Jackson Tree, an Associate Solicitor at Irwin Mitchell specialising in construction law, considers "material breach".

There has been a general theme over the past decade or so of lawyers drafting overly complex contracts. Although they are sometimes technically brilliant, they can be almost impossible to interpret and administer.

In part, this trend reflects the cautious nature of lawyers and their desire to make sure every conceivable angle is covered. Termination provisions are particularly challenging for the drafter and in some cases, paradoxically the caution leads to short, wide and vague provisions, similar to the following:

Party A may give notice terminating this Agreement if Party B is in material breach or material breaches any part of this Agreement”. 

With this clause in mind, termination seems quite straightforward as all you have to do is prove that the breach is “material”.

Unfortunately it isn’t all that simple as a breach that one party considers “material” might be regarded as “minor” by another. Further, the courts provide little guidance on the interpretation of “material breach” with the test being:

Whether the breach is “material” having regard to the facts, nature and the consequence which flow from the breach[1]

Material” is quite difficult to define and subject to one’s interpretation. Things to consider, include:

  1. The breach must be serious in the sense that the non-performance would seriously impact on the innocent party and not be trivial – this applies to both time and costs; and

  2. In the specific context of non-payment, the sums involved must not be trivial nor minimal.[2]

There you have it, simple really? Well, no not really, especially when you look at how the courts have applied the test. For example:

Facts

Court’s Decision

Defendant failed to pay the claimant £332,000 for the construction of a heat and power plant

Material breach because:

· the amount outstanding was not trivial; and

· non-payment was not due to some mishap, mistake or misunderstanding[3]

NHS trust awarded an excessive number of service failure points against the Contractor and the Contractor sought to terminate on the basis this amounted to material breach

Court held material breach on the grounds that the Trust had exercised its power in an arbitrary, capricious or irrational manner[4]

Contractor unduly delayed the provision of a revised programme

Material breach by the Contractor because:

· breach continued for over 30 days

· not a minimal or inconsequential breach

· not an accident, mistake or caused by some other similar factor, but a deliberate commercial decision to await the claim for an extension of time and money.[5]

Landlord was not to make variations that materially affected the size of the rooms constructed. The Agreement for Lease said that a reduction of more than 3% was material

The fact that the reduction in room sizes was a material deviation from the specified room sizes did not mean that it was a material breach for the purposes of termination. Whether it was a material breach was a matter of fact and degree. [6]

It is clear from the above examples that “material breach” is fraught with uncertainty especially when coupled with the significant risks associated with termination. That may make it very difficult for a party wanting to terminate to work out whether they are entitled to do so. Getting that judgment wrong can be very costly.

 

Set some boundaries

 

The most practical solution is to set the boundaries as to what is and what is not considered “material breach” in your contract. That of course, is exactly what the drafter of the material breach clause is trying to avoid having to do. As he or she is, just passing the problem on to the party who has to operate and administer the contract.

[1] Glolite Ltd v Jasper Conran Ltd (1998)

[2] McConomy and others v ASE Plc [2017] EWCA 92

[3] Dalkia Utilities Services Plc v Celtech International Limited [2006] EWHC 63

[4] Mid Essex Hospital Services NHS trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200

[5] Vivergo Fuels Limited v Redhall Engineering Solutions Limited [2013] EWHC 4030

[6] Mears Limited v Costplan Services (South East) Limited [2019] EWCA Civ 502

A copy of this article first appeared in Architecture Magazine