When a dispute arises, whether it is a payment dispute or otherwise, parties sometimes point the finger to the other party to argue that the other party breached the contract. What exactly does this mean? For a breach of contract to occur, the breach (or nonperformance) must be a MATERIAL BREACH. See Abbot Labs, Inc. v. Gen. Elec. Capital, 765 So.2d 737, 740 (Fla. 5th DCA 2000). A material breach is one that goes to the essence of the contract versus a minor aspect of the contract. See Covelli Family, L.P. v. ABG5, L.L.C., 977 So.2d 749, 752 (Fla. 4th DCA 2008). The Covelli Family Court explained:
“To constitute a vital or material breach, a party’s nonperformance must go to the essence of the contract. A party’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach.”
Id. (internal quotations and citations omitted).
Stated similarly:
“To constitute a vital or material breach a defendant’s nonperformance must be such as to go to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part. Corbin, supra, s 1104. A defendant’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach. Corbin states, at s 1104, pp. 562-565:
‘. . . The injured party, however, can not maintain an action for restitution of what he has given the defendant unless the defendant’s non-performance is so material that it is held to go the ‘essence’; it must be such a breach as would discharge the injured party from any further contractual duty on his own part. Such a vital breach by the defendant operates, with respect to the right of restitution, in the same way that a repudiation of the contractual obligation would operate. A minor breach by one party does not discharge the contractual duty of the other party; and the latter being still bound to perform as agreed can not be entitled to the restitution of payments already made by him or to the value of other part performances rendered.‘”
Beefy Trail, Inc. v. Beefy King Intern, Inc., 267 So.2d 853, 857 (Fla. 1972) citing and quoting Corbin on Contracts, Vol. 5.
In numerous circumstances, nonpayment can constitute a material breach. See Scott v. Rolling Hills Place Inc., 688 So.2d 937 (Fla. 5th DCA 1996) (finding that developer first breached contract by not paying engineer that discharged engineer of performance obligations). However, it is important for parties to consider that nonpayment does not automatically in of itself constitute a material breach. For instance, did the contract have a pay-if-paid clause? Did the party claiming nonpayment satisfy contractual conditions precedent to payment? Was the nonpaying party withholding money due to a performance issue such as defective or incomplete work? Was the payment late by a few days or was it never paid? Is the payment amount a relatively insignificant amount? Does the payment amount concern disputed amounts such as change orders or disputed defective or incomplete work? These are all questions that need to be a considered before a party takes an extreme position that it will no longer perform under the contract due to the nonpayment. A party should consult their written contract and counsel before taking any extreme position that the other party materially breached the contract to best determine the strategy and lay the foundation for the position.
The case of Marshall Const., Ltd. v. Coastal Sheet Metal & Roofing, Inc., 569 So.2d 845 (Fla. 1st DCA 1990), illustrates the ramifications of a party without a written contract taking an extreme position due to nonpayment. In this case, a general contractor entered into a contract to repair and replace roofs on three buildings at a Florida State Hospital. The general contractor then entered into an oral contract with a roofing subcontractor. During construction, a water leak arose with the new roof installed on one of the buildings. Both the general contractor and subcontractor appeared to agree that the new roof was defective and needed to be replaced. However, the subcontractor could not finance the repair / replacement work without getting paid for the work it had performed. The subcontractor was not paid for the work performed and determined that it would not perform any more work until it was paid. As a result, the general contractor terminated the subcontractor and hired a new roofing subcontractor to finish the balance of the roofing work and replace the defective roof. The subcontractor then sued the contractor for breaching their oral contract. The trial court ruled in favor of the subcontractor; the First District Court of Appeal reversed maintaining that the subcontractor actually committed the material breach:
“It is undisputed that Coastal [roofer] failed to install the roofing system on the east wing as required under the contract. When Coastal refused to repair the roof without further payment, it committed a material breach. Marshall [general contractor] was entitled to treat the breach as a discharge of its duty to pay Coastal until such time as Coastal repaired the defective roof and fulfilled its contractual duties. In light of the fact that the terms of the [general contractor’s] contract [with the owner] required substantial completion by July 25, 1988, and that Coastal refused to return to work until it was paid, Marshall was completely justified in determining that a material breach had occurred and ordering Coastal off the job.
We find no substantial, competent evidence to support a finding that Marshall [general contractor] breached the contract. The undisputed evidence demonstrates that Coastal [roofer] committed a material breach of the contract. This breach excused Marshall’s obligation to pay Coastal until the roof was repaired. We therefore reverse and remand for a new trial on damages and liability.”
Marshall Const., 569 So.2d at 848 (internal citations omitted).
Now, this case demonstrates why oral contracts are disfavored because rights and obligations are amorphous. Nothing is clearly defined and there is no written agreement to consult. If there was a written contract, most likely there would be a pay-if-paid provision in which the general contractor’s payment to the subcontractor was conditioned on its receipt of payment from the owner. It is uncertain whether the owner paid the general contractor for the defective work; if the owner did not, then the general contractor’s payment obligation would not have been triggered. But, let’s assume the owner did pay the general contractor. Well, the subcontract most likely contained a clause pertaining to defective work that would authorize the subcontractor to fix the work at its own costs and also entitle the general contractor to withhold sums as the result of incomplete or defective work. For instance, the standard form agreement between a contractor and subcontractor published by the ConsensusDocs (Document 750) contains the following provisions:
3.22.2.1 If the Architect/Engineer or Contractor rejects the Subcontract Work or the Subcontract Work is not in conformance with the Subcontract Documents, the Subcontractor shall promptly correct the Subcontract Work whether it had been fabricated, installed or completed. The Subcontractor shall be responsible for the costs of correcting such Subcontract Work, any additional testing, inspections, and compensation for services and expenses of the Architect/Engineer and Contractor made necessary by the defective Subcontract Work.
10.1.1 NOTICE TO CURE If the Subcontractor refuses or fails to supply enough properly qualified workers, proper materials, or maintain the Progress Schedule, or fails to make prompt payment to its workers, subcontractors or suppliers, or disregards laws, ordinances, rules, regulations or orders of any public authority having jurisdiction, or otherwise is guilty of a material breach of a provision of this Agreement, the Subcontractor shall be deemed in default of this Agreement. If the Subcontractor fails within three (3) business Days after written notification to commence and continue satisfactory correction of the default with diligence and promptness, then the Contractor without prejudice to any other rights or remedies, shall have the right to any or all of the following remedies:
10.1.1.1 supply workers, materials, equipment and facilities as the Contractor deems necessary for the completion of the Subcontract Work or any part which the Subcontractor has failed to complete or perform after written notification, and charge the cost, including reasonable overhead, profit, attorneys’ fees, costs and expenses to the Subcontractor;
10.1.1.2 contract with one or more additional contractors to perform such part of the Subcontract Work as the Contractor determines will provide the most expeditious completion of the Work, and charge the cost to the Subcontractor as provided under Clause 10.1.1.1; or
10.1.1.3 withhold any payments due or to become due the Subcontractor pending corrective action in amounts sufficient to cover losses and compel performance to the extent required by and to the satisfaction of the Contractor.
These provisions would hurt a subcontractor’s argument that it should get paid for work performed, including defective work performed, so that it could finance the repairs.
Again, before extreme positions are taken, a party should absolutely consult their written contract to determine rights, obligations, and risks they agreed to. Having a lawyer involved on the front end during the contract negotiation can help a party negotiate and/or appreciate the risks they are agreeing to. Even if a lawyer was not involved on the front end, having the lawyer involved when difficult issues arise during the course of construction will allow a party to preserve rights / arguments and take positions or avoid positions based on a determined strategy. As the expression goes, “An ounce of prevention is worth a pound of cure!”
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.