Introduction

Imagine youʼve signed a deal with a business partner, and everything seems to be going smoothly—until they suddenly drop the ball on a major part of the agreement. This isnʼt just a minor slip-up; itʼs a serious problem that threatens the whole deal. Welcome to the world of material breaches of contract.

So, what is a material breach of contract? A material breach of contract happens when one party fails to perform a key part of the agreement, and that failure is so significant that it undermines the entire purpose of the contract. Think of it as breaking the contract in a way that makes it hard (or even impossible) for the other party to get what they bargained for.

Letʼs dive into what a material breach really means, why it matters, and what to do if you find yourself dealing with one.

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The basics of a material breach of contract

A material breach of contract happens when one party doesnʼt meet their responsibilities in a way that seriously impacts the agreement. Unlike a minor breach—where a small detail might be missed without affecting the overall deal—a material breach strikes at the heart of the contract, causing real harm or loss to the other party.

Hereʼs what typically qualifies as a material breach.

Non-performance

This happens when one party completely fails to perform a major part of the contract. For example, if a supplier is supposed to deliver essential goods that your business relies on but doesnʼt show up at all, it can disrupt operations and lead to financial losses.

Substantial deviation

In this case, one party does meet their responsibilities, but they donʼt do it according to the contractʼs specifications. For instance, if a contractor is supposed to provide high-quality materials but delivers products that are of significantly lower quality, it can compromise the project and lead to extra costs for repairs or replacements.

Failure to meet deadlines

Meeting deadlines is crucial in contracts. For instance, if a marketing agency agrees to launch a campaign by a specific date but misses that deadline, it could delay the client's product launch, leading to lost sales and diminished market presence. This kind of delay can have significant financial implications, impacting both revenue and brand reputation.

Read: Understanding scope and complexity in your business contracts

Why does a material breach matter?

Material breaches are serious because they can change the whole nature of the deal. Hereʼs why theyʼre important.

Justifies termination

When a material breach occurs, it often gives the non-breaching party the legal grounds to terminate the contract. This means they can walk away from the agreement without facing any repercussions. For instance, if a supplier fails to deliver essential materials, the buyer can terminate the contract, freeing them from any further obligations. This right to exit can be crucial in protecting a companyʼs interests and resources.

Allows for legal action

A material breach gives the injured party the right to take legal action. This means they can file a lawsuit to claim damages, which might include lost profits, expenses from finding replacements, or any other financial losses directly related to the breach.

Additionally, the non-breaching party may seek specific performance, which is just a fancy of way of getting a court to force the breaching party to do what they were originally required under the contract. This helps the injured party recover what was lost.

Impacts trust and business relationships

A material breach can seriously undermine trust between parties. When one side fails to uphold their end of the bargain, it creates a rift that can make future collaboration difficult. Trust is foundational in business relationships; once itʼs damaged, it can be hard to rebuild.

For example, if a contractor consistently fails to deliver quality work, a client may hesitate to engage them for future projects, fearing more breaches down the line.

Reputation at stack

Material breaches can also have a ripple effect on a company's reputation. If a business is known for not fulfilling contracts or delivering subpar results, it may struggle to attract new clients or partners. In industries where reputation matters, a single breach can have long-lasting consequences that extend beyond the immediate contract.

How do you know if a breach if material?

Not every slip-up counts as a material breach. Courts usually consider a few key factors to decide if a breach is serious enough to be labeled "material".

How big was the breach?

Did the breaching party miss a minor detail, or did they fail to deliver a crucial part of the contract? The bigger the failure, the more likely it is to be material.

Impact on the other party

Did the breach cause real harm, loss, or trouble for the non-breaching party? If the breach makes it impossible for the non-breaching party to get what they were promised, itʼs more likely to be seen as material.

Intent and actions

Was the breach deliberate or just an honest mistake? Did the breaching party act in bad faith, or did they try to fix the problem right away?

Purpose of the contract

What was the main goal of the contract? If the breach ruins the core purpose of the deal, itʼs likely to be considered material.

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What to do if you face a material breach

If youʼre dealing with a material breach, here are a few steps you can take:

Review the contract

Look through the contract to see if it clearly defines what counts as a material breach and what actions you can take. Some contracts will spell out just what exactly a material breach is and what you can do if it takes place.

Talk to the other party

Contact the other party to discuss the issue. They might not even realize thereʼs a problem or could be open to resolving it without any legal hassle.

Keep records

Document everything related to the breach—emails, letters, phone calls, you name it. Keeping detailed records is crucial if you decide to go after damages or take legal action.

Think about termination

f the breach is serious and the contract allows it, you may have the right to end the agreement. Just make sure you follow any notice requirements spelled out in the contract.

Get legal advice

When things get tricky, talk to a lawyer. They can help you understand your rights, figure out your options, and guide you on the best path forward.

Read: What is a notice period and why is it important?

Examples of material breaches

Non-delivery

Imagine a construction company promises to build a facility by a set date but doesnʼt even start the project on time. This can lead to major delays, causing the client to lose money and possibly miss important deadlines. Itʼs a big deal that can disrupt everything.

Breach of confidentiality

Picture an employee who leaks confidential company information to a competitor. This violates a confidentiality agreement and can seriously harm the businessʼs reputation and competitive edge. The fallout from such a breach can be significant, affecting trust and financial stability.

Failure to perform as promised

Consider a supplier who only delivers half the products they agreed to and, on top of that, the items that do arrive are of much lower quality than promised. This not only disrupts the buyerʼs operations but can also lead to financial losses and a damaged relationship. Itʼs a classic case of not meeting responsibilities.

Read: What are defined terms in a contract?

Conclusion

A material breach of contract is a serious issue that can break the entire deal. It gives the non-breaching party the right to seek damages, end the contract, or pursue other legal options. Knowing what counts as a material breach and how to handle it can help protect your business and keep your partnerships strong. Stay alert for these deal-breaking moves and know your rights if you face a breach.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. Thatʼs where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and youʼll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.