Breach of Contract: Material Breach

Your business has likely been a party to at least a handful of contracts. Perhaps you have business contracts with suppliers, customers, and lenders. Most of these contracts will likely end well and without issue. However, you should be prepared for when something goes wrong in a contract and one side breaches the contract.

You'll need to identify the type of breach (material or not) and how to proceed if a breach occurs.

What Is a Material Breach of Contract?

In a contract, both sides make promises to each other. Each side promises to fulfill a specific obligation—whether that promise is payment, delivery of goods, or services. When one side doesn't fulfill their side of the contract—in other words, they "fail to perform"—that side (called the "breaching party") has breached the contract.

There are two kinds of breaches of contract:

• a material breach, and
• an immaterial (also called a "minor") breach.

While both types of breaches represent one side breaking the contract, only a material breach can result in actual damages or a terminated contract. In other words, the nonbreaching side of a contract can recover from a broken contract only if the breach was material.

Material Breach of Contract: Definition and Example

A material breach strikes so deeply at the heart of the contract that it renders the agreement irreparably broken. A material breach defeats the purpose of making the contract in the first place.

For example, suppose you run an event management company. You're holding a fundraiser dinner event on Saturday night and make arrangements for the catering staff to arrive earlier that day to set up. Under your contract, the catering company agrees to arrive at 4 p.m. with most of the food prepared for the dinner at 6 p.m. When Saturday afternoon arrives, the caterers are nowhere to be found and are unreachable. With no food and no word from the company, you decide to cancel the fundraising event.

In this instance, the catering company materially breached the contract. Your fundraiser depended on the dinner being provided that night. Because the catering company didn't show up, you had no choice but to cancel the event. The catering company's failure to perform defeated the purpose of making the contract in the first place.

Immaterial Breach of Contract: Definition and Example

An immaterial breach of contract is a minor breach. This type of breach is typically a small deviation from the contract that doesn't result in any meaningful difference. While the breach might be slightly inconvenient and not exactly what the other side bargained for, the variation doesn't render the contract useless or result in any serious damages.

Let's use our fundraiser dinner example from above. Again, suppose you contract with a catering company to provide the food for a fundraiser dinner. The contract says the company must arrive at 4 p.m. for the 6 p.m. dinner with the food mostly prepared. The afternoon of the fundraiser dinner, the catering company calls you and says they're running behind and can't arrive to the event space until 5 p.m. But the company promises that the dinner shouldn't be delayed more than 15 minutes. The catering company does indeed arrive at 5 p.m. and the agreed-upon dinner is served at 6:15 p.m.

This breach would likely be considered immaterial. Even though the company arrived late and dinner was served 15 minutes later than planned, the delay was minor. You were still able to hold your event and the dinner was still fully catered to all other specifications. The situation might've been stressful but ultimately didn't result in any meaningful difference.

When Is a Contract Materially Breached?

In some cases, it's relatively easy to determine whether a breach is material or not. But in other cases, it might be harder to tell. Courts typically consider several factors when determining whether a breach is material. Specifically, courts often look to guidance from a legal guide known as the "Restatement (Second) of Contracts," as well as to other court decisions that involve contract disputes.

Generally, the factors discussed below are relevant to determining whether a breach of contract was a material breach.

Is The Other Party Deprived of "The Heart" of What It Bargained for?

When asking this question, courts think about the contract's objective or purpose. Does the party's breach of the contract ruin the contract's objective and leave the nonbreaching party without the main thing they bargained for?

For example, suppose the BMW dealer promised to sell you a car with a radio and fancy hubcaps, but the car that was delivered lacked both. This omission probably wouldn't deprive you of the true purpose of your deal—the car—and would be less likely to be a material breach. You likely wouldn't be able to end the contract (though you could demand the dealer remedy the situation in some way).

On the other hand, if a used-car dealer promised you the very Ford Mustang driven by Steve McQueen in the movie Bullitt, then presented you with a different Mustang, that bait-and-switch would be a material breach. In this instance, your bargain wasn't about the make and model of the car; it was about one particular vehicle.

Can the Other Party Be Compensated for The Loss?

Will money solve the problem and, if so, how much? If the breach can be fixed with reasonable effort or expense, while keeping the contract in effect, then the breach is less likely to be material.

Consider the hubcap-free, radio-less BMW, mentioned above. Because the dealer could easily fix the problem by installing the promised features, the lack of the radio and hubcaps probably isn't a material breach of the contract. So you wouldn't be able to cancel the contract because the car is missing those promised features.

What Will the Breaching Party Lose (or Forfeit)?

How much has the breaching party already done to fulfill its end of the deal? This factor often hinges on timing: how far along the parties are in carrying out their contractual obligations when the breach of contract occurs.

For example, suppose your business hires a contractor to create a custom kitchen for your office breakroom. When the kitchen is near completion, the contractor breaches the agreement. In this case, because the breach happened near the end of the contract, the contractor will lose much more in time and money than if the breach of contract was declared before construction began. If most of the contractual obligations have been completed, you'll be less likely to be able to say that a breach of contract is material. The court would likely consider it unfair to allow you to cancel the contract when the work is mostly completed.

What Are the Chances That the Breaching Party Will Fix Things?

The more likely it is that the breaching party can and will fix the problem, the less likely the breach of contract is material. If the other party shows that a problem can likely be solved, the breach of contract is less likely to be material. For example, the party can provide security for its promised payment, or some other reasonable assurance that it'll honor the deal, or the economy or market can shift in favor of performance.

On the other hand, signs of financial weakness or defaults on payments show that the problems are less likely to be corrected (and make it more likely that you could rely on a material breach of contract to cancel the contract). For instance, if the party missed the past two payments and has shared that they don't have the money to pay their end of the contract, then you can argue that they won't fulfill their end of the bargain.

Did the Breaching Party Act in Bad Faith?

If the breach of contract was willful or resulted from bad faith or unfair dealing, the court is more likely to presume a material breach of contract. On the other hand, a breach that results from simple carelessness ("negligence") or circumstances beyond the party's control is less likely to be considered a material breach of contract.

For example, let's return again to the office kitchen example from earlier. If the contractor made promises to provide specific kitchen features that they knew they couldn't provide so you'd hire them for the job, then you could argue the contractor acted in bad faith. When the contractor fails to provide those features, a court could consider that a material breach. However, if the contractor intended to install the promised features but those items were discontinued or on backorder, then the breach wouldn't be material.

Is the Non-Breaching Party "Ready, Willing, and Able" to Perform?

It's not enough to simply claim that the other party committed a material breach of contract. The nonbreaching party must also be "ready, willing, and able" to perform its obligations under the contract if it hasn't performed them already.

What Does the Contract Say?

Some contracts provide guidance as to what constitutes a material breach of contract. Rather than rely on a judge's discretion or interpretation of the law should a dispute arise, the parties can include a clause in the contract that says that a breach of certain provisions of the contract will be considered material breaches.

For example, a clause might say that certain activities—a failure to make payments, a failure to maintain insurance, or a failure to achieve certain sales goals—will be considered material breaches of the contract.

Because delays in performance and payment aren't always considered material breaches, some contracts add a statement to the contract that "time is of the essence." This added language means that these types of delays will be considered material breaches of the contract.

What to Do When There's a Material Breach of Contract

In general, when one side has materially breached the contract, you have ways to recover from the beach. The most common types of remedies for a material breach of contract are:

• terminating the contract
• money damages (including actual and potentially special damages), and
• specific performance (forcing the other side to follow through with their contractual obligations).

In addition, your contract might even provide a remedy for contract breaches such as liquidated damages.

You'll need to notify the other side that they've breached the contract before you can cancel the contract or take legal action. In your notice of the breach, you should lay out how and when the breach occurred and whether the breach can be cured (fixed). It might be more advantageous to try to work it out than to end the contract or take them to court. Refer to your contract's notice provision for additional requirements, if your contract has one.

Additional Guidance on Material Breaches of Contract

If you'd like to learn more about contractual breaches and your options, check out our section on contract disputes. You can find articles about defenses to breach of contracts, anticipatory breaches, and tortious interference. You can read more in our section on UCC contracts. This section has articles with information about your performance obligations under the UCC, contract interpretation, and rules specific to different kinds of contracts.

If you find yourself in a situation where you've breached a contract or the other side of a contract has breached, consider speaking with a contracts attorney. They can help you understand your options moving forward—whether that's fixing the breach or suing for or defending against a breach of contract lawsuit.

If you'd like more in-depth information about contracts, read Contracts: The Essential Business Desk Reference, by Richard Stim (Nolo).