What is a “Material Breach” of a Contract?

Many written agreements refer to remedies being available if there is a “material breach” of the contract. Although every contract is different, below are a few tips for how to draft what constitutes a material breach and allows the non-breaching party to terminate the contract:

• It is essential to clearly outline the specific actions or occurrences that constitute a material breach. This allows the non-breaching party to terminate the contract without fear of having to pay termination penalties. Providing a clear list of material breaches also assists the court in enforcing these provisions, as well as providing guidance in determining if an unlisted breach should be considered to be material.
• The agreement should require notification to be sent to the breaching party prior to termination of the contract when a material breach occurs. The party in breach should be given a reasonable opportunity to cure the breach. If notification allows the problem to be fixed without delay and expense, both parties are better off.
• In addition to outlining what constitutes a material breach, the contract should also state general breach of contract terms. In other words, what operational standards must be met in order for the parties to measure performance under the agreement?
• Avoid using ambiguous terms in defining the expected standards of performance. For example, set objective standards instead of “best practice.”
• The contract should detail meaningful service standards. If no service standards are given, it minimizes the importance of missed services. It is also wise to avoid using service standards as liquidated damages for a breach. In other words, you do not want to create a situation where paying the liquidated damages is an acceptable alternative to performing under the contract.
• If specified service levels are not met, the contact should allow the non-breaching party to terminate the contract.