Termination for Breach: What Standard to Use?

It’s commonplace for contracts to provide that a party may terminate for “material breach” by the other party. I’m not keen on that standard: as longtime readers will know, material is not only vague, it’s also ambiguous—drafters use material to mean either “of dealbreaker-level importance” or just “significant” (in other words, “nontrivial”). (If I’m using defined terms, I’d use the defined term Significant for the latter meaning; if I’m not using defined terms, I’d use nontrivial or trivial, depending on the context, as it’s clearer what level of importance is being expressed.)

For example, if in a contract Acme states that it’s in compliance with its contracts, except for breaches that aren’t material, one suspects that the drafter had in mind that in this context, material means “nontrivial.” But in a provision that permits Acme to terminate on material breach by WidgetCo of its obligations under the contract, the drafter might well have intended that Acme could terminate only if a breach by WidgetCo brings the entire transaction into question. Because of this ambiguity, I prefer not using the word material in this context.

Here’s how I’d express the “dealbreaker” meaning of material for purposes of one component of a section specifying grounds for termination:

WidgetCo breaches any of its obligations under this agreement and a reasonable person in Acme’s position would want to terminate this agreement because of those one or more breaches, whether considered individually or in the aggregate;

The problem with this standard is that if it goes to litigation, you likely would have to revisit all sorts of intangibles. For example, what did Acme expect to get out of the transaction? And a court might well be reluctant to hold that there had been a “dealbreaker” breach unless the breach is relatively dramatic in nature. That’s why in some contexts the following standard might be appropriate:

WidgetCo breaches any of its obligations under this agreement, except for breaches that individually or in the aggregate are trivial;

Under this standard, if WidgetCo screws up in a way that creates a problem for Acme that is big enough that Acme would be unreasonable to ignore it, then Acme may terminate the contract. The justification for this lower threshold would be that Acme has the bargaining power. Acme is telling WidgetCo, If you mess up, even in a way that’s less than existential, we can get rid of you.

What do you think?

By the way, you could omit any qualification—Acme may terminate for any breach, no matter how trivial. Although that would likely bump up against the implied obligation of good faith, I’d prefer not to leave it to that, whichever side I’m representing. Of course, you could mitigate the effect of termination for any breach by giving the breaching party the opportunity to “cure” any breach. But as I noted in this 2013 post, the notion of cure has problems of its own.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.