If a contract is breached, it can be important to understand whether this has been a result of a material breach of contract or a substantial breach of contract. The type of breach is important because the remedies available for a material breach will usually include the option to terminate the contract. Ending the contract is not available for a lesser breach.
Summary
This article covers:
- What is a material breach of contract?
- What constitutes a material breach?
- Minor or technical breach of contract
- Examples of material breach
- How courts determine materiality
- Consequences of a material breach
- Material breach clauses in contracts
- Remedies for material breach
- Practical guidance for businesses and individuals
- FAQ
What is a Material Breach of Contract?
A material breach of contract is a breach that goes to the root of the commercial contract and substantially deprives one party of the whole benefit of the contract.
There is no set legal definition of a material breach of contract, and in deciding whether a breach is material or minor, the courts will look at the relevant facts of the case.
In the case of RiverRock European Capital Partners LLP v Harnack [2022], the High Court stated that a material breach is “… more than trivial, but need not be repudiatory … The breach must be a serious matter, rather than a matter of little consequence.”
If a breach can be remedied and there is little or no loss because of the breach, it is not likely to be considered material.
In the case of Dalkia Utilities Services plc v Celtech International Limited [2006] EWHC 63 (Dalkia), the court defined a material breach as one that has “a serious effect on the benefit which the innocent party would otherwise derive”.
When looking at whether a breach was material, the judge said that factors to be assessed include:
- The nature of the contract and the obligations it imposes
- The nature of the breach and its impact on the innocent party
- The circumstances surrounding the breach and any explanation that is given or is apparent
What Constitutes a Material Breach?
The case of Dalkia concerned a 15-year contract under which Dalkia Utilities Services Ltd would provide energy services to Celtech International Ltd. Celtech was contracted to pay Dalkia every month, but failed to pay three consecutive instalments.
The contract included a clause stating that “In the event of the client (Celtech) being in material breach of its obligations to pay the Charges, the company shall have the right to terminate this Agreement immediately”.
When Dalkia Utilities sought to terminate the contract, Celtech said that failure to pay three instalments out of over 100 that would be due over the term of the contract was not a material breach.
The court disagreed, saying that failure to pay a quarter of the year’s payments was “neither trivial nor minimal”.
Minor or Technical Breach of Contract
Minor breaches of contract, or breaches which are technical, partial or immaterial, do not give a party to the contract the right to end the contract.
The contract can still be partially completed, but if a party has suffered losses because of the breach, they can request damages.
A minor breach of contract could occur if a contract was delayed slightly, but not enough to cause a serious impact, or if minor details were changed, for example, goods supplied were of a different colour, but still the same quality, and the different colour was not significant.
Examples of Material Breach
The level of the breach is crucial in determining whether it is major or minor. For example, non-payment of a substantial sum, a failure to deliver goods when time is crucial or repeated late delivery despite warnings could all be held to be material breaches if the breach is fundamental to the contract.
How Courts Determine Materiality
In determining whether a breach is material or minor, the courts will look at a wide range of factors, including:
- The parties’ conduct
- The nature of the contract
- The contract terms
- The commercial situation
- Whether it is possible to remedy the breach
- The nature of the breach
- Whether the breach is defined as material in the contract
- The commercial consequences of the breach
- The impact of the breach on the party suffering the consequences
In the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962], the courts looked at innominate contract terms. These are terms that could be considered either a condition or a warranty, depending on how serious a breach is.
Hong Kong Fir Shipping chartered a ship to Kawasaki, but failed to maintain the engine or to provide a competent crew, and there was a total of 20 weeks of repairs during a two-year charter period.
Kawasaki terminated the contract, claiming a material breach. However, the court found that the relevant contract term, to provide a ship ‘in every way fitted for ordinary cargo service’ was not a condition but an innominate term. This meant that Kawasaki was not entitled to terminate the contract, although they would be entitled to damages.
Termination would only be the correct option if the breach meant that the other party was deprived of a substantial part of the benefit of the contract. In this case, the ship was still available for 17 months, so the deprivation was not considered substantial.
Consequences of a Material Breach
If a material breach is established, the non-breaching party can seek damages for any loss incurred. They may also be able to request an order for specific performance, requiring the other party to meet their obligations under the contract, or an injunction preventing any further breaches from occurring.
In some circumstances, a breach may be material even if it is capable of remedy. In this case, if the party in default takes steps to remedy matters, the non-breaching party may no longer have the right to end the contract. If you are in this position, you should take legal advice promptly on the implications before accepting remedial action.
If the non-breaching party withholds performance of their obligations under the contract, there is a risk that they could face a claim for breach of contract.
If a contract is remedied, you may still be entitled to claim damages if you have suffered a financial loss as a result of the temporary breach.
Material Breach Clauses in Contracts
Dealing with a breach of contract can be more straightforward if a contract clearly defines what constitutes a material breach. Ideally, the clauses will be robustly drafted, reducing the risk of disputes and misunderstandings. Generally, the more time and care are taken in preparing a contract, the lower the likelihood of legal disagreements at a later date.
Termination clauses can be included, setting out the circumstances in which a party will be entitled to end the contract.
Clauses relating to cure periods can also be used. This is a set period of time that the party in breach may be given to remedy the breach. Notice of the breach is served on the defaulting party, then the cure period begins. Should the breach not be remedied by the end of the cure period, the contract will usually allow the non-breaching party to terminate.
Remedies for Material Breach
When a material breach is established, the non-breaching party can ask the court to terminate the contract and award damages for any losses incurred and for consequential or foreseeable losses.
Orders for specific performance are less common, as it is not always practical to force one party to carry out its contractual obligations.
Where a breach is continuing, an injunction can be sought to end this situation.
If the contract includes a material breach clause, it may specify liquidated damages or a set amount to be paid in the event of a breach.
The best way of resolving disputes over breaches of contract is often by way of negotiation or by using an alternative form of dispute resolution such as mediation, early neutral evaluation or arbitration.
These options tend to be faster and more cost-effective than litigation. They can also prevent a relationship from deteriorating, which can be an important factor if you are likely to have future dealings with the other party.
Practical Guidance for Businesses and Individuals
If you believe that someone has breached the terms of a contract, you are advised to speak to an experienced commercial solicitor. It is crucial to handle the situation carefully, to avoid breaching the contract yourself or inadvertently accepting the breach and losing your right to take action.
Similarly, you should not attempt to terminate a contract without taking legal advice. Errors can be expensive, and you could end up in a difficult situation if the contract is not actually terminated or if the other party suffers losses.
If you have been accused of a breach of contract, you should discuss your options with a solicitor. Dealing with the matter promptly can prevent the situation from escalating and keep costs to a minimum.
Contact our Company and Commercial Litigation Solicitors
If you are dealing with a breach of contract and you need advice on the next steps, call us today.
Our experienced solicitors are here to help. Call 0330 173 3980, email info@witansolicitors.co.uk, or fill out our online contact form. We'll discuss your situation and find the best course of action for your needs.
FAQ
What is a material breach of contract in UK law?
There is no legal definition of a material breach of contract in legislation, but case law holds that it occurs when one party to a contract fails to perform a substantial obligation relating to the main purpose of the contract, causing a loss to the other party.
What is the difference between a material breach and a minor breach?
While a material breach of contract undermines the main purpose of the contract, a minor or non-material breach does not. While there may be losses in the case of a minor breach, the contract can still be substantially performed.
Can you terminate a contract for a material breach?
You may be able to terminate a contract if it has been materially breached; however, you should not assume that this is the case. Before taking any action, you should seek legal advice to avoid the risk of facing a claim yourself.
Who decides if a breach is material?
It may be clear from the terms of the contract whether a breach is material or not. Where it is less clear, the court can decide if it is not possible to resolve matters without the need for litigation.
What happens if you wrongly claim a material breach?
If you believe that a contract has been materially breached and you attempt to terminate the contract or fail to carry out your own obligations under the contract, you could face a claim for a material breach of contract yourself.
For this reason, it is essential to speak to a solicitor before taking any action.
Does a contract become void and unenforceable after a material breach?
If a contract is materially breached, it does not automatically become void and unenforceable. However, the non-defaulting party can choose to terminate the contract if they wish, although it is essential to establish that the breach is sufficient to be classed as material. It is essential to follow the correct procedure in terminating the agreement. This includes giving notice to the defaulting party of your intention and ensuring that you follow any process or obligations set out in the contract. The innocent party can also claim compensation if they have suffered losses as a result of the breach.
How do you draft and negotiate a contract?
When drafting a contract, you need to ensure that you have the scope to terminate it should certain breaches arise. For example, you can include clauses relating to non-payment stating that payment on time is “of the essence” and that non-payment of a set amount or payment that is late by a certain amount will constitute a material breach, giving you the right to terminate the contract, should you wish.
It is essential to have a commercial contract tailored to your exact requirements or, if you have been given a contract to sign, to have legal advice from an expert commercial solicitor to ensure that you have the scope you need to void or enforce it. A commercial contracts solicitor will be able to advise you on the clauses you need and negotiate on your behalf to secure the right terms and conditions.
Is non-payment of money due under a contract a material breach?
In some circumstances, non-payment can be a material breach, but this is not always the case. The court will look at a range of facts, including:
- The amount of the non-payment, a substantial non-payment, can be a material breach
- Whether the contract states that time is of the essence in respect of payments, if it does, non-payment is more likely to be a material breach.
- The terms of the contract and the circumstances of the case, which will help the court decide whether the breach is trivial or serious
- The conduct of the parties
- The consequences of the breach and its impact on the innocent party
- Whether the breach is capable of being remedied
- What are the consequences for each party if the contract were invalid for material breach
Is an anticipatory breach of contract enough to terminate?
If one party indicates that they will not perform their obligations under the contract or behaves in such a way that indicates this, it is an anticipatory breach of contract. For example, you may be notified that the other party will not be complying with certain conditions in the contract.
You are strongly advised to seek legal advice to ensure that you do not inadvertently breach the contract yourself. If you want to terminate the contract, you will need to be certain that the anticipated breach is sufficient to give you the right to do this.
In some circumstances, an anticipatory breach of contract will be enough to allow you to seek to terminate the contract. The correct process should be used, including following the terms of the contract as well as ensuring you give adequate notice to the other party.
How do you prove a material breach of contract?
Proving a breach of contract is relatively straightforward. Your solicitor will put together the documentation showing what the obligations were and evidence of their breach. This could be delivery notes, evidence of the quality of something that was supplied and copy correspondence. Evidence should also be put together in respect of any losses, as this will be needed if compensation is being claimed.
Your legal team will also seek to establish the seriousness of the breach, including by putting forward relevant case law in support of your case.
