Material breach of contract - What can be done?

Understanding the concept of a material breach of contract is fundamental for understanding contractual obligations and their enforcement. A material breach is a violation of the terms of a contract that is so severe it permits the non-breaching party to terminate the contract, seek damages, or both.

Defining a Material Breach of Contract

The basic common law position is that a material breach involves a failure by the breaching party to perform a duty so fundamental that it impacts the essence of the contract.

The determination of what constitutes a material breach involves considering the full factual matrix, including the terms of the contract, the circumstances surrounding the breach, and its effect on the benefit that the non-breaching party would have received if the breach had not occurred.

Case Law

The Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest) [2013] EWCA Civ 200:

This case involves a contract dispute between the NHS Trust and Medirest, the contractor providing catering and cleaning services at a hospital.

The contract included a clause for good faith cooperation and a system of Service Failure Points (SFPs) to monitor performance, with the possibility of deductions from payments or contract termination in the event that performance thresholds were not met.

Medirest’s performance led to the accrual of excessive SFPs, prompting the Trust to make substantial deductions from payments and eventually attempt to terminate the contract.

However, the Trust’s calculation of SFPs and deductions was significantly flawed. Medirest challenged these actions, citing material breaches by the Trust, and sought to terminate the contract.

Initially, the Trust’s actions were deemed material breaches by Cranston J, allowing Medirest to terminate the contract.

However, the Court of Appeal reversed this decision, finding that while the Trust’s actions were breaches, they were not material as they did not justify contract termination by Medirest, particularly since the Trust had corrected its errors.

In Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust (2013) LJ Jackson highlighted that the phrase ‘material breach’

“connotes a breach of contract which is more than trivial, but need not be repudiatory … Having regard to the context of this provision, I think that ‘material breach’ means a breach which is substantial. The breach must be a serious matter, rather than a matter of little consequence”.

Dissolution of RiverRock European Capital Partners LLP v Harnack (2022):

In the case of RiverRock European Capital Partners LLP v Harnack [2022], the High Court found no material breach despite alleged contract violations involving the management of an investment fund.

The investment firm, RiverRock, faced challenges in attracting investors and considered changing managers, leading to disputes. When the UK company managing the fund was dissolved due to failure to file with Companies House, RiverRock terminated their agreement, citing material breaches.

However, the court determined that the dissolution, an oversight capable of remedy, did not constitute a material breach, emphasising the need for a breach to be substantial and have significant consequences flowing from such a breach.

Dalkia Utilities Services Plc v Celtech International Ltd (2006):

This was a significant case in contract law. Dalkia contracted to supply energy services to Celtech, but Celtech failed to pay its invoices. Dalkia terminated the contract and sought damages.

The court held that Celtech failing to make three consecutive monthly payments constituted a material breach of Celtech’s obligations as the combined total was neither trivial nor minimal, entitling Dalkia to terminate. It also addressed the issue of whether Dalkia could exercise both its contractual right to terminate and its common law right to accept a repudiatory breach. The court concluded that, in principle, an innocent party can exercise both rights.

Material Breach vs. Repudiatory Breach

It’s important to distinguish between a material breach and a repudiatory breach, although both can lead to termination. A repudiatory breach is one where the breaching party shows an intention not to perform their obligations at all, fundamentally undermining the contract.

Whilst all repudiatory breaches can be considered material, not all material breaches are repudiatory. The distinction lies in the breaching party’s willingness and attempts to put right in the future, which may preclude the breach from being considered repudiatory.

Legal Remedies and Resolution

The consequences of a material breach are significant. The non-breaching party is entitled to seek remedies, including damages for losses incurred and, in some cases, specific performance or an injunction to prevent further breaches. The choice of remedy will depend on the nature of the breach and the terms of the contract.

Moreover, the resolution process often involves considering whether the breach can be rectified and the willingness of the breaching party to do so. This consideration can affect the choice between pursuing legal action and seeking a negotiated settlement, which might be more conducive to maintaining a commercial relationship.

How do I determine if a breach of contract is material?

To determine if a breach of contract is material, consider the extent to which the breach affects the contract’s core purpose and your ability to obtain the benefit you expected from the agreement.

Factors include the breach’s impact on the overall contract, whether it deprives you of what you fundamentally contracted for, the breaching party’s willingness to rectify the issue, and any specific terms in the contract defining materiality.

It may also be necessary to consult legal precedents and seek legal advice for a thorough analysis based on the contract’s specifics and the breach circumstances.

Can a material breach be rectified, and how does this affect my rights?

A material breach can sometimes be rectified, depending on the breach nature and the contract terms. If the breaching party is willing and able to correct the breach within a reasonable time frame, this may restore the contract’s intended benefits to the non-breaching party.

Rectification may affect your rights by potentially limiting the remedies available, such as precluding contract termination if the breach is adequately corrected.

However, you may still be entitled to damages for any losses incurred during the breach period. The possibility of rectification and its implications should be carefully considered, possibly with legal guidance.

How does the concept of “good faith” play into resolving a material breach?

The concept of “good faith” plays a significant role in contract law, emphasising honesty and fair dealing in fulfilling contractual obligations.

In resolving a material breach, demonstrating good faith — such as by communicating openly about the breach, seeking amicable resolutions, and making genuine efforts to rectify the issue — can influence negotiations and legal proceedings.

Courts may consider both parties’ good faith (or lack thereof) in handling the breach when determining remedies and assessing the breach’s materiality and impact on the contract.

How can a solicitor from our panel assist?

If you have suffered a loss due to a breach of a legally binding contract, please get in touch with our team today. We will pass your case onto one of our panel firms who will consider your case based on the merits of your claim.

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