What is Material Breach
Any failure to comply with the terms of a contract will technically constitute a breach of contract, but not all breaches are material. A material breach is a significant breach that allows the injured party to the contract to commence litigation for damages and potentially also seek an award of attorneys’ fees under the contract. The distinction between material and minor or immaterial breaches is not always straightforward, and much depends on the specific facts of the matter, but it is the rule in Florida that "a breach of contract is considered to be material where it goes to the essence of the agreement." Valium Corp., v. E. Buckingham Three, LLC, 224 So. 3d 993, 995 (Fla. 4th DCA 2017).
The question of whether a party’s breach of a contract is material is generally a question of fact that is determined by the jury , but it can also be resolved as a matter of law where the contract terms are clear and unambiguous. Darnell v. Yates, 642 So. 2d 1146, 1147-48 (Fla. 2d DCA 1994). Indeed, the Florida Supreme Court has held that "a non-defaulting party must perform a strict performance in order to recover for the other party’s breach," Nestle v. Annes, 389 So. 2d 1003, 1004 (Fla. 1980), and a "default of performance" "goes directly to the ‘essence’ of the contract so that materiality can be determined as a matter of law." Pham v. Hurley, 131 So. 3d 177, 180 (Fla. 4th DCA 2013).
Whether a breach is minor or immaterial, the prevailing party in a breach of contract lawsuit should be able to recover basic elements of damages under the contract, and those are given in three categories: This list is non-exhaustive, as other damages may also be available to remedy the harm caused by the other party’s breach.
Material Breach Elements
A "material" breach of contract is one that has the effect of significantly undermining or destroying the value of the contractual agreement. Whether or not a breach qualifies as a material breach is a question of fact, involving a determination of degree of the breach. A material breach of contract by one party authorizes the other party to treat the breach as a total breach and thus to effectively terminate the contract, or to elect to continue performing under the contract and bring an action for damages. Alternatively, a minor breach of contract does not justify a non-breaching party in ceasing performance, but only entitles the non-breaching party to claim any damages caused by the breach.
The Restatement (Second) of Contracts identifies the "significant" factors to be considered in deciding whether a breach is material or not: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for that deprivation; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or offer to perform will cure his failure, and the extent to which the delay in performing or offering to perform will hinder or prejudice that party; (e) the extent to which the requirements of justice will be not only that the inadequate compensation sustained by the injured party be remedied, but also that the party failing to perform or offer to perform be protected against loss that might have been avoided had he been able to perform or offer to perform perfectly.
Material Breach Consequences
The legal and practical consequences of a material breach of contract depend on the terms of the contract, the governing law and the nature of the breach. Unless the applicable law requires that the breaching party provide notice of its actions to be considered a breach, there is typically no action required by the non-breaching party.
The non-breaching party must at some point confront whether it should enforce the contract terms, including any post-breach notice or cure provisions, or should it elect to simply walk away from the contract. The non-breaching party cannot continue to require performance under the contract while simultaneously claim damages for breach, unless the damages are in the form of cost savings to the non-breaching party. If the non-breaching party prevents the breaching party from performing under the contract, the non-breaching party will have no basis to recover for damages it would have incurred under the contract if performance actually occurred.
If the non-breaching party intends to enforce its rights in the agreement, it should require the breaching party to cure the default or breach. If the breaching party fails to cure within any limitations set forth in the agreement, the non-breaching party should consider providing notice that it will terminate or suspend the agreement based on the breach. It may be appropriate to initially limit the remedy to suspension or temporary cessation of performance to allow the breaching party to cure the issue prior to termination.
If the non-breaching party believes the breach is so significant as to justify termination of the contract, it must clearly state so in its notice and adhere to the contract terms regarding any conditions to termination. Depending on the severity of the breach, the non-breaching party is almost certain to have a claim against the breaching party for damages. Damages generally fall into three categories: (1) reliance damages; (2) expectation damages; and (3) consequential damages. The measure of damages can ultimately depend on the specific injuries sustained and the nature of the contractual relationship.
Examples of Material Breach
Contractor’s Failure to Complete the Job: A contractor who is hired to build a house but abandons the project before it is done might be found to have materially breached the contract with the homeowner. Even if the work done is up to spec, the contractor failed to fulfill the obligation to complete the project.
A Tenant’s Electrical Issue: A lease may be considered materially breached if a tenant refuses to pay electricity bills, resulting in service being turned off. This would not only deny the landlord the rental income, but might also damage the commercial property.
An Unfulfilled Repair Contract: An HVAC company that promises and books an annual maintenance agreement but fails to do the work might be found to have materially breached the contract. In the event of unit failure, this might have serious implications for both the company and the client.
Construction Specifications: A builder who constructs a building with the wrong dimensions might be found to have materially breached if the dimensions are clearly specified in the contract.
Material versus Minor Breach
As stated above, a material breach of contract is generally one that goes to the very essence of the agreement between the parties. A minor or immaterial breach does not. However, determining whether a particular breach is material or not is not always obvious.
The Uniform Commercial Code, which governs the sale of goods, contains several helpful sections on the issue of material breach. The Code provides as follows:
- (1) Acceptor’s failure to pay the instrument according to its tenor is a material breach.
- (2) Failure to give notice of breach of warranty or request for price adjustment or substitution is a material breach.
- (3) Failure to give notice of breach of warranty of a defect that would cause a claim of injury at a subsequent sale is a material breach if the claim is presented in a timely manner after the subsequent sale.
That is to say , a breach of warranty of quality may be material even if it does not go to the essence of the contact where it is a latent defect such that it causes injury to a third party in subsequent sale of the goods by the buyer. In other words, the breach of warranty may be material even though there is no injury when the breach occurs because the defect does not show itself until later.
The distinction between materiality and non-materiality has important ramifications for the parties’ rights and obligations. If a party materially breaches a contract, the other party may suspend its performance on the contract, and it may also be entitled to be made whole as to any damages flowing from the material breach. If the breach is not material but merely "minor," the aggrieved party remains bound to perform under the contract.
How to Respond to a Material Breach
When a material breach occurs and parties are unable to resolve the matter amongst themselves, there are various paths they can take. Negotiation with the breaching party is always a good first step to find an amicable solution. However, if this proves unsuccessful, parties may need to resort to litigation. Litigation involves taking the matter to the trial court or petitioning for relief with another governmental agency that may be involved in the issues that form the basis of the contract. For example, the Department of Education oversees school fraud cases with a federal implication. If the contract does not directly involve the federal or a state governmental entity, then that contract could be handled either through the Civil Court or federal court systems. Each party has the right to initiate the formal litigation process, which becomes a matter of public record.
Depending on the language in the contract and the position of the parties, mediation is an alternative means of resolving contractual disputes. Mediation is a lower-cost way of trying to resolve a contractual dispute than hiring a lawyer, paying court fees, and potentially being responsible for opposing counsel’s fees if you do not prevail in court. In mediation, the objective is to explain the issues to a neutral third-party mediator. The mediator will then offer recommendations to resolve the matter in the best interest of both parties. The recommendation may not necessarily be what the strongest party would consider fair and just. The mediator will look at the strengths and weaknesses of each party and suggest a resolution based on the totality of information offered during the mediation session.
In Minnesota, as well as other states, the parties may be required to attend non-binding mediation prior to initiating litigation. Even if the parties are not required to attend mediation, they may still be amenable to attend mediation before resorting to legal action to see if the matter can be amicably resolved.
Another option once the parties have reached an impasse, is to take the contractual dispute to arbitration. Arbitration is a process where the parties set forth the rules such as the number of arbitrators and whether it will heard by a panel of arbitrators or one arbitrator. The rules contain the "how-to" for the arbitration process. It is a more private process than litigation, although arbitration is still a matter of public record unless the arbitration agreement states otherwise. If not specified, the arbitration will be binding. This means that the decision rendered at the end of the process cannot be appealed. Parties can include an escape clause that allows them to appeal or move to vacate the award if certain breaches of procedure occurred during the arbitration process.
The beauty of arbitration is that the parties can decide on what matters are pertinent to the dispute and how they would like any proposed solutions to be formulated. Arbitration is most often used in agreements with business partners or large contracts between pharmacist and the pharmacy.
How to Prevent Material Breaches
Preventing material breaches of contract, and the damages that flow from them, requires a dedicated approach to risk avoidance. Contractual obligations must be redrafted, when necessary, to promote understanding, compliance, and, ultimately, enforcement.
As a preliminary matter, the language of an integrated contract must be both specific and clear. Obscure or vague language should be avoided, because parties interpreting such language could easily reach differing conclusions as to what a contract actually means. In turn, these differences in interpretation can give rise to material breaches of contract. Lawsuits that ensue typically involve legal arguments over language, or lack of it as the case may be, found in such contracts. Framing the precise scope of obligations between contractual partners is a challenging but vital task, requiring input from counsel with experience.
Ideally, contracts should undergo periodic reviews, pursuant to which questions of enforceability, compliance, and breach can be addressed and answered. Material breaches often call attention to entire clauses in contractual agreements. Reviewing existing language and considering amendments to key provisions should be a normal part of any contractual relationship worth its salt.
Internally, effective communication between business partners, and between legal departments and leadership, can preemptively identify and cure potential contractual problems. Keeping records of relevant communications (e.g., e-mails or correspondence) is also important to preventing and remedying breaches of contract. In addition, broad training programs are beneficial, so that all parties understand what their legal obligations entail.
In contrast to drafting and reviewing contracts, there are also various alternative methods contracting parties can use to minimize the possibility of material breaches of contract. A recommendation from a friendly contracting party might encourage another in a similar position to hold back from asserting a claim. Litigation is expensive, slow, and requires significant resources from those involved. For that reason alone, the prospect of a claim against a party to the first contract often induces the second to find an avenue out of the dispute. Thus, even if intractable disputes do occur, one party might not dispense with mobilizing its resources for use in the conflict.
Material Breach Legal Help
Engaging legal assistance when confronting a material breach of contract is prudent. The right lawyer will help make relevant contract distinctions, guide you through the analysis of the possible existence of a material breach, and assist concerning available legal remedies . Based upon the facts, the right lawyer will advise you on how best to protect business relationships and whether to pursue legal action. Likewise, if your business has been accused of a material breach, experienced counsel can enable a clear understanding of the law involved, guide you in evaluating the allegations, and assist work toward effective solutions.