Dealing with a Material Breach of Contract: Steps, Remedies, and Prevention

Legal Consequences of a Material Breach of Contract

When a breach is deemed material, the law gives the non-breaching party stronger remedies than it would for a minor misstep. Courts generally allow:

• Termination of the Contract: The non-breaching party may be excused from further obligations, treating the agreement as void.
• Damages for Losses: Monetary compensation may be awarded to cover direct and consequential losses, often larger than what would apply for a minor breach.
• Enforcement of Termination Clauses: If the contract clearly defines what counts as a material breach, courts often uphold those terms as binding.

• Rescission: In some cases, the court may allow the contract to be cancelled entirely and require both parties to return any benefits already received, restoring them to their pre-contract position.
• Duty to Mitigate Losses: Even after a material breach, the non-breaching party must take reasonable steps to reduce further losses. Failure to mitigate may limit the damages recoverable in court.

At the same time, wrongly labeling a minor breach as material and terminating prematurely can expose you to liability. That’s why careful analysis—and legal guidance—are critical before acting.

What Do Courts Look at When Deciding if a Breach Is Material?

When determining whether a breach is material, courts focus on how seriously the breach affects the purpose and value of the contract. The central question is whether the non-breaching party has suffered a substantial loss that undermines the benefit they reasonably expected from the agreement.

Judges evaluate both the practical and legal impact of the breach, including whether the harm can be repaired, fairly compensated, or avoided through continued performance. No single factor is decisive—courts assess the overall circumstances of the case.

Key factors commonly considered include:

• Extent of Benefit Deprivation
  Courts examine how much of the expected benefit the non-breaching party has lost. If the breach defeats the main purpose of the contract, it is more likely to be considered material.
• Adequacy of Compensation
  If financial damages can reasonably compensate for the loss, the breach may be viewed as less severe. When money cannot restore the injured party’s position, the breach is more likely to be material.
• Extent of Performance
  Judges consider how much of the contract has already been properly performed. A breach occurring after substantial completion may be treated differently from one occurring early in the relationship.
• Willfulness or Good Faith
  Intentional breaches, bad faith conduct, or reckless disregard for contractual duties weigh in favor of finding a material breach. Honest mistakes or good-faith efforts to comply may reduce severity.
• Likelihood of Cure
  Courts assess whether the breaching party can realistically fix the problem within a reasonable time. A high likelihood of prompt correction may prevent the breach from being classified as material.
• Substantial Harm Caused
  The greater the operational, financial, or reputational harm suffered, the more likely the breach will be treated as material.

Together, these factors help courts determine whether the breach merely affects a minor term or fundamentally disrupts the contractual relationship. This balanced analysis ensures that termination and major remedies are reserved for genuinely serious violations.

How to Prevent a Material Breach of Contract

While not all risks can be eliminated, proactive measures greatly reduce the likelihood of disputes escalating into material breaches:

• Define Material Breach Clearly: Spell out in the contract what constitutes a material breach of contract, using precise language.
• Include Cure Periods: Add clauses that require giving the other party notice and time to fix issues before termination.
• Use Dispute Resolution Mechanisms: Mediation or arbitration clauses can resolve problems before they reach litigation.
• Regular Performance Reviews: Schedule checkpoints and audits to ensure obligations are being met.
• Leverage Contract Management Tools: Digital platforms can track obligations, deadlines, and SLAs, making breaches easier to prevent or detect early.

Remedies for Material Breach of Contract

When a material breach occurs, the non-breaching party has access to several legal remedies designed to protect its interests and restore fairness. The appropriate remedy depends on the nature of the breach, the losses suffered, and the commercial objectives of the injured party. Broadly, these remedies fall into three categories: monetary, equitable, and alternative dispute resolution options.

Monetary Remedies

Monetary remedies focus on compensating the non-breaching party for financial losses resulting from the breach. Their primary goal is to place the injured party in the position they would have been in if the contract had been properly performed.

Common monetary remedies include:

• Compensatory Damages
  These cover direct losses caused by the breach, such as lost profits, replacement costs, or additional operational expenses.
• Consequential Damages
  These address indirect losses that were reasonably foreseeable at the time of contracting, such as lost business opportunities or reputational harm.
• Liquidated Damages
  When the contract includes a pre-agreed damages clause, courts may enforce this amount if it represents a reasonable estimate of potential loss and not a penalty.
• Restitution
  Restitution requires the breaching party to return any benefits received, such as advance payments or transferred property, restoring the injured party to their pre-contract position.

Equitable Remedies

Equitable remedies are applied when financial compensation alone is insufficient to resolve the harm caused by the breach. These remedies focus on fairness and practical resolution rather than monetary recovery.

Key equitable remedies include:

• Termination
  The non-breaching party may end the contract and be released from further obligations when the breach undermines its core purpose.
• Rescission
  Rescission cancels the contract entirely and restores both parties to their original positions before the agreement was formed.
• Specific Performance
  In cases involving unique goods or assets, such as real estate or specialized intellectual property, courts may require the breaching party to fulfill their contractual obligations.
• Reformation
  Reformation allows courts to modify contract terms to reflect the true intent of the parties, especially when mistakes or misrepresentations contributed to the breach.

Other Options

Not all material breaches need to be resolved through litigation. Many organizations prefer alternative dispute resolution methods to reduce cost, time, and reputational risk.

Common alternatives include:

• Negotiation and Mediation
  These methods encourage parties to reach a mutually acceptable settlement with or without the help of a neutral mediator.
• Arbitration
  Arbitration involves presenting the dispute to an independent arbitrator whose decision is usually binding, offering a faster and more private resolution than court proceedings.

Selecting the right remedy requires balancing legal rights, commercial priorities, and long-term relationships. In most cases, professional legal advice is essential to ensure the chosen approach is enforceable and aligned with business objectives.

Real-World Examples of Material Breaches 

The best way to understand material versus minor breach is to see how the same legal principles apply across industries. While the context changes, the distinction always comes down to whether the core purpose of the agreement was defeated.

Below are real-world illustrations across common sectors:

Construction

• Material Breach: A contractor builds a foundation that fails mandatory safety codes, making the structure unsafe and unusable. This defeats the essential purpose of constructing a safe building.
• Minor Breach: The contractor uses a slightly different paint shade than specified, but the quality and safety of the building remain intact.

Software (SaaS)

• Material Breach: A provider fails to implement promised security or encryption features under an SLA, exposing the client to serious data-breach risks.
• Minor Breach: A non-essential reporting feature contains a minor bug that will be fixed in the next update, while core functionality remains unaffected.

Manufacturing

• Material Breach: A supplier delivers engine components that fail quality standards and cannot be used in production, disrupting the entire supply chain.
• Minor Breach: Correct parts are delivered one day late without causing significant operational disruption.

Professional Services

• Material Breach: A marketing agency fails to secure any of the agreed media placements for a major product launch, undermining the campaign’s purpose.
• Minor Breach: A typographical error appears in a social media post but is promptly corrected without affecting overall campaign performance.

Healthcare

• Material Breach: A vendor supplies defective medical devices that cannot be safely used, jeopardizing patient care and compliance obligations.
• Minor Breach: Delivery of non-critical supplies is delayed slightly, with no impact on patient services.

Telecommunications

• Material Breach: A provider fails to meet agreed network uptime commitments, causing major outages and business disruption.
• Minor Breach: A short service slowdown occurs, but overall monthly uptime targets are still achieved.

Business outcomes are only part of the equation. When disputes escalate, courts evaluate whether the breach truly undermined the contract’s core purpose—and the consequences

How Digital Contracts and Online Transactions Affect Material Breaches

As contracting moves online, material breaches are increasingly linked to system performance, data integrity, and automated workflows. In digital agreements, failures are often caused by technology gaps rather than physical non-performance.

A material breach in digital contracts may occur when:

• Systems prevent timely access to contracted services
• Security or data protection controls fail
• Platform outages disrupt critical obligations
• Automated workflows execute incorrectly

Because many digital contracts operate continuously, even short disruptions can undermine core obligations and trigger serious legal consequences.

Role of Automation and Smart Workflows

Modern contract platforms rely on automation to manage approvals, renewals, payments, and compliance checks. While this improves efficiency, it also introduces new breach risks.

Key implications include:

• Configuration errors: Incorrect rules or workflows can block performance or approvals.
• Rigid execution: Automated processes may lack flexibility for exceptions or urgent changes.
• Data dependency: Inaccurate or incomplete data can trigger wrongful actions.
• Delayed intervention: Issues may escalate before manual review occurs.

When automation fails, the resulting breakdowns can qualify as material breaches—especially in high-value or regulated contracts.

Challenges in Proving Digital Contract Breaches

Digital breaches are harder to evaluate than traditional failures because they involve complex systems and shared responsibility.

Common challenges include:

• Technical evidence: Breaches depend on system logs, timestamps, and audit trails.
• Multiple platforms: Failures may span CLM, ERP, billing, or vendor systems.
• Vendor dependencies: Cloud outages or integration failures complicate liability.
• Cyber incidents: Security breaches may overlap with contractual obligations.

Without structured documentation and monitoring, proving responsibility becomes difficult.

For enterprises, strong audit trails, system integrations, and governance controls are essential to manage breach risk in digital contracting environments.