Breach of Contract: Immaterial versus Material Breaches
Contracts are important business instruments. When businesses (or the people that run them) have reached what is commonly known as a “meeting of the minds”, a written contract allows the parties to memorialize their agreements. While it is true that certain contracts do not need to be in writing, it is better practice to make sure that all of your “contractual” agreements are written down and acknowledged by all parties. Not only is this because a written contract is stronger for evidentiary purposes, but, also, because, well, people forget things and an oral contract is inherently plagued by that sensible truism.
Did you know that a contract can be so simple that it can even be, and has been, written on a napkin? A napkin contract, littered with the crumbs and remnants of foreign food particles, is still as powerful as a contract written on the most expensive watermarked bond paper. In this sense, not only do contracts define the duties and responsibilities between the parties, but they are also fundamental to establishing you and your business’ reputation. Note: Although it goes without saying, for reputation enhancing purposes, one should stay away from the ominous flavor-saving napkin contract.
Did you know that there are different types of breaches? A breach (and the resulting remedies) depends on whether it was or will be considered “material”, “total” or “immaterial”. While it is true that “[a]ny performance that falls short of that promised is a ‘breach’” it is likewise true that a “…breach is material if the failure or deficiency in performance is so central to the contract that it substantially impairs its value and deeply disappoints the reasonable expectations of the promisee.”
A breach that is said to be both total and material allows the non breaching party to do one of three things. The nonbreaching party may: 1. Withhold their own performance; 2. Terminate the contract; or 3. Claim full damages for the breach. It is imperative that you speak to an attorney to determine whether a breach is “total” and “material” so that you understand your rights. If you misinterpret the breach, and act in a way that you shouldn’t have, you, as the nonbreaching party, may also be liable for certain damages.
If the breach is said to be “material” but not “total”, the nonbreaching party may: 1. Suspend performance; 2. Allow an opportunity for the breaching party to remedy or otherwise cure the deficiency; or 3. Claim compensation for any loss suffered. Again, it is important that you consult with an attorney so that you can better ascertain your rights.
Finally, If the breach is not “material”, the breaching party is said to have “substantially performed” under the contract. In this case, the nonbreaching party may only claim compensation for any loss suffered.
At Friedman Legal, we can help your business draft contracts and other critical business-related documents. Additionally, we can help you better understand, evaluate, and assess your risks pursuant to a contract that you may have signed or are contemplating entering into.
1 Blum A., Brian, Contracts, Aspen Publishers 2007.
5 Blum Supra.