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Understanding Contracts: Breaches and Termination

In this post, I’m going to talk about how different parts of a typical contract work together to produce different results when one of the parties fails to live up to their end of the bargain.

Here are a few things to look for in your contracts to see how a breach (sometimes also a "default") might develop into a breakdown of the relationship.

First, look for the word “material.” Material breaches (as opposed to immaterial breaches) are cause for walking away from the contract or suing. In some cases, it’s very intuitive which are the material terms (price of goods sold) and which are immaterial (notice of receipt of payment within seven days).

But every relationship is different, and many times a contract will explicitly point out that some (or all!) terms are material, and that any failure to perform perfectly breaks the whole deal. Check for these. Usually a drafter will add the note about material breach after the terms it applies to, but sometimes this appears in the miscellaneous terms of a contract toward the end.

Once you have a sense of what the big no-nos are, see if there’s any leeway. People aren’t perfect, so contracts will often state that a given failure is a material breach, but still allow anything from 7 to 60 days to correct it (depending on the industry and parties). These typically provide for some notification of the breach before the clock starts ticking. If you’re looking for this term, it’s often expressed as an “opportunity to cure.”

Finally, once you know what you can do to get in and out of trouble, see if your agreement days anything about what “trouble” means. Most contracts have clauses that either limit liability, shift it around, or set damages at a fixed amount. For this, you should thumb through until you reach clauses like Limitation of Liability, Indemnification, Remedies, and Liquidated Damages.

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