In a recent case, the Western District of Virginia provided guidance on breach of contract claims. Here, the court made clear that if one party to a contract materially breaches the contract, subsequent breaches by the other party cannot be the basis for a breach of contract claim. Under the first material breach doctrine, if the initial breach by one party is material, the other party to the contract is excused from performing his contractual obligations. Additionally, the court confirmed that a party does not waive the first material breach defense by continuing to perform after the initial material breach. 

Remy Holdings International, LLC v. Fisher Auto Parts, Inc.

Fisher Auto Parts, Inc. began purchasing automotive products from USA Industries in 1997. Fisher and USA had an agreement in 2012, which included an express provision stating “[t]his letter of understanding is predicated upon USA keeping Fisher competitive in the marketplace.” In 2014, Remy Holdings International, LLC acquired USA, and in 2015 Fisher and Remy negotiated and signed a contract entitled the First Amendment to the Letter of Understanding (the “2015 LOU”). The 2015 LOU included a provision that stated, “[t]his letter of understanding is predicated upon REMY keeping Fisher competitive in the marketplace in every way.” The 2015 LOU also included a termination provision stating that Fisher could end the contract with 60 days notice if it didn’t believe Remy provided competitive products.

Remy’s performance began to decline in 2017, including a failure to timely fill Fisher’s purchase orders. Based on Fisher’s ongoing assessment of Remy’s performance, including Remy’s inadequate efforts to keep Fisher “competitive in the marketplace in every way” and to “provide competitive products to Fisher compared to similar competitive products sold under the same market conditions,” Fisher exercised its termination right by notice dated June 18, 2018. Remy filed suit alleging Fisher breached its contract by wrongfully withholding payment under the contract and for wrongfully terminating their agreement. Remy claims that Fisher’s first breach occurred on July 1, 2018, when it provided its termination notice. Fisher counterclaimed that Remy breached the contract by failing to keep Fisher competitive in the marketplace.

In breach of contract matters, Virginia courts apply the “first material breach” doctrine. “A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. If the initial breach is material, the other party to the contract is excused from performing his contractual obligations.” Additionally, Virginia courts have rejected the argument that a party waives the first material breach defense by continuing to perform after the initial material breach.

The court here found that Remy breached the contract prior to July 1, 2018, by failing to fulfill their obligation to keep Fisher competitive in the marketplace. Remy admitted to its performance issues. The court concluded that this breach was material because it “defeats an essential purpose of the contract.” Because of this first material breach, the court determined that Remy was precluded from proceeding against Fisher for breach of contract. Although Remy argued Fisher waived the defense by continuing to order products from Remy, the court here explained that Virginia courts have rejected the argument this argument.

What Does Remy Holdings International, LLC v. Fisher Auto Parts, Inc. Mean for Businesses?

The court here offered guidance on when a breach of contract claim may be successful. Both Remy and Fisher here made claims of breach of contract. However, the court did not even reach the merits of Remy’s claims of alleged breaches by Fisher, because it determined that Remy’s breach preceded any potential breach by Fisher. In Virginia, under the first material breach doctrine, if the initial breach by one party is material, the other party to the contract is excused from performing its contractual obligations. Thus, even if Fisher did breach the contract, it was already excused from having to perform any contractual obligations since Remy materially breached the contract first. The court here also confirmed that a party does not waive the first material breach defense by continuing to perform after the initial material breach. Thus, the fact that Fisher kept performing under the contract after Remy’s initial breach did not prevent it from being able to claim the first material breach defense.

The major takeaway for businesses is that the timing of any breach of a contract is crucial to a claim. If both parties breach a contract, the party who commits the first material breach of a contract is not entitled to sue to enforce the contract terms. Thus, before bringing a claim for breach of contract, a business should consider if it materially breached the contract first. If so, the business will likely be precluded from succeeding on a breach of contract claim. Businesses should also keep in mind that even if they continued to perform under the contract after a material breach by another party, that should not necessarily stop them from bringing suit, as that is not a waiver of the defense.

If you need more guidance or information, contact the employment law experts at General Counsel, PC today at 202-360-4230. Attorneys at General Counsel, PC are specialized in labor and employment law and have experience working with business owners and individuals across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William.