Addisons Contractual Interpretation Series
“Material Breach”
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 other.1
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 contract.4
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”.
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 party.7 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 obligation.10
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
5
[2009] NSWSC 899 (hereafter Mobileciti).
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].
6
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:
12
Above n8 at [49].
[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.
13
•
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.
Published: 20 April 2012
The assistance of Chuanchan Ma, Graduate, of Addisons in the preparation of this article is
noted and greatly appreciated
For more information please contact:
David Ferguson, Partner
Telephone: +61 2 8915 1053
Facsimile: +61 2 8916 2053
Email: david.ferguson@addisonslawyers.com.au
Kristy Dixon, Senior Associate
Telephone: +61 2 8915 1057
Facsimile: +61 2 8916 2057
Email: kristy.dixon@addisonslawyers.com.au