21st April 2023
Whether a breach of contract is ‘material’ (or ‘substantial’ – in this context, the terms are generally interchangeable) can be difficult to ascertain. But the answer can have a major impact on the consequences flowing from such a breach. The issue crops up often in commercial disputes. In this briefing, Walker Morris’ Commercial Dispute Resolution experts Gwendoline Davies and Kieran Craddock, and Commercial specialist Ryan Doodson, explain how the approach adopted by the courts can offer practical assistance for contract negotiators and commercial parties.
The basic, common law position  is that a contract can only be terminated if the actions of a breaching party go right to the core of the contract and substantially deprive the innocent party of the benefit the contract was intended to confer. (Such a breach is also known as a repudiation, or a repudiatory breach.)
To allow termination, as opposed to just financial compensation, for breaches which are less drastic than repudiatory breaches, but that nevertheless still have a significant impact, parties often agree express terms providing for termination in the event of a material breach of contract. But what constitutes a ‘material’ breach?
There is no universal legal definition for material breach of contract. Meaning will therefore be a question of interpretation, on a case by case basis. Over time, the courts have adopted a varied approach to interpreting materiality:
So, in light of the court’s varied approach and the significant subsisting uncertainty, how can a contract negotiator or contracting party determine whether a breach of contract is material?
If there’s no express contractual definition for ‘material’ breach of contract, the following factors should be taken into account:
For all practical purposes, the courts have a considerable degree of discretion when deciding whether or not a breach of contract is material.
One option to minimise the uncertainty that accompanies that level of discretion is to try to eradicate ambiguity, by expressly defining within the agreement what constitutes a material breach of contract.
Parties can achieve this by including wording to establish a scope of any triggering breach (material or otherwise) and/or by setting out specific circumstances which would give rise to a material breach.
A common approach is for the parties to identify any specific contractual obligations that are, in the parties’ opinion, so significant that any breach would have important consequences and should, therefore, give rise to the ability for the innocent party to terminate. Such obligations will vary from contract to contract, depending upon the context, the parties and the particular subject matter of the contract. For example, in a contract containing service levels, the parties – or at least the party seeking to enforce the service levels – may wish to specify that certain failures to achieve the service levels will amount to material breach of contract. Similarly, in a distribution agreement where the distributor is prohibited from distributing into certain territories, the supplier may wish to define breach of this key obligation as material.
Where parties identify specific scenarios in this way, it may be prudent to expressly clarify that the defined list is not exhaustive and is without limitation, but this will be a question of individual preference. This tactic should provide the option for a party to argue that a breach not specifically called out may still be designated material by the party seeking to terminate. However, drafting-in this ‘wiggle room’ does still leave some uncertainty and some scope for dispute.
Walker Morris has a large team of specialists, experienced in all aspects of commercial negotiation and transactional work, as well as litigation and dispute resolution across all sectors.
Speaking to our Commercial team at the outset of any contract negotiation, or in relation to any contract review process, can ensure that your contracts provide the certainty and/or the flexibility your business requires.
If/when disputes do arise, our Commercial Dispute Resolution experts can provide strategic dispute resolution advice and assistance with the conduct of litigation or any alternative dispute resolution  process, to help you to achieve a commercially successful resolution.
If you have any queries about the points raised in this briefing or if you would like specific advice relating to any contractual dispute, please contact Commercial Dispute Resolution specialists Gwendoline Davies or Kieran Craddock.
 that is, in the absence of express statutory or contractual provisions
 this decision was made in reliance on a much earlier case, Schuler v Wickman Machine Tools Sales (1974)
 alternative dispute resolution, often referred to as ADR, or NDR/ ‘negotiated dispute resolution’, simply refers to dispute resolution by a process other than court proceedings
(FCIArb) Head of Commercial Dispute Resolution