What Constitutes Material Breach of Contract
A material breach of contract refers to a violation that is sufficiently substantial so as to excuse the non-breaching party from any further performance under the contract, and to entitle that party to damages for the breach. What constitutes "materiality" in any given case is determined through a balancing of circumstances in light of the following factors:
Has the injured party received the benefit bargained for in the contract?
Did the party failing to perform receive a benefit from the contract for which it is compensated?
Will the performance by the party failing to perform be of value substantially disproportionate to the amount agreed upon as compensation?
If the party had fully performed at what additional cost?
Was the party failing to perform an intentional or careless violator?
Was there an opportunity to bring about a remedy for the violation?
What is the matter of the breached obligation (is it a lapse in time and for the performance of promises to later execute the general purpose of the contract , or is it an issue with the subject matter of the contract itself)?
The word "material" in a legal context means either a substantial or relevant matter, or of a major consequence. The breach must have resulted, in this instance, in a detriment of substantial value to the other party. If a minor matter is involved and the breach is substantially minor, a material breach has not occurred.
Material Breach Examples
A variety of contracts can be susceptible to material breach. Business agreements are particularly prone to material breach due to the potential for one party’s poor performance to have significant adverse effects on the other party. Real estate contracts also pose a significant possibility for material breach, whether for commercial or residential sales and rentals. Material breach can also arise from failure to perform significant duties in service related contracts.
Contracts for purchase or sale of goods may be subject to material breach if the seller fails to deliver the goods in a timely manner, or where a party sells defective goods to another party. Examples of material breach involving sales of goods are when: Material breach has also been seen in real estate sale contracts. A seller will often promise to do something in a home sale contract and then does not perform that promise such as where the seller agrees to fix something in the property before the close and then simply does not get that work done. Other examples in addition to repairs include: The sale of commercial buildings can also lead to material breach and often does as those sale contracts seem to be riddled with promises that the parties make that are then not completed. Likewise, commercial leases can also lead to material breach where the tenant is not in compliance with the lease terms. Contracts for service provisions can often lead to material breach particularly where the service provided is critical to the success of the other party. For example, if a financial advisor fails to provide his services after entering into a contract with a client the client could file a claim for material breach. We see this often in construction contracts where a contractor fails to complete the job or fails to meet a deadline. Material breach often goes hand in hand with other tort claims as well where it is helpful to claim material breach to add additional information to the claim.
The Penalty for Material Breach
The consequences of a material breach
If a party to a contract has committed a material breach, the innocent party is entitled to terminate. By terminating the contract, they place themselves in the position that they would have been in if the contract had never been made. The innocent party will also be able to claim damages to put them back in the position they would have been in had the contract been performed. Naturally they can recover any money they paid under the contract.
Whether a notice is required for the innocent party to exercise their right to terminate depends on the terms of the contract. It is common for contracts to include a provision that requires a specified period of notice to be given. If no provision is included in the contract, the innocent party may not be able to terminate a contract consisting of mutual promises unless they give the other party the opportunity to perform the promise. As such, if a reasonable time limit for performance has not been clearly stated, the innocent party must give the other party timely notice and an opportunity to perform.
Once a party becomes aware that the other party has committed a material breach of the contract, they must consider what action they should take. If the innocent party does not terminate the contract and allows the other party to continue to perform, they may waive their right to treat the breach as a material breach. Case law has established that the elements of waiver are:
Firstly, it needs to be determined whether the innocent party had knowledge of the other party’s breach. Usually knowledge of a material breach will exist once the breach has been discovered or is reasonably capable of being discovered.
Secondly, a person ‘exercises’ a right or power when they give notice, commences shelling a sum of money on account or express an intention to do something. This does not necessarily mean that the parties must agree to vary the contract, rather the requirement is satisfied if the behaviour of the parties was inconsistent with the strict discharge of the other party’s obligations.
Once the circumstances are known, the innocent party is required to inform the other party within a reasonable time that they intend to treat the contract as discharged. They can however, continue to perform or to demand performance by another party on the contract to avoid a default under the contract, until it is possible for them to terminate.
Assertion of rights following a material breach can also be waived if after the breach, the innocent party gives the other party the opportunity of remedying the breach.
It is important to note that waiver does not affect rights accrued before the waiver. Therefore, if the innocent party has suffered a loss, they can still sue to recover that loss.
In any event, both parties can agree to continue to perform the contract, notwithstanding the innocent party’s awareness of the material breach.
Legal Solutions: Addressing Material Breach of Contract
For many people, the emotional devastation caused by a material breach of contract is more damaging than financial loss. Yet in order to help the hurt party recover, the law must impose a more calculable loss so that money paid or services rendered can be equitably divided.
For a material breach falling under the UCIOA, the laws governing that state apply. Most states have a statute of limitations to enforce contracts. That time limit may be two years or four years depending on the state, but it’s generally a short time frame.
The first option for the non-breaching party when a material breach occurs is to seek specific performance of the contract. The plaintiff may wish to go this route because it generally provides the solution to the problem and can be done in a relatively short period of time. If specific performance is not appropriate, a plaintiff may be able to seek monetary damages from the breaching party. The non-breaching party may recover direct or consequential damages depending on whether the issue has to do with a tangible piece of property or a financial benefit. Direct damages are expenses that can be calculated, while consequential damages are unforeseen damages that occurred as a direct result of the material breach. If enough time has passed, an aggrieved party may also seek contract rescission.
The rules covering remedies for material breach vary from state to state. For example, some states may allow a plaintiff to seek both rescission and consequential damages, while other states may only allow a single alternative. A plaintiff may seek all remedies available, provided such remedies are severable. One possible fact situation may provide all three remedies, specific performance on part of the breaching party, direct damages, and consequential damages. These remedies are considered separate; if you can’t use a remedy for one event you can still seek another remedy for a different event.
Proving a Material Breach in a Contract
Proving a Material Breach in Court
When pursuing a claim of material breach of contract, the party bringing the claim (the "plaintiff") has the burden of proof in court. Unless the parties’ agreement states otherwise, the law puts the burden on the plaintiff to prove, by a "preponderance of the evidence," that a material breach occurred. This means that, to win on a material breach claim, the plaintiff must produce evidence that shows that it is more likely than not that a material breach occurred. The defendant may rebut this by showing the court that no breach occurred. Thus, in order to prevail, the plaintiff must first show that a material breach occurred, which involves both proving the existence of a contract, a breach, and the extent of the damages caused by the breach.
Generally, a court will consider evidence and witness testimony in determining whether there was a material breach. Such evidence may include , but is not limited to, emails and other written correspondence, invoices, receipts, and inspections/reports made by various parties to help establish how the contract was breached. If there is a dispute over the extent to which the breach occurred, expert witnesses may be used to give their opinion on the matter. In total, a variety of means can be used to prove a material breach, depending on the nature of the contract and the damages claimed.
Ultimately, the plaintiff has the burden to prove, by a preponderance of the evidence, that the defendant breached the contract. However, once the plaintiff has successfully established the occurrence of the breach, the burden switches to the defendant to show that no breach occurred. If the defendant presents no evidence to support such a claim, the court will typically side with the plaintiff.
Avoiding Material Breach
When entering into a contract, the parties can take steps to avoid committing a material breach. As all lawyers agree, prevention is better than cure; so the risk of a potential future conflict should prompt the drafting party to appreciate the motivations behind the contract terms and explain them to the other party. The negotiating party should be willing to specifically ask questions, preferably written ones, if something is not clear.
Clear and Concise Contract Drafting
Clear and concise drafting will reduce the chances of disputes arising concerning the interpretation of the contract language. Ambiguous language might be reasonably understood by one party but not the other. In exaggerated situations, a war might ensue to determine what the contracts terms mean.
Regular Communication between Parties
Communication is critical in any relationship. If a party feels uncomfortable with aspects of a business deal, it cannot be afraid to seek clarification from the other party. No matter how basic the question might seem, clarifying the expectations of both parties is critical to avoiding a future material breach from occurring.
Dispute Resolution
The parties could agree to include a specific dispute resolution clause in the contract if the risk of a material breach of contract is high. The clause might require parties to meet and discuss certain issues before filing a lawsuit.
Material Breach of Contract vs Minor Breach
Material breach is when one party does not fulfill their obligations under a contract and the failure goes to the essence of the contract. For example, if one party contracts to pay the other for the construction of a building, but the construction does not comply with the contract’s specifications and becomes unusable, then the party building the structure has materially breached the contract. In this case, the non-breaching party would not be liable for delay damages associated with the materially deficient structure being built.
If there were delay damages assessed against the owner after the project was terminated, the owner would be entitled to a complete offset from those damages. In other words, you would credit the claim the contractor has for delay damages against the claims the owner has for the cost of repairs against the construction company , without any reduction for the delay damages assessed against the owner; rather, the owner has a single damage claim.
A minor breach, on the other hand, is a breach of contract that is not so material as to excuse future performance by the non-breaching party. A court may reduce contract damages where it finds that the breaches do not deprive the non-breaching party of the benefit of its bargain under the contract. For instance, the key question for a Minor breach is whether the value of the contract has been substantially diminished by the breach, while for a material breach the main question is whether the party against whom the breach is asserted is entitled to suspend or terminate performance. If a contract is materially breached, damages will not be reduced; if it is a minor breach the damages may be significantly reduced.
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