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What is a Material Breach in a Commercial Contract?

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Commercial contracts play a key role in maintaining the smooth operation of a company. These contracts govern the interactions between individuals or businesses, outlining terms about performing certain actions and corresponding restrictions. A material breach of a commercial contract may lead to a contract ending. However, recognising whether there is a material breach may be complicated. If you find yourself on the receiving end of the contract, it is crucial to pursue remedies with the support of legal advice to prevent potential exploitation. This article will discuss the key factors you should consider if you want to identify a material breach and how you should go about dealing with the breach. 

What is a Material Breach?

A material breach is when a party to the contract fails to perform what they had previously agreed to, making it highly challenging to fulfil a contract. A material breach is also known as a fundamental breach. 

In comparison, a minor breach is more insignificant as it allows the possibility of completing the remainder of the contract.

When identifying a material breach, it is crucial to determine whether the extent of non-compliance of the contract is necessary to constitute a material breach. 

How Do You Prove a Material Breach?

For you to prove a material breach, you must be able to identify the: 

  1. existence of a contract; and
  2. other party’s failure to fulfil an essential contract term or there was a substantial alteration of the bargain. 

In some contracts, there are clauses specifying what constitutes a ‘material breach,’ while others may not include these clauses. Even if the contract fails to include such clauses, a breach of an essential contract term is generally considered a material breach. 

What qualifies as an ‘essential’ term depends on the context and circumstances surrounding the contract. Generally, there are two tests you can apply.

The Essentiality TestThe Substantiality Test
This test focuses on whether the contract explicitly states that time or content is essential or if the court must ascertain what the parties thought was essential when making the contract. Therefore, the main question to ask is, if the contractual obligation did not exist, would you have refrained from entering into this contract with the other commercial party?This test applies if you cannot prove essentiality, where you can establish that the breaching party altered the contractual bargain. For example, if it is not an essential term, it remains a substantial alteration of the bargain because of X, Y and Z.

You will only be required to demonstrate either essentiality or substantiality. For example, suppose you contract with a supplier to provide 200 surfboards for your rental business by a specified date. On that date, they did not deliver the surfboards. The contract explicitly states that the delivery must occur by a specified date to maintain your surfing schedule. This specific performance would be an essential term in the contract. Likewise, the delay resulted in substantial financial losses for you due to halted operations and missed customer deadlines. In this case, the supplier’s failure to deliver the agreed-upon surfboards within the specified timeframe likely qualifies as a material breach. 

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What to Do Once You Establish a Material Breach?

If you believe there has been a material breach of the agreement, you can take legal action to terminate the contract. However, you should check whether the contract contains a specific action you must take in case of a material breach. If there is no contractual clause specifying this, you may continue with legal action to cancel the contract immediately. 

The initial step is generally contacting the breaching party for an amicable resolution. If they remain unresponsive, drafting a formal letter to seek reparation for the breach becomes the subsequent action. These letters outline your intended steps, particularly if they decline to cover your losses. Additionally, it is necessary to provide notice and a timeframe for rectifying the breach, even if legal action remains possible.

Legal proceedings are generally costly and time-intensive, potentially harming both parties. Nonetheless, seeking guidance from a specialist might be advisable based on the situation’s demands.

Potential Remedies

Experiencing losses due to a material breach allows you to seek relief through a range of remedies, including:

  • damages;
  • specific performance; or 
  • an injunction. 

If damages adequately address the situation, the court may not opt for specific performance or an injunction. Given the complexity of remedy laws, seeking guidance from someone with legal expertise can help. 

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Key Takeaways 

A material breach of a contract often results in the termination of a contract. If you suspect such a breach, seeking remedies to recover incurred losses is crucial. However, exploring available remedies can be complex. Obtaining legal advice is essential for a better understanding and guidance to maximise available remedies and protect your contractual rights. 

If you believe there has been a material breach in your contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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