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Living in a Material (Breach) World, Part 2

by Vinay Jain

In our previous post, we looked at the concept of breach of contract, the two types of breach (material and immaterial) and the differences between them. We also touched on how it can be hard sometimes to determine whether a particular breach is actually material.

In this post, we’ll look at how you can draft your contracts to eliminate that ambiguity for types of breaches that you care about. We’ll also look at the concept of “cure,” which allows contracts to get back on track even when there has been a breach.

In the previous post, we pointed out how delayed payment to a freelancer under an independent contractor agreement doesn’t necessarily qualify as a material breach of that agreement. If you’re that freelancer, though, being paid on time is probably material to you in a personal sense, if not a legal one. Fortunately, you can specify in the contract that failure to pay on time constitutes a material breach of the agreement, eliminating any doubt.

For example, your contract might say something like, “Material breach of this agreement includes, but is not limited to, Client’s failure to pay Freelancer on time.” An alternative route would be to include a “time is of the essence” clause in relation to payments, which might say something like “The timeliness of Client’s payment to Freelancer is of the essence in this agreement.” In other words, timely payment goes to the heart of the contract, which is an indirect way of saying it’s a material term. Courts can find some leeway in this approach, though, so it’s probably better to be direct.1

Breaches of contract, even material ones, happen all the time, and yet it’s rare that they actually result in the termination of a contract. This is a good thing, because it would be hard to get business done in a world where both parties to a contract had to perform perfectly every time. One mechanism for dealing with breach is including a “cure” period in the contract. The cure provision usually requires the non-breaching party to notify the breaching party of the breach, and then gives the breaching party a certain amount of time to fix, or cure, it. If the breach is cured within the specified time, the parties carry on with their business with each other.

Of course, some breaches can be incurable, for example one that leads to a loss of reputation.2 And other breaches, even when curable, might demand a cure that goes beyond performing the original obligation. For example, if the contract so specifies, interest charges might be payable with a late payment in addition to the overdue amount.

Here’s a recap of the key concepts from both posts on material breach.

Recap:
  • The law recognizes two categories of breach of contract – material and immaterial.
  • Material breach occurs where a breach of contract substantially defeats the contract’s purpose.  An immaterial breach goes to less important parts of the parties’ agreement.
  • When its not clear whether a particular breach is material, courts look at a variety of factors in making a determination.
  • A material breach allows the injured party to stop performance under the contract and terminate it.  A party injured by immaterial breach is not entitled to stop performance and terminate.
  • A party injured by material breach may have more remedies available to it than one injured by a non-material breach.
  • Parties can reduce uncertainty around material breach by expressly defining and addressing it in contract, and by including a cure provision.
Tips:
  • Talk with the other party to your contract about what each of you consider to be the most important parts of the agreement.
  • In your contract, consider including a non-exhaustive list of things that would constitute material breach.
  • Consider including a cure mechanism.
  1. A party can end up waiving a time is of the essence clause through its behavior, for example, by continuing to perform under a contract or failing to provide notice of the breach. See., e.g., Home Properties of New York, L.P. v. Ocino, Inc. 775 A.2d 671, 677 (N.J. Super. A.D. 2001).
  2. See., e.g., Guiffre Hyundai, LTD v. Hyundai Motor America, No. 13-cv-0520, 2013 U.S. Dist. LEXIS 67795 (May 10, 2013) (the court held that a party’s engagement in widespread deceptive business practices constituted an incurable breach of a contract requirement to “maintain a high standard of ethical care”).
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Vinay Jain

As Chief Legal Officer, Vinay serves as Shake's general counsel, is responsible for the company's legal contracts and content, and leads efforts to educate consumers and small businesses about the law.

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