What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts – and one that exercises clients and lawyers alike in the course of their work. The commercial team at Herrington Carmichael LLP solicitors are highly experienced in drafting and interpreting contract clauses.
What is a ‘material breach’? The phrase ‘material breach’ has no set legal meaning unless given one in a contract. Otherwise the meaning in a particular case will be decided by the courts taking in to account factors including the intention of the parties who have used the expression in an agreement.
Over the years the courts have given guidance in commercial cases. One judgement held that a breach may be ‘material’ if it is “serious in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive”. Another judgment has stated that a material breach “connotes a breach of contract which is more than trivial, but need not be repudiatory” (a breach is repudiatory when it is so serious that it allows the contract to be terminated by the innocent party – analysis is required on a case by case basis in respect of the seriousness of the issues experienced in the context of the contractual arrangement).
When considering whether there has been a material breach, the parties’ primary focus must be on the character and gravity of the breach and its overall impact on the innocent party.
What constitutes a material breach? A material breach will generally be a breach that is substantial and serious, rather than a matter of little consequence.
The courts have ruled that a series of minor breaches of a contract could constitute material breach.
In reality, contractual parties often have different views on what constitutes a material breach. The impact on the parties of a material breach is potentially significant and where a dispute cannot be resolved, the court will be asked to rule on whether or not a material breach has occurred.
Rather than relying on the courts to assist in defining the term “material” breach, contract drafters may choose to provide a definition of the breaches which would be considered ‘material’ in the context of that particular contract – this is often done where a contractual provision is of particular importance or concern to a client. Sometimes contract drafters prefer not to define the phrase ‘material breach’, instead relying on the flexibility of the interpretation that will be applied by the courts should a dispute arise.
What are the remedies? Commercial contracts often include a clause allowing an innocent party to terminate the contract in the event of a material breach. These clauses should be carefully drafted to minimise the risk of a future dispute on their terms.
In the absence of an express (and properly drafted) term, a proven material breach will often entitle the innocent party to claim damages for losses arising as a result of the breach and trigger rights to terminate the contract. However, demonstrating that a material breach has occurred can be a difficult and costly process.
What do you need to prove? Whether there has been a material breach is a question of fact. Unless there has been a total breakdown in the relationship, it is potentially unwise to seek to terminate the contract because the other party may argue that the purported termination is, in itself, repudiation of the contract. The consequences could be a substantial claim for damages against the person alleging the breach. There may be other less risky courses of action available to the innocent party, and if handled well it may be possible for the parties to continue to work together.