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Material Breach

written by: Vineet Sharma - Assistant Manager-Legal - HCL Comnet Limited
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This article considers what constitutes the ‘Material Breach’. Under Common Law what are the right available to aggrieved party to terminate the contract. Whether ‘any breach’ also constitutes ‘Material Breach’? What constitutes the serious factors which may amount Material Breach. Look out for various factors and circumstance which constitutes Material Breach under a Contract.

In Commercial Contracts, a provision is normally provided allowing either party to terminate upon the other party’s breach of contract. It is common for contracting parties to include a right for one or both parties to terminate for a material breach of the agreement by the other party. Lets understand what constitutes a material breach?

What Is Material + Breach
# The meaning of "material" depends more on the parties and their characterization of the terms rather than automatically amounting to a fundamental/repudiatory breach 1.

# A breach is committed where a party without lawful excuse fails or refuses to perform what is due from him under the contract, performs defectively or incapacitates himself from performing.

# Material breach is possible where the term, breached is a condition or an in nominate term, the consequences of which are so serious that the breach justifies the termination

Position under Common Law
# Common Law rules govern the right to terminate by the innocent Party for breach of contract, provided a repudiatory breach is established,

# The fact that not all contract terms are of equal significance, some are more important than others and the distinction has been traditionally drawn between a condition and a warranty.

# A condition goes to the "root" and "heart" of the contract, the breach of which gives rise to an automatic right to terminate the contract whether or not any prejudice or loss is suffered. i.e. a "repudiatory breach". Such repudiatory breach amounts to material breach.

# Whereas a warranty is a lesser, subsidiary term in a contract, which only allows the aggrieved party to claim damages, and does not entitle him to terminate the contract

Innominate Terms
# "Innominate Terms" are such intermediary terms that neither fall under "conditions" nor "warranties". In case of breach of innominate terms, the innocent party gets is entitled to claim compensation but may or may not be entitled to set aside the contract, depending on the gravity of the breach.

# An innominate term can be distinguished from a condition on the basis that breach does not give rise to an automatic right to terminate performance of the contract and it can be distinguished from a warranty on the ground that the innocent party is not confined to a remedy in damages 2.

# A greater degree of flexibility is available and the Court of Law can focus on the consequences of the breach by allowing a party to terminate performance of the contract only where the breach of the innominate term has had serious consequences.

Factors Responsible For Serious Breach

# Any detriment caused, or likely to be caused, by the breach;
# Any delay caused, or likely to be caused, by the breach;
# The value of any performance received or tendered by the innocent party;
# The cost of rectifying the breach;
# Any offer by the defaulting party to rectify the breach;
# Whether the defaulting party has previously breached the contract or is likely to do so in the future; and
# Whether the innocent party would be adequately compensated by an award of damages in respect of the breach.

Any Breach Vs. Material Breach?

# Where a clause in the contract states that either Party can exercise the right to terminate the Agreement if any party commits a breach of any of its obligations under the Agreement. Will it amount to material breach?

# In order for any single breach to give rise to a right to terminate it had to constitute a repudiatory breach under common law. The contract should not be interpreted in such a way as to defeat its commercial purpose.

# In the context of a commercial contract involving substantial investment or at least substantial undertaking of financial obligations by one party or involving a myriad of obligations of differing importance and varying frequency, the common sense interpretation can be imposed upon the strict words of the contract. That is to say, a repudiatory breach or an accumulation of breaches that as a whole can properly be described as repudiatory are a precondition to termination of the Agreement pursuant to such clause3.

Conclusion
# "Material breach", in essence is where "all the circumstances is wholly or partly remediable and is, or, if not remedied, is likely to become serious, in the wide sense of having a serious effect on the benefit which the aggrieved party would otherwise derive from performance of the contract in accordance with its terms".

# The word "material" is directly linked with ‘the magnitude of the breach’. In a commercial contract, magnitude can be presumed to refer to the commercial consequences of the breach were it not to be remedied.

# Technically specking, remediable breaches should be regarded as Innominate Terms. That is to say, if the breach is "irremediable" then the parties can rely on their Common Law Right to terminate for Repudiatory Breach, provided the consequences are sufficiently serious.

This is a tricky and complicated area of the law, in which the magnitude of breach ultimately decides whether a breach is sufficiently serious to justify termination based on all the facts and circumstances relevant to the particular case. Looking from the other side, if a contracting party gets it wrong and purports to terminate, when he was not in fact entitled to do so (because the breach was not repudiatory), he will be held to have repudiated his obligations under the contract and may be liable to pay substantial damages in consequence.

The author can be reached at :vineetks@legalserviceindia.com
 
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