In Depth Look at Material Breach
When one of the parties to a contract fails to fulfill a substantial and significant part of the agreement, it is said to be a material breach. By definition, a material breach is a breach of the contractual obligation that the other party to the contract may forgive and requires more than just a non-substantial deviation from the terms of the contract. Generally , the non-breaching party to the contract can terminate it if there is a material breach. The non-breaching party may have the right to damages as well.
A material breach is a substantial breach or violation of the agreement. A nonmaterial breach of the agreement is usually only a partial breach or a deviation of the contract. In many cases, a partial breach does not defeat the object of the contract. Such a breach requires the non-breaching party to perform to the extent of the breach. In such a case, the non-breaching party may be entitled to recover damages; however, such recovery is typically less than if it had been a material breach.
Deliberate Failure to Comply
There are several instances that could probably qualify as intentional non-performance. A party may actually engage in contemplated conduct knowing full well that the likely result is to not perform as required under the contract. The key to these examples is intent. These parties do something that they know will lead to a breach. Two simple examples of this would be: (i) a party that copies a song/recording but knows (or should know) of the expressly agreed upon performance so that they know the copied song would violate such performance, and (ii) a party that conveys a right or interest in property that it does not own at the time of the conveyance (because it was actually secretly previously conveyed by the first conveying party). For example, a party that grants a right of first refusal to one party and then later conveys the property with notice of the reserved right (knowing that the right was previously granted) would almost certainly be in violation of the first contract (the contract granting the right of first refusal). One example of intentional non-performance that seems to come up a lot is when certain competitors offer to pay an incentive for employees to leave their current employer and to work for them to acquire the customers that the departing employee previously acquired.
Refusal to Provide Goods or Services
The failure to deliver promised goods or services on time can be, depending on the circumstances, a material breach (even without regard to other factors). Some illustrative cases follow: The failure to deliver the goods at the agreed upon time constitutes a "material breach" and entitles the owner to recover damages. (See Haskell v. Zoning Bd. (2004) 125 Cal.App.4th 442, 474, as amended Feb. 5, 2004 [observing that failure to timely complete performance may be a material breach].) This is so because the entire value of the contemplated venture was that it would be timely completed. It would be of little value to a purchaser if the project was untimely completed. We conclude that this violation of the agreement by the Purchasers really deprived the Sellers of the principal benefit for which they bargained. The Purchasers agreed to an extension of 35 days, but claimed to have completed the work on December 21, 1999, about three months late, and discarded the Sellers’ extension requests. We do not agree with the Purchasers’ description of the Sellers’ forfeiture of one payment as being a mere technical consequence that had nothing to do with the implied covenant of good faith and fair dealing. The Purchasers realized that they had forfeited several thousand dollars by not timely completing the work and yet continued to demand and accept installments after the forfeiture. At some point, it would have been appropriate for Purchasers to stop accepting payments until they were ready to perform. By then, the project was almost two years late, the zoning permit was expiring and individual permits were approaching expiration. Assuming that Purchasers would eventually complete performance, the question is whether the Purchasers discharged the contract by anticipatory breach. We conclude that they did, because they could not conform the project to meet specifications by December 21, 1999. At that time, the zoning permit and the tentative approval for the subdivision of the property in the commercial area expired September 9, 2000. Vice President Klein’s testimony reflected a similar conclusion. He expected that all that would have remained to complete the project was the pouring of concrete. But, as he admitted, had there been substantial additional work to be done after December 21, 1999, the parties’ agreement would have been void. The Court of Appeal agreed and held, … In sum, we conclude that when a party, such as the Purchasers here, is foreclosed from completing his contract and anticipatorily breaches, the other party is relieved of its burden to show the extent of the loss.
Significant Departure from Agreement
The courts have generally agreed that any substantial deviation from the terms of the contract may constitute a material breach. What constitutes substantial or not, depends on the terms of the contract and the facts of the case in question.
An example of a court finding a material breach based on a substantial deviation from the terms of the contract occurred in the case of Stockton v. Brown, 2011 Cal. App. Unpub. LEXIS 7942 (Oct. 13, 2011). In Brown, the defendant entered into the contract to employ the plaintiff’s company. The contract required the defendant to pay the plaintiff for its time, expenses, and profit for the work completed. Defendant did not pay plaintiff for several months after work completed, and when it did eventually pay it was significantly short of what defendant said it would pay. Plaintiff went out of business and sued the defendant, claiming that defendant’s substantial deviation from the terms of the contract was a material breach. The trial court ruled in plaintiff’s favor. On appeal, the court looked to the contract. When read as a whole, it was clear the parties defined compensation as meaning that the contractor was entitled to be paid for its time, expense, and profit. The Court found this to be a substantial and material deviation from the contract terms, granted summary judgment, and awarded $100,000 in damages.
Ignoring Monetary Obligations
Failure to Pay Money Obligations, or to Make Other Payments Required Under the Contract, and the Resulting Material Breach
Not surprisingly, failure by one party to pay required money obligations is one of the most common ways to create a material breach of contract. But has Florida’s appellate courts ever set an outer limit on the failures to pay money obligations that will constitute a material breach of a contract? The answer is no, although they have set some outer limits on how many times the payment has to fail before it will create a material breach.
For example, in Del Mar Props. Ltd. v. Union Am. Corp. , 976 So. 2d 905 (Fla. 3d DCA 2008), the court considered a contract that called for the purchaser to pay the seller $167,000 to purchase a property. The purchaser failed to make the payment. The court ruled that the purchaser’s failure to pay would constitute a material breach which would permit the seller to rescind or offset the purchase price if the failure to pay was "major and pervasive" or, at least, "quantitatively important"—that is, if the performance which has been rendered is of such little worth as compared with the total value of that which was promised "plainly evinces that had the parties been made aware of the true facts, they would never have made the bargain that they did . "
On the other hand, in Solerman v. Timber Ridge Townhome Owners Ass’n, Inc. , 896 So. 2d 910 (Fla. 4th DCA 2005), the court held that a homeowner’s failure to pay her share of an association’s special assessment did not create a material breach of the homeowner’s obligations to the association. This was so even though the homeowner had previously failed to pay her share of two other special assessments plus late fees and attorney’s fees incurred by the association.
Florida’s appellate courts also have held that willful failure by an insurance company to pay sums due under an insurer’s policy are material breaches. Coleman v. Prudential Prop. & Cas. Ins. Co., 783 So. 2d 1063, 1064 (Fla. 2d DCA 2000). However, the mere failure to pay a sum due under the policy, without more, does not create a material breach. United Servs. Automobile Ass’n v. Micari, 422 So. 2d 943 (Fla. 3d DCA 1982).
Consequences of Material Breach
A material breach can have a significant impact on a contract by allowing the non-breaching party to terminate the contract or pursue legal damages. When a material breach occurs, the non-breaching party is generally entitled to treat the contract as terminated and may be able to recover actual damages resulting from the breach. For instance, if a contractor performs sub-par work and a building owner is forced to pay another contractor to fix the work, he may be able to recover that additional cost in a lawsuit against the breaching contractor.
Whether a breach is material will depend on the specific facts, as the question of whether the non-breaching party can treat the contract as terminated or whether he or she may seek damages in a lawsuit will vary. In many construction contracts, for example, there may be specific provisions detailing the rights of the parties when a material breach occurs.
The term material breach usually signifies an action, omission or other omission which goes to the heart of the agreement. A material breach is one that goes to the "essence," or "substance" of the agreement and deprives the non-breaching party of what the parties bargained for. The remedial consequences of a material breach in part depend on the exact terms of the agreement and the type of damage caused. For instance, a material breach may entitle the non-breaching party to rescind the agreement. The injured party may also be able to recover consequential damages resulting from the breach.
Avoiding a Material Breach
Maintaining clear administrative policies is crucial to minimizing material breaches. Administrative actions, such as failing to send an authorized document on time or declining to authorize a requested warranty, can divide customer-base from businesses if not clearly defined. By outlining all expectations in carefully crafted written agreements, businesses can reduce the risk of premature contract termination.
Specific clauses within contracts and agreements can further reduce the likelihood of a material breach. For example, an enforceable choice of law clause and dispute resolution clause can be included to provide necessary jurisdiction and venue to protect both parties. Similarly, a forum selection clause would eliminate confusion and disagreement should any issues arise . Furthermore, damages caused by breaches can be minimized by requiring security, such as cash bonds, letter of credit, escrow, or other forms of collateral. Clear definitions should also be included in contracts to ensure that no ambiguity exists about who is responsible for what and to avoid unintentional violations.
In addition to provisions within contracts, a business can help prevent a material breach by fostering a positive relationship with its customer-base. Open and frequent communication can help a business and its clients understand each other more fully and allow for both parties to remain informed. Also, internal policies should be communicated across the company at regular intervals to ensure that employees are always clear about customer needs and expectations.