First to Breach? Not So Fast
by Stanford R. Solomon and Gabriel D. Pinilla
The Florida Bar Journal – July/August 2018
Every law student learns the “first breach” or “prior breach” doctrine, which is commonly stated as follows: When a contracting party commits a breach of the contract, the counter party is discharged of its obligations under the contract.1 Conventional wisdom accepts this doctrine as a foundational and even simple principle of contract law. Foundational, it may be. Simple? Not so much. The first breach doctrine is commonly misunderstood, misapplied, conflated with other concepts, and taken for granted — often to the detriment of client interests.
To bring clarity to the doctrine’s practical application, this article addresses areas of confusion in terminology and definitions, highlights the differences in applying the doctrine offensively versus defensively, and discusses the unique scenarios presented by employment covenants and the enforcement thereof. Lastly, this article details the essential practical and strategic decisions that can make a critical difference when attempting to wield or to defend against the doctrine in business dealings and in resulting litigation.
The principles underlying the prior breach doctrine are applicable in various contexts. Accordingly, our analysis encompasses cases covering various legal contexts, including rescission,2 claims for damages, set off,3 anticipatory breach or repudiation,4 and conditions precedent.5
Essential Elements of the First Breach Doctrine
In order for the first breach doctrine to apply in any context, all of the following elements must converge: 1) There must be a first breach of contract; 2) the breach must be material or substantial6; 3) the contract provision breached must be a dependent (not an independent) covenant7; and 4) the non-breaching party must not have waived the right to enforce the prior breach against the opposing party.8
Although some cases treat the material/substantial breach requirement and the dependent covenant requirement as interchangeable, the greater weight of authority treats these concepts as distinct elements of the analysis.9 Materiality bears on the nature and impact of the breach. In contrast, whether a covenant is dependent or independent is based on the nature of the contract provision itself and the parties’ intent in forming their agreement.
The element of nonwaiver aligns with the notion that, as with most rights afforded by Florida law, a first breach defense or claim may be waived. The waiver of a prior breach claim or defense may be expressed by contract10 or implied by conduct.11
Knowing the critical elements is the first step to protecting and advancing client interests in first breach scenarios. Understanding the nuances of each such element is just as pivotal.
What is a Material Breach?
The materiality requirement mandates that the breached contractual duty must be of significant importance, such as, when the injury suffered as a result of the breach will be of a weighty magnitude. The language most consistently used in prior breach and related cases describes a material breach as one that goes to the essence of the contract between the parties. As stated in Burlington & Rockenbach, P.A. v. Law Offices of E. Clay Parker, 160 So. 3d 955 (Fla. 5th DCA 2015): “To establish a material breach, the party alleged to have breached the contract must have failed to perform a duty that goes to the essence of the contract and is of such significance that it relieves the injured party from further performance of its contractual duties.”12
The breach of ministerial, minor, technical, or administrative provisions of a contract will typically not be found to be material.13 Likewise, materiality will not be found where little to no harm or injury is suffered due to the alleged breach,14 or where the requirement alleged to have been violated is not dispositive of any significant practical rights.15 Breaches that are commonly found to be material include the failure to comply with price and payment obligations.16
The meeting of certain deadlines can also be deemed material, particularly where the contract provides that time is essential.17 Even where the contract does not specify that “time is of the essence,” failure to meet a deadline may qualify as a material breach where the facts surrounding the contract or its performance demonstrate that timing plays an important role in achieving the purposes of the contract or where significant prejudice results from untimely performance. In such a case, or if notice of a specific date of performance is provided to the party charged with such performance, delay can be deemed material despite the absence of a “time of the essence” provision.18 There is no absolute, bright-line rule. Even where time is declared to be “of the essence,” delay will not be deemed a material breach unless the clause is clearly applicable to the specific contract requirement at issue.19 Similarly, a slight delay in meeting deadlines is typically not considered to be a material breach.20
Materiality is a question of fact21 to be determined based on all relevant circumstances, including the intent and conduct of the parties, and the extent of the injury sustained as a result of the breach.22 Although not dispositive, it is a good practice to state expressly what contract terms are essential/material and to act accordingly when a breach does occur.
Dependent v. Independent Covenants
While similar in concept to the definition of materiality, characterizations of a dependent covenant use specific and distinct language. A dependent covenant is a contract term that goes to the “whole consideration” or to an “indispensable purpose of the contract.” The Florida Supreme Court’s often-cited decision in Steak House, Inc. v. Barnett, 65 So. 2d 736 (Fla. 1953), discusses the difference in dependent and independent covenants: Conditions or covenants in a contract are classed as dependent or independent from a consideration of the intention and understanding of the parties as shown by the whole contract.
A covenant is independent where it does not go to the whole consideration of the contract but is only subordinate and incidental to its main purpose, and the breach of such a covenant will not ordinarily constitute a sufficient reason for rescission.
A covenant is dependent where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered as destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted. A breach of such a covenant amounts to a breach of the entire contract; it gives to the injured party the right to sue at law for damages, or courts of equity may grant rescission in such instances if the remedy at law will not be full and adequate.23
While this description of a dependent covenant certainly sounds very similar to the definition of materiality, the consistent use of distinct language in both definitions implicates a difference in application. A term that may be deemed to go to the essence of the contract, for example, may not at the same time be considered to encompass the “whole consideration” or be “otherwise indispensable to the contracting parties.”24
The considerations applicable to whether a covenant is dependent are different from those applied to determine materiality. While materiality is a fact-based analysis focused on the substantiality of the breach, the injury suffered and closely related factors, whether a covenant is dependent is a question of law for the court to decide based on the intent of the parties gleaned from the face of the contract.25
Because the characterization of a covenant as dependent is based on the intent of the parties as determined from the four corners of the contract, contract preparation becomes critically important. Working carefully with clients to establish ultimate goals and expectations is paramount. Each covenant should be considered separately to establish the interaction between and priority of the parties’ respective obligations and the performance thereof.
The defense of prior breach, or any one of the remedies available, can be waived. A waiver of first breach rights and remedies will be determined based on the terms of the contract and the conduct of the parties. For example, the parties to a contract may agree that conduct otherwise constituting a waiver of relief under a prior breach theory (and corresponding remedies) does not operate as a waiver. In City of Miami Beach v. Carner, 579 So. 2d 248 (Fla. 3d DCA 1991), a landlord-tenant case, the court found that the tenant, the party asserting the prior breach doctrine, had exhibited conduct establishing an implied waiver of the right to claim damages for “total breach,” leaving the tenant with only a claim for partial breach damages. The lease, however, contained a nonwaiver provision. The appellate court remanded the case noting that “it remains to be determined whether a nonwaiver clause in the lease entitled [the tenant] to remain on the property after declaring a breach and still recover total breach damages.”26
A party can also be deemed to have contractually waived the right to assert a claim or defense of prior breach. In Branch Banking & Trust Co. (BB&T) v. S&S Dev., Inc., 2015 WL 12683834, *8 (M.D. Fla. June 30, 2015), lenders and real estate developers squared-off in a dispute over competing breaches of loan agreements. The contracts at issue related to failed real estate development projects that the lenders had been obligated to fund. In defense of an action by the lenders to enforce the loan agreements, the developers claimed that the lenders committed a prior breach by failing to fund properly the projects as required by the contracts, and that the funding deficiency caused the projects to fail. The BB&T court found the prior breach arguments unpersuasive, pointing to a loan extension agreement executed by the developers after the occurrence of the alleged prior breaches by the lenders. The extension agreements contained a general release by the developers in favor of the lenders as to “all…counterclaims, defenses, rights of set off, demands and liabilities whatsoever…known or unknown, suspected or unsuspected, both at law and in equity.”27 Based on that provision of the extension agreement, the court concluded that the developers had “contractually waived the prior breaches.”28