Introduction

Imagine you’ve 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 isn’t just a minor slip-up; it’s a serious problem that threatens the whole deal. Welcome to the world of material breaches of contract.

A material breach is a big deal in the contract world. It 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.

Let’s 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 occurs when one party doesn’t fulfill their promises 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.

Here’s what typically qualifies as a material breach:

• Non-performance: One party fails to perform a major part of the contract. For example, a supplier doesn’t deliver critical goods that your business needs to operate.

• Substantial deviation: One party does perform but not in the way the contract specified. For instance, delivering goods of significantly lower quality than agreed upon.

• Failure to meet deadlines: Missing a key deadline that was essential to the contract, like failing to complete a project by the agreed-upon date.

Why does a material breach matter?

Material breaches are serious because they can change the whole nature of the deal. Here’s why they’re important:

1. Justifies ending the contract: Usually, a material breach gives the non-breaching party the right to cancel the contract and walk away from any remaining obligations.

2. Opens the door to legal action: The wronged party can often seek compensation, or take legal steps to recovery any losses or enforce the contract.

3. Affects trusts and future dealings: A serious breach can break trust and strain business relationships, making future co-operation challenging or unlikely.

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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, it’s 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, it’s likely to be considered material.

What to do if you face a material breach

If you’re 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 specific breaches and the steps you’re allowed to take.

• Talk to the other party: Contact the other party to discuss the issue. They might not even realize there’s 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: If 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.

Examples of material breaches

• Non-delivery: A construction company agrees to build a facility by a specific date but fails to start the project on time, leading to major delays and financial losses for the client.

• Breach of confidentiality: An employee leaks confidential company information to a competitor, violating a confidentiality agreement and causing significant harm to the business.

• Failure to perform as promised: A supplier delivers only half of the products agreed upon in the contract, and those that do arrive are of much lower quality than what was promised.

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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. That’s 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 you’ll 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.

Conclusion

A material breach can derail the whole contract, allowing the non-breaching party to claim damages, cancel the agreement, or take legal action. Understanding what qualifies as a material breach and how to respond can help protect your business and maintain strong partnerships. Keep an eye out for these major issues, and know your rights if one comes up.