A breach is the non-performance of a contract or a provision in the Contract. There are two types of breaches, minor and material. A minor breach is usually a cause for the collection of damages. A material breach is a failure to perform that goes to the heart of the Contract and may be cause for both termination of the contract and claim damages. In contract drafting how do you establish something as a material breach, which if uncured would give the right to terminate for cause?
If you say nothing in your contract, it would be up to the court to determine whether it was minor or material and whether you would have the right to terminate the agreement. I don’t like to leave issues to chance, nor do I want a court to determine after the fact that I didn’t have the right to terminate the agreement. So within the agreement I want to use language to establish that right when it’s needed. Since termination is a right, not a duty, I want to use that right to drive the behavior I want from the supplier.
Let me give you an example, if you have a supplier who fails to deliver on time, money damages for the late delivery may be sufficient. If you have a supplier who you committed to purchase a high volume from and they are consistently not delivering on time, you probably want the right to terminate the agreement. If the Contract had language that said “time and rate of delivery of Products is of the essence of this Contract, and failure to meet time and rate of delivery shall be a material breach of this contract. You could establish the right to terminate for cause in that section, or more likely you would establish that right in a separate termination for cause section.
For example a termination for cause section could read: “Either party may terminate this Agreement, without any cancellation charge, for a material breach of this Agreement by the other party. Such termination will be effective at the end of a thirty (30) day written notice period if the material breach remains uncured.” In doing that you can spell out the specific sections, where the breach of that section constitutes a material breach.
Should breach of warranties be a material breach of the contract? In my opinion, that depends upon the warranty and the impact of the breach.
For example a contract may have a warranty against defects in material and workmanship.
Should a breach of that be both a material breach and also give rise to the right to terminate the agreement? While money damages might seem sufficient, what if the supplier wasn’t repairing or replacing any defective products? Would you want the right to terminate the agreement.
Standard Contracts also contain a number of legal warranties such as:
The party signing the contract has the right to enter into the contract.
Performance will comply with contract, laws, regulations, etc.
Product or Service doesn’t infringe the Intellectual Property rights of a 3rd party.
The Product or Service conforms to warranties and specifications of the contract.
Free of defects in design and safe for use.
The Product is new, and not re-conditioned.
Which of these would you want the right to terminate?
Always think about the impact of a breach. For the above list of warranties how would you respond?
The party signing the contract has the right to enter into the contract. I would want the right to terminate simply because if the individual didn’t have the authority, it’s not an enforceable agreement against the other party.
Performance will comply with contract, laws, regulations, etc.. Whether I would want the right would depend on the circumstances. If I had on-going purchase obligations I would want the right to terminate.
Product or Service doesn’t infringe the Intellectual Property rights of a 3rd party. If this prevented me from being able to use. Resell, or sublicense the item I would want the right to terminate.
The Product or Service conforms to warranties and specifications of the contract. If I bought it for internal use, money damages might be sufficient. If I was buying it to resell or use in a product that was for sale, I would want the right to terminate.
Free of defects in design and safe for use. I would always want the right to terminate. I don’t want to buy products that aren’t safe simply because of potential liability issues.
The Product is new, and not re-conditioned. . If I bought it for internal use, money damages might be sufficient. If I was buying it to resell or use in a product that was for sale, I would want the right to terminate. The reason for that is if you use a re-conditioned item, you cannot sell a product as new and that reduces the value of the product and customers may not want to purchase products that contain reconditioned parts.
