A and B enter into a contract. B breaches the contract. A can cancel the contract if B committed a material breach. In other words, only a material breach allows the non-breaching party to cancel the contract. This is an unwritten rule under New York law contained in every contract, unless your contract specifically provides differently, see below.
So the million dollar question is, what is a material breach? This question is crucial when you are faced with B breaching the contract. Can you cancel? Or should you keep performing, as hard as that feels like in light of B’s audacity to breach his obligation? If it later turns out that B’s breach was not material, you yourself most likely committed a material breach by canceling and will have to suffer consequences. One consequence is that you lost the change for a breach of contract claim against B since such a claim requires that you yourself were performing faithfully under the contract.
New York Courts and Material Breaches of Contract
New York courts have said:
Under New York law, a non-breaching party’s obligation to perform is excused only when there is a material breach by the other party – i.e., where the breach is so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.
The breach has to go to the root of the contract. Conversely, technical non-compliance with a contractual condition does not excuse performance.
Whether a given set of facts constitutes a material breach of a contract is a question of law to be decided by the Court. This leaves a lot of uncertainty in determining beforehand what constitutes a material breach.
What I take from that:
Clear material breaches are not paying the purchase price or not providing the services agreed to. But if 60% of the services were performed it becomes a little less clear.
Not following minor rules in the contract about notice requirements or not performing exactly as the work order requires are probably minor breaches.
If a client came to me with a particular situation I would look to case law and try to find a situation similar to my client’s and see what the courts have said in those situations.
Can you agree beforehand on what is a material breach of contract and what is not?
Yes, if you have a written agreement you could provide specifically what constitutes a material breach and allows for termination. That would overrule the general principles outlined above. So you can provide that even a minor breach is considered material under your agreement and entitles you to terminate. But, one has to be careful in drafting these provisions to avoid giving the impression that any event not listed is automatically a minor breach. Since you can’t think of every event under the sun, this could likely exclude some events which you would have rather called a material breach with the option to terminate.
The solution is to add language that says something like “……and all other events deemed to be material breaches under the law.”