What is Material Breach of Contract?
In the field of contract law, a material breach of contract is one that is significant enough in nature to allow for the innocent party to discontinue or affirm its additional performance and pursue damages for the failure to perform. In fact, the concept of material breach is best understood by examining the opposite scenario in which a party is found to have substantially performed its obligations under the contract , thus permitting recovery for the claim but also barring any additional claims for breach.
The simplest way to describe a material breach of contract is to say it is "a serious breach of an obligation which goes to the essence of the agreement, but it must be more than de minimis." In other words, the innocent party has likely committed a material breach if his or her breach of the contract will defeat the object or purpose of the contract. At the same time of course, the breach has to be significant enough that its discovery has the effect of greatly diminishing its worth or value to the innocent party.
Elements of a Material Breach
Identifying a material breach requires analysis of both the timing and the quantum of performance that a party fails to deliver. When interpreting the meaning of material breach, courts will often look to the Restatement (Second) of Contracts for sophisticated guidance on the meaning of this term. Section 241 of the Restatement defines "material" breach with reference to five elements: (1) the extent to which the injured party will be deprived of the benefit which it reasonably expected under the contract; (2) the extent to which the injured party can be adequately compensated for that part of the benefit of which it will be deprived; (3) the extent to which the party in breach will suffer forfeiture; (4) the extent to which the party in breach has already received or will have already received some benefit under the contract; and (5) the extent to which the party in breach would be able to perform . . . the remainder of his contractual duties . . . . Restatement (Second) of Contracts ยง 241. In applying this generally accepted formulation of the materiality rule, California courts consider and balance all five of these elements in determining whether a material breach has occurred. See, e.g., Redke v. Gabrielsen, 6 Cal.3d 94, 102 (1971).
The Effects of Material Breach
The consequences of a material breach may include terminating the contract and suing for damages. A non-breaching party can typically terminate any remaining contractual duties or cancel the contract altogether. Additionally, the non-breaching party is generally able to sue for consequential and incidental damages. Consequential damages are damages that occur as a result of the original breach but were not considered by the parties when drafting the contract. Incidental damages are small amounts of compensation for time and effort where it may be impractical to calculate other damages.
However, a non-breaching party can only sue for consequential damages if the breaching party was on notice of the possibility that any breach may cause such damages. Courts assume that all parties are on notice of incidental damages. Moreover, a non-breaching party can recover all anticipated damages from a breach of contract if he, she or it elects to sue for breach of contract. The non-breaching party cannot divide damages and selectively sue for some if each category of damages cannot be divided. Some damages, such as consequential damages, may be indivisible because they arise from an indivisible injury.
Examples of Material Breach
Material breach generally means that the breach is so large that it undermines the entire agreement. The fact that the other party could sue for breach of contract before filing for a formal resolution does not mean that it meets the standard for materiality. In some cases, the victim of the breach does not have a right to sue within the system. It has to seek a solution in another way.
Common examples of material breach include:
-When a person sells a house to someone else without telling the buyer that there are major repairs that must be made
-When a contractor comes to do work on a property and then fails to return and finish
-When one party to an agreement tries to make a deal with another without the consent of the other a party
-When one party does not pay the other for work done
-When one party breaks a promise that made the other party agree to become involved in the first place
-When a person does not pay for the property that they promised to purchase
The above list barely scratches the surface of the types of situations that can amount to material breach of contract. If you feel that you have been a victim of material breach of contract, you should speak with an attorney as soon as possible. The sooner the situation is addressed, the better off you will be.
Material Breach vs. Minor Breach
A party’s breach of a contract is material if it is so substantial and fundamental as to deprive the injured party of the benefit for which he/she bargained. On the other hand, a breach is minor if there has been some deviation from a stated requirement or condition, but the main purpose of the contract has not been frustrated. The injured party’s decision whether or not to accept a minor breach generally depends upon factors such as whether the breach will prevent the aggrieved party from getting the benefit of his bargain, and whether the breach will cause the aggrieved party unreasonably to incur substantial costs in performing. A material breach provides some basis for suspending performance, such as temporarily withholding payment, until such breach has been remedied. A minor breach only warrants such suspension if it threatens the expected outcome of the contract.
If a party has committed a material breach of contract , the non-breaching party may, depending on the circumstances, terminate the contract and sue for damages. If the contract is ongoing, the non-breaching party may wait for the next obligation to be performed in order to treat the breach as a breach of the entire contract. Absent impossibility, the non-breaching party must continue performance in a manner consistent with the terms of the contract to avoid claims of mitigation. However, the non-breaching party may not be required to continue performance of a contract that provides for continuous performance or if performance is suspended. The injured party must refrain from performing any acts which are inconsistent with the continuance of the contract. Notably, if the non-breaching party waives the breach, it extinguishes a right to treat the failure as a material breach and may not later seek to enforce it.
Addressing a Material Breach
When a party suspects that it has incurred a material breach of contract, the most prudent course of action is to consult with an attorney immediately. It is important that a party understand its rights and obligations before taking action, particularly where there is a material dispute over the facts. A party’s reaction to the event can have a significant impact on how the action proceeds and the potential recovery it may finally obtain. Gathering Evidence. Before speaking with an attorney, the aggrieved party should consider what evidence it has to support its claims against the breaching party. This usually includes documents, but may also include photographs, voice messages, or other communications between the parties. In some cases, such as an action for breach of warranty, it may be necessary for the aggrieved party to preserve evidence, such as allowing an independent expert to inspect its property. In other cases, it may not be necessary to take any steps unless and until the aggrieved party commences suit. Consult with an Attorney. A simple consultation with a competent attorney can often save a party substantial time and expense. Specifically, an experienced lawyer will be able to advise a party of its options, including whether it really does have a viable claim, the potential recovery at issue, and the costs associated with bringing an action. It is particularly important to retain counsel because a party’s actions once it learns that it has a cause of action may potentially limit its recovery and a party should avoid making any admissions that might jeopardize its chances at bringing a recovery. Consider Negotiation. Once a party has prepared the evidence in the form of documents and/or photographs, and has consulted with an attorney, it should consider whether it makes sense to engage in negotiations with the other party before commencing an action. In some cases, such as where the other party is a corporation, negotiations may be particularly difficult if the other party is unmotivated to advance such settlement options to its lawyers. In those cases, it may not make sense to attempt to engage in negotiations because neither party will be able to assess the other’s willingness to settle. Nonetheless, where the other party is amenable to settlement negotiations, it may make sense to retain counsel and to pursue such settlement discussions through counsel. Review Potential Defenses. It is important for the aggrieved party to be aware of the potential defenses that the breaching party may have. Such defenses necessarily include the warranties contained in the contract, for example, where the breaching party claims that its product was fit for the uses intended by the contract, but that such uses were fundamentally different from those which were contemplated by the contracting parties. In such cases, the breaching party may argue that the ordinary damages for a breach of warranty should be disallowed because they are not foreseeable.
Avoiding a Material Breach of Contract
While it’s obviously impossible to anticipate every potential dispute between the parties that could give rise to a material breach, there are measures that can be taken to reduce the likelihood that a party will later attempt to rely upon a material breach defense. The primary tool for this is simply effective contract draftsmanship. A well-drafted contract should clearly and unambiguously outline the obligations of each party, including the extent and specifics of what constitutes adequate performance of the contract obligations.
One particularly effective way to ensure that there is no confusion as to the obligations placed on each party, and therefore to ensure that a breach of a contract will not be deemed to be material, is to carefully set out in the contract that the performance of all duties and obligations called for by the contract must be of "good and workmanlike" quality. By consistently using this language throughout the contract, it communicates to the parties that all duties must be performed in a competent and skillful manner , and if any performed duties fall short of this quality, then they will be in breach of the contract. In effect, this type of language guards against a party arguing that a breach is only material if it goes to the "essential purpose of the contract" or is "substantial and fundamental." Rather, under a good and workmanlike standard, a party’s failure to perform a contract duty to any degree significantly impacts the contract as a whole, and the breach is sufficient to allow the non-breaching party to proceed with an action for damages.
Ultimately, for those drafting contracts, the best approach is to assume that a material breach argument will be made at some point, and to expressly address the issue in the contract. Failure to implement appropriate contract clauses to guard against these types of tactics will leave your client vulnerable to an argument that looks to add ambiguity to the terms of a contract, and renders the client defenseless to a material breach defense and the resulting damages.
No Responses