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MATERIAL BREACH AND REPUDIATION

Jack A. Walters, III

Cooper & Scully, P.C.

Founders Square

900 Jackson Street, Suite 100

Dallas, Texas 75202

214.712.9500

214.715.9540 Fax

www.jack.walters@cooperscully.com

Annual Construction Symposium

January 30, 2009

Dallas, Texas

TABLE OF CONTENTS

I. Introduction...................................................................................................................................... 1

II. Material Breach................................................................................................................................ 1

III. Repudiation......................................................................................................................................2

IV. Miscellaneous .................................................................................................................................. 3

A. Prerequisites to Right to Terminate ....................................................................................3

B. Waiver of Breach ................................................................................................................ 3

C. Revival of Time of Essence Requirement........................................................................... 3

D. Duty to Mitigate Damages / Owner Completion of Project................................................ 3

E. Assignment ......................................................................................................................... 3

TABLE OF AUTHORITIES

PAGE

46933, Inc. v. Z&B Enters.,

899 S.W.2d 800 (Tex.App.-Amarillo 1995, writ denied).......................................................... 2

A.L. Carter Lumber Co. v. Saide,

168 S.W.2d 629 (Tex. 1943) ..................................................................................................... 3

America's Favorite Chicken Co. v. Samaras,

929 S.W.2d 617 (Tex.App.-San Antonio 1996, writ denied)................................................ 2, 3

American Bank v. Thompson,

660 SW.2d 831 (Tex.App.-Waco 1983, writ ref'd n.r.e.) .......................................................... 2

Cal-Tex Lumber Co. v. Owens Handle Co.,

989 S.W.2d 802 (Tex.App.-Tyler 1999, no pet.)....................................................................... 3

Chilton Ins. Co. v. Pate & Pate Enterprises, Inc.,

930 S.W.2d 877 (Tex.App.-San Antonio 1996, writ denied).................................................... 2

Consolidated Eng'g v. Southern Steel,

699 S.W.2d 188 (Tex. 1985) ..................................................................................................... 3

Dew, Inc. v. Debco Forms, Inc.,

827 S.W.2d 379 (Tex. App.—San Antonio 1992, no writ)....................................................... 3

Dracopoulas v. Rachal,

411 S.W.2d 719 (Tex. 1967) ..................................................................................................... 1

Glass v. Anderson,

596 S.W.2d 507 (Tex. 1980) ..................................................................................................... 2

Great American Ins. Co. v. North Austin Mun. Utility Dist. No. 1,

908 S.W.2d 415 (Tex. 1995) ..................................................................................................... 3

Gunter Hotel v. Buck,

775 S.W.2d 689 (Tex.App.-San Antonio 1989, writ denied).................................................... 1

Hernandez v. Gulf Group Lloyds,

875 S.W.2d 691 (Tex. 1994) ..................................................................................................... 1

Hudson v. Wakefield,

645 S.W.2d 427 (Tex. 1983) ..................................................................................................... 1

Interceramic, Inc. v. South Orient R.R.,

999 S.W.2d 920 (Tex.App.-Texarkana 1999, pet. denied)........................................................ 3

Jenkins v. Jenkins,

991 S.W.2d 440 (Tex.App.-For Worth 1999, pet. denied)........................................................ 2

Jernigan v. Langley,

111 S.W.3d 153 (Tex. 2003) ..................................................................................................... 3

Joseph v. PPG Indus., Inc.,

674 S.W.2d 862 (Tex. App.—Austin 1984, writ ref'd n.r.e.) .................................................... 3

iii

Kaiser v. Northwest Shopping Ctr., Inc.,

587 S.W.2d 454 (Tex.App.-Dallas 1979, writ ref'd n.r.e.) ........................................................ 2

Kiewit Tex. Mining Co. v. Inglish,

865 S.W.2d 240 (Tex.App.-Waco 1993, writ denied)............................................................... 2

Laredo Hides Co., Inc. v. H&H Meat Products Co., Inc.,

513 S.W.2d 210 (Tex.Civ.App.-Corpus Christi 1974, writ ref'd n.r.e.) ....................................3

Long Trusts v. Griffin,

222 S.W.3d 412 (Tex.2006) ...................................................................................................... 2

Martin v. Birenbaum,

193 S.W.3d 677 (Tex.App.-Dallas 2006, pet. denied) .............................................................. 3

McKnight v. Renfro,

371 S.W.2d 740 (Tex.Civ.App.-Dallas 1963, writ ref'd n.r.e.).................................................. 3

Murray v. Crest Constr., Inc.,

900 S.W.2d 342 (Tex. 1995) ..................................................................................................... 2

Mustang Pipeline Co., Inc. v. Driver Pipeline Co., Inc.,

135 S.W.3d 195 (Tex. 2004) ..................................................................................................... 1

Mustang Pipeline Co. v. Driver Pipeline Co.,

134 S.W.3d 195 (Tex. 2004) ................................................................................................. 1, 3

Nutt v. Members Mut. Ins. Co.,

474 S.W.2d 575 (Tex.App.-Dallas 1971, writ ref'd n.r.e.) ........................................................ 2

Perry v. Little,

419 S.W.2d 198 (Tex. 1967) ..................................................................................................... 2

Pollack v. Pollack,

39 S.W.2d 853 (Tex.Comm'n Appp. 1931, holding approved)................................................. 3

Puckett v. Hoover,

202 S.W.2d 209 (Tex. 1947) ..................................................................................................... 1

Pulaski Bank and Trust Co. v. Texas American Bank/Fort Worth, N.A.,

759 S.W.2d 723 (Tex.App.-Dallas 1988, writ denied).............................................................. 3

Seagull Energy E&P, Inc. v. Eland Energy, Inc.,

207 S.W.3d 342 (Tex. 2006) ................................................................................................ 3, 4

Seismic & Digital Concepts, Inc. v. Digital Resources Corp.,

590 S.W.2d 718 (Tex.Civ.App.-Houston [1st Dist.] 1979, no writ).......................................... 2

Smallwood v. Singer,

823 S.W.2d 319 (Tex App.-Texarkana 1991, no writ).............................................................. 2

Southern Steel Co. v. Consolidated Eng'g,

677 S.W.2d 97 (Tex.App.-San Antonion 1984), rev'd on other grounds, 699 S.W.2d 188 (Tex.

1985).......................................................................................................................................... 1

Stewart v. Basey,

245 S.W.2d 484 (Tex. 1952) ..................................................................................................... 2

Stowers v. Harper,

376 S.W.2d 34 (Tex.App.-Tyler 1964, writ ref'd n.r.e.)............................................................ 3

Taylor-Fichter Steel Constr. Co., Inc. v. Curtis,

144 S.W.2d 285 (Tex. Civ. App.—Beaumont 1940, writ dism'd) ............................................ 1

Texas Bank & Trust Co. v. Campbell Bros.,

569 S.W.2d 35 (Tex. Civ. App.—Dallas 1978, writ dism'd)..................................................... 1

Thomas v. Thomas,

902 S.W.2d 621 (Tex.App.-Austin 1995, writ denied) ............................................................. 3

Van Polen v. Wisch,

23 S.W.3d 510 (Tex.App.-Houston [1st Dist.] 2000, pet. denied) ............................................ 2

MISCELLANEOUS

Restatement (2d) of Contracts § 241 (1981)................................................................................ 1, 2

Restatement Second of Contracts, § 241 (1981).............................................................................. 1

MATERIAL BREACH AND REPUDIATION

I. INTRODUCTION

A contract can be terminated for cause as

specified in a contractual termination provision or

under the common law. A contract can also be

terminated for convenience if provided for, and

according to the procedures, in the contract

documents. However, terminations are not favored by

the law and will be strictly construed. Thus, strict

compliance with the conditions precedent, common

law requirements, and/or contractual procedures will

be required. Further, wrongful terminations for cause

can give rise to actions/liability for the terminated

party's costs, fees, and/or lost profits. A contract can

be terminated under the common law when the

terminated party: (1) materially breaches the contract,

or (2) repudiates a dependent promise.

II. MATERIAL BREACH

A plaintiff's performance is excused if the

defendant materially breaches the contract. Mustang

Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195,

196 (Tex. 2004). The plaintiff can suspend

performance of its obligations only if the defendant's

breach was material, that is, if it deprived the plaintiff

of the benefit that could have been reasonably

anticipated from full performance. Hernandez v. Gulf

Group Lloyds, 875 S.W.2d 691, 693 (Tex. 1994). If a

breach is not material, the non-breaching party cannot

suspend its own performance in response to a

nonmaterial breach or a breach of a subsidiary

obligation. Southern Steel Co. v. Consolidated Eng'g,

677 S.W.2d 97, 103 (Tex.App.–San Antonion 1984),

rev'd on other grounds, 699 S.W.2d 188 (Tex. 1985).

Further, a party breaches a contract by improperly

terminating it. Gunter Hotel v. Buck, 775 S.W.2d 689,

697 (Tex.App.–San Antonio 1989, writ denied).

Thus, a wrongful termination can give rise to an

action for breach of contract and potential liability for

the wrongfully terminated party's fees, costs, and/or

lost profits.

A material breach of contract is generally defined

as the non-performance of a duty that is so material

and important so as to justify the injured party in

regarding the whole transaction at an end.

Restatement Second of Contracts, § 241 (1981).

Whether a party's breach was material is usually a

question of fact. Hudson v. Wakefield, 645 S.W.2d

427, 430 (Tex. 1983). However, some breaches are

material as a matter of law. See Mustang Pipeline Co.

v. Driver Pipeline Co., 134 S.W.3d 195, 200 (Tex.

2004). In determining materiality, courts will take

into account the following circumstances/factors in

determining whether a failure to render or offer

performance is material:

(1) the extent to which the

injury/non-breaching party will be

[significantly] deprived of the benefit

it reasonably expected;

(2) the extent to which the non-

breaching party can be adequately

compensated for the benefit it will be

deprived of;

(3) the extent to which the party

failing to perform or to offer to

perform (the breaching party) will

suffer forfeiture;

(4) the likelihood that the

breaching party will cure its breach,

taking account of all the

circumstances, including any

reasonable assurances; and

(5) the extent to which the

behavior of the breaching party

comports with standards of good faith

and fair dealing.

Restatement (2d) of Contracts § 241 (1981);

Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691,

693 (Tex.1994).

When time is of the essence, failure to perform

timely is a material breach as a matter of law. Id. at

199-200. However, if a contract expressly provides

that time is of the essence, the parties may extend the

time limit by waiving strict compliance. Puckett v.

Hoover, 202 S.W.2d 209, 212 (Tex. 1947). The

parties' waiver may be shown by parol evidence or

may arise from the surrounding circumstances and

course of dealing. Id. Further, the parties can orally

agree to extend the time for performance, as long as

the oral agreement is made before the written contract

expires. Dracopoulas v. Rachal, 411 S.W.2d 719, 721

(Tex. 1967).

Additionally, some courts have held that an

unjustified failure to pay is a material breach. Texas

Bank & Trust Co. v. Campbell Bros., 569 S.W.2d 35

(Tex. Civ. App.—Dallas 1978, writ dism'd); Taylor-

Fichter Steel Constr. Co., Inc. v. Curtis, 144 S.W.2d

285 (Tex. Civ. App.—Beaumont 1940, writ dism'd).

However, whether nonpayment or late payment is a

material breach will depend upon the facts of a

particular case. Mustang Pipeline Co., Inc. v. Driver

Pipeline Co., Inc., 135 S.W.3d 195 (Tex. 2004). The

amount of the overdue payment must be considered as

a factor when determining whether the nonpayment is

a material breach.

Where one party materially breaches a contract,

the non-breaching party is forced to elect between two

courses of action: ceasing performance and suing for a

MATERIAL BREACH AND REPUDIATION

total breach of contract, or continuing performance

and suing for a partial breach. Chilton Ins. Co. v. Pate

& Pate Enterprises, Inc., 930 S.W.2d 877, 887-888

(Tex.App.–San Antonio 1996, writ denied);

Smallwood v. Singer, 823 S.W.2d 319, 321 (Tex

App.–Texarkana 1991, no writ). However, if the

defendant's breach can be characterized as

nonmaterial or if it is a breach of a "subsidiary"

obligation (a condition not regarded as vital to the

contract), the plaintiff can sue for a partial breach and

bring later suits for continued or successive breaches.

See American Bank v. Thompson, 660 SW.2d 831,

834 (Tex.App.–Waco 1983, writ ref'd

n.r.e.)(subsidiary breach); Kaiser v. Northwest

Shopping Ctr., Inc., 587 S.W.2d 454, 457 (Tex.App.–

Dallas 1979, writ ref'd n.r.e.)(nonmaterial breach).

If an owner allows a breaching contractor to

perform without objection, or if the owner continues

to insist upon performance under the contract, it will

waive the owner's right to terminate the contract.

Seismic & Digital Concepts, Inc. v. Digital Resources

Corp., 590 S.W.2d 718, 721 (Tex.Civ.App.–Houston

[1st Dist.] 1979, no writ).

In response to a material breach, a plaintiff can

cease performance and sue for a total breach of the

contract. Long Trusts v. Griffin, 222 S.W.3d 412, 415

(Tex.2006). A claim for damages for total breach is

based on all of the injured party's remaining rights to

performance. Restatement (2d) of Contracts §236(1)

(1981). Alternatively in response to a material breach,

a plaintiff can continue with its performance and sue

for partial breach. Smallwood, 823 S.W 2d at 321. A

claim for damages for partial breach is based on only

part of the injured party's remaining rights to

performance. Restatement (2d) of Contracts § 236(2).

If the plaintiff treats the contract as continuing after

the defendant's breach, the plaintiff will not be

excused for terminating its own performance later.

Long Trusts, 222 S.W.3d at 415.

III. REPUDIATION

A plaintiff's performance is excused if the

defendant repudiates a dependent promise. Glass v.

Anderson, 596 S.W.2d 507, 511 (Tex. 1980). A

dependent promise is a promise that is conditioned on

the performance of a reciprocal promise by the other

party. 46933, Inc. v. Z&B Enters., 899 S.W.2d 800,

807-08 (Tex.App.–Amarillo 1995, writ denied).

Dependent promises are usually intended to be mutual

and concurrent acts; the parties do not intend that

either party should perform some act as a condition

precedent to the act of the other party. See Perry v.

Little, 419 S.W.2d 198, 200-01 (Tex. 1967). A

dependent promise is sometimes referred to as a

"concurrent condition." Id. If the plaintiff and

defendant are required to perform their promises

simultaneously, the plaintiff must be ready and willing

to perform and must offer to perform its dependent

promise before it can sue on the contract. Id. Unless

the parties' agreement indicates a different intent, a

court will presume the promises of the parties are

mutual and dependent. Nutt v. Members Mut. Ins.

Co., 474 S.W.2d 575, 577-78 (Tex.App.–Dallas 1971,

writ ref'd n.r.e.).

A party repudiates a contract if, without just

excuse, it absolutely and unconditionally refused to

perform the contract. Jenkins v. Jenkins, 991 S.W.2d

440, 447 (Tex.App.–For Worth 1999, pet. denied).

The party's words or conduct must show a fixed

intention to abandon, renounce, and refuse to perform

the contract. Id. If the party's refusal to perform its

contractual obligations is based on a genuine mistake

or misunderstanding about matters of fact or law,

there is no repudiation. Id.

Repudiation can occur before performance is due

(anticipatory repudiation) or after partial performance.

A party breaches a contract by absolutely repudiating

an obligation under the contract, without just excuse,

before the defendant's performance is due. Murray v.

Crest Constr., Inc., 900 S.W.2d 342, 344 (Tex. 1995).

This is known as "anticipatory breach." Id. A party

breaches a contract by repudiating an obligation under

the contract, without just excuse, after defendant has

partially performed its contractual obligations. Van

Polen v. Wisch, 23 S.W.3d 510, 516 (Tex.App.–

Houston [1st Dist.] 2000, pet. denied).

When a defendant's breach is by repudiation, a

plaintiff has two options: accept repudiation, or wait

for performance, both providing recourse to sue

damages. Murray v. Crest Constr., Inc., 900 S.W.2d

342, 344 (Tex. 1995); America's Favorite Chicken Co.

v. Samaras, 929 S.W.2d 617, 626 (Tex.App.–San

Antonio 1996, writ denied).

The plaintiff can accept the defendant's repudiation

(before retracted) by materially changing its position

in reliance on the repudiation or indicating to the

defendant that it considers the repudiation to be final.

Glass v. Anderson, 596 S.W.2d 507, 510 (Tex. 1980).

Further, an anticipatory breach does not change the

usual rule that damages for breach of contract

compensate the innocent party for loss or damage

actually sustained. See Stewart v. Basey, 245 S.W.2d

484, 486 (Tex. 1952). Thus, the plaintiff may recover

the value of the expected performance of the contract,

which may be less than the remaining face value of

the contract because of the uncertainty of future

performance. Kiewit Tex. Mining Co. v. Inglish, 865

S.W.2d 240, 245 (Tex.App.–Waco 1993, writ denied).

MATERIAL BREACH AND REPUDIATION

If the plaintiff sues for unaccrued future damages, it

both: (1) resolves its right to recover future contract

payments into a mere cause of action for damages,

and (2) gives up its right to sue on the contract later.

Thomas v. Thomas, 902 S.W.2d 621, 624 (Tex.App.–

Austin 1995, writ denied). The plaintiff cannot sue

again for damages that accrue later. Id. at 624-25.

Alternatively, the plaintiff can treat the

repudiation as inoperative and sue for damages as they

accrue when the time for performance is due.

America's Favorite Chicken Co. v. Samaras, 929

S.W.2d 617, 626 (Tex.App.–San Antonio 1996, writ

denied). If the plaintiff ignores the repudiation, it

keeps the contract alive for the benefit of both parties

and remains subject to all of its own obligations.

Pollack v. Pollack, 39 S.W.2d 853, 857 (Tex.Comm'n

Appp. 1931, holding approved).

IV. MISCELLANEOUS

A. Prerequisites to Right to Terminate

A party that does not perform its obligation

cannot enforce the remaining terms of the contract

against the other party. Interceramic, Inc. v. South

Orient R.R., 999 S.W.2d 920, 924 (Tex.App.–

Texarkana 1999, pet. denied). Thus, a contractor may

not rely upon a material breach of the other party if

that contractor has committed a breach of contract

itself. Joseph v. PPG Indus., Inc., 674 S.W.2d 862

(Tex. App.—Austin 1984, writ ref’d n.r.e.). When

both parties are in breach, the case usually turns on

who breached first. In Texas, the general rule is that

reciprocal promises in a contract are presumed to be

mutually dependent and the breach of one will excuse

the performance of the other. Dew, Inc. v. Debco

Forms, Inc., 827 S.W.2d 379 (Tex. App.—San

Antonio 1992, no writ).

To determine when a party's contractual duties

were discharged, courts should consider: (1) the extent

to which it reasonably appeared to the injured party

that delay might prevent or hinder reasonable

substitute arrangements, and (2) the extent to which

the agreement provided for performance without

delay. Mustang Pipeline Co. v. Driver Pipeline Co.,

134 S.W.3d 195, 199 (Tex. 2004).

B. Waiver of Breach

Waiver is an intentional relinquishment of a

known right and is made either expressly or indicated

by conduct that is inconsistent with an intent to claim

the right. Jernigan v. Langley, 111 S.W.3d 153, 156

(Tex. 2003). Prolonged silence or inaction in

asserting a known right is conduct that may amount to

waiver. Martin v. Birenbaum, 193 S.W.3d 677, 681

(Tex.App.–Dallas 2006, pet. denied). The plaintiff's

intent is the primary factor in determining waiver, and

in the absence of a clear intent expressed in words,

acts, or conduct, waiver will be implied only to

prevent fraud or inequitable consequences. Stowers v.

Harper, 376 S.W.2d 34, 40 (Tex.App.–Tyler 1964,

writ ref'd n.r.e.).

A plaintiff may affirm a breached contract, and

thus waive its claim of breach, in one of two ways: (1)

by showing a conscious intent to do so, or (2) by

acting to induce the defendant's detrimental reliance,

thereby creating an estoppel situation. Consolidated

Eng'g v. Southern Steel, 699 S.W.2d 188, 191 (Tex.

1985).

However, the following acts will not necessarily

constitute waiver: (1) plaintiff's acceptance of a

defendant's late performance does not necessarily

constitute waiver of breach; (2) plaintiff's continuing

performance after defendant's breach; and (3)

plaintiff's honest efforts to induce defendant to

perform the contract. Cal-Tex Lumber Co. v. Owens

Handle Co., 989 S.W.2d 802, 812 (Tex.App.–Tyler

1999, no pet.)

C. Revival of time of essence requirement

When the time for performance has been waived

because the owner has led the contractor to reasonably

believe that strict compliance with the schedule will

not be required, the owner cannot subsequently

terminate the contract for late performance without

first notifying the contractor that strict compliance

will be insisted on in the future and then giving the

contractor a reasonable time to cure its default.

Laredo Hides Co., Inc. v. H&H Meat Products Co.,

Inc., 513 S.W.2d 210, 218 (Tex.Civ.App.–Corpus

Christi 1974, writ ref'd n.r.e.); A.L. Carter Lumber Co.

v. Saide, 168 S.W.2d 629, 630 (Tex. 1943).

D. Duty to mitigate damages / Owner completion

of project

All parties have a duty to mitigate their damages.

Great American Ins. Co. v. North Austin Mun. Utility

Dist. No. 1, 908 S.W.2d 415, 426 (Tex. 1995); Pulaski

Bank and Trust Co. v. Texas American Bank/Fort

Worth, N.A., 759 S.W.2d 723, 735 (Tex.App.–Dallas

1988, writ denied).

If a general contractor fails to perform, an owner

can complete the project and its damages are

measured by the reasonable and necessary costs of

completing the job less the unpaid balance under the

contract. McKnight v. Renfro, 371 S.W.2d 740, 745

(Tex.Civ.App.–Dallas 1963, writ ref'd n.r.e.).

E. Assignment

Generally, it is not a defense to a breach of

contract action that a defendant assigned its

contractual rights and duties to a third party. Seagull

Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d

MATERIAL BREACH AND REPUDIATION

342, 346-47 (Tex. 2006). A defendant that assigns its

rights and duties to a third party remains liable on the

contract unless the other party to the contract

expressly or impliedly releases it from liability. Id. at

347.