(Author's aside: Why no post since May? Because things have been busy here at BUSKLAW HQ - practicing law for clients!)
When both parties to a contract breach it, what's a court to do? This was the issue presented to Kent County Circuit Court Judge Christopher Yates in Zackary Electric, Inc. v Knoebel Construction, Inc. The facts are straightforward. Defendant Knoebel Construction was hired as a general contractor to build out an Altar'd State clothing store in Woodland Mall in Grand Rapids, Michigan. Knoebel in turn hired Zackary Electric as its electrical subcontractor for the project, and Zackary started work in July 2018. On August 12, 2018, Zackary sent an invoice to Knoebel for $47K, but Knoebel did not promptly pay Zackary because Knoebel hadn't yet received any payment from Altar'd State. Unhappy with not being paid, Zackary left the job site on August 31, 2018, and it sent a letter to Knoebel declaring it to be in breach of the subcontract between the parties. Knoebel responded that it wasn't in breach because the subcontract with Zackary stated that payment to Zackary wasn't due until Altar'd State paid Knoebel, and Knoebel had not received any funds from Altar'd State. Further, Knoebel alleged that Zackary breached the subcontract by failing to complete the work, forcing Knoebel to hire another electrical subcontractor, Hardy Electric, to finish the job. Litigation ensued.
Fortunately, Michigan contract law is clear on resolving a case where both parties breach a contract: the party who first breaches a contract cannot sue the other contracting party for their subsequent breach or failure to perform. However, this rule only applies if the initial breach was substantial. And to determine whether a substantial breach occurred, a Michigan trial court must consider whether the non-breaching party obtained the benefit which they reasonably expected to receive.
Judge Yates found that Zackary failed to complete the work before leaving the job site in breach of the subcontract with Knoebel. He then considered whether Knoebel breached the subcontract by failing to pay Zackary's August 18th invoice and concluded that Knoebel did not (substantially or otherwise) breach the subcontract for the very simple reason that Knoebel had not received funds from Altar'd State, and the subcontract stated that payment will be made following Contractor's receipt of payment from the owner. Knoebel did not receive payment from Altar'd State until September 12, 2018, so Knoebel wasn't obligated to pay Zackary until that date.
The penultimate issue for Judge Yates to consider was damages. He found that Knoebel paid Hardy $71K to finish the electrical work after Zachary left the job, thus avoiding paying Zachary every single dollar that it would have earned if had completed the work. Of the $71K, Knoebel claimed (for some undisclosed reason) $65K in damages. Since the subcontract price for the work was $60K, and the price for Hardy to complete the work was $65K, the Court awarded damages to Knoebel in the amount of the difference, or $5K (figures rounded for simplicity).
The final issue was the award of legal fees to Knoebel from Zachary based on the blanket indemnity provision in the subcontract. Judge Yates decided to conduct a post-trial evidentiary hearing to determine the proper amount of those fees.
One wonders if this entire litigation would have been avoided if Zachary had simply read - and understood - that it wasn't entitled to payment from Knoebel until Knoebel had received payment from Altar'd State. Alas, this apparently* not being the case, the compensated lawyers in this dispute once again emerge as the real victors.
*(Or did Zackary walk away from the job because they found a more lucrative contract for another project?)
Moral: Read Your Contracts, People!
_____________________________________________
Comments