Contract Breach: Material Breach

How can you determine if your contract has been "irreparably violated" according to the law?

A "material" breach of contract is one that strikes so deeply to the heart of the contract (a failure to perform the contract) that it renders the agreement "irreparably broken" and negates the purpose of the deal in the first place. The break must go right to the heart of the parties' agreement. If there is a major breach (sometimes known as a "total" breach), the other party can simply terminate the agreement and seek damages from the other party in court.

Courts frequently consult the Restatement (Second) of Contracts for aid in determining whether a breach is material, as well as other court decisions arising from contract disputes. The considerations listed below are generally relevant in establishing whether a contract breach was a substantial breach.

Is the other party being denied "The Heart" of the bargain?

For example, if the BMW dealer promised you a radio and stylish hubcaps, but the car you received lacked both, it is unlikely to be a significant breach because you were not deprived of the main goal of your deal—the car. You wouldn't be able to get out of the agreement (though you could demand the dealer remedy the situation in some way). A substantial breach would occur if a used-car vendor guaranteed you the exact Ford Mustang driven by Steve McQueen in Bullitt and then delivered a different Mustang. Your transaction wasn't about the make and model of the car in this case; it was about one specific vehicle.

Is it possible to compensate the other party for their loss?

Will money be able to address the problem, and if so, how much will it cost? It's less likely to be substantial if it can be repaired with reasonable effort or expenditure while the contract is still in place. Consider the BMW with no hubcaps and no radio mentioned earlier. Because the dealer could easily solve the problem by installing the promised features, you wouldn't be allowed to cancel the contract.

What is the Loss (or Forfeiture) for the Breaching Party?

What has the breaching party done so far to keep its end of the bargain? This aspect is frequently influenced by timing: how far along the parties are in carrying out their contractual responsibilities when the contract is breached. Consider a homeowner who commissions a custom kitchen from a contractor. If the homeowner announces a breach of contract when the kitchen is nearly finished, the contractor will lose a lot more time and money than if the breach was announced before construction began. If the majority of the contractual requirements have been met, you will be less likely to be able to claim a serious breach of contract and hence cancel the relationship.

What Are the Chances of the Breaching Party Making Things Right?

The less likely a violation of contract is substantial, the more likely the violating party can and will repair the problem. If the other party demonstrates that problems are likely to be resolved, such as by providing security for its promised payment or other reasonable assurance that it will honor the agreement, or if the economy or market shifts in favor of performance, the breach of contract is less likely to be material. Signs of financial weakness or payment defaults, on the other hand, indicate that the problems are less likely to be resolved (and make it more likely that you could rely on a material breach of contract to cancel the contract).

Is it possible that the Breaching Party acted in bad faith?

When a case is taken to court, the judge is more likely to presume a serious breach of contract if the breach was purposeful or came from bad faith or unfair dealing. An executive who was insubordinate and refused to obey directives, for example, was deemed to have significantly breached his employment agreement by a court. A breach caused by carelessness ("negligence") or circumstances beyond the party's control, on the other hand, is less likely to be considered a material breach of contract.

Is the non-breaching party "ready, willing, and able" to fulfill its obligations?

It's not enough to simply assert that the other party breached the contract materially. If the contract's responsibilities haven't been fulfilled yet, the non-breaching party must be "ready, willing, and able" to do so. For example, in one case, a New York man agreed to pay $610,000 for a "as is" vacation home. When the sellers refused to complete the transaction, the buyer sued for breach of contract. The buyer lost because he was unable to demonstrate that he was "ready, willing, and able" to fulfill the contract's requirements, which included significant modifications to the heating and plumbing systems. In other words, he refused to accept the house "as is."

What Is In The Contract?

Certain contracts specify what constitutes a significant breach of contract. Instead of relying on a judge's judgment or interpretation of the law in the event of a dispute, the parties might incorporate a phrase in the contract declaring that a breach of particular contract clauses will be regarded as serious breaches. For example, a provision may say that certain actions will be regarded as substantial breaches of the contract, such as failing to make payments, failure to retain insurance, or failure to meet specified sales targets. Because delays in performance and payment aren't always considered substantial breaches, some contracts include a clause that says "time is of the essence," implying that these types of delays will be regarded material breaches.

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