Australia: "Material Breach" in contracts

Addisons Contractual Interpretation Series
Last Updated: 29 April 2012
Article by David Ferguson and Kristy Dixon

This is one of a series of articles in which we have reviewed the judicial interpretation of some words and phrases that are commonly used in contracts. In this article we look at the meaning of the phrase "material breach".

Context

The parties to a contract often have an express right to terminate in the event of a "material breach" by the other1.

What is a "material breach"?

Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd2

Forklift Engineering Australia Pty Ltd (Forklift) was a dealer of Powerlift (Nissan) Pty Ltd (Powerlift) products. The dealer agreement contained a provision which entitled either party to terminate the agreement if the other party commits a "material breach" of the agreement, which is either not capable of being remedied or is not remedied within 14 days of being required to do so. Powerlift sought to activate this provision for Forklift's failure to pay invoices and provide information.

The Supreme Court of Victoria noted that the term "material breach" "does not appear to be a concept known to the law of contract" and that it is therefore "a question of determining the parties' intention in using the expression in the agreement"3. After examining the dictionary meaning and the common law meaning of "material", Warren J concluded that a "material breach" can be equated with the expression known to the law of contract of "fundamental breach", being a breach that goes to the very root of the contract4.

Warren J held that Forklift's failure to pay invoices and monies due constituted a material breach of the agreement, since it was a term that went to the very root of the agreement between the parties. Powerlift was therefore entitled to terminate the agreement.

Mobileciti Pty Ltd v Vodafone Pty Ltd5

In the more recent case of Mobileciti, the Supreme Court of New South Wales looked at the meaning of the word "material" in the context of an express right to terminate a contract on the basis of "material misrepresentations"6.

The Court noted that "material" is an ordinary English word without any technical or special meaning. After examining the dictionary definitions of the word, Hamilton AJ held that the question of whether a representation is "material" should be assessed from the perspective of the party with the right to terminate. That is, the misrepresentations must be of substantial import or of consequence to the innocent party7. His Honour found that this approach was consistent with the observations of Tobias JA in Water Lane Pty Ltd & anor v Sweeney & ors8 to the effect that, for a breach to be material, it was required to be of particular significance to the relevant parties.

Elders Ltd v E J Knight & Co Pty Ltd9

Shortly after Mobileciti, the Supreme Court of NSW had to consider the meaning of "material breach" in the context of a lease. The lease in question prohibited the assignment of rights and obligations under the lease without the prior written consent of the lessor (not to be unreasonably withheld), with a transfer of shares in the lessee being a deemed assignment. A transfer of shares in the lessee was alleged to constitute a breach of this provision. The lease also provided that if the lessee committed a "material breach" of the lease which was not rectified, then all concessions on rent would cease and the total amount of the rent which had been conceded would become immediately due and payable.

For reasons relating to the commencement date of the lease, White J held that there was no breach. However, his Honour went on to also hold that a breach of the provision prohibiting assignment would not have been "material". His Honour observed that a material breach did not need to be fundamental and that the focus should be on the materiality of the breach rather than the materiality of the obligation10.

Adopting Hamilton AJ's approach in Mobileciti, White J held that for the breach to be material, it must have a serious effect on the benefit which the lessor would otherwise have had from compliance – "that is, it must be of serious or substantial import"11. His Honour took the view that the materiality of the breach in this case can be tested by asking:

...whether the Lessor would have been required to give its consent to the assignment if that consent had been sought. If the Lessor would in any event had been bound to consent to the transfer of the shares, the failure to obtain its prior consent, whilst a breach of the Lease, would not be a material breach because it would not seriously adversely affect its interest.12

In other words, a breach will only be a "material" breach if it would substantially adversely affect the interests of the innocent party.

White J concluded that since the lessor was bound to consent to the transfer of shares regardless of the circumstances, the lessee's failure to obtain the lessor's consent prior to the transfer of shares would not be a "material" breach within the meaning of the termination clause, given that it "would not seriously adversely affect" the lessor's interests.

English cases

The approach adopted by the NSW Supreme Court in Elders is consistent with the position taken by the English courts in a series of cases.

In National Power Plc v United Gas Co Ltd & anor13, the English High Court rejected an argument that "material breach" had the same meaning as "repudiatory breach"14. The Court held that a "material breach" was a breach that has a serious effect on the benefit that the innocent party would have otherwise derived from the contract.

In Dalkia Utilities Services Plc v Celtech International Ltd15 (cited by Hamilton AJ in Elders), the English High Court expressly confirmed the distinction between "material breach" and "repudiatory breach", and held that continued and repeated failure to make payments due under the contract in question constituted a "material breach" which gave rise to a right of termination.

This approach was confirmed in the more recent case of Crosstown Music Company 1, LLC v Rive Droite Music Ltd & ors16, where the English High Court noted that "materiality" simply "connotes the concept of significance, as opposed to triviality, and ... has to be measured in its total context".

Conclusions and suggestions

The word "material", when used in the context of the term "material breach" as the basis of a right to terminate a contract, will be given a meaning synonymous with "significant from the perspective of the innocent party". This means that a court will assess whether the breach in question has a serious adverse effect on the party that has been deprived of performance or compliance with the contract. This analysis does not require the breach to constitute a fundamental breach that would justify termination under general contract law in the absence of an express right to terminate.

Given that this approach leaves parties to a contract in some uncertainty as to what breaches will be "material", it is worth considering whether to expressly identify the specific breaches that will give rise to a right to terminate. These might include:

  • failure to make payment within a certain timeframe;
  • failure to deliver goods or achieve key milestones by set dates;
  • failure to achieve prescribed standards or comply with prescribed specifications.

The assistance of Chuanchan Ma, Graduate, of Addisons in the preparation of this article is noted and greatly appreciated.

Footnotes

1 This express right of termination is to be distinguished from the common law right to terminate for a "fundamental breach", see eg Koompahtoo v Sanpine [2007] HCA 61.
2 [2000] VSC 443.
3 Above n2 at [68].
4 Warren J at [70] further cited case authorities which described a "fundamental breach" as "any breach which provides the promisee with a right to terminate performance of the contract" and "a breach that deprives a party of substantially the whole benefit of the contract", and as consisting of "total non-performance of the contract".
5 [2009] NSWSC 899 (hereafter Mobileciti).
6 This case also dealt with misleading and deceptive conduct issues that are not relevant to this article.
7 Above n5 at [60].
8 (2008) Aust Contract Reports ¶90-287.
9 [2009] NSWSC 1462 (hereafter Elders).
10 Compare the position taken by Warren J in the Forklift case.
11 Above n8 at [48].
12 Above n8 at [49].
13 [1998] All ER (D) 231.
14 Under English law, a "repudiatory breach" is a breach of a contractual term that is central to the performance of the contract, or a breach which substantially deprives the innocent party of the benefits it would have received under the contract. This is analogous to the concept of a "fundamental breach" under Australian law.
15 [2006] 1 Lloyd's Rep. 599.
16 [2009] All ER (D) 269.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
David Ferguson
Kristy Dixon
 
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