Contracts are critical for businesses. They govern your relationships with vendors, clients, and others. When one party doesn’t hold up their end of the deal, it can create losses for everyone else involved — whether that’s in the form of lost time, lost money, or lost customers.
Not all contract breaches create the same level of woe, however. You — and the court — may approach a minor contract breach differently than you would a major one. That’s why it’s important to understand the difference between material and non-material contract breaches.
Discover the differences between these two types of contract breaches below, and learn when you might want to involve business formation and planning attorneys to help you
What Is a Material Contract Breach?
A contract breach of any type is a failure to hold up the provisions of a contract. If the breach is big enough that the main purpose of a contract is not met, the breach is considered to be material.
Let’s look at some examples of potential material breaches to better understand this premise.
- A business contracts with a factory to purchase 50,000 metal rods measuring two feet long by September 30. The factor delivers 50,000 metal rods on time, but they are all one foot long. This is likely a material breach, especially if the business specifically needs two-foot rods to make its products work.
- A larger company signs an agreement to buy a smaller company. The purchase contract is for the company’s real (property, equipment, inventory) and intangible (skills, knowledge, brand reputation) assets. The smaller company’s owner is involved in a scandal that decimates the brand’s reputation. This may be a material breach, as it could significantly alter the overall value of the business.
What Is a Non-Material Contract Breach?
A non-material breach is still a legal contract breach, but it has a more minor impact to the overall outcome. The purpose of the contract is still achieved, though perhaps not to the full satisfaction of one or more parties.
Consider the same examples from the previous section, this time with non-material breaches:
- The factory delivers 45,000 metal rods to specification by the September 30 deadline and delivers the remaining 5,000 rods by the next week. Depending on the facts of the case, this may be deemed a non-material breach. The contract was ultimately fulfilled, though the business may have lost some time or money or experienced inconvenience due to the delay.
- In the situation involving the purchase of the smaller company, one of the machines used in the company’s processes breaks before the agreement can be completed. While this may cause some expense to the buyer, it’s possible the original purpose of the contract can still be met. Depending on the details, this might be considered a non-material breach.
How Do the Remedies Differ for Each Type of Contract Breach?
The legal ramifications of a material breach are very different from those associated with a non-material breach. If a party to a contract can demonstrate that another party breached the contract materially, the non-breaching party can exit the contract without penalty. The non-breaching party cannot exit the contract without penalty if only a non-material breach occurred.
The breaching party may be held liable for losses and other damages in the case of a material breach. In the case of a non-material breach, the breaching party is typically only required to “make good” on the breach.
Consider the example above about the business purchase. If the buyer can demonstrate that the seller engaged in a willful breach that substantially reduced the value of the business for sale, the buyer may be able to get out of the M&A agreement altogether. The buyer might also be able to seek compensation for its wasted time and expenses and any damage to its own brand or business caused by the sellers breach of contract.
However, in the case of a simple machine failure deemed a non-material breach, the contract is upheld. The seller may need to repair or replace the machine or compensate the buyer for doing so, but that would typically be the extend of any damages.
Legal Help Negotiating and Enforcing Business Contracts
As you can see, the stakes are very different depending on the type of breach you’re dealing with. The lines can also be thin — and subjective — when it comes to what is a material breach and what is a non-material breach.
Working with a business lawyer when you’re planning for, executing, or following through on contracts can help you avoid costly mistakes, reduce the risks of breaches, and hold people accountable when they breach an agreement with you.
Whether you’re looking to close a big deal or want to purchase a new business, reach out to Crow Estate Planning & Probate for help. Our business formation and planning team can ensure your contract foundation is solid or help you navigate contract law if you think someone has breached yours.