If someone doesn’t hold up their end of a contract, it might seem only fair that you wouldn’t have to uphold yours either. Legally speaking, though, it’s more complicated than that. Let’s look at the concept of breach of contract and what it might mean for you.
A “breach of contract” occurs anytime a party to a contract doesn’t perform a contract to its exact specifications. For example, if you have a loan agreement with someone, failing to pay back the loan is a breach of that contract. And submitting a 490-word piece for a freelance writing contract that calls for 500 words is a breach of that writing contract.
The law distinguishes between two kinds of breach – important ones (“material” breaches) and unimportant ones (sometimes called “minor” breaches). A material breach is something that goes to the heart of a contract (like the unpaid loan), whereas a minor breach is small (like the writing submission that comes up a little short).1
The distinction between a material and non-material breach matters because, unless the contract specifies a different procedure, a material breach allows the injured party to stop performing on the contract, whereas in the event of a non-material breach the injured party still has to perform.2
Let’s look at an example. Say an executive hires a freelance graphic designer to create a slideshow for a presentation he’ll be giving in two weeks. Their contract specifies that the slideshow will be in PowerPoint. Per the contract, the executive pays half up front, with the other half due at completion. The graphic designer goes to work and delivers an excellent presentation that is exactly what the businessperson wanted, except for one thing – it’s done in Keynote (a similar type of software) instead of PowerPoint.
Let’s say that the two software types are of equal quality and the presentation is otherwise satisfactory. Is this a material breach? Can the executive stop performing his end of the contract – in other words, not pay the designer the second half of the fee?
In a word, no.3 The designer’s deviation from the contract didn’t strike at the heart of the deal – the executive still got a high-quality, usable presentation. Therefore the contract is still effective and the executive must pay. However, if the executive suffered any actual harm as a result of the designer’s minor breach – say, for example, the executive had to spend $20 to buy a copy of Keynote to run the slideshow – he is entitled to compensation for that from the designer.
On the other hand, let’s say that the designer delivered a completely botched, unusable presentation. This is a material breach, and assuming the contract doesn’t specify what happens in the event of a material breach, the executive has the right to terminate the contract. In other words, the executive is not obligated to pay the designer the remaining half of the fee, and he can sue the designer for what he already paid.
The concept of material breach is useful because it prevents a contract from self-destructing over a technicality. It would be hard to get business done in a world where either party could cancel a contract whenever the other failed to perform it exactly to the contract’s letter.
But there’s also a downside to having two categories of breach, which is that it’s hard to know sometimes which category a given breach falls into.4 The situation is even more complicated because the answer can depend on the circumstances. Not being paid on time is a good example. In building contracts, delayed payment often prevents a builder from purchasing necessary supplies, creating a material breach.5 In consulting or freelance work, however, delayed payment doesn’t necessarily impair the consultant or freelancer from performing the contract, at least up to a point, in which case it’s doubtful whether the breach is material from a legal standpoint. For example, in the eyes of a court, a freelancer who doesn’t get paid for two weeks can probably still complete a presentation or finish an article, even though the payment delay is personally burdensome.
In Part 2 of this post, we’ll look at how you can draft your contracts to eliminate the ambiguity surrounding whether a particular type of breach is material. We’ll also discuss a mechanism you can use to help things get back on track even when there has been a material breach.
- 23 Williston on Contracts § 63:3 (4th ed. 2000) ((A) “material” breach is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract or makes it impossible for the other party to perform under the contract.). ↩
- See, e.g, Jim Beam Brands Co., v. Tequila Cuervo La Rojena S.A. De C.V., (Sup. NY, Jan. 27, 2011) (the defendant admitted that it breached the terms of an agreement, but the court found the breach to be not material, and so the court only awarded a nominal amount of damages); Campbell v. Shaw, 947 S.W.2d 128, 131 (Mo. Ct. App. 1997) (If the breach is material or if the breaching party’s performance is a condition to the aggrieved party’s performance, the aggrieved party may cancel the contract. If the breach is not material, the aggrieved party may sue for partial breach, but may not cancel.); 28 N.Y. Prac., Contract Law § 17:10 (“A material breach … would justify the other party to suspend its own performance of the contract. If not cured, a material breach relieves the non-breaching party of an obligation to further perform. The nonbreaching party may immediately terminate a contract upon a material breach where the contract does not contain (an extenuating provision.) (emphasis added)”). ↩
- This scenario is based on the classic case of Jacob and Youngs, Inc. v. Kent, where the court found that a home builder’s use of a certain brand of piping instead of the agreed upon brand was not a material breach because the two types of pipes were equivalent in function, quality and cost. 230 N.Y. 239 (1921). ↩
- Courts generally look at 5 factors in determining whether a breach is material: (1)The extent to which the injured party will be deprived of the contract’s benefit; (2) The extent to which the injured party can be adequately compensated; (3) The extent to which the breaching party will suffer loss; (4) The likelihood that the breaching party will fix its failure; and (5) The extent to which the breaching party acted in good faith and engaged in fair dealing. Restatement (Second) of Contracts § 241 (1981). ↩
- See Manganaro Corp. v. HITT Contracting, Inc., 193 F. Supp. 2d 88, 97 (D.D.C. 2002) (the court found that building contracts often provide for “installment payments as construction proceeds … to supply funds necessary for the agree performance.” As such, “a failure to make one of the progress payments … is more likely to justify suspension of performance by the builder.”; Corbin on Contracts § 692 (1960). ↩