| The term "material breach" is a familiar one. It | | | | ➢ That it won't run customer's software? |
| appears routinely in contracts, generally in the | | | | ➢ Does it matter whether that software |
| termination provisions: | | | | is incidental or critical to customer's operations? |
| "Either party may terminate this agreement if the | | | | Lawyers have a method for finding answers to |
| other commits a material breach of any term | | | | questions such as these. They call it "discovery." It |
| hereof, and fails to cure such breach within thirty | | | | is one of the more expensive and time consuming |
| days of receiving written notice of the existence | | | | parts of a lawsuit. If there is enough money at |
| thereof." | | | | stake, vendor's lawyers will leave no file |
| At first reading, this provision appears to be clear, | | | | untouched, and no employee not-interviewed, in |
| fair and easily enforced. It is mutual - it protects | | | | an effort to show that the alleged breach is not |
| either party. It provides notice and an opportunity | | | | material - that the failure (assuming there was |
| to cure, in the event the breach was inadvertent. | | | | one) did not cause real and substantive harm to |
| It permits termination only for serious - "material" | | | | customer. Alternatively, vendor's lawyers will |
| - breaches. But what is a "material breach"? | | | | argue that the product or service complained |
| In the legal world, a breach is failure to fulfill an | | | | about meets the standards set forth in the |
| obligation set forth in a contract. A "material | | | | contract, or that customer never disclosed that |
| breach" is a failure so severe that it threatens the | | | | requirement X would be central to the deal. |
| value of the entire contract. For example, if a | | | | Vendor's lawyers will suggest that, at best, |
| customer orders one ton of steel, she will | | | | customer is mistaken or confused; at worst they |
| probably not want to terminate the contract if | | | | will suggest that customer is making a dishonest |
| the vendor delivers only 1, 998 pounds, rather | | | | attempt to escape the contract, for whatever |
| than the 2,000 expected. Vendor might issue a | | | | reason. |
| credit or refund or promise to deliver the missing | | | | Which delivers us to a quandary: What is a |
| material immediately. Or customer might overlook | | | | drafter to do if the officially sanctioned term |
| the missing two pounds as inconsequential. In | | | | "material breach" is simply an invitation to dispute |
| contrast, if the vendor delivers one ton of brass | | | | and litigation? |
| rather than steel, customer may wish to cancel | | | | Change the definition. |
| the order or terminate the supply contract. If we | | | | The problem is not the term itself, but the |
| assume the customer needs the steel for an | | | | meaning given that term by the law. But, in |
| office tower, the brass simply will not suffice; it is | | | | commercial contracts, laws, regulations, and legal |
| simply not strong enough. Clearly a material | | | | definitions are generally DEFAULT provisions - |
| breach. | | | | they apply only if the parties do not set their own |
| Or is it? | | | | rules or definitions. (Within limits. A contract to |
| Assume the contract says "metal," rather than | | | | commit a crime is still a crime, and unenforceable.) |
| "steel." Brass is a metal. | | | | Which of these provisions would you prefer to |
| Assume customer wants to terminate the | | | | administer and enforce? |
| contract because she needs the steel | | | | "Either party may terminate this agreement if the |
| immediately, and lacks the time to wait for | | | | other commits a material breach of any term |
| vendor to deliver the correct product. Is timely | | | | hereof, and fails to cure such breach within thirty |
| and accurate delivery a condition of the contract? | | | | days of receiving written notice of the existence |
| Is it a MATERIAL condition of the contract? Put | | | | thereof." |
| another way, did vendor know that the contract | | | | OR |
| required him to deliver the right product, at the | | | | "Either party may terminate this agreement if the |
| right time? | | | | other commits a material breach of any term |
| What if the contract simply calls for "steel"? Does | | | | hereof, and fails to cure such breach within thirty |
| it matter whether vendor delivers the latest | | | | days of receiving written notice of the existence |
| space-age alloy or a truckload of rusting auto | | | | thereof. |
| parts? | | | | "For the purposes of this provision, 'material |
| Let's change industries. Customer orders a | | | | breach' shall mean...." |
| "computer." | | | | Admittedly, the latter is more difficult to complete. |
| ➢ Does it matter that the new device | | | | Each party must ask itself "What would cause me |
| processes 16 million instructions per section, when | | | | to want to call off this deal?" Then they must |
| the industry standard is 25 MIPS? | | | | persuade the other party to include those |
| ➢ Does it matter if customer paid a | | | | provisions in the agreement. Both steps run |
| discount price? | | | | counter to the common understanding of the deal |
| ➢ Does it matter if customer paid a | | | | process - "Get it done" and "Be positive." A more |
| premium price? | | | | realistic rule is probably "Be thorough." The more |
| ➢ Does it matter if the product is | | | | time spent up-front spelling out the details of a |
| delivered "a little" late? | | | | deal - and identifying the key parts of the deal - |
| ➢ That is "slightly" over budget? What is | | | | the less time will be spent arguing about perceived |
| "slightly"? | | | | failings. |
| ➢ That it "doesn't quite" work? What is | | | | Or, as our parents always taught us: "Get it right |
| "doesn't quite"? | | | | the first Copyright 2006, Thomas J. Hall. All rights |
| ➢ That it runs fine as a stand alone, but | | | | reserved. |
| won't interface with customer's systems? | | | | |