It has been a while since I made a substantive post here at Construction Law Musings. Things have been a bit busy here at the firm and at home (graduations, 31st anniversary, etc.) but I plan to get back on the horse and keep the posts going more consistently.
Today’s post is, as you may have guessed, a cautionary tale in being sure you, as a construction professional, follow your contract if you want to be successful later in the unfortunate event of litigation. The latest case of which I am aware that shows this to be true is Advanced Training Grp. Worldwide, Inc. v. Pro-Active Techs, Inc. out of the 4th Circuit Court of Appeals. This matter involved a joint venture between ATG and Pro-Active for federal contract work, the details of which are well laid out in the opinion so I won’t get into them here. The key factor leading to the opinion (discussed below) was that the contract had a small business set-aside contract requiring a small business to self perform at least 51% of the work, meaning that subcontracted work did not count toward the 51% requirement. Further, the joint venture memorandum of understanding (MOU) between the parties required that Pro-Active (the small business) have 2/3 voting rights. However, when the rubber hit the road, ATG insisted that the entity contracting with the government apportion the board voting 50/50 between the two. This insistence along with ATG having started subcontracting work to others endangered the small business set aside status that was the basis for the relationship in the first place. Based on this Pro-Active sent a letter to ATG terminating the JV and, of course, ATG sued for breach of contract.
The Court of Appeals reviewed the record, including the finding by the District Court that ATG could not sustain a breach of contract action because it was the first to breach the contract and its essential purpose. The Court of Appeals set out the applicable Virginia law as follows:
Under Virginia law, the “‘party who commits the first breach of contract,’ if material, ‘is not entitled to enforce the contract’ and thereby excuses the nonbreaching party from performance.” In other words, if ATG materially breached the MOU before Pro-Active unilaterally terminated ATG from the joint venture, ATG’s breach of contract claim fails because ATG was the first to breach. (citations omitted)
After a good discussion of the application of this principal to the dispute, and with proper deference to the trial court’s findings of fact, the 4th Circuit upheld the decision of the well reasoned district court opinion finding for Pro-Active because ATG materially breached the contract first.
The lesson here is that just because the other guy breaches the contract that does not mean the end of the inquiry. If you have materially breached first, you may be unable to enforce your contractual rights, no matter how well drafted that contract may be. Before taking steps that may be in contravention of any term of your construction contract, be sure to consult with an experienced Virginia construction attorney. It may turn out that you are better off continuing to follow the contract to put yourself in the best possible position despite the other party’s breach.
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