A party to a contract may be excused from performance under a contract if the other party to the contract materially breaches the contract. This rule of contract law is demonstrated by an Illinois case involving a landowner, a contractor, and a surety. The landowner hired a contractor to build a hardware store on the owner’s land. The owner required the contractor to provide a completion bond backed by a surety company that would permit the building to be completed in the event the contractor failed to make adequate progress on the building. When it became clear to the owner that the contractor would not be able to complete the building by the required completion date, the owner terminated the construction contract and hired another contractor. After the building was completed, the contractor sued the owner for the balance due it under the contract. The owner filed a counterclaim against the contractor and a suit against the surety to recover the cost overruns resulting from its hiring of the substitute contractor.
The surety sought to dismiss the owner’s claim based on the owner’s failure to give the surety notice of the contractor’s breach of the contract, which provided that the surety had the option to hire an alternate contractor to complete the project. The court agreed, holding that the surety’s performance under its surety bond was excused due to the owner’s failure to comply with a material provision of the contract, i.e., the notice required to be given to the surety company of the contractor’s breach.
A corollary to the material breach doctrine is that a party that materially breaches a contract will not be permitted to take advantage of those terms of the contract that would otherwise benefit that party. This rule of law was demonstrated in the Illinois case of McBride v. Pennant Supply Corp. (“Pennant”). McBride, a shareholder of Pennant who had worked for Pennant for many years, resigned from Pennant. Thereafter, he sought to enforce the terms of the buy-sell agreement, which provided that his shares would be purchased by Pennant in the event of his resignation. The buy-sell agreement required Pennant to determine the value of the resigning employee’s shares and then purchase those shares at one-half their value. Pennant failed to determine the value of the shares as required by the buy-sell agreement for several years, but then sought to enforce the one-half purchase price provision when McBride sued to require Pennant to purchase his shares.
The Illinois Appellate Court decided that Pennant’s refusal to provide the appraisal as required by the buy-sell agreement was a material breach. In making this determination, the court held Pennant’s breach was an essential, bargained-for provision of the contract, and that Pennant’s breach caused a disproportionate prejudice to McBride. Thus, the court held that, as a result of Pennant’s material breach, it should not be permitted to take advantage of the provision that reduced the purchase price to be paid to McBride to one-half of their value.
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