We are living in a material world, but am I a material breach?

Trying to terminate a contract when one of the parties has done something to breach the terms of that contract is a complicated process. Many contracts contain provisions which permit the parties to terminate the contract where one party is in “material” or “serious” breach. In some circumstances, parties will also have rights to terminate contracts at common law where the other party is in “repudiatory” breach. In this article we will be looking at the meaning of these different types of breach.

Types of breach

A “repudiatory breach” is the most serious type of breach a party can commit and gives rise to a common law entitlement to the other party to terminate the contract immediately (even where the contract does not itself contain any termination provisions, or only permits termination on notice). A breach is classified as “repudiatory” if it falls into one of the following categories:

• It is a breach depriving the innocent party of substantially all the benefit of the contract;
• It is a breach of a contractual condition;
• A party refuses to perform all or substantially all its obligations under the contract; or
• A party has acted or by default (i.e. not acted) in such a way as to disable itself from performing its contractual obligations.

In addition to a repudiatory breach, the parties can also agree in a contract that it can be terminated based on something that is less than a repudiatory breach. This is what is called a material breach. However, just because a contract states that a breach is material, this will not automatically mean the contract can be terminated on that basis.

This principle has led to a huge amount of case law on what is and is not a material breach. Despite the large number of cases considering what is a material breach, no clear definition has been developed. Instead, a “sliding scale” measurement has been adopted, where a material breach must be “more than trivial” (at the lower end) and can be serious enough that it could be considered a repudiatory breach (at the higher end).

To determine where a breach falls on this sliding scale, the courts will analyse the “total factual matrix”. This involves looking at the terms of the contract and the circumstances of the case; every case will turn on its own facts. Some other factors that would suggest a material breach is where the issues are “substantial” or a “serious matter” or involve something that could not be put right in the future.

Case studies of material breaches

A recent example of a breach which the courts classified as being material is found in the case of THJ Systems Ltd v Sheridan [2023] EWHC 927 (Ch).

This case concerned a contract to provide software training. The contract required that in the training presentation, the logo of the software was prominent and visible on the training materials and there was a slide that included the company’s details including a copyright notice. The training materials did not include the information required in the contract and it was decided this was a material breach.

Conversely the courts did not think there was a material breach in the case of Riverrock European Capital Partners LLP v Harnack [2022] EWHC 3270 (Comm). This claim involved a contract between an investment firm and a company set up to provide advice on an investment fund. The alleged breach of contract was that the company had been struck off because of a failure to file its confirmation statement by the required deadline. The court decided that the breach was not material because it could be easily remedied and there was no loss to the fund or the investors. It also became apparent during the case that the investment firm wanted to terminate the contract anyway, and used the company being struck off as an opportunity to justify terminating the contract.

Lessons to be learned

As can be seen from these cases there is a great deal of uncertainty when it comes to defining a material breach, which makes it even more important to provide clear definitions within the contract itself. This principle was endorsed by the court in Winkworth Franchising Ltd v Goble [2023] EWHC 2883 (Comm).

The contract in that case was a franchise agreement between an estate agency brand and the franchisee who operated in certain areas of London. The contract provided that the franchisee was entitled to extend the franchise period, and the agency could refuse that extension if the franchisee was in breach of the contract. The franchisee served a notice to extend the contract, and the agency refused on the grounds that the franchisee had failed to provide copies of its accounts within the time period specified in the contract. The court stated that it could not rewrite an agreement between the parties and the breach of a specific obligation should be treated as being a material breach. Therefore, the franchisee was not entitled to extend the contract

The lesson to be learnt from cases that decide on material breaches, is to avoid ambiguity within a contract when you want to terminate based on something that is not a repudiatory breach.

Whether you are relying on a repudiatory or material breach, terminating a contract correctly is a very difficult process. There can be instances where if a contract is terminated without valid grounds, then this could lead to the other party terminating the contract and claiming damages. Therefore, taking legal advice at an early stage is important to avoid a costly dispute later in the process.

If you would like more information on terminating contracts, please contact our Dispute Resolution solicitors.

This article was written by David George and Emma Butcher.