Material Breach of Contract: Everything You Need to Know
Material breach of contract is the failure of a party to uphold their end of a contract in a way that cannot be reconciled and renders the contract seemingly pointless. 4 min read
2. Has the Injured Party Been Deprived?
3. Is Compensation an Option?
4. What Will Be Forfeited?
5. Can the Breach Be Fixed?
Updated November 6, 2020:
Material breach of contract is the failure of a party to uphold their end of a contract in a way that cannot be reconciled and renders the contract seemingly pointless. This is a deep breaking of the contract, not just a breach of a superficial term or condition.
What Is a Material Breach of Contract?
The term "material" in a material breach of contract refers to the substance of the agreement. A material breach breaks the agreement at its core or root. Material breaches can also be called total breaches and can result in the injured party (the party that did not commit the breach) either terminating the contract or seeking damages through a lawsuit.
When deciding on the level of a breach of contract, the court will use the Restatement (Second) of the Law of Contracts to help determine whether a material breach has occurred. There are several factors that the court will take into consideration when deciding on the type of breach.
Some aspects of the breach to consider include:
- Deprivation of the injured party
- Options for compensation
- Chance of forfeiture
- Remedy options
Has the Injured Party Been Deprived?
One of the major points a court will need to decide is whether the injured party was deprived of the major part of the agreement. For instance, if you purchase a car online and pay for a sunroof and heated seats, but the car is delivered without the sunroof, this is not considered a material breach because you still received the car which was the main focus of the contract.
In such a case, the contract could not simply be terminated by the buyer, but they could demand some kind of remedy from the dealership.
On the other hand, if you purchase a guitar that was said to have been used and signed by a famous musician, yet you receive an old, standard guitar with nothing special about it, this is could be considered a material breach. The entire purpose of your purchase, and therefore the contract, was to obtain this one-of-a-kind guitar, not just any guitar.
A good way to be sure that material breaches are recognized by the court is to make sure that your contracts are very detailed. If you signed a product sales agreement to buy an item, but none of the specific details of what you paid for are listed in the agreement, it could be difficult to prove a material breach.
Is Compensation an Option?
To determine whether a breach of contract is material, find out if compensation is a reasonable remedy. If the injured party can simply be compensated for the breach, it is unlikely that it would be found to be a material breach. Compensation, in this case, can be in the form of money or service.
In the previously-imagined case of the vehicle purchase, the dealership can simply fix the breach by either installing the sunroof in the car or giving you a refund for the cost of the sunroof.
What Will Be Forfeited?
How far along has either of the parties progressed in the fulfillment of their end of the agreement? If the contract is terminated, any work already done will be forfeited.
If a homeowner hires a company to build an addition to their house, and a breach of the building contract occurs, how far along is the contractor in the building? If the addition is one week away from completion, and the homeowner declares breach of contract, it is unlikely that this will be considered a material breach. In the case of a material breach, the contractor could lose all of the money they put into building the addition.
A material breach is much more likely to be considered if the agreement was recently formed or if work has not yet begun on the project.
Can the Breach Be Fixed?
If the breach is an issue that can be easily fixed, it is not likely to be considered a material breach. When the breaching party can give proof that the problem is likely to be solved in the near future, or if the market or economy shifts in a way that favors the breaching party and their ability to perform their end of the deal, it's not a material breach.
However, if there is proof of financial issues that are not likely to change soon, like defaulting on payments or a negative shift in the market, the injured party could rely on the contract due to a material breach.
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