Introduction:
The freedom to contract is an often overlooked but economically critical right of each person and allows our economic life to exist in the United States. Not only is every competent adult allowed to enter into a contract, but the state, itself, via its courts, will enforce the terms of the contract if either party breaches the contract. Enforcement of contracts is a central service provided by the courts and allows one to purchase items, to contract with builders and buyers and sellers, to be an employer or employee, and, indeed, to enter into the economic life of the society.
Central to the right to contract is the right to enforce the contract if the other party breaches the agreement. But not every breach will be enforced by the courts. To bring in the power of the government to assess fault and determine damages, the alleged breach must be a “material breach of contract.”
This article shall discuss the definition of “material breach of contract,” and provide methods to avoid the problem of finding that a breach, considered important to you, is considered immaterial to a court of law.
The Basic Law:
Material Breach, or Total Breach, is a serious violation of the terms of a contract. The term "material" in a material breach of contract refers to the substance of the agreement. A material breach breaks the agreement at its basic core. Material breaches can also be called total breaches and can result in the injured party (the party that did not commit the breach) either terminating the contract or seeking damages through a lawsuit.
On the other hand, a non-material breach means the party is violating a term of the contract that does not rise to the level of breaching its very purpose. As an example, if I contract to purchase from you five dozen fiberglass boxes for storing tools in beige but they are delivered in white but can still serve the purpose and you cannot demonstrate any significant harm that occurs to you due to the color change, a court could find that the breach is not material, and no damages are due.
When deciding on the level of a breach of contract, most courts utilize the Restatement (Second) of the Law of Contracts to help determine whether a material breach has occurred. Based on the Restatement, there are several factors that the court will take into consideration when deciding on the type of breach.
Some of the criteria the court considers are:
If there is any real harm or loss to the injured party
Options for compensation that would negate the breach
Chance of forfeiture of rights of the breaching party
Remedy options
Has the Injured Party Been Deprived?
One of the major points a court will need to decide is whether the injured party was deprived of a major benefit of the agreement. The facts pertaining to the transaction are key and each contract will be judged on the totality of the circumstances surrounding performance and breach. If I am buying storage boxes and boxes of a different color are delivered, it would be hard for a court to determine that a material breach occurred. On the other hand, if I am buying a car that was once used by a celebrity and the true value is not just transportation but the connection to the celebrity, the court will find that a material breach if I deliver a perfectly good car that was not owned by the celebrity.
Is Compensation Easily Achieved?
To determine whether a breach of contract is material, find out if compensation is a reasonable remedy. If the injured party can simply be compensated for the breach, and the breaching party offers to do so, it is unlikely that it would be found to be a material breach. Compensation, in this case, can be in the form of money or service. Thus, if I painted your barn in a color slightly different than you wanted but offered to repaint it in the right color, no material breach can be alleged. Even if the breach did occur, it is now “cured.”
What Will Be Forfeited?
How far along has either of the parties progressed in the fulfillment of their end of the agreement? If the contract is terminated, any work already done will be forfeited.
Assume you hired me to fix your stove, and I was late but on the verge of finishing a week late and had installed all the parts but one. If the homeowner declares a breach of contract, all my work would be lost due to the late installation of a single part. The court would be unlikely to consider that a material breach on my part if I am ready and able to perform the final step.
A material breach is much more likely to be considered if the agreement was recently formed or if work has not yet begun on the stove and I was very late.
How Can the Breach Be Fixed?
If the breach is an issue that can be easily fixed, it is not likely to be considered a material breach. When the breaching party can give proof that the problem is likely to be solved in the near future, or if the market or economy shifts in a way that favors the breaching party and their ability to perform their end of the deal, it's not a material breach. Thus, if I am three weeks late on the delivery of construction materials for a project that will still not start for two more months, that breach is likely to be considered immaterial once I deliver the products.
Harm to the Injured Party
A breach which has no injury to the other party may be considered immaterial. A classic example is that if you breach a contract to sell a product but the price of the product actually goes down in the market so I can replace it with no loss, indeed, with a benefit, then no damages accrue to me and the breach may be considered immaterial.
Common Sense of the Courts
There is no particular mystery here. If the court considers the violation of the contract as minor and not causing any real harm, then the complaining party is facing an obstacle to any recovery. Courts normally have both common sense and a sense of equity. They are not inclined to be willing to “punish” a party for breaching simply because a breach occurred.
As one famous law professor commented, “It is not a crime to breach a contract. There is no moral wrong in it, indeed, it may be the correct thing to do in some economic situations. You may have to pay damages to the other side, but those damages may be less than the harm you would face in continuing the contract. There is no “moral degradation” in deciding to breach an agreement.”
Too many parties, angered by a breach, want a court to punish the other side rather than engaging in the calm deliberation of precisely what harm was caused and what damages lie. Punitive damages almost never are awarded in a breach of contract action since the right to breach exists so long as one is willing to face damages.
Solutions:
Wise drafting of the contract terms will eliminate much uncertainty as to what a material breach is. The parties simply insert clauses defining what is and what is not a material breach. An example is,
The Parties agree that time is of the essence in this Agreement and any delay in performance will be considered a material breach. The parties further agree that strict adherence to specifications of the products to be delivered is essential for the proper performance of this agreement and any deviation from said specifications will be considered a material breach of this agreement however minor.
The freedom to contract also allows one the freedom to craft verbiage to specify what is a material breach. Note, however, that a court may not be inclined to enforce an unreasonable provision in any agreement even if such a clause is drafted. Common sense and equity will still apply.
Thus, if you put in the agreement that time is of the essence, but a delay caused by a strike held up parts still not needed for one week and the delay was one day, the court will often find a way to consider the breach immaterial. Be reasonable in the clause you draft.
Conclusion:
Material breaches allow relief but that is an element of the case that must be proven by the plaintiff. Common sense will normally allow an intelligent person to see if the breach will truly matter and whether a judge or jury will consider it nitpicking. It all comes down to whether the breach really harmed the other party and was significant enough that the harm was not trivial. Language in the contract can help, but a good test is for the party claiming the breach to find an uninterested layperson, describe the situation, and see their reaction. If the reaction is a shrug and you cannot explain why it is so important, consider simply moving on.