In the legal world, a breach is failure to fulfill an obligation set forth in a contract. A “material breach” is a failure so severe that it threatens the value of the entire contract. For example, if a customer orders one ton of steel, she will probably not want to terminate the contract if the vendor delivers only 1, 998 pounds, rather than the 2,000 expected. Vendor might issue a credit or refund or promise to deliver the missing material immediately. Or customer might overlook the missing two pounds as inconsequential. In contrast, if the vendor delivers one ton of brass rather than steel, customer may wish to cancel the order or terminate the supply contract. If we assume the customer needs the steel for an office tower, the brass simply will not suffice; it is simply not strong enough. Clearly a material breach.
Or is it?
Assume the contract says “metal,” rather than “steel.” Brass is a metal.
Assume customer wants to terminate the contract because she needs the steel immediately, and lacks the time to wait for vendor to deliver the correct product. Is timely and accurate delivery a condition of the contract? Is it a MATERIAL condition of the contract? Put another way, did vendor know that the contract required him to deliver the right product, at the right time?
What if the contract simply calls for “steel”? Does it matter whether vendor delivers the latest space-age alloy or a truckload of rusting auto parts?
Let's change industries. Customer orders a “computer.”
Does it matter that the new device processes 16 million instructions per section, when the industry standard is 25 MIPS?
Does it matter if customer paid a discount price?
Does it matter if customer paid a premium price?
Does it matter if the product is delivered “a little” late?
That is “slightly” over budget? What is “slightly”?
That it “doesn't quite” work? What is “doesn't quite”?
That it runs fine as a stand alone, but won't interface with customer's systems?
That it won't run customer's software?
Does it matter whether that software is incidental or critical to customer's operations?
Lawyers have a method for finding answers to questions such as these. They call it “discovery.” It is one of the more expensive and time consuming parts of a lawsuit. If there is enough money at stake, vendor's lawyers will leave no file untouched, and no employee not-interviewed, in an effort to show that the alleged breach is not material – that the failure (assuming there was one) did not cause real and substantive harm to customer. Alternatively, vendor's lawyers will argue that the product or service complained about meets the standards set forth in the contract, or that customer never disclosed that requirement X would be central to the deal. Vendor's lawyers will suggest that, at best, customer is mistaken or confused; at worst they will suggest that customer is making a dishonest attempt to escape the contract, for whatever reason.
Which delivers us to a quandary: What is a drafter to do if the officially sanctioned term “material breach” is simply an invitation to dispute and litigation?
Change the definition.
The problem is not the term itself, but the meaning given that term by the law. But, in commercial contracts, laws, regulations, and legal definitions are generally DEFAULT provisions – they apply only if the parties do not set their own rules or definitions. (Within limits. A contract to commit a crime is still a crime, and unenforceable.)
Which of these provisions would you prefer to administer and enforce?
“Either party may terminate this agreement if the other commits a material breach of any term hereof, and fails to cure such breach within thirty days of receiving written notice of the existence thereof.”
“Either party may terminate this agreement if the other commits a material breach of any term hereof, and fails to cure such breach within thirty days of receiving written notice of the existence thereof.
“For the purposes of this provision, 'material breach' shall mean....”
Admittedly, the latter is more difficult to complete. Each party must ask itself “What would cause me to want to call off this deal?” Then they must persuade the other party to include those provisions in the agreement. Both steps run counter to the common understanding of the deal process - “Get it done” and “Be positive.” A more realistic rule is probably “Be thorough.” The more time spent up-front spelling out the details of a deal – and identifying the key parts of the deal – the less time will be spent arguing about perceived failings.
Or, as our parents always taught us: “Get it right the first time.”
Copyright 2006, Thomas J. Hall. All rights reserved.