Doctrine of Material Breach

INTRODUCTION

Section 2(h) of the Indian Contract Act, 1872 defines contract as “An agreement enforceable by law is a contract”. In common parlance, a contract is an agreement that stipulates legally enforceable rights and obligations for the parties involved.? Failure by either party to fulfill their responsibilities as outlined in the contract constitutes a breach of contract.?

In this article, we will be talking about Material Breach of a contract. A material breach, also known as a substantial breach, is a significant and fundamental violation of the terms and conditions of a legally binding contract. It occurs when one party to the contract fails to perform an essential aspect of their obligations as stated in the agreement. Material breaches are crucial in contract law because they have significant legal consequences for the parties involved.

In National Power plc v. United Gas Company Ltd. (1998) All ER (D) 321, Justice Colman had analyzed the term “material breach” to mean “a serious violation of any of the guilty party's responsibilities,” allowing for? the termination of the contract if the remedy for such a breach had not been started within seven days.?

The Hon’ble Court determined that the ability to remedy a material breach distinguished it from a repudiatory breach, and that it was not commercially reasonable to limit the innocent party's common law rights in the event of a repudiatory breach. Accordingly, the term "material breach" must be used to describe a non-repudiatory breach.

ILLUSTRATIONS

1. A material breach of the contract would occur if the buyer has paid the seller in full but the seller decides to abruptly not sell.
2. An executed leave and license agreement will be a material breach of contract if the licensee stops paying the landlord's rent.

CRITERIA

There are four requirements that must be met in order to establish a material breach of a contract:

1. A valid Contract between the parties;
2. The aggrieved party has performed its part of obligations as per the Agreement;
3. The breaching party has breached important obligations as per the Agreement; and;
4. The aggrieved party suffered damages and losses owing the breach of the Agreement.??

REMEDIES?

The aggrieved party may be eligible to claim several remedies if they have suffered losses due to a material breach.

Common remedies are:?

1. Obtaining financial compensation (damages)
2. Specific performance
3. Request for an Injunction

?The courts have discretionary power to grant these remedies. However, damages are an exception.? If the contract has a ‘agreed damages clause,’ the amount can often be established in advance.

CASE LAWS

In the case of Dalkia Utilities Services Plc v Celtech International Ltd (2006) EWHC 63 (Comm), the High Court determined that failing to make three consecutive monthly payments amounted to a significant breach of Celtech's obligations. This was because the combined total of these missed payments was deemed to be "neither trivial nor minimal."?

In Compass Group UK and Ireland Ltd V Mid Essex Hospital Services NHS Trust (2013) EWCA Civ 200, LJ Jackson articulated that the term 'material breach' signifies a breach of contract that surpasses mere triviality but need not necessarily be repudiatory. In the context of this provision, 'material breach' denotes a breach that is substantial and significant. It must be a matter of gravity rather than of minimal consequence.?

In the recent case of Stobart v Esken (2022) EWHC 1036 (Ch), it was established that there had been no material breach because the types of breaches committed could potentially be rectified in the future.?

The same principle was upheld in the recent legal matter of River Rock European Capital Partners LLP v Harnack (2022) EQHC 3270 (Comm). In this case, it was determined that the dissolution of a company did not qualify as a material breach of the contract, as the company had the potential to be reinstated on the register.?

CONCLUSION

The doctrine of material breach is a crucial concept in contract law that ensures fairness and accountability in contractual relationships. Parties entering into contracts should be aware of their obligations and understand the consequences of failing to meet them. By doing so, they can help promote trust and confidence in the business and legal world, ultimately facilitating the smooth functioning of commercial and personal transactions.