Material contracts: Overview, definition and example
What are material contracts?
Material contracts are contracts that are considered significant or essential to the operations, financial standing, or legal obligations of a business or individual. These contracts are typically large in scope, involve substantial commitments, or have the potential to impact the business’s performance or reputation. Material contracts may include long-term agreements, high-value transactions, or contracts that establish key business relationships, such as supplier agreements, distribution contracts, or employment contracts with senior executives.
In a corporate context, material contracts are often subject to disclosure requirements in financial statements or regulatory filings, such as those made to the Securities and Exchange Commission (SEC) for publicly traded companies.
Why are material contracts important?
Material contracts are important because they represent key commitments and obligations that can significantly influence a business’s operations, profitability, and risk profile. They often have a direct impact on the business's ability to meet its financial goals, manage liabilities, or grow its market position. Failure to comply with the terms of a material contract or the termination of such contracts can lead to serious financial consequences or operational disruptions.
Understanding and managing material contracts are critical for businesses to ensure they are fulfilling their obligations, maintaining valuable relationships, and protecting their interests.
Understanding material contracts through an example
A tech company enters into a multi-year agreement with a supplier to provide essential components for its flagship product. This contract is considered material because it represents a significant portion of the company’s supply chain and impacts the company’s ability to produce and deliver products to its customers. If the contract is terminated or the supplier fails to deliver, it could result in major operational and financial issues for the company.
An example of a material contracts clause
Here’s how a material contracts clause might appear in a contract:
“The Parties acknowledge that this Agreement constitutes a material contract for the purposes of this business relationship. The Parties agree that any breach or termination of this Agreement may have significant financial, operational, and reputational consequences. In the event of termination, the Parties shall negotiate in good faith to mitigate any negative impact on business operations.”
Conclusion
Material contracts are critical agreements that have a substantial impact on the financial and operational stability of a business. These contracts typically involve significant value or strategic importance, and their performance or non-performance can lead to serious consequences. Properly managing and understanding material contracts ensures that businesses uphold their key obligations and minimize risks related to contract disputes or breaches.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.