It seems to be a common understanding amongst persons that if you enter into an agreement with someone, but they don’t do what they promised in that agreement, then you don’t have to do what you promised. Unfortunately, that is only partly true.
In the law this common understanding can translate into one of two doctrines. The first is called “failure of consideration.” The second is called “prior material breach.”
A failure of consideration occurs when, because of some supervening cause arising after the contract is formed, the promised performance fails. Cheung-Loon, LLC v. Cergon, Inc., 392 S.W.3d 738, 747 (Tex. App.—Dallas 2012, no pet.). For example, you enter into a contract to buy a used car over the phone. However, when you arrive to pick up the car, you find it has (in between the time when you agreed to purchase the car and when you arrived) been struck by lightning burned into cinders and scrap metal. A total failure of consideration is ground for cancellation or rescission of the contract. Cheung-Loon, LLC v. Cergon, Inc., 392 S.W.3d 738, 748 (Tex. App.—Dallas 2012, no pet.); citing Food Mach. Corp. v. Moon, 165 S.W.2d 773, 775 (Tex.Civ.App.-Amarillo 1942, no writ). In the above example, the loss of the car would be grounds for you to cancel or rescind your deal with the seller.
The doctrine of prior material breach has been described as “a fundamental principle of contract law. Henry v. Masson, 333 S.W.3d 825, 840-41 (Tex. App.—Houston [1st Dist.] 2010, no pet.).
The doctrine provides “that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance.” BFI Waste Sys. of N. Am. v. N. Alamo Water Supply Corp., 251 S.W.3d 30, 30–31 (Tex.2008) (per curiam). This reflects the common understanding. However, there is a caveat.
If after the breach, the non-breaching party continues to insist on performance by the party in default, “the previous breach constitutes no excuse for nonperformance on the part of the party not in default and the contract continues in force for the benefit of both parties.” (emphasis added) Chilton Ins. Co. v. Pate & Pate Enters., Inc., 930 S.W.2d 877, 887 (Tex.App.-San Antonio 1996, writ denied) (quoting Houston Belt & Terminal Ry. v. J. Weingarten Inc., 421 S.W.2d 431, 435 (Tex.Civ.App.-Houston [1st Dist.] 1967, writ ref’d n.r.e.)); see also Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 756 (Tex.App.-Houston [14th Dist.] 2004, pet. denied).
Therefore, if someone has breached an agreement with you, you must elect between two courses of action—continuing performance under the contract or ceasing to perform.
If you treat the contract as continuing after the breach, you will be deprived of any excuse for terminating his own performance. Long Trusts v. Griffin, 222 S.W.3d 412, 415–16 (Tex.2007) (per curiam); Hanks v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex.1982); Gupta, 140 S.W.3d at 756; W. Irrigation Co. v. Reeves Cnty. Land Co., 233 S.W.2d 599, 602 (Tex.Civ.App.-El Paso 1950, no writ). Alternatively, you may treat the contract as breached and sue for damages.
This may seem common sense, but there is a trap. What if the agreement is not as simple as buying x for y dollars. What if there are multiple moving parts, and the seller has only breached one part?
For example, what if you agree to buy a business with no liabilities for $100,000.00 in ten equal monthly payments. Subsequently, in the first month of operation you discover the business does have liabilities of approximately $10,000.00. It may seem common sense to simply tell the seller you are offsetting the liability against one of the monthly payments you owe them. In fact, in many cases the seller will agree to such an accommodation. However, what if the seller refuses?
The buyer then has two choices: (1) continue to perform, that is, send the ten monthly payments of $10,000.00 as payment for the business and also sue for damages (in this case for $10,000.00); or (2) declare the whole contract in breach and rescind the deal, which would include returning the business and then suing for damages based on loss of the benefit of your original bargain (the value of the business you thought you were buying minus what you agreed to pay for it). There is no legitimate legally supportable middle ground. You cannot refuse to make the monthly payment and insist on an offset while retaining the business. If you refuse to make the monthly payment, you are opening yourself up to liability. If you elect to treat the contract as continuing after a breach and continue to demand performance, you obligate yourself to perform fully. See Long Trusts, 222 S.W.3d at 415–16.
If you are getting into a high dollar agreement, you ought to have competent legal counsel from the date the first serious offer is made, but when that high dollar agreement has problems you absolutely must have competent legal counsel quickly. Doing otherwise exposes you to unnecessary risk.
