Material Breach

What is a material breach?

A breach is a failure to do what a contract promises. A material breach is a serious one. It goes to the heart of the deal and takes away much of what the other side signed up for. A minor breach is a smaller slip that does not.

The label decides what the other side may do:

• Minor breach: the injured side can claim damages (money for the harm) but must keep performing. As courts applying Pennsylvania law put it, a party "does not have a right to suspend performance if the breach is not material."
• Material breach: the injured side can stop performing and, under many SaaS contracts, end the deal after a cure period. In Mustang Pipeline v. Driver Pipeline (2004), the Supreme Court of Texas held that a party is released from further obligations "only if the other party materially breached."

How courts decide what is material

When a contract does not define the word, the answer comes from state law and the facts. Many courts use five factors from section 241 of the Restatement (Second) of Contracts, a summary of contract law published by the American Law Institute. The Supreme Court of Texas listed them in 2004, Pennsylvania courts use them, and the New Jersey Supreme Court adopted them in 2017. In plain terms, a court weighs:

1. How much of the expected benefit the injured side loses.
2. Whether money can make up for that loss.
3. How much the breaching side would forfeit if the deal ended.
4. How likely the breaching side is to cure (fix) the failure, including any reasonable assurances it gives.
5. Whether the breaching side acted in good faith and dealt fairly.

A small shortfall may not count. In a non-precedential 2015 federal appeal under Pennsylvania law, delivering 1,248 motion sensors instead of 1,263 was not material: the side receiving them got the benefit of the bargain, and the side delivering them offered to lower the price. Rules vary by state.

What it looks like in a vendor's terms

A typical clause reads like this:

Either party may terminate this Agreement for cause if the other party materially breaches it and does not cure the breach within 30 days after receiving written notice describing the breach.

• "for cause": ending the contract because of the other side's fault. See termination for cause.
• "materially breaches": only serious failures count, and the clause does not list them.
• "does not cure ... within 30 days": the breaching side gets a cure period to fix it first.

AWS, Salesforce, HubSpot, Zendesk and Atlassian all use a 30-day version of this clause. Some vendors add causes only they can use. HubSpot's terms let HubSpot terminate on 30 days' notice "if we determine that you are acting, or have acted, in a way that has or may negatively reflect on or affect us, our prospects, or our customers."

Why it matters to you

Money follows the label. Under the Salesforce Main Services Agreement, if you terminate for cause, Salesforce refunds prepaid fees for the rest of the term. If Salesforce terminates for cause, you pay any unpaid fees for the rest of the term, to the extent the law allows. HubSpot refunds "prepaid but unused fees" if you terminate for cause; if HubSpot does, you must "promptly pay all unpaid fees due." One breach can be worth a full term of fees.

Guessing wrong is costly too. If you stop paying because you think the vendor breached, and a court later finds the breach was minor, you may be the one in breach.

What to check

• Definition: whether "material breach" is defined, or whether you can add examples, such as missing the SLA uptime target in several months or failing to report a data breach in time.
• Cure period: how long, and whether it is the same for both sides.
• Extra causes: grounds only the vendor can use, and rights to suspend the service without any breach finding.
• Money: what you get back if you terminate for cause, and what you owe if the vendor does.
• Outage remedies: whether the SLA makes service credits your sole and exclusive remedy, and whether that leaves room to terminate for repeated outages.
• Evidence: tickets, dates and notices, since materiality turns on facts.

How Venpo helps

Termination rights sit in terms that vendors can change on their own. Venpo watches your vendors' terms of service and other public legal pages and emails you a plain-English alert when one changes, such as a new cause for termination or a change to what you owe when the contract ends. Each vendor's change history keeps a redline of every version, so you can show which terms applied when the breach happened.