Contract law is a body of law which regulates the making and enforcing of contractually binding agreements, where understanding how the law operates, including the different types of breaches of contract and the remedies that can flow from these breaches, can be useful, not least for those involved in or responsible for running their own business.
The following guide provides an overview of breach of contract law, and the implications in respect of any material breach of contract when it comes to legal rights and remedies.
What is a material breach of contract?
In order to define a material breach of contract, it is first important to understand the basis of any contractual agreement to which you are a party. A contract is essentially a legally enforceable agreement between two or more parties. There are several different types of commercial contracts, often associated with the sale of goods or the provision of services.
The terms of contract set out the respective rights and obligations of each party under the agreement, where it is these terms that determine what the contracting parties are legally obligated to do in exchange for the promise of the other(s). The contractual terms dictate how the contract is to be performed, where performance that falls short of what is required may constitute an actionable breach of contract. A contractual breach can occur where one party refuses to perform their duties under the contract, their performance is substandard or if they fail to perform their duties within a reasonable timeframe.
In those cases where a contractual breach is significant, resulting in a substantially different result to what was originally agreed in the contract, this may be classed as a material breach of contract. In contrast, if the breach is immaterial, where the main deliverables of a contract have been mostly achieved, although not to the specific standard as outlined within that contractual agreement, this may be classed as a minor breach of contract.
There is no legal definition of what constitutes a ‘material breach’, but it is generally one that is substantial and serious, rather than a matter of little consequence. However, not all breaches are repudiatory, even where a breach is considered to be material. A repudiatory breach of contract, also commonly known as a fundamental breach, is where the severity of the breach is such that the contract can be lawfully terminated. However, a continuing or recurring material breach of contract could potentially be repudiatory. Equally, the courts have also ruled that a series of minor breaches of contract can constitute a material breach.
You may have also come across the term referred to in contract law as anticipatory breach, where the breach has not yet happened, but either you or another party to the contract has expressed an intention to breach the contract’s terms. An anticipatory breach of contract will become an actual breach once the date that the contractual obligation in question was due to be performed has since passed. However, the way in which an actual breach is then categorised will depend on whether this can be treated as a minor or material breach.
What constitutes a material breach of contract?
For a breach to be classed as a material breach of contract, it must usually be one where the innocent party has received significantly less value from the contractual agreement than they were originally promised. A good example of this is where one party has altogether failed to perform their contractual obligations. It could also be where one party fails to perform their obligations on time, where any delay has had a significant knock-on effect, for example, in the context of a commercial sale of goods or services agreement, this has negatively impacted other business transactions. However, whether any breach is perceived as material will be a question of fact, having regard to the following factors:
- how much benefit the non-breaching party actually received from the contract
- the extent of any performance by the breaching party
- whether or not any negligent or wilful behaviour occurred on their part
- whether or not the remainder of the contract can be fulfilled
- whether there is a fair and suitable way to compensate the innocent party for their losses.
The expression ‘material breach’ has no set legal meaning, unless it has specifically been given one within the written terms of the contract. Otherwise, the meaning of material breach of contract will be decided by the courts, taking into account the factors set out above, and the intention of the parties where this phrase has been used in the agreement.
Over the years, when considering the meaning of material breach of contract, the courts have given guidance in the context of various cases. In one case it was held that a breach may be treated as ‘material’ if that breach is “serious in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive”. In another, it was said that a material breach “connotes a breach of contract which is more than trivial, but need not be repudiatory”. Ultimately, however, what constitutes a material breach of contract will require a careful analysis on a case-by-case basis in respect of the seriousness of the issues and losses experienced, all within the context of the contractual arrangement.
What is a non-material breach of contract?
While a material breach of contract is one in respect of which the innocent party has received significantly less value from the contractual agreement than they were promised, a non-material or immaterial breach refers to a minor breach of contract. This essentially means that the main part of a contract has been performed, but there may be certain issues as to the standard or timing of that performance. Still, a series of minor breaches, depending on the context and facts involved, could also be classed as material breaches.
A non-material or immaterial breach of contract might occur, for example, where goods or services have been substituted with alternatives in the context of a commercial sale of goods or services contract, or where goods or services have been delivered or completed slightly later than outlined within the contractual terms of the agreement.
When considering whether there has been an immaterial or material breach of contract, the parties primary focus must be on the nature and gravity of the breach in question, and what remedies may be available to the innocent party, as well as its overall impact on that party.
Since most minor contractual breaches will not substantially change the outcome of a contract, parties will usually have to adduce evidence that the breach has been detrimental to them in some way in order to seek a remedy. This typically means that the business will have to show that the non-material breach resulted in a financial loss of some sort.
What are the implications of a material breach of contract?
When it comes to breach of a contract, the remedies potentially available to the innocent party will depend on both the character and severity of the breach in question, taking into account the consequences of the breach for them or their business.
Even if a material breach of contract can be shown, not all such breaches are repudiatory, except where the contract expressly allows an innocent party to terminate in the event of a material breach. This means that not all material breaches can justify the innocent party bringing the contract to an end, where it can often be unwise to seek to terminate the contract, unless there has been a total breakdown in the contractual relationship. This is because the other party may argue that the purported termination is, of itself, repudiation.
However, in all cases of material breach, the innocent party will potentially be entitled to damages to compensate them for any financial losses flowing from that breach. Damages refers to a sum of money, or compensation, used to put the aggrieved party back in the position that they would have been in had the contract been properly performed. In some cases, especially in the context of commercial contracts where the monetary stakes are high — for example, where a delayed delivery of goods has resulted in the loss of a valuable sale or even a valuable long-term client — provided the innocent party can satisfactorily prove causation, they can seek to recover a sum to reflect the extent of that loss.
How will damages for material breach of contract be assessed?
In the same way that damages are assessed for other types of contractual breach, there are various legal principles that come into play when assessing damages for a material breach of contract, including causation, remoteness and mitigation.
Causation is a long-standing legal principle used in the assessment of damages for breach of contract, where to claim contractual damages, the Claimant must first prove, on a balance of probabilities, that the breach of contract actually caused the loss complained of. If the loss would have happened in any event, then the breach cannot be said to have caused the loss. Factors here that may require special consideration are whether or not there are multiple causes or contributing factors to any loss suffered, or any intervening acts.
Additionally, damages will only be recoverable for loss suffered as a result of the breach, provided that loss is not too remote. Remoteness is a principle used to determine legal causation. This is different from factual causation, which examines whether the damage actually resulted from the breach. Once factual causation has been established, it will be necessary to go on to ask whether the law is prepared to attribute the damage complained of to the particular material breach of contract, notwithstanding the factual connection.
Finally, the aggrieved party will be under a duty to mitigate any loss. The rule of mitigation requires a Claimant to take all reasonable steps to minimise its loss, where damages cannot be recovered for any loss which could have been avoided by them taking such steps.
How to avoid a material breach of contract
It is important for parties to a contract to understand the nature of any agreement that they are considering or have already entered in to, and their respective rights and obligations under it, not least their legal rights and remedies in the context of different kinds of breach.
By seeking legal advice prior to entering into a contract, this can often help to clarify the parties’ respective contractual rights and obligations, and to ensure that these reflect their best interests. By having a legal expert draft a contract on your behalf can not only ensure that it covers all of the terms and conditions necessary to protect you in the event of any material breach of contract, or any unexpected breach on your part, but that the agreement is clear in its terms. In particular, parties can reduce the potential for uncertainty by defining what is meant by ‘material breach’ within their contract, such as failure to make payments or maintain insurance, rather than relying on the court’s interpretation of the law should a dispute arise. Similarly, because delays in performance and payment are not always considered material breaches, the contract could also clarify that ‘time is of the essence’, meaning that these types of delays will be treated as a material breach of contract.
For those parties who may already be facing a possible material breach of contract scenario, by seeking expert advice at the earliest opportunity, each party can assess where they stand, legally speaking, and determine the strength of their claim or defence. It is at this crucial juncture that robust legal and practical advice can mean the difference between making the right or wrong strategic decision, with a view to resolving the matter without recourse to litigation. The alternative, very often, is to become embroiled in costly and drawn out proceedings, ultimately relying on the judge’s subjective interpretation of what does or does not constitute a material breach of contract based on the specific factual matrix involved.
Material breach of contract FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
