Breach of Contract 101 – or – When
is a breach more than a breach?
(September 2003)
Dear Jim,
In reviewing the contract we signed with our publisher, it says
that if we are one day late delivering a milestone, it is a material
breach.
We know we have to meet our commitments. This includes our milestone
dates. If we don’t, we’re in breach.
So why does the agreement restate the obvious?
Two Weeks Late
Dear Two Weeks Late:
Publishers never miss an opportunity to carry a big, big stick.
One of the biggest sticks in a development contract is “material
breach.”
“Material breach” is what is known to lawyers as a “term
of art.” That means the words have specific meaning under the
law.
Not every breach is created equal. Material breaches have the most
severe consequences. A party seeking recovery for a material breach
has much broader rights and powers. Development agreements prepared
by publishers may treat breaches as material, when upon close examination
they are not.
When one side breaches (fails to adequately perform a contractual
obligation), the remedy for the other side is to bring an action
to recover actual damages suffered as a result of the breach. The
contract continues and both sides have an ongoing obligation to perform.
The law of damages is extremely complicated – but as a general
concept, contract damages are limited to out-of-pocket losses suffered
by the non-breaching party as a direct result of the breach, less
savings realized by the non-breaching party arising from the breach
(for example, costs not incurred).
When a breach is a “material breach,” however, the stakes
increase dramatically.
“Material breach” is covered in Section 109 of the new
proposed Article 2B (Software Contracts and Licenses of Information)
of the Uniform Commercial Code, a law that governs commercial transactions
across the United States (except in Louisiana).
Proposed Section 109 (to paraphrase) provides a “material
breach” occurs when: (i) there is a failure to perform an agreed
contract term that is an essential element of the agreement; (ii)
the breach caused or is likely to cause substantial harm to the non-breaching
party (such as costs or losses that significantly exceed the contract
value); (iii) the breach substantially deprives or is likely to substantially
deprive the non-breaching party of a substantial benefit it reasonably
expected under the contract; or (iv) the parties agree that a
breach is material (emphasis added).
While the remedy for a garden variety breach is an action for damages,
the remedy for material breach includes the non-breaching party’s
right to cancel the contract and refuse to perform its further obligations.
Many development agreements provide that delivery of any milestone
even one day late constitutes “material breach.” It is
unlikely that this short delay meets any criteria above for material
breach, except the last - the parties’ agreement in the contract
that such short delay constitutes material breach.
Late delivery of milestones is certainly a breach (for which there
is a remedy – the non-breaching party’s actual damages);
and the cumulative effect of multiple late deliveries, when all facts
are known, may constitute a material breach. But that determination
should be made in court or in an alternative dispute resolution (ADR)
procedure before a neutral fact finder, not set in stone far in advance
in a development contract.
Anything less may be unfair to the developer, and can turn a garden
variety no-damage breach into much, much more.
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