One Breach - Two Breach

One Breach, Two Breach,

Old Breach, New Breach:

An Analysis of Competing Contract Claims in Light of

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc.

Presented to:

Annual Construction Law Conference

San Antonio, Texas

Presented by:

Amy K. Wolfshohl

Porter Hedges LLP

Houston, Texas

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I. Introduction

In disputes involving construction, in many instances the parties are faced with

contractual claims and counterclaims. For example, an owner may assert a claim against a

contractor for defective work while at the same time withholding funds that the contractor seeks

to recover through a contractual claim for payment (among other claims that would likely be

asserted). Another common scenario involves competing delay claims between parties in the

contractual chain. These types of scenarios create “competing breach” claims.

Competing breach claims almost always involve an analysis of who breached first,

whether the claimed breaches were material, and whether a party was required to continue

performing or was entitled to cease its performance. Competing breach claims create complexity

in jury charges and in awarding attorneys’ fees because there may be two valid claims that must

be analyzed. While most decisions focus on claims for material breach, the Texas Supreme

Court recently issued an opinion with respect to a claim involving a non-material breach.

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc. adds another layer to the analysis of

competing breach claims and highlights the importance of analyzing whether a breach is

immaterial. This paper includes a discussion of the case, how it adds to competing breach

analysis, provides a summary of jury charge issues (including those raised in Bartush) and ends

with a discussion of attorneys’ fees.

II. Discussion of Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc.

A food manufacturer, Bartush-Schnitzius Foods, Co. (“Bartush”), sought to develop a

new line of food which required refrigerated storage that did not exceed 38 degrees.

Bartush

contacted a refrigeration contractor, Cimco Refrigeration, Inc. (“Cimco”), to install a new

system.

Although Cimco sent Bartush a letter listing three options, the letter did not reference a

particular temperature range for any option.

Bartush accepted the most expensive option.

When the system was completed, Bartush set the temperature to 35 degrees.

This caused

ice to form on the fan motors, which overheated and failed, causing the temperature to increase

at times to 60 degrees.

When Bartush discovered the problem, it had already paid Cimco

$306,758 but still owed $113,400.

The parties did not agree on how to proceed, and the

manufacturer hired an engineer to investigate the matter.

The engineer recommended a warm-

glycol defrost unit,

and Bartush hired another contractor to install the unit at a cost of

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 434 (Tex. 2017).

Id.

There is no discussion as to whether the unit constitutes betterment.

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$168,079.

After the warm-glycol defrost unit was installed, the system was able to maintain a

temperature of 35 degrees.

Cimco sued Bartush to recover the balance due on the contract.

Bartush asserted a

counterclaim for breach of contract, seeking as damages, the cost of the warm-glycol defrost

unit.

Cimco asserted in its defense that the equipment it installed was exactly as described in

the accepted purchase order and denied that it had made any guarantee regarding the equipment’s

capacity to maintain a specific temperature.

The case was tried to a jury which found: (1) both parties breached the contract,

(2) Cimco breached first, (3) Bartush’s breach was not excused, (4) Bartush was entitled to

$168,079 (the cost of installing the warm-glycol defrost unit), and (5) Cimco was entitled to

$113,400 (the contract balance).

The remainder of the case involved interpreting the legal

significance of the jury’s various findings.

a. Trial and Appellate Court Findings

Although the jury found both parties breached the contract and that Bartush’s breach was

not excused, the trial court believed it favored Bartush and rendered judgment in favor of

Bartush for $168,079.

The lower court awarded nothing to Cimco, who appealed.

addition to advocating a different interpretation of the jury verdict, Cimco argued that no

evidence existed that it had breached the contract.

The Fort Worth Court of Appeals reversed.

The appellate court determined that the

jury’s failure to find Bartush’s breach was excused as necessarily implying a finding that

Cimco’s first breach was nonmaterial.

The court of appeals further held that Bartush’s failure

to pay was a material breach as a matter of law, which rendered irrelevant the jury’s finding that

Cimco breached first and precluded Bartush’s recovery.

The appellate court remanded to the

trial court for entry of judgment that Bartush take nothing and that Cimco recover $113,400 in

damages.

The appellate court did not reach Cimco’s alternative assertion that no evidence

supported the jury’s finding that the contractor had breached the contract.

Id.

Id. at 435.

Id.

Id. at 438.

Cimco Refrigeration, Inc. v. Bartush-Schnitzius Foods Co., 518 S.W.3d 57, 62 (Tex. App.—Fort Worth 2015),

review granted, judgment rev’d, 518 S.W.3d 432 (Tex. 2017).

Id. at 61–62.

Id. at 62.

Id.

Bartush-Schnitzius Foods Co., 518 S.W.3d at 438.

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Both parties appealed to the Texas Supreme Court. Bartush argued that the trial court’s

judgment should be reinstated because the contractor’s first breach was material as a matter of

law and thus excused its subsequent failure to comply with the agreement.

Alternatively,

Bartush argued that both damages awards should be given effect, resulting in its net recovery of

$54,679 in compensatory damages.

Cimco argued that the court of appeals correctly concluded

that Bartush’s material breach excused Cimco’s nonmaterial breach.

b. Supreme Court Decision

In reaching its decision, the Texas Supreme Court distinguished between material and

nonmaterial breach as follows:

“It is a fundamental principle of contract law that when one party

to a contract commits a material breach of that contract, the other

party is discharged or excused from further performance.”

contrast, when a party commits a nonmaterial breach, the other

party “is not excused from future performance but may sue for

the damages caused by the breach.”

Thus, according to the Texas Supreme Court, depending on the severity of the first

breach, a party’s performance may be excused or the non-breaching party may be required to

continue to perform. The court also noted that breach of contract does not require a finding of

materiality. Specifically, “the claim requires a finding of breach, not a finding of material

breach.”

In this case, according to the court, materiality was appropriately determined by the jury

unlike in Mustang Pipeline where materiality could be determined as a matter of law.

The

court noted that in most cases, materiality presents issues of fact determined by the following

factors outlined in Mustang Pipeline:

(a) the extent to which the injured party will be deprived of the

benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately

compensated for the part of that benefit of which he will be

deprived;

perform will suffer forfeiture;

Id. at 435.

Id.

Id. at 436 (quoting Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 196 (Tex. 2004)) (emphasis

added).

Id. (quoting Levine v. Steve Scharn Custom Homes, Inc., 448 S.W.3d 637, 654 (Tex. App.—Houston [1st Dist.]

2014, pet. denied)) (emphasis added) (footnote omitted).

Id. (citing Mays v. Pierce, 203 S.W.3d 564, 575 (Tex. App.—Houston [14th Dist.] 2006, pet. denied) (“A breach

of contract occurs when a party fails or refuses to do something he has promised to do.”)).

Id. at 436–37.

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(d) the likelihood that the party failing to perform or to offer to

perform will cure his failure, taking account of the

circumstances including any reasonable assurances; and

(e) 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.

Here, the jury decided these factors in the context of whether Bartush’s breach was excused

instead of whether Bartush’s or Cimco’s breach was material.

Specifically, the jury question

on materiality was as follows:

QUESTION NO. 4

Was BARTUSH’s failure to comply excused?

“Failure to comply” by BARTUSH may be excused if you find that CIMCO previously

failed to comply with a material obligation of the same agreement.

A failure to comply must be material. The circumstances to consider in determining

whether a failure to comply is material include:

(a) The extent to which the injured party will be deprived of the benefit which it

reasonabl[y] expected;

(b) The extent to which the injured party can be adequately compensated for the part of

that benefit of which it will be deprived;

forfeiture;

(d) The likelihood that the party failing to perform or to offer to perform will cure its

failure, taking into account the circumstances including any reasonable assurances;

(e) 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.

Answer “Yes” or “No”.

Answer: No

The Supreme Court determined that it could not “overrule the jury’s implied finding” that

Cimco’s breach was not material.

Because Cimco’s breach was not material, Bartush was

required to continue its performance (i.e. payment). Bartush’s continued performance, however,

Id. (citing Mustang Pipeline, 134 S.W.3d at 199).

See id. at 436.

Id. at 437.

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would not discharge its claim for damages against Cimco which had already arisen. In deciding

the case, the court held “[w]hile a party’s nonmaterial breach does not excuse further

performance by the other party, neither does the second breach excuse the first.”

In other

words, as stated by the Texas Supreme Court, “a material breach excuses future performance, not

past performance.”

Interestingly, there is no discussion regarding whether Bartush’s breach

was material or—if it was immaterial—how that affected the court’s analysis. However, the rule

discussed by the court seems to imply that Bartush’s non-payment was material.

Thus, the Texas Supreme Court found that the Fort Worth Court of Appeals erred in

holding that Bartush’s later, material breach excused Cimco from liability for its breach of its

duty to perform.

The Texas Supreme Court agreed with Bartush’s alternative argument in

holding that both parties should be awarded the damages found by the jury, so that Bartush was

entitled to a net award.

Except, the Texas Supreme Court remanded to the court of appeals for a

determination of whether there was any evidence that Cimco breached.

Accordingly, Bartush’s

claim for a net damage award remains viable unless Cimco prevails on its argument that there

was no evidence of its breach.

III. Analysis

a. Key Finding of Materiality

Key to the Bartush court’s holding is the non-materiality of the original breach. In

particular, the Texas Supreme Court found that Bartush was required to continue to perform and

pay Cimco because Cimco’s breach was nonmaterial. Consequently, in rendering advice to

clients based upon whether to continue to perform after a breach, it is critical to know whether

the breach is material or immaterial. Because only certain breaches are material as a matter of

law, tread lightly on advising clients to discontinue performance.

The following cases discuss: (i) when materiality of a breach can be determined as a

matter of law; (ii) when materiality is a fact question; and (iii) breaches that are not immaterial as

a matter of law.

i. Material Breach Determined as a Matter of Law.

Cases holding that a breach is material as a matter of law are the exception to the rule, but

important to analyzing competing breach claims. The following cases present examples where

material breach could be determined as a matter of law.

In Mustang Pipeline, the Texas Supreme Court determined that a jury need not make an

express finding of materiality when the evidence shows a material breach as a matter of law.

Id.

Id. (emphasis in original).

Id. 437–38.

See id. at 437.

Id. at 438.

Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 198 (Tex. 2004).

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Mustang contracted with Driver for the construction of 100 miles of pipeline.

During the

bidding phase, Mustang emphasized a completion deadline of April 30, 1997.

The parties’

contract contained a “time is of the essence” clause while also contemplating avoidance of

weather-related delays.

Claiming extensive weather delays, Driver only completed 15 miles of

pipeline during the first 58-days of a 98-day schedule.

With 40 days to complete 85 miles of

pipeline to meet the April 30th deadline, Mustang terminated Driver and hired another contractor

to complete the work. Mustang sued Driver for the cost of completion, lost profits, and

attorneys’ fees.

Driver asserted a counterclaim for breach of contract alleging Mustang

wrongfully terminated the contract.

After considering factors of material breach laid out in the

Restatement (Second) of Contracts §§ 261–62, the court found that Driver materially breached

the contract as a matter of law, and therefore discharged Mustang from further performance

under the contract.

In sum, the Mustang Pipeline court held that Driver breached as a matter of

law because: (i) the contract contained a hard deadline, a time is of the essence clause, and

contemplated avoidance of delays and (ii) an objective inability to cure existed.

Hooker v. Nguyen also addressed material breach as a matter of law.

In Hooker, the

owner, Hooker, contracted with Nguyen, the contractor, for the construction of a salon.

After

notifying Nguyen of many construction issues, Hooker and Nguyen entered into an agreement by

which Nguyen agreed to remedy the issues and complete the salon by February 4, 2001.

Based

on the evidence, the jury found that Nguyen failed to substantially complete his obligations by

February 4.

Because Nguyen failed to prove substantial performance, the Fourteenth District

Houston Court of Appeals held that Nguyen materially breached as a matter of law.

Therefore,

Hooker was discharged of his obligation to pay the remaining contract price.

A similar set of facts are addressed in Casarez v. Alltec Const. Co.

The parties’

contract on a home elevation project required substantial completion by a certain date and

included a time is of the essence clause.

The contractor could not complete the project without

additional money in excess of the contract price.

The homeowners refused to pay the

Id. at 196.

Id.

Id. at 196–97.

Id.

Id. at 197.

Id.

Id. at 200.

Hooker v. Nguyen, 14-04-00238-CV, 2005 WL 2675018, at *3 (Tex. App.—Houston [14th Dist.] Oct. 20, 2005,

pet. denied).

Id. at *1–2.

Id. at *2.

Id. at *10.

Id. This does not apply when the owner is the first to materially breach. 1.9 Little York, Ltd. v. Allice Trading

Inc., 01-11-00390-CV, 2012 WL 897776, at *6 (Tex. App.—Houston [1st Dist.] Mar. 15, 2012, pet. denied) (citing

Tips v. Hartland Developers, Inc., 961 S.W.2d 618, 623 (Tex. App.—San Antonio 1998, no pet.)).

Hooker, 2012 WL 897776, at *10.

Casarez v. Alltec Const. Co., 14-07-00068-CV, 2007 WL 3287933, at *5 (Tex. App.—Houston [14th Dist.] Nov.

6, 2007, no pet.).

Id. at *1, *5.

Id. at *5.

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additional money and the contractor stopped work before the home was substantially complete.

Through its failure to achieve substantial completion, the contractor materially breached the

contract as a matter of law and the homeowners were discharged from any remaining contractual

duties.

ii. Material Breach Not Determined as a Matter of Law.

In contrast to cases holding that material breach could be determined as a matter of law,

the murky water presented by dueling breach claims is the more common scenario. The

following cases presented the court with material breach claims that could not be determined as a

matter of law.

For example, in MHI Partnership. Ltd. v. DH Real Estate Investment Co., a builder

entered into a contract with a developer to purchase residential lots within a subdivision.

amendment to the contract required that the developer provide backup information for an

increase or decrease in actual construction and engineering costs three weeks before the closing

date.

The developer achieved substantial completion of Phase 1 and demanded closing on lot

sales within the next 10 days.

The developer also notified the builder that costs had increased

2%, but such backup information verifying the cost increase was not provided three weeks

before closing.

The builder terminated the contract for developer’s failure to provide the

backup information three weeks before closing as provided in the contractual amendment. The

builder asserted such a failure was a material breach of the parties’ contract based on the

“boilerplate” time is of the essence clause in the contract.

After a review of the evidence, the

Austin Court of Appeals determined that the parties’ “boilerplate” time is of the essence clause

and circumstances indicated that the parties did not intend the time is of the essence clause to

apply to this particular three week deadline.

Therefore, the court could not conclude that the

breach was material as a matter of law and affirmed the trial court’s denial of a directed verdict.

In Continental Dredging, Inc. v. De-Kaizered, Inc., a Houston dock owner contracted for

dredging services in front of his dock to a uniform depth of 36-feet.

After several ships were

unable to dock, the owner refused to pay the contractor’s outstanding invoice for the material

dredged.

At the trial court, the jury determined that the contractor had breached the contract,

but that the breach did not excuse the owner from performance.

Thus, the jury impliedly found

that the breach was immaterial.

On appeal, the owner argued that the evidence was factually

Id.

Id. at *6.

MHI P’ship, Ltd. v. DH Real Estate Inv. Co., 03-04-00485-CV, 2008 WL 3877717, at *1 (Tex. App.—Austin

Aug. 20, 2008, pet. denied).

Id.

Id. at *2.

Id. at *5–6.

Id. at *6.

Cont’l Dredging, Inc. v. De-Kaizered, Inc., 120 S.W.3d 380, 386 (Tex. App.—Texarkana 2003, pet. denied).

Id. at 387.

Id. at 394.

Id.

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and legally sufficient to support a finding that the contractor materially breached as a matter of

law.

The Texarkana Court of Appeals disagreed, holding that there was sufficient evidence to

prove that the contractor almost dredged to 36-feet.

With sufficient evidence to prove that the

contractor substantially performed, there could be no finding of material breach as a matter of

law.

The First District Houston Court of Appeals addressed a material breach claim made by a

Municipal District against a Utility District for its failure to “promptly” bill for water supplied.

The contract provided that the Districts would supply water to one another in the event of an

emergency.

Thereafter, the providing District was obligated to bill “promptly upon termination

of the Emergency or Temporary Period, whichever is earlier.”

From 1999 to 2006, the

Districts’ water supply was carried on account and the offset balance was reported.

During this

time, the Municipal District received substantially more water than it supplied to the Utility

District.

After determining its need for emergency water had diminished, the Utility District

sent the Municipal District an invoice to settle the account.

The Municipal District refused to

pay.

One of the Municipal District’s arguments was that the Utility District materially

breached the contract by failing to “promptly” bill, thus excusing the Municipal District’s

obligation to pay.

While acknowledging that under a time is of the essence contract a court

may find a material breach as a matter of law, the Houston Court of Appeals concluded that was

not the intent of the parties in this case.

The First District Houston Court of Appeals in GCC Constructors, Inc. v. American

Horizon Concrete, Inc., held that evidence presented at the trial court was insufficient to find that

the subcontractor’s abandonment of a construction project after late payment was a material

breach as a matter of law.

GCC, a first-tier subcontractor, contracted with American Horizon,

a second-tier subcontractor, for concrete work, including both materials and manpower.

The

subcontract did not contain a completion date or impose a work schedule.

While the

subcontract did contain a time is of the essence clause, the same provision allowed for GCC to

amend American Horizon’s work schedule.

It was undisputed that American Horizon

abandoned the project after only partial performance.

American Horizon alleges that it

Id. at 393–94.

Id. at 395.

Id.

Harris Cty. Util. Dist. No. 16 v. Harris Cty. Mun. Dist. No. 36, 01-10-00042-CV, 2011 WL 3359698, at *9 (Tex.

App.—Houston [1st Dist.] Aug. 4, 2011, no pet.).

Id. at *1.

Id.

Id. at *2.

Id.

Id. at *9.

Id. (citing Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 196 (Tex. 2004)).

GCC Constructors, Inc. v. Am. Horizon Concrete, Inc., 01-04-00817-CV, 2007 WL 926652, at *5 (Tex. App.—

Houston [1st Dist.] Mar. 29, 2007, no pet.).

Id. at *1.

Id.

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abandoned the project because of GCC’s failure to pay, delays not entirely caused by American

Horizon, and requests for expedited work without pay.

The trial court found that GCC

breached the contract awarding American Horizon $40,000 in damages.

On appeal, GCC

claimed that under Mustang Pipeline’s analysis, the facts indicate that American Horizon

breached the subcontract, and GCC was also excused from its financial obligation to pay.

While the court recognized that the subcontract contained a time is of the essence clause, GCC-

American Horizon’s circumstances differed from those of Mustang Pipeline.

Unlike in

Mustang Pipeline, the need for timely performance was only one of several issues GCC and

American Horizon disputed.

Furthermore, the majority of delays on the project did not stem

from American Horizon.

In sum, because the trial court was required to resolve the parties’

factually disputed allegations concerning timely performance and causal delays, the appellate

court overruled GCC’s argument that American Horizon materially breached the subcontract as a

matter of law.

iii. Immaterial Breach

On the flip side of the coin, some litigants have argued that the court should determine

immateriality as a matter of law. The following breach, however, was not immaterial as a matter

of law:

In Pelco Construction Co. v. Chambers County, the First District Houston Court of

Appeals refused to find that an owner’s withholding of 10% of the contract price from a

contractor was an immaterial breach as a matter of law.

Chambers County withheld 10% of

two invoices submitted by Pelco for its work constructing a firehouse.

Chambers County

alleged that it withheld payment due to defects in the work and asserted three reasons as to why

the court should find that withholding 10% was an immaterial breach as a matter of law.

First,

Chambers County argued that 10% was a nominal amount to withhold.

Second, the withheld

amount was not intended to be permanent; once Pelco made corrections, the remaining amount

would be paid.

And third, Chambers County argued that Pelco’s failure to follow the payment

dispute resolution process prevented Pelco from claiming the breach as material.

The court

rejected all three arguments refusing to find immateriality as a matter of law because 1) case law

does not support the assertion that 10% contractual withholding is a nominal amount as a matter

of law; 2) the justification for withholding any amount was based on Pelco’s defective work

which was not established as a matter of law; and 3) it was unclear whether the contractual

provision at issue was applicable to the circumstances and even if it was, failure to follow the

Id. at *4.

Id. at *2.

Id. at *4.

Id.

Id. at *5.

Pelco Constr. Co. v. Chambers Cty., 495 S.W.3d 514, 524–26 (Tex. App.—Houston [1st Dist.] 2016, pet. denied).

Id. at 518.

Id. at 524–25.

Id. at 525.

Id.

Id. at 525–26.

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dispute resolution procedures does not establish that Chambers County’s breach was

immaterial.

Further, the court reasoned that Chambers County did not provide Pelco with

notice and an opportunity to cure the defects as required under their contract, but simply issued

payment for less than the entire amount.

100

To find immateriality, the court would have to

conclude that Chambers County’s failure to notify Pelco of the alleged defects was immaterial,

but that Pelco’s failure to follow the claims procedure was material.

101

Nothing in Chambers

County’s motion for summary judgment established such conclusion as a matter of law.

102

The cases above demonstrate that even the same type of breach—i.e. failure to timely

perform, will in some instances be material as a matter of law and in other instances be a matter

for a jury to determine. Consequently, a prudent litigator should not count on any particular

breach being classified as material as a matter of law.

b. If a Contractor substantially performs, is the breach ever material?

Substantial performance of a construction contract throws another wrinkle into a material

breach analysis. In ordinary contract cases, a party who is in default cannot maintain a suit for

its breach.

103

This strict rule has been relaxed in the law of construction contracts by the doctrine

of substantial performance, which allows recovery to a building contractor who has breached but

substantially performed his contract.

104

This raises the question as to whether a contractor can

ever materially breach a contract that it substantially performs. It would appear the answer to

that question is no.

In a footnote, the Texas Supreme Court analogized the Bartush case to a construction

case in which the contractor achieves only substantial completion as follows: “[a] similar state of

affairs often arises in the context of construction contracts, when a contractor sues for the

balance due and owing on the contract and the property owner counterclaims for damages for

incomplete or defective performance.”

105

The Texas Supreme Court noted that “[i]n such cases

if the contractor has substantially completed performance, i.e. the contractor’s breach is not

material, then the contractor has a claim for the unpaid balance and the owner has a claim for

damages.”

106

“Substantial performance may be raised by a party seeking to recover on a contract that

was not fully performed or may be raised as the defensive issue of prior material breach by the

Id. at 526.

100

Id.

101

Id.

102

Id.

103

Gulf Pipe Line Co. v. Nearen, 138 S.W.2d 1065, 1068 (Tex. 1940).

104

Dobbins v. Redden, 785 S.W.2d 377, 378 (Tex. 1990); Vance v. My Apartment Steak House of San Antonio, Inc.,

677 S.W.2d 480, 481 (Tex. 1984); Atkinson v. Jackson Bros., 270 S.W. 848, 850 (Tex. Comm’n App. 1925, holding

approved).

105

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 437 n.5 (Tex. 2017) (citing Vance,

677 S.W.2d at 480)). Accord, the Restatement (Second) of Contracts § 237, cmt. d (discussing the substantial

performance doctrine).

106

Id.

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party defending a breach of contract action.”

107

However, the contractor has the burden to prove

substantial performance.

108

Consequently, the owner (or other upstream party) should consider

raising substantial performance as an issue if the contractor’s substantial performance is in

question.

109

In the end, a finding that the contractor substantially performed is similar to the material

breach analysis.

Indeed, “the doctrine of substantial performance overlaps with the requirement

that the breach of a contract must be material.”

110

“[T]he doctrine assumes, if there is substantial

performance, the breach is immaterial.”

111

For the contractor to meet its burden that it substantially performed a construction

contract,

the contractor must have in good faith intended to comply with the

contract, and shall have substantially done so in the sense that the

defects are not pervasive, do not constitute a deviation from the

general plan contemplated for the work, and are not so essential

that the object of the parties in making the contract and its purpose

cannot, without difficulty, be accomplished by remedying them.

112

Thus, the contractor must prove: (i) good faith; (ii) the absence of pervasive defects; and

(iii) that the defects can be remedied without the contract failing its essential purpose.

In the following case, the court found there was no material breach because the contractor

substantially performed. In Continental Dredging, the court found that an owner was not

excused from paying a contractor who substantially performed the contract.

113

The court equated

substantial performance with the lack of material breach. Specifically, the court found that the

contractor’s dredging operation did not achieve 36-feet required by the contract but almost

achieved that depth. The court noted that “[t]he ratio between what was left unperformed and

the total performance promised will frequently be decisive.”

114

The dredging contractor also

acted in good faith that it had concluded the contract.

115

As such, there was substantial

performance and no material breach.

116

107

St. Paul Mercury Ins. Co. v. Stewart Builders, Ltd., 01-09-00276-CV, 2011 WL 944377, at *6 (Tex. App.—

Houston [1st Dist.] Mar. 17, 2011, no pet.).

108

Vance, 677 S.W.2d at 482.

109

See Texas Pattern Jury Charge 101.46; cf Turner, Collie & Braden, Inc. v. Brookhollow, Inc., 642 S.W.2d 160,

165 (Tex. 1982) (discussing an implied finding of substantial performance due to the presentation of some evidence

that the contractor substantially performed); Movie Grill Concepts I, Ltd. v. CCM Grp., Inc., 05-02-00892-CV, 2003

WL 549425, at *2 (Tex. App.—Dallas Feb. 27, 2003, pet. denied) (discussing instruction in jury charge relating to

substantial performance).

110

See Gentry v. Squires Const., Inc., 188 S.W.3d 396, 403 n.3 (Tex. App.—Dallas 2006, no pet.).

111

Id.

112

Turner, Collie & Braden, Inc. v. Brookhollow, Inc., 642 S.W.2d 160, 164 (Tex. 1982).

113

Cont’l Dredging, Inc. v. De-Kaizered, Inc., 120 S.W.3d 380, 395–96 (Tex. App.—Texarkana 2003, pet. denied).

114

Id. at 395.

115

Id.

116

Id. at 396.

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While not a construction dispute, the Fifth Circuit also held that a finding of substantial

performance establishes no material breach occurred and therefore does not excuse the other

party’s performance.

117

In Measday v. Kwik-Kopy Corp., the Fifth Circuit, applying Texas law,

analyzed the doctrine of substantial performance as applied to an employment/service

contract.

118

Measday was hired to serve as Kwik-Kopy’s regional franchise director under a 5-

year contract.

119

Before expiration of the contractual relationship between Measday and Kwik-

Kopy, Kwik-Kopy’s director of marketing told Measday he needed to sign a new agreement and

had no choice in the matter. Preferring to work under the existing contract, Measday refused to

sign the new contract and was subsequently terminated.

120

Measday sued for breach of contract.

The trial court found a valid 5-year contract and awarded Measday damages.

121

On appeal,

Kwik-Kopy argued that the jury instruction of substantial performance was in error.

122

Although

the Fifth Circuit agreed, the court held that such error did not require reversal because the facts

presented by Measday were sufficient to prove substantial performance.

123

Therefore, Kwik-

Kopy’s argument—that Measday did not substantially perform thereby excusing Measday’s

termination—must fail.

124

“A finding of substantial performance established there was no

material breach,” and therefore Kwik-Copy was not excused from performance.

125

These cases demonstrate that substantial performance may help certain parties to

demonstrate the lack of a material breach. In cases where the contractor or other downstream

party is less likely to prove substantial completion, it may be helpful to raise the issue due to the

burden shifting aspect of proving substantial performance.

c. Hypothetical Discussion of Bartush

Assume that the jury in the Bartush case found that Cimco breached first and the breach

was material (or that Bartush’s breach of contract was excused). Does Cimco’s breach excuse

Bartush from remitting any additional funds to Cimco? In addition to the amounts it withheld,

could Bartush seek an award of repair costs?

In the Bartush case, the Texas Supreme Court echoes the familiar rule that a material

breach by one party discharges the other from future performance.

126

But how far does that rule

extend? Under the hypothetical, would it justify the jury verdict in the Bartush case where the

trial court rendered judgement for Bartush for $168,079 and awarded nothing to Cimco?

Remember that Cimco was owed $113,400, which was the balance due on the contract.

117

Measday v. Kwik-Kopy Corp., 713 F.2d 118, 126 (5th Cir. 1983).

118

Id. at 124.

119

Id. at 121.

120

Id. at 122.

121

Id.

122

Id. at 123.

123

Id.

124

Id. at 125.

125

Id.

126

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 437 (Tex. 2017).

6471760v2

The hypothetical is similar to the facts in Hooker v. Nguyen.

127

In that case, Hooker hired

Nguyen to build the interior of a salon.

128

Nguyen’s work was late and some defects existed in

the work.

129

At the end of the project, Hooker failed to pay $44,159.20 to Nguyen.

130

The jury

found that Nguyen failed to substantially perform but also awarded him the balance outstanding

on the work.

131

The jury also awarded Hooker $58,949.00 ($3,949.00 for costs of remedying or

repairing defects; $5,000.00 for liquidated damages for Nguyen’s late performance; and

$50,000.00 in diminution of value of the salon).

132

The Fourteenth District Houston Court of

Appeals determined that the jury finding that Nguyen failed to substantially perform was

equivalent to a finding of material breach excusing Hooker’s further performance.

133

Thus, the

appellate court reversed and rendered.

134

Nguyen was awarded nothing and Hooker was

awarded the damages found by the jury.

135

Based upon the precedent in Hooker, Cimco would not be entitled to its balance due and

Bartush would be entitled to its cost of repair. This result raises questions relating to an owner

receiving a windfall due to not paying for defective work and being awarded the cost of repair.

Perhaps, however, this result was brought about due to the lack of a claim for quantum meruit.

136

IV. Other common breach scenarios – Continuing Performance

The first to breach rule stated in Mustang Pipeline—that “when one party to a contract

commits a material breach of that contract, the other party is discharged or excused from future

performance”—applies only so long as the parties do not treat the contract as continuing in

effect.

137

Chilton Ins. Co. v. Pate & Pate Enterprises, Inc. illustrates an example of when the non-

breaching party elects to continue the contract after a breach by its contractual counter-party, but

then later attempts to withhold payments based on these prior material breaches. In Chilton,

Chilton provided a performance bond on behalf of Caliber, the subcontractor hired by the general

contractor, Pate, to perform a public works project.

138

After Caliber defaulted, Chilton entered

into a takeover agreement with Pate, whereby Chilton agreed to complete Caliber’s work and

Pate agreed to pay Chilton in accordance with the terms of Caliber’s subcontract.

139

Due to

delays and problems with Chilton’s work, Pate withheld payment from Chilton, even though

127

14-04-00238-CV, 2005 WL 2675018 (Tex. App.—Houston [14th Dist.] Oct. 20, 2005, pet. denied).

128

Id. at *1.

129

Id.

130

Id. at *3.

131

Id. at *3.

132

Id. at *3 n.2.

133

Id. at *10.

134

Id. at *11.

135

Id.

136

See Beeman v. Worrell, 612 S.W.2d 953, 956 (Tex. Civ. App.—Dallas 1981, no writ) (holding that recovery in

quantum meruit was proper where contractor failed to substantially perform and where owner had payments

outstanding).

137

Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 756 (Tex. App.—Houston [14th Dist.] 2004, pet. denied).

138

Chilton Ins. Co. v. Pate & Pate Entes., Inc., 930 S.W.2d 877, 888 (Tex. App.—Corpus Christi 1996, writ

denied).

139

Id.

6471760v2

Chilton continued to perform the work.

140

When the project was complete, Pate acknowledged

that Chilton was owed a balance under the takeover agreement, but claimed that it had been

damaged by Chilton’s poor performance and delays and demanded reimbursement from

Chilton.

141

Chilton filed suit alleging, among other claims, breach of contract.

142

Pate

counterclaimed to recover its damages for Chilton’s breach of contract.

143

In its live pleadings,

Pate judicially acknowledged that Chilton was entitled to a credit against the actual damages it

allegedly owed to Pate.

144

Pate, however, argued that its failure to pay Chilton the remaining amount owed under

the takeover agreement was excused by Chilton’s prior material breach.

145

The court

acknowledged the general rule that “[w]here one party materially breaches a contract, the non-

breaching party is forced to elect between two courses of action—continuing performance or

ceasing performance. Treating a contract as continuing, after a breach, deprives the non-

breaching party of any excuse for terminating their own performance.”

146

The court found

that Pate treated the contract with Chilton as continuing because “by its own words, [Pate]

admits it ‘did not seek to declare the contract terminated [upon the breach], but rather operated

within the terms of the contract and performed its obligations under such contract.’”

147

The court

rejected Pate’s argument that the election of remedies doctrine applied to Chilton when Pate first

withheld a progress payment because Pate was permitted to withhold this payment under the

subcontract, finding that “[a]n election does not arise until the other party materially breaches the

contract. Pate’s failure to comply with the subcontract did not occur at the time it withheld

progress payments. If a breach occurred, it was when Pate withheld final payment after the

Project was accepted by the City.”

148

Instead, the election of remedies occurred when Pate

determined that Chilton materially breached the contract—at that time, Pate could have either

discontinued its own performance, rescinded the contract and sued for material breach, or

continue its performance and lose Chilton’s material breach as an excuse for its own non-

performance.

149

By its own actions, Pate elected to treat the contract as continuing, and therefore

forfeited any excuse for its own breach of failing to pay the admitted credit to Chilton.

150

Similarly, in Eco Built, the court found that a contractor, Landmark, could not refuse to

pay a terminated subcontractor, Eco Built, for work completed before the termination even

though the jury found that Eco Built breached the contract first and the breach was material.

151

Specifically, the court held that Landmark waived Eco Built’s prior breach as an excuse for

terminating its own non-performance (i.e. not paying Eco Built’s invoices before termination).

152

140

Id.

141

Id.

142

Id.

143

Id.

144

Id. at 885–86.

145

Id. at 887.

146

Id. at 887–88 (citations omitted) (emphasis added).

147

Id. at 888.

148

Id.

149

Id.

150

Id.

151

Eco Built, Inc. v. Lulfs, 2010 WL 3629821, at *6 (Tex. App.—Austin, Sep. 17, 2010).

152

Id. at *5.

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As a result, the payments owed to Eco Built were offset against the damages incurred by

Landmark.

153

While parties are required to continue to perform after another party breaches the contract

if they elect to treat the contract as continuing, that does not mean a claim for damages is

waived.

154

The non-breaching party’s election of remedies “affects only whether the non-

breaching party is required to perform fully after the breach.”

155

“[A]ny action indicating an

intent to continue [the contract] will operate as a conclusive choice,” and while the non-

breaching party will be deprived of “any excuse for ceasing performance on his own part,” the

injured party will not be deprived of “his cause of action for the breach which has already taken

place.”

156

A party’s “continuing performance after another party’s breach is not a waiver of the

right to recover damages due to the breach, and a non-breaching party’s honest efforts to induce

the party in default to perform the contract do not constitute waiver.” As such, a prior material

breach is treated more like an immaterial breach when the non-breach party continues to

perform.

V. Jury charge

Drafting the jury charge is complicated by dueling breach claims. The biggest mistake is

assuming that one size fits all. While you can begin with the jury charges recommended by the

Texas PJC and the Texas Supreme Court, all charges have to be adjusted to the needs of the case.

Texas Pattern Jury Charge 101.2 (2016) includes the following comment with respect to

competing claims of material breach:

Disjunctive question for competing claims of material breach. If both

parties allege a breach of contract against one another, the court can ask

the breach-of-contract question disjunctively, together with an appropriate

instruction directing the jury to decide who committed the first material

breach.

157

An alternative way to submit competing claims of breach of an

agreement is set forth below.

QUESTION 1

Did Don Davis fail to comply with the agreement?

153

This case illustrates the ease with which parties can be considered to have continued performance after the

breach. The contract was executed on September 27, 2002. On November 15, 2002 Landmark served notice of

default and on December 6, 2002, Landmark terminated the contract. While Landmark made a partial payment after

disputes arose and amended the contracts at issue, this continued “performance” only lasted for a couple of weeks.

There was no jury question regarding continued performance. Had Landmark not paid anything to Eco Built the

results may have been different in the case.

154

Chilton Ins. Co. v. Pate & Pate Enters., Inc., 930 S.W.2d 877, 888 (Tex. App.—Corpus Christi 1996, writ

denied) (citing Western Irr. Co. v. Reeves Land Co., 233 S.W.2d 599, 602–03 (Tex. App.―El Paso 1950, no writ)).

155

Avasthi & Assocs., Inc. v. Dronamraju, No. 01-11-00786-CV, 2012 WL 6644873, at *8 (Tex. App.―Houston

[1st Dist.] 2012, pet. denied) (mem. op.).

156

Avasthi, 2012 WL 6644873, at *7 (quoting Compass Bank v. MFP Fin. Servs., Inc., 152 S.W.3d 844, 858 (Tex.

App.―Dallas 2005, pet. denied)).

157

Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 200 (Tex. 2004).

6471760v2

[Insert instructions, if appropriate.]

Answer “Yes” or “No.”

Answer: ____________

QUESTION 2

Did Paul Payne fail to comply with the agreement?

[Insert instructions, if appropriate.]

Answer “Yes” or “No.”

Answer: ____________

If you answered “Yes” to Question 1 and Question 2, then answer

Question 3. Otherwise, do not answer Question 3. QUESTION 1

QUESTION 3

Who failed to comply with the agreement first?

Answer “Don Davis” or “Paul Payne.”

Answer: ____________

The pattern jury questions in Pattern Jury Charge 101.2 are a derivation of the charge

recommended by the Texas Supreme Court in Mustang Pipeline. In that case, the court noted

that the parties could have avoided having the jury finding both parties in breach “had the trial

court submitted the breach of contract question disjunctively (“Did Driver Pipeline Company or

Mustang Pipeline Company fail to comply with the parties’ contract?”) accompanied by an

appropriate instruction directing the jury to decide who committed the first material breach.”

158

However, the Committee on Pattern Jury Charges elected to re-state the disjunctive question as

two questions and pose a third question relating to order of breach which, according to the

Committee, focuses on the “defense of prior material breach.”

159

Additionally, the Committee

recommends predicating damages only on an affirmative finding of Question 1 and 2 but not 3

relating to who failed to comply first.

The Committee on Pattern Jury Charges of the Texas State Bar also provides the

following commentary with respect to materiality listing the factors for determining materiality

and noting:

158

Id.

159

PJC 101.2 Comments to disjunctive question for competing claims of material breach (noting Question 3 submits

the defense of prior material breach).

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Material breach. If the parties dispute whether the alleged breach is a

material one, the court should insert any or all of the following instructions

regarding materiality, as appropriate:

A failure to comply must be material.

Interestingly, the PJC arguably does not contemplate a nonmaterial breach like the one discussed

in Bartush (which the court found justified an award of damages but required continued

performance

160

) because it states that a failure to comply must be material or alternatively

permits the parties to assume the breach was material.

In the Bartush case, the parties appear to have followed the instruction of PJC 101.21-22

which recommends the following question when a party submits one or more defenses to a

contract suit:

PJC 101.21 Defenses—Basic Question

If you answered “Yes” to Question [101.1], then answer the

following question. Otherwise, do not answer the following question.

QUESTION ______

Was Don Davis’s failure to comply excused?

PJC 101.22 Defenses—Instruction on Plaintiff’s Material Breach

(Failure of Consideration)

Failure to comply by Don Davis is excused by Paul Payne’s

previous failure to comply with a material obligation of the same

agreement.

Answer “Yes” or “No.”

Answer:__________

Thus, prior material breach was submitted as a defense instead of part of Question 2 which asked

whether Cimco failed to comply with the contract. Interestingly, had materiality been raised in

connection with Question 2 relating to Cimco’s failure to comply it is possible the jury would

have found Cimco did not breach because the jury later found that Cimco did not fail to comply

with a material obligation of the agreement in Question 4. If the jury had found that Cimco did

not breach but Bartush did, Bartush would not have been awarded any damages.

160

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 437 (Tex. 2017).

6471760v2

In CFS Forming Structures Co. v. Flintco, Inc., the Fifth Circuit approved another form

of jury instructions in connection with competing breach scenarios.

161

In this case, Flintco

contracted with CFS to perform the concrete scope in connection with a conference center and a

hotel. While several schedules were issued, Flintco became concerned that CFS was not timely

performing the concrete work.

162

Before the project manager went on vacation, he sent a cure

notice to CFS requesting CFS commence curing its delay in beginning the concrete work. While

he was out, CFS began the slab work by laying down vapor barriers, applying pest control,

grading the site, and similar actions consistent with preparing the concrete work.

163

The project

manager returned and terminated CFS because it had failed to undertake “significant carton

form” work.

164

The submitted jury questions were as follows:

165

Question 1: Do you find that CFS was in compliance with the

master project schedule on September 28? If “No” proceed to

question 2; if yes, proceed to question 3.

Question 2: Do you find that CFS satisfied the notice in the “cure

letter” of September 28 by commencing operations? If yes,

proceed to question 3; if “no” proceed to question 4.

Question 3: What amount of money would compensate CFS for

Flintco’s termination?

Question 4: What amount of money would compensate Flintco for

CFS’s breach?

The jury found that CFS was not in breach of the subcontract on September 28 and awarded

damages for Flintco’s unjustified termination.

166

Flintco argued that the district court erred by

refusing to submit the questions in the disjunctive as recommend by Mustang Pipeline. In

rejecting Flintco’s argument, the Fifth Circuit opined that the purpose behind the Mustang

Pipeline court’s instruction was to capture the concept of materiality. Specifically, the Fifth

Circuit held that “[t]he district court’s jury instruction here adequately capture the question of

materiality despite their not being worded in the disjunctive [because] [t]he charge contains the

implicit assumption that the breaches, if they occurred were material.”

167

That is, the jury questions require that, (1) if the jury finds that

CFS breached the subcontract by failing to comply with the CPM,

Flintco must be awarded damages, but (2) if CFS was in

compliance, then Flintco’s termination was wrongful and the jury

must determine the quantity of damages incurred by CFS. Even

though they do not explicitly require the jury to decide materiality,

161

CFS Forming Structures Co., Inc. v. Flintco, Inc., 393 F. App’x. 136, 142 (5th Cir. 2010).

162

Id. at 139.

163

Id.

164

Id.

165

Id. at 139–40.

166

Id. at 140.

167

Id. at 142.

6471760v2

these instructions will nevertheless establish which breach, if any,

is material. And, because of the “cure” provision, CFS could only

be in breach under the instant facts if it were first notified of a

putative breach and afforded an opportunity to cure. There is no

question that Flintco terminated the subcontract and that it

purported to do so because of CFS’s putative failure to cure the

delay outlined in the “cure letter.” It necessarily follows that if

CFS was not actually in breach vel non, then the termination for

that breach was wrongful.

168

Because the jury charge addressed materiality and prevented conflicting findings, it was

proper.

169

Upon review of the cases above, there is much more guidance with respect to submitting

questions regarding breaches that are clearly material. The Texas Pattern Jury Charge fails to

provide guidance with respect to common breach scenarios where one of the breaches was

immaterial or where the parties continue to perform after the original breach. Likewise, Mustang

Pipeline and Flintco do not address a scenario like that in Bartush where the court found that

Cimco breached first but its breach was not material.

While the Bartush Court used implied findings to resolve the issues before it, the Texas

Supreme Court made no further recommendations for handling jury questions relating to material

breach in that case. As such, practitioners are left without much guidance to draft jury charges

where one breach was not material or the first breach was material but later performance was not

excused because the non-breaching party continued to perform. While there are multiple ways to

ask the jury to decide completing breach claims, to the extent the parties believe that one of the

breaches was immaterial, consider a modification of the questions posed by Bartush and Cimco

as follows: Question 1 and 2 regarding each parties’ failure to comply with the agreement at

issue, Question 3 regarding order of breach (predicated on an affirmative finding for 1 and 2) and

then express questions regarding materiality with appropriate predicates. The materiality

questions are suggested in lieu of asking the jury to determine whether a party’s breach was

excused to avoid having a court decide whether a finding of materiality or immateriality was

implied. If additional questions are used regarding materiality as suggested, the jury will decide

materiality and it will not be implied either through asking who breached first or in a question

relating to whether a parties’ breach was excused.

VI. How are attorneys’ fees affected by competing breach claims?

Dueling breach claims also create unique issues with respect to attorneys’ fees. In

Bartush, the jury was asked about both parties’ fees and awarded Bartush fees but not Cimco.

170

According to Cimco, it was not awarded fees due to conditional submission of the question

regarding its fees.

171

168

Id. at 142–43.

169

Id. at 143.

170

Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc., 518 S.W.3d 432, 435 (Tex. 2017).

171

Id. at 438.

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In connection with competing breach claims, both parties may be awarded fees under

certain circumstances. The analysis is varied depending upon the existence of a prevailing party

clause.

a. No prevailing party clause

Texas Civil Practice and Remedies Code § 38.001 is the statute that Texas litigants look

to for recovery of attorneys’ fees in connection with breach of contract claims. Parties are

entitled to recover fees from individuals and corporations under Texas Civil Practice and

Remedies Code § 38.001 even in the absence of a prevailing party when they (1) prevail on a

cause of action for which attorneys’ fees are recoverable, and (2) recover damages.

172

Under the predecessor to Texas Civil Practice and Remedies Code § 38.001, the Texas

Supreme Court analyzed the ability of both parties to recover fees in the absence of a prevailing

party clause. In McKinley v. Drozd, a general contractor brought suit against homeowners to

recover the balance due on a construction contract and its attorneys’ fees.

173

The homeowners

asserted a competing claim for breach of contract and requested attorneys’ fees.

174

The trial

court awarded both parties damages under their breach claims as well as equal attorneys’ fees.

175

The Texas Supreme Court addressed the issue of whether a party needs a net recovery in order to

recover attorneys’ fees under Texas Civil Statutes, article 2226—the predecessor to Texas Civil

Practice and Remedies Code § 38.001.

176

The court looked to the wording of the statute and

concluded, “all that is required to obtain attorneys’ fees is a ‘just amount owing’ not tendered

within 30 days.”

177

Therefore, in competing breach claims, even if a party’s damages are

completely offset, the party may still recover its attorneys’ fees.

178

The party who prosecutes a breach of contract claim but recovers no damages, cannot be

awarded fees under § 38.001 because he did not receive relief on a valid claim.

179

Specifically,

§ 38.001(8) provides that a party “may recover reasonable attorneys’ fees from an individual or

corporation, in addition to the amount of a valid claim and costs, if the claim is for . . . an oral or

written contract.”

180

In Green v. Solis, although a jury found that Solis failed to comply with a

subcontract, the jury awarded zero damages to Green for Solis’ breach.

181

Because Green failed

to recover damages on its breach of contract claim, Green was not entitled to recover attorneys’

fees under § 38.001.

182

172

Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997) (citing State Farm Life Ins. Co. v. Beaston, 907

S.W.2d 430, 437 (Tex. 1995)).

173

McKinley v. Drozd, 685 S.W.2d 7, 8 (Tex. 1985).

174

Id.

175

Id.

176

Id. at 10.

177

Id.

178

Id. at 11.

179

Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 389–90 (Tex. 1997).

180

TEX. CIV. PRAC. & REM. CODE § 38.001(8).

181

Green, 951 S.W.2d at 386.

182

Id. at 390.

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b. Prevailing party clause

In Intercontinental Group Partnership v. KB Home Lone Star, L.P., the Texas Supreme

Court, identified the standard for determining the prevailing party in a breach of contract action

in connection with a prevailing party clause. In considering whether an award of contractual

attorneys’ fees was proper, the court determined that a party “prevails” on a claim “when actual

relief on the merits of his claim materially alters the legal relationship between the parties by

modifying the defendant’s behavior in a way that directly benefits the plaintiff.”

183

Thus, the concept of “prevailing party” as a claimant includes not just successfully

proving or defending against a claim but also receiving relief. In a breach of contract action

where a party seeks § 38.001 attorneys’ fees,

184

the party who “prevails” must be the breach of

contract claimant who “prove[s] compensable injury and secure[s] an enforceable judgment in

the form of damages or equitable relief.”

185

On the other hand, in connection with a prevailing party clause, a party may—in many

instances—be awarded fees for successfully defending a breach of contract claim.

186

Thus, the

analysis of cost of defense is different for competing breach claims where a prevailing party

clause exists and where one does not because there is no award of fees under § 38.001 for a

successful defense.

In www.Urban.inc. v. Drummond, the court discussed order of breach in connection with

whether a defendant could be a prevailing party entitled to attorneys’ fees in connection with its

defense of a breach of contract claim.

187

In the Drummond case, Chris Drummond signed a

Residential Buyer/Tenant Representation Agreement in 2011 in which Drummond agreed to

exclusively work through Urban for six months. Under the terms of the agreement, Urban was

entitled to a commission based on the gross sales price of the property. The agreement also

provided for a payment to Urban upon Drummond’s default. The agreement also contained the

following attorneys’ fees provision:

ATTORNEY’S FEES: If Client or Broker is a prevailing party in

any legal proceeding brought as a result of a dispute under this

agreement or any transaction related to this agreement, such party

183

Intercontinental Grp. P’ship v. KB Home Lone Star L.P., 295 S.W.3d 650, 654 (2009) (quoting Farrar v. Hobby,

506 U.S. 103, 111–12 (1992)). Note that the Court left open the issue of whether a defendant who successfully

defends a breach of contract claim would be entitled to contractual attorneys’ fees.

184

TEX. CIV. PRAC. & REM. CODE § 38.001.

185

KB Home, 295 S.W.3d at 652 (defining “prevail” in relation to breach of contract claimant in contractual

attorneys’ fees case); Green, 951 S.W.2d at 390 (defining “prevail” in relation to breach of contract claimant under

EX. CIV. PRAC. & REM. CODE § 38.001 breach of contract case); Mustang Pipeline Co. v. Driver Pipeline Co., 134

S.W.3d 195, 201 (Tex. 2004) (holding party not entitled to attorneys’ fees where party has valid breach of contract

claim but awarded no damages).

186

Chevron Phillips Chem. Co. LP v. Kingwood Crossroads, L.P., 346 S.W.3d 37, 70 (Tex. App.—Houston [14th

Dist.] 2011, pet. denied) (holding fees for defense of claim were proper where “contractual provision entitling a

‘prevailing party’ to recover attorneys’ fees does not distinguish between successful prosecution and successful

defense of a claim”); see also VSDH Vaquero Venture, Ltd. v. Gross, 05-16-01041-CV, 2017 WL 3405312, at *5

(Tex. App.—Dallas Aug. 9, 2017, no pet.).

187

WWW.URBAN.INC. v. Drummond, 508 S.W.3d 657, 663 (Tex. App.—Houston [1st Dist.] 2016, no pet.), reh’g

denied in part (Feb. 7, 2017).

6471760v2

will be entitled to recover from the non-prevailing party all costs of

such proceeding and reasonable attorney’s fees.

Only Urban’s breach of contract claim and Drummond’s affirmative defense of prior material

breach and breach of fiduciary duty were submitted to the jury. The jury found that Urban

materially breached first through its failure to use best efforts under the agreement. The jury also

found the Drummond breached. Neither party was awarded damages. Urban contended that the

trial court erred by awarding attorneys’ fees to Drummond because Drummond is not a

“prevailing party” under the agreement.

188

Urban asserted several arguments to attempt to show that it was the prevailing party

including that Drummond’s breach necessitates a finding that Drummond was not the prevailing

party.

189

Specifically, Urban argued that Drummond could not recover attorneys’ fees based on

his defense of Urban’s breach of contract claim because the jury found that Drummond breached

the agreement and there is no jury finding that Drummond’s breach was excused. The court

reasoned, however, that the jury’s findings demonstrate that Drummond’s failure to comply with

the agreement was excused as a matter of law by Urban’s prior material breach. As such, the

order of breach can also affect the party designated as the prevailing party.

The determination of the prevailing party under a prevailing party clause is even more

complicated by facts similar to those in McKinley and in Bartush where both parties prevail on a

claim and are awarded damages particularly due to the lack of case law available to provide

guidance on the issue. While it was at least partially rejected in KB Home,

190

some courts

continue to rely upon the “main issue” analysis in other contexts.

191

Thus, some courts may

determine the identity of a prevailing party through an analysis of who prevailed on the main

issue. The author also has experience with arbitrators permitting both parties to recover fees

without engaging in an analysis of who prevailed on the main issue. If parties desire more

188

Id. at 665.

189

Id. at 670.

190

KB Home, 295 S.W.3d at 661–62 (rejecting the dissenting opinion’s “main issue” analysis used to define a

“prevailing party”).

191

Drummond, 508 S.W.3d at 667–68 (“Therefore, we do not read KB Home as rejecting “main issue” analysis in

all cases in which a contractual attorneys’ fee provision controls, but, rather, only in those cases in which such

analysis is incompatible with a controlling contractual provision.”). See Silver Lion, Inc. v. Dolphin Street, Inc., 01-

07-00370-CV, 2010 WL 2025749, at *18 (Tex. App.—Houston [1st Dist.] May 20, 2010, pet. denied) (relying upon

pre-KB Home authorities and holding defendant who prevailed on “main issue” was entitled to attorneys’ fees

pursuant to contract provision); see also SEECO, Inc. v. K.T. Rock, LLC, 416 S.W.3d 664, 674 (Tex. App.—

Houston [14th Dist.] 2013, pet. denied) (holding defendant who prevailed on “main issue” was entitled to attorneys’

fees pursuant to contract provision); Bhatia v. Woodlands N. Houston Heart Ctr., PLLC, 396 S.W.3d 658, 670–71

(Tex. App.—Houston [14th Dist.] 2013, pet. denied) (same); Johnson v. Smith, No. 07-10-00017-CV, 2012 WL

140654, at *2 (Tex. App.—Amarillo Jan. 18, 2012, no pet.) (same). In a case tried to a jury, the issues that are fully

litigated and properly submitted to the jury provide compelling evidence of the main issues in that case. See Bhatia,

396 S.W.3d at 670–71 (holding that, in suit involving multiple claims and counterclaims based on breach of

contract, tort, and statutory causes of action, some of which “were essentially abandoned, and others were defeated

in motions practice and were not submitted to the jury or raised in th[e] appeal,” main issues were those that were

fully litigated, properly submitted to jury, and formed the basis of the “vast majority of the [trial] testimony”); see

generally Johnson, 2012 WL 140654, at *3 (stating that parties who “obtained favorable findings on all major jury

issues” and take-nothing judgment in their favor were prevailing parties under contract).

6471760v2

certainty with respect to fees and the identity of a prevail party, the best practice would be to

define the prevailing party in the attorneys’ fee provision.

VII. Conclusion

In analyzing competing breach claims, attorneys should consider materiality first and

then analyze whether parties continued to perform. Construction litigators should also be

mindful that not all breaches are material and that damages may also be awarded for certain non-

material breaches. In drafting the jury charge, consider both material and immaterial breaches

and remember that the Texas Pattern Jury Charge does not address immaterial breaches or

continuing performance after a material breach. In determining strategy in settlement and trial,

attorneys should also consider the effect of competing breach claims as well as the existence of a

prevailing party clause on attorneys’ fees.

One Breach, Two Breach,

Old Breach, New Breach:

An Analysis of Competing Contract Claims in

Light of Bartush-Schnitzius Foods v.

Cimco Refrigeration

Construction Law Foundation of Texas, 31

Annual Construction Law Conference

Presented by: Amy K. Wolfshohl

[email protected]

Competing Breach Claims

• When both parties assert claims for breach of

contract questions arise regarding:

– Who breached first

– Whether the breaches were material

– Whether performance continued after a breach

– Whether either party or both are entitled to fees

• Analysis of these issues should begin with

established case law

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First Breach is Material

• First breach is material [Mustang Pipeline]

– Non-breaching party is no longer required to

perform

– Second breach by non-breaching party is excused

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Material Breach + Continued

Performance

• First breach is material but non-breaching party

continues to perform [Chilton]

– Non-breaching party’s performance is not excused

– Second breach by non-breaching party is not

excused

– Claim for damages for first breach is not waived

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First Immaterial Breach

• What is the effect of the first breach being

immaterial?

– Are damages available for the immaterial breach?

– Does the first material breach following the

immaterial one negate the immaterial breach?

• The questions were answered recently and

definitely by the Texas Supreme Court.

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Bartush-Schnitzius Foods v. Cimco

Refrigeration

• Bartush hired Cimco to build refrigerated

storage for seafood dips.

• The refrigerated storage could not maintain

the temperature necessary for the dip without

ice forming on the fan motors.

• When Bartush discovered the problem, it had

already paid Cimco $306,758, but still owed

$113,400.

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Bartush-Schnitzius Foods v. Cimco

Refrigeration

• The parties did not agree on how to proceed,

and the manufacturer hired an engineer.

• The engineer recommended a warm-glycol

defrost unit, and Bartush hired another

contractor to install the unit at a cost of

$168,079.

• After the warm-glycol defrost unit was

installed, the system was able to maintain a

temperature of 35 degrees.

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Competing Breach Claims

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Cost of Defrost Unit

Bartush

Cimco

Jury Findings

1. Both parties breached the contract

2. Cimco breached first

3. Bartush’s breach was not excused

4. Bartush was entitled to $168,079 (the cost of

installing the warm-glycol defrost unit)

5. The contractor was entitled to $113,400 (the

contract balance)

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Trial Court

• Although the jury found both parties breached

the contract and that Bartush’s breach was

not excused, the trial court believed it favored

Bartush and rendered judgment in favor of

Bartush for $168,079.

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Fort Worth Court of Appeals

Reversal

• Bartush breached the contract, and the jury’s

failure to find the breach was not excused

necessarily implied a finding that Cimco’s first

breach was nonmaterial.

• Bartush’s failure to pay was a material breach

as a matter of law, rendering irrelevant the

jury’s finding that Cimco breached first and

precluding Bartush’s recovery.

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Fort Worth Court of Appeals

Reversal

Breach 1 – Cimco’s failure to perform (immaterial)

Breach 2 – Bartush’s non-payment (material as a MOL)

Cimco wins and Bartush gets nothing

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Texas Supreme Court

• “It is a fundamental principle of contract law

that when one party to a contract commits a

material breach of that contract, the other

party is discharged or excused from further

performance.”

• By contrast, when a party commits a

nonmaterial breach, the other party “is not

excused from future performance but may

sue for the damages caused by the breach.”

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Texas Supreme Court

• Materiality was appropriately determined by

the jury unlike in Mustang Pipeline where

materiality was determined as a matter of law

• Materiality was determined by the jury in

connection with finding that Bartush’s breach

was not excused (not in the initial questions

regarding who breached and which breach

was first)

– Resulted in implied finding that Cimco’s breach

was immaterial

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Immaterial Breach is Relevant

• “While a party’s nonmaterial breach does not

excuse further performance by the other

party, neither does the second breach excuse

the first.”

• “[A] material breach excuses future

performance, not past performance.”

• Court seems to imply that Bartush’s non-

payment was material even though it was not

discussed by the court or decided by the jury.

Construction Law Foundation of Texas,

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Immaterial Breach is Relevant

• Cimco breached first but its breach was

immaterial

• Bartush breached second

• Bartush was required to continue to perform

(pay the balance due) but was also entitled to

damages for Cimco’s immaterial breach

• Result: Bartush’s damages offset by amounts

owed to Cimco (assuming the appellate court

determines issues in a manner that favors

Bartush on remand)

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Closer Look at the Jury Charge

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Jury Question/Answer Potential for

Conflict

Conflicting Result Resolution by TXSC

Q1 and Q2 – Whether

the parties complied

with agreement?

Neither complied.

Q3 – Who breached

first? Cimco

[No instruction on

materiality]

PJC – Implies

materiality in the

absence of an

instruction or

question.

Trial court concluded

that verdict favored

Bartush.

Appellate court

disregarded finding

and concluded

Bartush’s breach was

material as a MOL.

Cimco’s first breach

entitled Bartush to

damages.

Q4 – Was Bartush’s

failure to comply

excused due to Cimco’s

prior material breach?

No.

Materiality factors as

an affirmative

defense potentially

conflict with the PJC

assumption of

materiality.

Disregarded by trial

court.

Implied a finding that

Cimco’s breach was

immaterial which

meant Bartush was

required to perform.

Jury Questions to Consider

• Q1 and Q2 – Failure to comply (same)

• Q3 – Who breached first? (same)

• Q4 and 5 – Explicitly ask about materiality of

breach to the extent a jury answers “yes” to

questions 1 and 2

– No implied findings

– Enables the jury to determine both material and

immaterial breach

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Materiality as a Matter of Law

• While materiality is typically determined by

the fact finder, some breaches are material as

a matter of law.

• When a breach can be determined as a matter

of law, you can recommend a client cease its

performance without worrying about whether

a fact finder will also determine that the client

breached.

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Material Breaches as a

Matter of Law

• Failure of a contractor to prove substantial

performance [Hooker v. Nguyen] relieved

owner of remaining payment obligations

• Contractor breached as a matter of law

because: (i) the contract contained a hard

deadline, a time is of the essence clause, and

contemplated avoidance of delays and (ii) an

objective inability to cure existed [Mustang

Pipeline]

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Consider a Hypothetical

• Assume that the jury in Bartush found that

Cimco breached first and that Bartush’s

breach was excused (i.e. Cimco’s breach was

material). Was Bartush permitted to keep the

contract balance owed to Cimco and receive

an award of repair costs?

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Hypothetical

• Likely yes. See Hooker v. Nguyen

• Windfall for the owner who was awarded

repair costs and entitled to withhold the

contract balance

• Consider a quantum meruit claim when

representing a contractor under similar

circumstances

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Attorneys’ Fees

• Competing breach claims complicate the

analysis of fee awards

• Analysis depends upon whether there is a

prevailing party clause in the contract

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Recovery of Attorneys’ Fees under

Tex. Civ. Prac. Rem. Code §38.001

• Recovery for claimant from individuals and

corporations when:

– Claimant prevails on a breach of contract action;

and

– Recovers damages.

• Zero damages = Zero fees [Green v. Solis]

• Attorneys’ fees may be awarded even if the

damages award by one party is completely

offset by the other award [McKinley v. Drozd]

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Recovery of Attorneys’ Fees with a

Prevailing Party Clause

• To be a prevailing party, a claimant who seeks

money damages on a breach claim must

prevail on the claim and be awarded damages

[Intercontinental Group Partnership v. KB

Home Lone Star, L.P.]

• A defendant must prevail, but does not need

to be awarded damages.

• Party seeking an award of fees does not need

to be concerned with the type of entity sued.

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Poll

• Can both parties recover fees when:

– Both parties assert breach claims

– Both parties are awarded damages

– The contract includes a prevailing party clause

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Main Issue?

• Main issue analysis rejected in part by the

Texas Supreme Court in KB Home.

• Some courts continue to apply it

• Would seem to make sense that there is one

prevailing party in a dispute BUT…

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Two Prevailing Parties?

• No case specifically addresses the issue

• Parties can alternatively request fees against

individuals and corporations under §38.001

[Alta Mesa Holdings, LP v. Ives, 488 S.W.3d

438, 455 (Tex. App.—Houston [14th Dist.]

2016, pet. denied)].

• Consider defining the prevailing party in your

contract to ensure certainty of any result you

want to achieve.

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Final Thoughts

• Don’t neglect the immaterial breach claim

• Remember that the PJC does not address

claims for non-material breach

• Materiality will typically be determined by a

fact finder and not as a matter of law

• Use a prevailing party clause with a definition

of the prevailing party to get more certainty in

attorneys’ fee awards

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Any Questions?

• Thanks to Dr. Seuss for inspiring the title of

this presentation.

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