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Authored - NJ Contract Law Update - Strong Justice Against Diversion of Funds Under "First Material Breach" Doctrine
JANUARY 16, 2013 | Windels Marx - Commercial Litigation

In Peek v. Johl & Co., Inc., 2012 WL 6115678 (N.J.App.Div. Dec. 2012), the Court applied the doctrine of "first material breach" to impose strong justice upon a contracting party (the seller) who had agreed to split certain commissions with the buyer 50/50 in connection with the sale of an insurance "business" (apparently a brokerage). When defendants (buyers) found out that plaintiffs (sellers) were diverting 100% of commissions supposed to be split 50/50 (as so found by the trial court), they refused to pay (and the trial and appellate courts refused to enforce) the $59,000 Note representing the balance due on the $84,000 purchase price. The courts held that the diversion constituted a material breach; and applied the doctrine that "[i]f a party commits a material breach of an agreement, the non breaching party is relieved of its obligations under the agreement" [citations and quotations omitted].

Neither court allowed the plaintiffs to evade the materiality of their breach (and thus the applicability of the above doctrine) under quasi-contract doctrines such as unjust enrichment and quantum meruit, or general principles of unconscionability. The courts also did not allow the doctrine of "substantial performance" to (a) trump materiality of the breach, and (b) mandate payment notwithstanding same. Neither court was swayed by the disproportionality between the relatively small commissions diverted and the $59,000 balance due. The courts were obviously influenced by the scienter associated with the diversion, even though scienter is rarely an issue in contract matters.

The moral of the story is that a relatively small gain through misconduct can lead to far more dramatic consequences.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.




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