and does not constitute legal advice.

The general rule of contract law sounds simple enough: When a contracting party commits a first breach, the other party is relieved of its obligations under the contract. This legal principle is known as the first breach, or prior breach, doctrine. As common as these situations can be, applying this rule not always is straightforward, and your conduct will determine what remedy is available to you under the law. Keeping in mind some key considerations when putting a contract together can put you in a winning position.

Core elements

A first breach situation arises when the following elements converge:

• A first breach of contract is committed.
• The breach must be material or substantial.
• The contract provision breached must not be an independent covenant.
• The nonbreaching party cannot have waived the right to enforce the breach.

Knowing these core factors is the first step to protecting your rights.

What is a material breach?

For first breach rights to trigger, the breach must be material, which means the unfulfilled obligation must have some significant importance to the contract or the injury that results from the breach must be serious. The contract can explicitly define what is material. In some cases, all it takes is to call the obligation “essential” to the contract. The familiar phrase “time is of the essence” was born out of this type of analysis. Although you are not required to call a material term “of the essence,” breach of a clause described with those words can legitimately be argued to be material.

But common sense still applies. Even when time is of the essence, a minor delay in meeting deadlines typically is not considered to be a material breach. This generally is true of most breaches of minor, technical or administrative contract provisions. The same goes for breaches that lead to insignificant harm or where the breach does not affect any meaningful practical rights. Breaches more commonly found to be material include the failure to comply with price and payment obligations or when a substantial and important obligation under the contract is not performed.

Materiality is a question of fact decided on all relevant circumstances, including the intent and conduct of the parties and extent of the injury sustained. As a result, it is good practice to state expressly what contract terms are essential and/or material and for parties to a contract to act as though the issue is important if a breach occurs.

Dependent covenants

Dependent clauses, or covenants, are indispensable to a contract, meaning without them there would be no point in performing the contract. Because dependent terms are so critical to a contract, it justifies giving the nonbreaching party the right to stop performing when a first breach of a dependent clause occurs.

Whether a covenant is dependent is determined by the express terms and language used in the contract. This is where smart contract drafting can make or break a first breach battle. Considering the contract’s ultimate goals and expectations is well worth the effort. Each key contract provision should be considered separately to establish its priority and whether it should be able to stand apart or be tied to performance of the rest of the contract. Knowing which provisions should be declared independent (meaning which clauses should be enforceable even if you have breached some other term of the contract) can be critical.

Waivers

You can waive your right to take advantage of a claim or defense that the opposing party committed a first breach. Waivers can be explicit or based on conduct, but a good contract will spell out what constitutes a waiver and can limit waivers by conduct.

Other than in situations involving a signed written or verbal waiver, the conduct of the parties following a first breach scenario will determine whether a first breach claim or defense has been waived. For example, if you continue to accept the benefits of continued performance after a breach, that conduct can be deemed a waiver of the right to enforce the breach by stopping your own performance. You may still have the right to claim damages resulting from the breach, but you will likely have to continue performing or risk being liable yourself for any damages to the other side.

A good practice is, at minimum, to speak up and make it known you object to the breach when it occurs. Declare a breach or default and demand compliance in writing as an initial step while you formulate what the most effective remedy will be for your business. If the nature of the other party’s breach calls for it, you will want to be able to take advantage of any right you may have to stop performing.

Defense vs. offense

Asserting the first breach doctrine offensively can be treated differently than when you assert it as a defense against claims of breach by an opposing party. When you are raising the claim offensively, seeking damages or other specific relief, you will generally have to show you were capable of performing your obligations under the contract. However, if you are asserting the other side’s first breach as a defense, proving you were capable of performing your obligations may not be required.

Remedies

Remedies available under a first breach situation will depend in large part on the circumstances, particularly the conduct of the nonbreaching party. How you act following the first breach will determine whether you can rescind the contract, simply stop performing or be limited to recovering damages. If a breach is not acknowledged and pursued, the right of rescission may be lost and other rights may be diluted. You may even lose out on certain forms of damages.

Therefore, when a first breach occurs, it is important to thoroughly consider all possible outcomes. If continuing to perform the contract will mean a greater benefit in the future versus the near-term benefits of rescission, continuing the contract while objecting and preserving your right to pursue damages will be the right course of action. However, if rescission is the best remedy, you have to act accordingly and in a timely manner to preserve that outcome because there’s no going back.

Employment covenants

The prior breach doctrine is prominent in post-employment restrictive covenant cases. A former employee’s defense that you breached first can bar your right to preliminary injunctive relief, which often is strategically critical. Front-end injunctive relief likely will be denied or dissolved if you failed to pay compensation owed to a former employee or breached some other material term of employment.

This is an example of when flagging a specific contractual provision as independent is crucial. Identifying noncompete, nonsolicit and similar obligations as independent will allow enforcement of those provisions even where there is some claim of breach against you.

Taking away that potential defense can mean getting a court to stop a former employee from continuing to work for a competitor from the start of and during the entirety of your lawsuit to enforce the noncompete. That can be a momentum-winning point in noncompete litigation and generally leads to early resolution and the avoidance of long-term legal expense.

Plan for success

Working closely with knowledgeable counsel regarding contract analysis and drafting before projects begin is the start of winning a first breach battle. The next critical point is when the other side breaches. You should meet with counsel in the moments that follow a breach to make sure you land in the best position and with the strongest rights well in hand.

Gabriel D. Pinilla is the managing partner of Cotney—Attorneys & Consultants’ Denver office.