5.3.1.1 Material Breach of Contract in General

• Jurisdiction: Arizona

In the context of a construction project, it is rare that the parties to a dispute will have no contractual relationship. If they are parties to a contract, the contract theory is the most basic of the claims for relief to be made. A contract is formed by an offer, an acceptance, consideration passing between the parties (often just mutual promises made or a promise of payment for work promised to be performed), and reasonably certain terms (oral or written).^[1]

A common theory invoked as a basis to pursue an owner is a “material” breach of contract. It is virtually always a question of the particular facts and circumstances of each case whether the breach at issue is material; there appears to be no standard test or formula to be applied. About the only thing courts agree upon is that in the event a contract is “materially” breached, the non-breaching party is excused from further performance of its contract obligations.^[2] Whether a party has committed a material breach of a construction contract is the paramount issue in every termination. In light of this, one would think that the legal standard as to what constitutes a “material” breach would be well determined. This, however, is not the case.

A material breach is fairly characterized as a substantial failure of the agreement between the parties that justifies the other party’s not performing its obligations under the agreement any further.^[3] As to what constitutes a “substantial failure of the agreement” so as to constitute a material breach is often decided on a case by case basis. In making this determination, courts often focus on the consequences of the breach instead of the type of actions that caused the breach. This is well illustrated in the Restatement (Second) of Contracts § 241 (1981):

§ 241 Circumstances Significant in Determining Whether a Failure is Material.

In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

(a) The extent to which the injured party is deprived of the benefit which he reasonably expected;

(b) The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(d) The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances, including any reasonable assurances; and The extent to which the behavior of the party failing to perform or to offer to perform comports with the standard of good faith and fair dealing.

The factors identified in the Restatement (Second) of Contracts § 241 are not hard and fast rules as to what constitutes a material breach. Instead, these factors are to be applied in a balancing approach to determine if, in fact, a party committed a material breach. This principle is recognized in Comment a to Restatement (Second) of Contracts § 241:

The standard of materiality applies to contracts of all types and without regard to whether the whole performance of either party is to be rendered at one time or part performances are to be rendered at different times. . . . It is to be applied in the light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances. This Section therefore states circumstances, not rules, which are to be considered in determining whether a particular failure is material. (Emphasis added; internal citations omitted).

Despite the uncertainty in the Restatement, courts have set some guidelines as to what does and does not constitute a material breach sufficient for the nonbreaching party to terminate the contract. Some of these guidelines include:

1. An unexcused breach is material if it reasonably compels a clear inference of unwillingness or inability of one party to meet the contractual future performance expectations...