Contract Law / Avtalsrätt
Breach of contract vs. material breach of contract
Material breach of contract will typically determine if you have a right to liquidated damages and to terminate an agreement in advance - so what is a breach of contract, and when is it material?
Contractual relationships are complex and varied - therefore, the grounds for demanding damages and to have a right to terminate an agreement in advance, can´t be described in detail when parties enter into an agreement (typically). Instead the parties need to rely on principles that regulate the matter. Often the agreement will, in accordance with general contract law, state that a material breach from one party gives the other party a right to liquidated damages and/or a right to terminate the agreement.
So, what is then a breach of contract - and what is a material breach of contract? Given the above, the difference will be of key relevance with dramatically different results for the parties.
There is no absolute answer. It will be a case by case assessment. But we do have guidance. Some fundamental principles to consider are as follows.
Two main types of breach may constitute material breach;
If the breach changes the character/the nature of the contract, and what the non-breaching party reasonably can expect from the agreement.
If the breach leads to the non-breaching party (seriously) losing trust in the breaching party.
When assessing if indeed a material breach is at hand, and if it will give the non-breaching party a right to terminate the contract, you need to look at all relevant details in the specific case at hand. Some key matters to consider are:
What are the consequences of the breach? Will the non-breaching party not get fundamental parts of what it is entitled to under the agreement?
Has the breaching party rectified the breach or can it, and has it stated that it is willing to mend the breach without it unduely impacting the non-breaching party?
Was the breach made willfully or by negligence?
Does the consequence of terminating the agreement stand in proportion to the breach, or does it come across as being to severe as a consequence for the breach?
Is the relationship between the parties significantly damaged due to the breach?
What will a general interpretation of the contract provide in relation to the breach - looking at (i) the parties’ joint intention when entering into the agreement, (ii) the wording of the agreement, (iii) the structure of the agreement, (iv) non-mandatory regulation, and (v) the purpose of the clause in question (that the party has committed a breach against).
To give some illuminating examples.
A company enters into an agreement with a car distributer to get 10 new cars for its newly employed sales staff, who needs those cars in for their everyday sales operations and who starts their work in August immediately after the summer break, three months away. The cars have been promised for delivery by mid-July, i.e. in two and a half months. Come early August, the cars are still missing. Let’s look at two responses that the distributer gives when the buyer calls asking for the cars.
In scenario (a), the distributer says that he does not know where they are and blames the manufacturer – but two days later the buyer finds out that the distributer got a better price from another purchaser so he sold them and figured he would order new cars for the buyer that would get what he wanted only a that they would arrive end August.
In scenario (b) the distributer says that he has been chasing the cars day and night and that they will be delivered first thing next Monday, so that the buyer still gets them before the sales staff has started working again.
In both cases we have a late delivery of the ordered cars. In case (a) it should reasonably be argued that it is a material breach and in case (b) it should be argued that it is not a material breach. So the buyer should have a right to terminate the agreement in case (a) but not in case (b).
Conclusion The devil is in the details and you should, when entering into a contract of relevance, consider what are the most important clauses and what would be the most important grounds for you to want to terminate the agreement or to safe guard against the other party having a right to terminate the agreement against you. You may, already when entering the contract state that specific breaches are to be considered as material breaches of contract.
Stockholm, 2023-11-21
Author: Katarina Strandberg
Contractual relationships are complex and varied - therefore, the grounds for demanding damages and to have a right to terminate an agreement in advance, can´t be described in detail when parties enter into an agreement (typically). Instead the parties need to rely on principles that regulate the matter. Often the agreement will, in accordance with general contract law, state that a material breach from one party gives the other party a right to liquidated damages and/or a right to terminate the agreement.
So, what is then a breach of contract - and what is a material breach of contract? Given the above, the difference will be of key relevance with dramatically different results for the parties.
There is no absolute answer. It will be a case by case assessment. But we do have guidance. Some fundamental principles to consider are as follows.
Two main types of breach may constitute material breach;
If the breach changes the character/the nature of the contract, and what the non-breaching party reasonably can expect from the agreement.
If the breach leads to the non-breaching party (seriously) losing trust in the breaching party.
When assessing if indeed a material breach is at hand, and if it will give the non-breaching party a right to terminate the contract, you need to look at all relevant details in the specific case at hand. Some key matters to consider are:
What are the consequences of the breach? Will the non-breaching party not get fundamental parts of what it is entitled to under the agreement?
Has the breaching party rectified the breach or can it, and has it stated that it is willing to mend the breach without it unduely impacting the non-breaching party?
Was the breach made willfully or by negligence?
Does the consequence of terminating the agreement stand in proportion to the breach, or does it come across as being to severe as a consequence for the breach?
Is the relationship between the parties significantly damaged due to the breach?
What will a general interpretation of the contract provide in relation to the breach - looking at (i) the parties’ joint intention when entering into the agreement, (ii) the wording of the agreement, (iii) the structure of the agreement, (iv) non-mandatory regulation, and (v) the purpose of the clause in question (that the party has committed a breach against).
To give some illuminating examples.
A company enters into an agreement with a car distributer to get 10 new cars for its newly employed sales staff, who needs those cars in for their everyday sales operations and who starts their work in August immediately after the summer break, three months away. The cars have been promised for delivery by mid-July, i.e. in two and a half months. Come early August, the cars are still missing. Let’s look at two responses that the distributer gives when the buyer calls asking for the cars.
In scenario (a), the distributer says that he does not know where they are and blames the manufacturer – but two days later the buyer finds out that the distributer got a better price from another purchaser so he sold them and figured he would order new cars for the buyer that would get what he wanted only a that they would arrive end August.
In scenario (b) the distributer says that he has been chasing the cars day and night and that they will be delivered first thing next Monday, so that the buyer still gets them before the sales staff has started working again.
In both cases we have a late delivery of the ordered cars. In case (a) it should reasonably be argued that it is a material breach and in case (b) it should be argued that it is not a material breach. So the buyer should have a right to terminate the agreement in case (a) but not in case (b).
Conclusion The devil is in the details and you should, when entering into a contract of relevance, consider what are the most important clauses and what would be the most important grounds for you to want to terminate the agreement or to safe guard against the other party having a right to terminate the agreement against you. You may, already when entering the contract state that specific breaches are to be considered as material breaches of contract.
Stockholm, 2023-11-21
Author: Katarina Strandberg