Any well-organized business will have countless professional contracts that provide straightforward terms and expectations. But what happens if someone doesn’t follow through with the terms of one of those contracts? In legal terms, this is a material breach of contract. Unlike minor breaches, which may involve slight deviations from agreed-upon terms, a material breach disrupts the core purpose of the contract, often leaving one party unable to achieve the intended benefit or result.
Understanding what constitutes a material breach is essential to knowing your rights and how to proceed to keep your business functional. This guide will explore the ins and outs of material breaches and what you can do if you encounter one.
Key Elements of a Material Breach of Contract
You’ll be able to tell if a breach of contract is material if it has the following elements:
The extent of harm caused: If a breach causes substantial legal, financial, or reputational damage that undermines the contract’s purpose, a material breach has likely occurred.
Whether the non-breaching party received the agreed-upon benefits: If the breach prevents the non-breaching party from receiving the benefits outlined in the contract, a court or a lawyer will determine whether the breach is material.
Whether the breach was intentional or negligent: Intentional breaches often carry more weight than those resulting from negligence. Courts may view deliberate actions as more harmful to the agreement’s integrity than accidental or unintentional oversights.
If you find that the breach you’ve experienced includes any or all of these factors, you may need to take further action.
The Difference Between Material Breach of Contract and a Minor Breach
The best way to verify if you need to seek further legal action for a breach of contract is to compare it with the definition of a minor breach.
A material breach occurs when one party’s failure to fulfill their obligations significantly impacts the other party’s ability to benefit from the agreement. This breach often justifies the non-breaching party’s decision to terminate the contract or seek substantial damages.
On the other hand, if the breaching party fails to meet a less critical and more specific aspect of the contract, they likely committed a minor breach, also known as a partial breach. While frustrating, a minor breach doesn’t fundamentally affect the contract’s purpose or prevent the non-breaching party from enjoying its primary benefits. For instance, if a supplier delivers the correct goods a few days late, this delay might be considered a minor breach if it doesn’t significantly harm the buyer.
Examples of Material Breaches of Contract
Material breaches occur in various industries. If your business issues and receives contracts, you likely may run into some of the following scenarios:
Construction contracts: If a contractor or freelancer fails to complete a project in the time provided or to the standard expected, it could be considered a material breach of contract.
Service agreements: If a provider does not provide the services outlined in the contract or the services are significantly substandard, they are committing a material breach of contract.
Supplier contracts: If a supplier fails to deliver goods or products or delivers defective goods, they are committing a breach of contract.
Employment contracts: An employee or an employer may commit a material breach of contract in several ways. For example, an employee may breach a non-compete clause and work for a competitor. An employer may breach a contract by failing to pay the agreed-upon salary or benefits.
This is not a comprehensive list. Any breach that leads to significant damage may be considered a material breach.
Legal Options for Breaches of Contract
If you find that someone has made a material breach of contract, you have several legal options to choose from:
Contract Termination
When you find out a contract breach is material, you must determine if you can remedy the situation or if it caused irreparable harm to your business. If the breach can be remedied or cured, you must notify the breaching party to correct the issue. To correct it, they may need to fulfill missed obligations, deliver goods, or provide services they agreed to in the contract. They must do so promptly and in good faith to allow the contract to proceed without further termination.
Suppose the breach did cause irreparable harm that caused lasting damage to your business. In that case, you’ll need to terminate the contract, which may involve consulting a business lawyer and dissolving the contract.
Monetary Damages
One of the most common responses to a breach of contract is pursuing monetary damages to compensate for any financial losses, which includes the following types:
Compensatory damages: These damages reimburse the non-breaching party for direct financial losses and put the non-breaching party in the same financial position as if the breach had never occurred. For example, if a supplier fails to deliver raw materials, the buyer might recover the cost of purchasing replacement materials at a higher price.
Consequential damages: These damages cover losses that occur as an indirect result of the breach but are reasonably foreseeable at the time of the contract. For instance, if a delayed delivery causes a manufacturer to miss a production deadline, resulting in lost profits, those lost profits could be considered consequential damages.
Incidental damages: These damages account for additional costs you experienced because of the breach, such as expenses for storing defective goods or hiring temporary services to mitigate the impact.
Liquidated damages: A contract will pre-determine these damages. They’re beneficial if calculating the actual damages is too tricky. For example, a construction contract might include a clause requiring the contractor to pay a set fee every day they delay a project.
You can choose from these types of monetary damages based on the nature of the breach and your circumstances.
Specific Performance
In some circumstances, monetary damages aren’t enough to fully address the extent of a material breach of contract. When this occurs, a court may order specific performance, requiring the breaching party to fulfill the obligations outlined in the contract. This remedy occurs in industries such as real estate when the breaching party cannot fix the damage with money due to the unique value of the good or service. For example, if a seller refuses to transfer a property after accepting payment, the court may compel the seller to complete the sale rather than awarding financial damages to the buyer.
Lawsuits
When you can’t resolve a breach of contract through negotiation or alternative remedies, you may need to pursue litigation to enforce your rights and recover damages. Businesses typically turn to litigation when the breach results in significant financial, operational, or reputational damage that they cannot adequately address through informal resolution or other legal remedies. Litigation is essential in cases where the breaching party denies liability, disputes the contract terms, or refuses to engage in good faith efforts to resolve the issue. The litigation process allows businesses to present evidence, argue their case before a court, and secure a legally binding judgment.
How To Handle a Breach of Contract
When responding to a breach of contract, it can be challenging to know which steps to take first, especially if the breach caused significant damage to your business. Here are some suggestions on how to proceed:
In-depth Legal Evaluation & Analysis of the Contract
When in doubt, it’s best to initiate a legal process that can protect you and prevent breaches in the first place. Before signing, all parties should review the contract, paying special attention to the obligations and expectations outlined in the contract and what remedies you should take in case of a breach. If a breach has occurred, you can look at these remedies to see how you might cure the breach — whether the breaching party may need to pay for monetary damages or if you need to proceed with mediation and arbitration.
If you need a contract that protects you and informs everyone involved, ask a business attorney to draft or review an existing one. They can analyze the contract for any loopholes that may cause a dispute.
Document the Breach
When a material breach of contract occurs, documentation is your key to filing and supporting your claim. This may involve gathering and organizing evidence, such as:
– Emails or written documents;
– Invoices and payment records;
– Timelines of missed deadlines and performance failures;
– The original contract.
These documents should provide a documentary trail of how the breaching party failed to complete their obligations. It’s also essential to keep these documents readily available to reach a favorable resolution.
Communicate with the Breaching Party
Once you’ve gathered all the proper evidence, you should contact the breaching party via a formal notice to inform them of how, why, and when they breached the contract. This also provides them with the opportunity to resolve the matter.
Before delivery of a formal notice, consult a business attorney. They can ensure that it is professionally and legally sound.
Seek Out a Business Lawyer
If you haven’t already done so, seek out a business lawyer. They’ll be able to evaluate your specific situation, analyze the contract, and recommend the best course of action — from mediation to litigation.
They’ll also be able to distinguish whether the breach is material or minor and help you file a lawsuit if necessary. Additionally, a business lawyer can assess potential risks, such as counterclaims or disputes over the contract terms, and help you navigate settlement negotiations during mediation, arbitration, or litigation.
Pursue Mediation, Arbitration, and Litigation
Once you’ve taken the advice from a business lawyer, you’ll be able to proceed into one of the following legal processes:
Mediation: This nonbinding process involves contacting a neutral third party to facilitate discussions as you and the breaching party reach a mutually agreeable resolution. It is often less costly and less formal than some other processes and may be great for preserving business relationships.
Arbitration: During this process, an arbitrator, which your contract may nominate in the event of a breach, will hear the case of both parties before reaching a decision. A lawyer can help you prepare and present your case and ensure the arbitration proceeds smoothly..
Litigation: When all other legal processes fail, or aren’t suitable for your situation, you will file a lawsuit and represent your case in court. While this process is more costly and time-consuming, it may be unavoidable for serious material breaches of contract.
In every legal process following a breach of contract, your business lawyer should support you — which is why it’s essential to find an attorney with experience and knowledge of business law who can advocate for your needs in any circumstance. Jason Burris, the principal attorney at Burris Law, is that attorney for you. With his broad expertise, you will feel safe knowing he can represent your interests — no matter how severe the material breach of contract is. Contact us today to schedule your consultation, and we can represent you to reach a favorable resolution