The Virginia Business Litigation Blog
An often-invoked defense to an action for breach of contract is to claim that the contract cannot be enforced by a party who committed the first material breach. Significantly, the rule does not bar recovery unless the prior breach goes to the “root of the contract.” If both sides breach but neither breach is particularly severe, the contract will normally be enforced albeit with appropriate offsets. A recent application of this rule comes from a recent Virginia Court of Appeals opinion in Inviting Structures, Inc. v. Royal, where the court held that the first-material-breach rule did not bar either party’s recovery.
The case arose from a $232,180 landscaping contract between Inviting Structures, Inc., d/b/a State of the Art Landscape (“SOTAL”), and homeowners Margit Royal and Jerry Wolford. SOTAL agreed to build a bluestone terrace, patio, and steps; plant a Japanese garden according to a detailed landscape plan; install lighting; accept delivery of a copper spa tub from the manufacturer and install it on the property; and build a structure to house the spa tub’s mechanics. The homeowners would pay on a draw schedule tied to project milestones: a $60,000 deposit, $60,000 after concrete subslabs were poured, $60,000 after veneer stones were laid, $40,000 after the spa tub was delivered, and $12,180 after planting was completed. The contract also contained a change-order provision requiring that any modifications be in writing and either signed by both parties or approved via email.
Problems surfaced early. In September 2018, Royal noticed that SOTAL’s subcontractor was planting the garden in locations that did not conform to the landscape plan and asked the company to halt work until she returned from a trip out of town. SOTAL complied. In October, SOTAL began pouring concrete subslabs and issued an invoice for the first $60,000 progress payment; the homeowners paid it, though emails exchanged afterward suggested the concrete work was not yet finished. The parties then agreed by email to several additions to the scope of work (e.g., sod installation, rock removal, and additional masonry) with corresponding charges. Over the following months, additional items were added or eliminated by email, including removing the wind chime mount and the structure to house the spa tub mechanics. SOTAL delivered the spa tub to the property in May 2019. The homeowners never made the final two progress payments because they believed the work was incomplete and defective. In August 2019, SOTAL announced it would perform no further work. 
The homeowners sued for breach of contract; SOTAL counterclaimed for the unpaid balance.
The trial court found that SOTAL committed the first material breach in two ways: by planting the garden out of conformity with the landscape plan in September 2018, and by invoicing for the concrete subslabs before the work was finished in October 2018. Based on those findings, the court dismissed SOTAL’s counterclaim entirely and awarded the homeowners $22,701.92 in damages for defective and incomplete work, while declining to award $131,000 to replace the spa tub.
The Court of Appeals reversed in part. On the planting issue, the court agreed with the trial court’s factual finding that SOTAL had deviated from the contract specifications by installing plants in the wrong locations. But the court held that this breach was not material. The damages attributable to the planting deficiencies were at most $12,471.60 (the total landscaping remediation award), a minor fraction of the $232,180 contract price. And the record showed no bad faith: SOTAL halted planting at Royal’s request and met with her to discuss the issues. Under the Supreme Court of Virginia’s decision in Kirk Reid Co. v. Fine, 205 Va. 778 (1965), even willful departures from contract specifications do not necessarily meet the threshold of bad faith needed to completely bar a contractor’s recovery, and courts should instead permit recovery with an offset against damages awarded to the other side.
On the premature-invoicing issue, the court’s analysis was equally straightforward. The contract contained no provisions governing when an invoice could be issued; it specified only when payment was due. And even assuming the invoice constituted a breach, the homeowners voluntarily paid it without objection and suffered no damages because SOTAL completed the concrete work shortly afterward. That was not the kind of breach that goes to the “root of the contract.”
Turning to the homeowners’ breach, the court found that their failure to make the $40,000 progress payment due upon spa tub delivery was a breach of the contract’s express terms. The contract tied the payment to delivery, not to completion of installation, and the homeowners had rejected a proposed addendum that would have required additional work before payment was due. But this breach, too, fell short of the materiality threshold. The homeowners had paid $192,170 of the $232,180 contract price—substantial performance of their payment obligation. Their failure to pay the remaining balance went only to “a minor part of the consideration,” not to the root of the contract, following the Supreme Court of Virginia’s holding in Neely v. White, 177 Va. 358 (1941). And there was no bad faith: the homeowners genuinely believed the work was incomplete.
The court also addressed the contract’s change-order provision, holding that email exchanges between the parties satisfied the requirement for written approval of scope changes. Because the contract itself authorized approval “via email,” the trial court erred in treating the provision as requiring more formal documentation. The parties’ email agreements on additional work items—sod installation, rock removal, masonry, sod watering, and various credits—were enforceable change orders, and the amounts owed for that work should be included in the offset calculation on remand, the court held.
This opinion demonstrates that before the first-material-breach rule will be applied to bar recovery, courts will look to the magnitude of the breach relative to the contract as a whole and to whether the breaching party acted in bad faith. Where both sides have fallen short of perfect performance (which is quite common), the appropriate remedy is often not to declare a winner and a loser but to let both parties recover on their claims, with damages offset against each other.