September 30, 2015

"That Was Wrong. But That Was Really Wrong" - Breach of Contract Versus Material Breach of Contract

Faegre Baker Daniels partner Brian Clifford authored the following article for the Control System Integrators Association in September 2015. 

My integrator clients often assume they can automatically stop working if they are not getting paid on a project. Likewise, when I represent facility owners, they often assume that they can withhold payment or terminate a contract anytime an automation vendor fails to comply with a term of the parties’ agreement. However, in order to take such actions, there usually must be, not just a breach of contract, but a material breach of contract.

Specifically, while any breach of contract may entitle the non-breaching party to monetary damages, in order to stop complying with your own obligations under an agreement, you generally have to show that the other party has defaulted under the agreement in a substantial and important way. As the Supreme Court of Arkansas (USA) succinctly stated last year, “a relatively minor failure of performance on the part of one party does not justify the other in seeking to escape any responsibility under the terms of the contract; for one party's obligation to perform to be discharged, the other party's breach must be material.”

What constitutes a “material” default? One common definition is that it is a breach of the contract that “is of such importance that the contract would not have been made without it.” Here are some of the questions to consider when trying to determine whether or not you can walk away from your contractual commitments based on the other party’s default:

  • Can you be compensated for the other party’s breach by a later award of economic damages?
  • Is it reasonably likely that the other party will cure its default within a reasonable period of time?
  • Has the other party acted in good faith, even if it has not met all of its obligations under the agreement?
  • What percentage of the contractual requirements is left to be performed?
  • Has the other party given you assurances that it will be able to comply with other contract obligations?

Although each jurisdiction has slightly different rules, the ability to abandon a contract because the other party is not complying with it is not automatic.

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