Even in the best of times contract counter-parties do not always perform as expected. They are late, they supply the wrong goods, or they do not perform at all. Given that COVID-19 is causing massive supply chain disruptions, small business closures and economic hardships the analysis of what is a material breach is getting more important and more difficult.
California law
In California, a material breach of contract is generally a question of fact. That means it is a question for a jury or judge, as applicable. The trier of fact will try to figure out the following:
- How serious was the breach?
- How likely is it that the injured party will get substantial performance?
How serious is the breach?
Some breaches are easy to categorize. Things like minor delivery delays or slight variances in product specifications are not going to rise to the level of material breach. However, the analysis changes if we are talking about perishable items or products that require exacting precision. In that case even a slight delay may ruin the product or make it unusable.
Will there be substantial performance?
Substantial performance means the benefit of the agreement for the injured party. If the breach is serious and it causes performance to be very difficult then there is probably a material breach of the contract.
Prerequisite before there is material breach
The non-breaching party must have done everything it was required to do under the contract before it claims that the other side committed a material breach. This means any preconditions for the other party to perform must have been completed. These might include things like executing a contract or purchase order, providing the necessary product specifications or delivery address. Without doing its part under the contact, the injured party cannot successfully claim breach by the other party.
What if there is a material breach?
If there is a material breach and the injured party has fulfilled all of its obligations, then the injured party is discharged from its obligations under the contract. Oftentimes, this means the obligation to pay the non-performing party is removed.
The problem is that if the injured party is wrong it may be liable for damages to the breaching party.
Injured parties should consult their attorney before making the decision to not pay the breaching party.
COVID Impacts
Another problem in current times is that the breaching party may have the defenses of:
- Force majeure
- Impracticability
- Impossibility
Force majeure is a provision in the agreement that excuses performance by one or more parties in the event that circumstances fit into the definition of what excuses performance. The language of the contract must mention the event or circumstance that the breaching party is claiming as an excuse in order for the defense to be valid. In the case of COVID-19 words such as disease, pandemic, contagion, or the like would be needed for the clause to apply.
Impracticability is where performance is made impracticable as a result of extreme and unreasonable difficulty, expense, injury, or loss to one of the parties involved. Even if performance is possible it will be excused if performing would cause unreasonable difficulty, expense, injury, or loss.
Impossibility is closely related to impracticability as a defense and imposes the entire burden of proof on the breaching party.
What to do about a material breach?
Assuming that there is a material breach, the injured party has various options (from fastest to slowest):
- Negotiate with the breaching party to obtain compensation
- Negotiate with the breaching party to amend the agreement so that the breaching party can perform
- Enter into mediation with the breaching party
- Engage in binding arbitration with the breaching party
- Document the breach and file a lawsuit against the breaching party