UK businesses are facing increasing financial pressure, and with economic uncertainty set to continue, many will be looking for ways to terminate their written agreements – especially if the counterparty is not performing its side of the bargain and is in breach of contract. But how 'bad' does a breach have to be before a contract can be terminated?
In most instances, a material breach of contract must have occurred before a party can terminate. But how can you tell if a breach is material or not? Here are five things to look for when faced with a breach of contract.
1. Explicit contract terms
Contracts may state that breach of certain terms will be material. For example, a common provision is that time will be 'of the essence' when it comes to payment. If properly drafted, a party's failure to pay on time may then constitute a material breach of contract and trigger specific rights for the innocent party. If time is not 'of the essence' then the innocent part can still seek to turn a non-material breach into a material breach by setting a deadline by which the non-material breach must be remedied.
2. A term going 'to the root' of the contract
If there isn't express provision in the contract, then parties should consider whether the breach relates to a term which goes 'to the root' of the contract. This is a flexible test and requires consideration of the term in the overall context of the agreement and its relationship to other contractual terms.
3. The nature of the breach
If the term breached goes to the 'root of the contract', the facts and circumstances surrounding the breach will be important in deciding whether there's a material breach. The commercial context of the contract and the breaching party's conduct, for example, may be relevant.
4. Consequences of the breach
It's not necessary to prove material loss, but the consequences of any breach may be a useful factor in establishing material breach.
Whether a breach is material will often depend on the facts and circumstances, so it's often unclear to parties whether a breach is material. Ultimately, if a contract is wrongfully terminated, then the party terminating the agreement will themselves be in material breach. Legal advice should therefore be obtained as soon as possible if faced with a breach of contract.
If you require advice in relation to breach of contract, please do not hesitate to get in touch with our Real Estate Litigation team or your usual Brodies' contact.
