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When is a breach of contract a 'material' breach?

Picture of Hannah Batten

By Hannah Batten, Megan Berry

11 Apr 2023 | 1 minute read

A 'material breach' of a contract will commonly trigger a right for the non-breaching party to terminate that contract, but under English Law, there is no legal definition of what constitutes a material breach. Instead, the question of whether or not a particular breach is serious enough to be material will be dependent on both the facts of the case and the wording of the contract.

The High Court's recent decision in RiverRock European Capital Partners LLP v Harnack [2022] EWHC 3270 (Comm) is a useful reminder of:

  1. how the courts will assess what constitutes a material breach of contract where the contract does not contain any further clarification; and
  2. what happens when a party purports to exercise a right to terminate for material breach on the basis of a breach that is later found not to be sufficiently serious to constitute a material breach.

Background

RiverRock European Capital Partners Limited (“RiverRock”) are an investment firm who appointed DREAM under a consultancy and other agreements to manage an investment fund (the “DREAM Agreements”). DREAM acted as RiverRock’s “Appointed Representative” for the purpose of providing FCA-regulated activities and Mr Harnack and Mr Moersdorf were appointed to act as fund managers.

From the beginning, difficulties arose whereby the fund had trouble in sourcing investors and finding opportunities for the fund to invest in. As a result, RiverRock considered changes to its management.

RiverRock subsequently discovered that DREAM had been dissolved and struck off from Companies House because it had mistakenly failed to file a confirmation statement. The agreement contained a clause allowing termination for a “material breach”. RiverRock claimed that the strike-off and dissolution of DREAM amounted to a material breach entitling it to terminate those agreements and claim repayment of certain fees from Mr Harnack and Mr Moersdorf.

Decision

Ultimately the Court determined that the breach was not material, as it was the consequence of a simple oversight which could easily have been remedied. The Court themselves made it clear that “the concept of a “material” breach has not been easy to define“. In reviewing the case, the key factors of materiality for the Court were the issues, context and consequences. Therefore, the Court were keen to understand the breaching party’s explanation for the relevant breaches, the consequences to each party for either the contract remaining in existence or being terminated and the significance of the breach in the context of the contract as a whole.

The Court decided that a material breach “is more than trivial, but need not be repudiatory…The breach must be a serious matter, rather than a matter of little consequence”. In light of this, the fact that the breach was capable of remedy and caused no loss was indicative that it was not material. RiverRock had not been concerned by the dissolution, and there were no practical consequences arising from the breach other than the need to replace the fund manager, which based on the evidence was the intention even without the breach occurring. RiverRock were therefore not entitled to the sums it sought from Mr Harnack and Mr Moersdorf.

Key takeaways

This case demonstrates that whether a breach amounts to a ‘material’ breach is a fact-based exercise, and that a material breach termination trigger will only be effective if the breach had a serious effect on the benefit the innocent party would receive from the performance of the contract.

When drafting and negotiating contracts, we recommend that the parties clearly set out what they mean by a ‘material breach’ and, wherever possible, either specify or include examples of what events should be considered serious enough to qualify. If a certain event is intended to create a right of termination, the parties should expressly say so in the contract. Without this, the question of materiality will be open to interpretation, creating uncertainty (and thereby increasing the risk of litigation, which is not in either party’s interest). In some cases, it may even be appropriate to include a right to terminate in the event of any breach, to avoid the issue altogether.

However, if no such definition exists in the contract, a party should give careful consideration to the impact of a particular breach and how they will evidence those consequences before seeking to exercise a right to terminate in reliance on that breach. The consequences of getting this assessment wrong can be severe, and may include facing a claim for wrongful termination and/ or a counterclaim for the terminating party’s own breach of contract. If you find yourself in this situation we recommend seeking expert advice before asserting a right to terminate for material breach.

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