Termination for "material breach" – what
exactly is "material"?
September 2021
Contracts for the international sale of goods
often contain provisions entitling one of the
parties to terminate the contract for “material
breach”. If the parties have expressly defined
what they mean by material breach, then this
should not give rise to much uncertainty if
the crunch comes, and one party wishes to
terminate. This article considers what
happens if “material breach” is left undefined,
as it is a question which we have been asked
by traders quite often in recent times.
As those familiar with English contract law will know,
a breach which goes to the root of the contract, or
deprives a party of substantially the whole benefit of
the contract, will entitle the innocent party to
terminate for what is known as repudiation. A
contractual right to terminate for “material breach”
allows the innocent party to terminate for a breach
which is not quite as serious as that. But where on
the sliding scale of seriousness does any particular
breach fall? The decision in Dalkia Utilities Services
PLC v Celtech International Limited [2006] EWHC 63
(“Dalkia”) contains some very helpful guidelines
about what constitutes a material breach.
Whether a breach is material is a question of fact.
Defined generally by the English High Court as a
breach that has “a serious effect on the benefit
which the innocent party would otherwise derive”
1
,
the common denominator in every case analysis is
that a material breach must be substantial.
1. Considerations in Dalkia v Celtech
The facts
The claimant, Dalkia Utilities Services Ltd, entered a
15-year contract to provide energy services to the
defendant, Celtech International Ltd. Payment under
1
Dalkia Utilities Services PLC v Celtech International Limited
[2006] EWHC 63 (“Dalkia”) at 99.
the contract was to be made in monthly instalments,
known collectively as the “Charges”.
The contract contained a clause that provided, “In
the event of the client (Celtech) being in material
breach of its obligations to pay the Charges, the
company shall have the right to terminate this
Agreement immediately.” There was also a clause
that made a Termination Sum payable by Celtech if
the contract ceased because of Celtech’s breach.
Celtech then failed to pay 3 monthly instalments
consecutively. Dalkia sought to terminate the
contract and claim a Termination Sum from Celtech.
Celtech argued that this failure to pay 3 monthly
instalments, out of over a hundred payments, was
not “material”. These non-payments, they claimed,
were small in proportion to the total amount
payable. The issue in this case was whether
Celtech’s non-payment of 3 monthly instalments in a
15-year contract amounted to a material breach of
the contract.
The decision
The High Court ruled in favour of the Claimant,
Dalkia. Celtech, having failed to pay three
consecutive monthly instalments, had committed a
material breach of its obligations to make payment
under the contract.
The total amount of the instalments combined was
“neither trivial nor minimal”
2
, as they formed a
quarter of the current year’s payments and Celtech
was on the brink of insolvency.
Christopher Clarke J laid down the following (non-
exhaustive) factors in assessing the materiality of a
breach
3
:
1. The nature of the contract and the specific
obligations involved;
2
Dalkia at 102.
3
Dalkia at 102.
TERMINATION FOR "MATERIAL BREACH" – WHAT EXACTLY IS "MATERIAL"?
2. What the breach consists of and its impact on the
innocent party; and
3. The circumstances in which the breach arises,
including any explanation given or apparent as to
why it has occurred.
Due to the fact-sensitive nature of the inquiry, the
High Court considered the specific material breach
clause in a commercial context.
4
It held that such a
clause was “designed to protect a client [from
termination] where the default is minimal or
inconsequential or (even if it is not) is accidental or
inadvertent” but to allow the contractor to terminate
in all other cases. Celtech's default in this case was
not minimal or accidental, as Celtech did not have
sufficient funds to make the payments.
2. Clauses allowing time to remedy a
material breach
Even if a given breach is found to be material,
termination of a contract may not be granted by the
courts if the breach is remediable; and if the
consequences of the termination would lead to a
serious imbalance, benefit-wise, between the
parties.
5
Parties to the contract may therefore consider
inserting a clause allowing the party in breach to
remedy the breach before a right to termination can
be exercised. Lord Reid has clarified that "remedy"
refers to actions to be taken by the breaching party
to “put [matters] right for the future.”
6
The English Court of Appeal, in the recent case of
Bains v Arunvill Capital Limited [2020] EWCA Civ
545, held that actual performance of the contract is
required to remedy a material breach. A mere
indication of intention to perform does not constitute
a remedy.
4
Dalkia at 102.
5
Phoenix Media Limited v Cobweb Information Limited [2000] 5
WLUK 424
6
See Lewison on Interpretation of Contracts, Chapter 17, at
17.119: FL Schuler AG v Wickman Machine Tool Sales Ltd [1974]
A.C. 235.
3. Concluding comments
Whether a breach is material depends to a very large
degree on the specific factual matrix of each case.
The Dalkia factors provide guidance in determining
whether a particular breach is material, but the
ultimate decision on a right to terminate hinges on
specific contextual details and considerations about
whether the breach can be remedied. Parties can
reduce the potential for uncertainty by defining what
they mean by "material breach" in their contracts.
Contact us
John Simpson
Partner, Singapore, London
T: +65 6622 9565
E: john.simpson@shlegal.com
© Stephenson Harwood LLP 2021. Any reference to Stephenson Harwood in this document means
Stephenson Harwood LLP and its affiliated undertakings. Any reference to a partner is used to
refer to a member of Stephenson Harwood LLP. Information contained in this document is current
as at the date of first publication and is for general information only. It is not intended to provide
legal advice. LONADMIN/16172001/180821
