‘Material Breach’ of Contract: Action Required
Commercial contracts often include provision for termination in the event of a material breach – but what does this mean in practice? An important ruling1 clarifies that merely expressing an intention to perform contractual obligations does not in itself remedy a breach – action is required.
At common law, a material breach is treated as a contractual breach that leads to substantial and serious consequences for the parties not in breach. However, the parties can have different opinions on what amounts to a material breach, reflecting their own situations and perspectives.
The remedy for a material breach depends on the contractual terms. The contract may allow the innocent party to terminate on a material breach, but if it is silent, they may be entitled to claim damages for losses caused by the breach and the right to terminate the contract.
So what happened in this case?
The parties entered into a consultancy agreement, under which the claimant would provide structuring and implementation of various equity finance strategies.
The agreement allowed termination by either party “having materially breached any of the provisions of this Agreement and not having remedied such breach within 21 days after the service of written notice by the first Party requiring the same to be remedied”.
A material breach was alleged against the claimant, who denied the assertion that he had stated an intention not to perform his contractual obligations. He said he intended to fulfil his obligations, therefore any breach should be considered remedied. However, notwithstanding his stated his intentions, the claimant provided no further services.
The High Court found eight reasons for concluding that there had been a material breach of contract and the appeal judges upheld the ruling. The specified breach by the claimant was his refusal to provide the services – this was the “actual state of affairs”. The appropriate remedy was for the claimant to actually provide the required services, which he did not do.
The Court of Appeal said that his solicitors’ letter stating that he confirmed the intention to perform his contract obligations did not remedy the breach - actual performance was necessary.
What does this mean?
It is important for the contractual parties under a commercial agreement to understand what amounts to a material breach and what constitutes a satisfactory remedy for an alleged breach. If the party in breach does not take action indicative of an expressed intention to remedy the breach, they may not be able to defend a potential claim for a contractual breach and termination .
Should a dispute arise, maintaining communications with the other side is vital to avoid misunderstandings and inaction potentially being misconstrued. It would be prudent in these situations to take specialist legal advice.
1 Bains v Arunvill Capital Ltd [2020] EWCA Civ 545
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