Material breach of contract: What it is and why it matters

Not all contractual breaches are equal. Find out what makes a breach material and how that determination can affect your rights.

Contracts are central to the success of many business transactions. When the other party fails to live up to their contractual obligations, you may end up shouldering significant financial losses.

However, not all breaches are equal. You aren't necessarily justified in terminating the contract simply because the other party failed to fully uphold their end of the bargain. Your rights and options for dealing with a contractual violation will depend on the extent of the breach.

The law makes a key distinction between material (or total) and nonmaterial (or minor) breaches. This difference matters because you can only get out of the contract if the other party's breach was material. You may still be entitled to compensation for minor breaches, but the damages are usually far more substantial when the breach is material.

Classifying a material breach

So when is a contractual breach considered material? It depends on the unique circumstances of each situation. A breach is generally material if it defeats the fundamental purpose of the contract (when interpreted in a reasonable light).

For example, suppose you own a toy store. You have a contract with a wholesaler to ship you toys on the first of every month. One month, the wholesaler runs into a problem with the shipment, and the toys arrive a few days late. The delay would likely not amount to a material breach of contract because you could still sell the toys.

However, suppose your store sells Christmas trees, and the trees don't arrive until after New Year's. In this case, the breach would be material, as it would defeat the entire purpose of the contract.

Navigating gray areas

Many breach of contract cases involve gray areas. In determining whether a material breach occurred, Oregon case law outlines five factors for consideration:

  • Whether the breach deprives you of the benefit of the bargain (that is, whether it destroys the value you reasonably expected to receive out of the contract)
  • Whether adequate compensation is available for your losses
  • Whether the party who failed to perform will suffer forfeiture
  • Whether that party can remedy the breach
  • Whether that party has acted in good faith

Applying these factors requires a careful factual analysis. There are rarely black or white answers, and missteps can cost you valuable rights. As a result, it's important for business owners to consult with legal counsel whenever they encounter contractual issues.