Technology contracts (like other commercial agreements) often contain an express right for a party to terminate the contract in the event of a 'material breach' by the other party.

But what degree of non-compliance with the contract is necessary to constitute a 'material breach'? Until recently, this has been somewhat ambiguous, with different jurisdictions taking different approaches. However, a recent case has aligned the position in Victoria with those of New South Wales and Queensland.

The case

In Androvitsaneas v Members First Broker Network [2013] VSCA 212, the Victorian Court of Appeal departed from the previous position in Victoria (in Forklift Engineering Australia Pty Ltd v Power Lift (Nissan) Pty Ltd [2000] VSC 443), which was that 'material breach' is equivalent to the common law doctrine of fundamental breach. Fundamental breach has been described as a breach which goes to the root of the contract, and which deprives a party substantially of the whole benefit of the contract.

The Victorian Court of Appeal Androvitsaneas instead preferred the formulation of material breach adopted by the NSW Supreme Court by White J in Elders Ltd v EJ Knight Co Pty Ltd (2009) NSWSC 1462:

... for the breach to be material, it must have had a serious effect on the benefit which the Lessor would otherwise have had from the transaction, that is, it must be of a serious or substantial import. [emphasis added]

This test is similar to the one applied by the Queensland Supreme Court last year in Vision Eye Institute Ltd v Kitchen [2014] QSC 260, which asked whether the breach was:

...a moment of significance, not merely trivial or inconsequential.

The test applied by the Victorian Court of Appeal is notably more liberal than the doctrine of fundamental breach, because the breach in question need only have a serious effect on the other party – that is, it need not reach the (higher) threshold of depriving that party substantially of the entire benefit under the contract.

In Androvitsaneas, the Court of Appeal considered whether a misrepresentation constituted a material breach. The Court held that the conduct in the case was of serious or substantial import, because it could have put in jeopardy Members First's credit licence and exposed it to criminal liability under consumer credit protection laws.

Although the Court of Appeal distinguished the case from the situation in the Forklift case, some commentators suggest this was merely an instance of judicial politeness, and that the interpretation of material breach in all contracts in Victoria has now shifted.

Significance for technology contracts

For technology contracts (as for other commercial agreements), it appears that the test now applied in Victoria for 'material breach' is whether the breach has a serious effect on the benefit which the injured party would otherwise have gained from the contract.

Thus, the customer's short delay in making payment, or the supplier's failure to comply with the specification in a minor or insubstantial respect, are unlikely to reach the 'material breach' threshold set by Androvitsaneas.  On the other hand, the supplier's failure to comply with the specification in a substantial or material manner (assuming, of course, that compliance with the specification is an obligation on the part of the supplier under the contract) may well constitute a 'serious effect' or be of sufficiently 'serious or substantial import' so as to constitute a material breach of the contract.

Importantly, the Court of Appeal's decision in Androvitsaneas does not excuse counterparties (when negotiating a contract) from carefully considering the triggers that should give rise to termination of a contract.  If specific objective triggers can included in the contract (such as termination due to failure to meet particular service levels or meet specific milestones), then, at least if you are the customer, specifying these objective termination triggers will almost always be preferable to relying on the more elastic concept of 'material breach' (notwithstanding that this concept may have a lower threshold than was previously the case).

Conversely, if what you intend by 'material breach' is actually the higher standard of 'fundamental breach' (that is, the breach must undermine the core benefit of the contract in order for the injured party to terminate the contract), this will need to be stated in the contract, and the term 'material breach' should be avoided.