You see it in sports all the time. Two players get into a heated exchange, one pushes the other, who then retaliates by pushing back even harder. The referee, however, only sees the second push, and so the retaliator and his team get penalized, and the instigator walks back to their sideline with a grin on their face. Does the same hold true when contracting parties each claim the other side is in breach? Is it better to be the instigator who breaches first, as opposed to the retaliator who responds in kind with their own breach? Or, is the party that breaches first the one that's penalized?
Under Michigan law, a contracting party "who first breaches a contract cannot maintain an action against the other contracting party for his subsequent breach or failure to perform." Able Demolition v Pontiac, 275 Mich App 577, 585; 739 NW2d 696 (2007). While it sounds simple, this "first-breach rule" only applies if the initial breach was "substantial." Id. For a breach to be substantial, it must change the contract such that further performance by the other party is rendered ineffective or impossible. McCarty v Mercury Metalcraft Co, 372 Mich 567, 574; 127 NW2d 340 (1964).
In determining if the first breach is substantial, considerations include:
- the extent to which the injured party will still obtain the substantial, reasonably anticipated benefit;
- the extent to which the injured party may be adequately compensated in damages for lack of complete performance;
- the extent to which the party failing to perform has already partly performed or made preparations for performance;
- the greater or less hardship on the party failing to perform in terminating the contract;
- the willful, negligent, or innocent behavior of the party failing to perform; and
- the greater or less uncertainty that the party failing to perform will perform the remainder of the contract. Walker & Co v Harrison, 347 Mich 630, 635; 81 NW2d 352 (1957).
In other words, it's not as simple as proving that the other side breached the contract first and, voilá, the claim is dismissed. Instead, the party attempting to establish that the other party breached first must not only prove the prior breach, but also that the prior breach had a substantial impact on the parties' overall contract and performance.
Each contractual party, therefore, needs to be clear on what the other side's alleged breach is and the impact of that breach before taking steps to repudiate the contract or sue the other side. Unlike in sports, where the actions of the aggressor are often missed by the referee, in court, the actions of both parties will be closely scrutinized to determine who was truly the aggressor, whose breach matters, and who is liable. As stated by the Michigan Supreme Court, "the injured party's determination that there has been a material breach, justifying his own repudiation, is fraught with peril, for should such determination, as viewed by a later court in the calm of its contemplation, be unwarranted, the repudiator himself will have been guilty of material breach and himself have become the aggressor, not an innocent victim." Walker, supra.
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