Businesses deal with contracts on a daily basis. While it is always preferable to have your contracts in writing, oral contracts are enforceable, with certain limited exceptions.
This is not news to most of you in the business world. A lesser known tenet of contract law is the first breach doctrine. This doctrine stands for the rather common sense notion that when a party to a contract does not live up to his own obligations owed under the contract, he may not sue to enforce the contract against the other party.
Stated another way, if a party has committed the “first breach”, it cannot thereafter sue to enforce provisions of the contract that are favorable to that party, even if there is a subsequent “breach” by the other party.
For this doctrine to apply, the first breach must be “material” to the agreement between the parties.
A common example would be if an employer fails to pay an employee all that is owed pursuant to an employment contract, that employer will not be allowed to enforce non-competition and non-solicitation covenants contained in that same contract. It is also well established that a failure to pay an amount owed under a contract is a “material breach.”
In 1983, in the case of Licocci v. Cardinal Associates, the Indiana Court of Appeals succinctly stated this principle, which has been consistently upheld since that time:
“As a rule, a party first guilty of a substantial or material breach of contract cannot complain if the other party thereafter refuses to perform … where a contract is not performed the party is guilty of the first breach is generally the one upon whom rests all the liability for the nonperformance…. A party who has himself been guilty of the first substantial breach of contract cannot rescind the contract because of the subsequent refusal or failure by the other party to perform.
A party who fails to make payments as required by a contract is guilty of a breach thereof.”
Employers should be especially mindful of this and pay the wages and salaries owed. Unilaterally cutting pay or withholding a final paycheck will likely result if the non-competition and non-solicitation covenants becoming unenforceable. Given the courts’ general distaste for enforcing non-competition agreements, evidence that an employer has not lived up to its obligations under an employment agreement will often be enough to cause the trial court to refuse to enforce the non-competition covenant. This likely will result in costing the employer far more than the employer is saving through the pay reduction or withholding.
The lesson of course is to always fulfill the terms and obligations of your contracts. You want o be the party wearing the “white hat and the white gloves” so that the business will have the authority to enforce the agreement that it bargained for at the time of the contractual agreement.