March 14, 2023
… Whether or not a breach of contract is serious enough to be ‘material’ is something which will be dependent both on the specific facts of the case and the wording of the contract itself.
The recent decision in RiverRock European Capital Partners LLP v Harnack [2022] EWHC 3270 (Comm), sets out a useful overview of the law on what constitutes a ‘material breach’ of contract, and is a salient reminder of the pitfalls that can befall the unwary should a breach be found not to be material enough to be acted upon.
The term ‘material breach’ unfortunately occupies somewhat of a blurred middle ground between a ‘repudiatory’ breach and a simple breach of contract…
However, if a party purports to terminate a contract on the basis of a material breach in accordance with the relevant provisions of the contract but does so wrongly, the consequences can be severe, as the ‘innocent’ party may then be entitled to claim this purported termination amounts to a repudiatory breach, terminate and claim damages itself.
In its decision in RiverRock, the High Court ultimately determined that, while there had been breaches of contract, these were not serious enough to be deemed ‘material’…
Analysis
In its decision, the Court began by making clear that ‘the concept of a ‘material’ breach has not been easy to define’. In reviewing recent cases on the issue, context and consequences were the key determiners of materiality, and included: the breaching party’s explanation for the relevant breaches; the consequence to each party of either the contract remaining in existence or being terminated; and the significance of the breaches in the context of the contract as a whole [Dalkia Utilities Services Plc v Celtech International Ltd]. Fundamentally, as Jackson LJ, giving the principal judgment of the Court of Appeal in probably the leading case on material breach [Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd] stated, 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’.
At paragraph 51 of its decision in RiverRock, the Court set out its conclusion on what amounted to a ‘material’ breach for the purposes of the Dream Agreements:
‘A repudiatory breach was not required (otherwise the term would add little since the Consulting Agreement could be terminated in the context of a repudiatory breach in any event at common law…) Instead what was needed was a substantial breach. It had to involve serious consequences for the innocent party, for which purpose I adopt the description of Neuberger J. in Glolite Ltd. v Jasper Conran Ltd, The Times, 28 January 1998 of serious ‘…in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive from performance of the contract in accordance with its terms.
In light of this reasoning, the fact that the breach was ‘readily capable of remedy‘ and caused no loss to the fund or its investors, was strongly indicative that it was not material. In fact, there were no real practical consequences arising from the breach, other than the need to replace the fund managers, which the evidence showed RiverRock had been intending to do in any event…