There have been many court cases dealing with this subject. So then, does it matter whether a breach of contract is a trivial breach or a material breach and if so what difference does it make? The simple answer is that “Yes”, it does matter a lot whether a breach is a material (substantial) breach or a trivial (small) breach of a contract. This is particularly true when it comes to real estate transaction because there can be so many dollars at stake.
Almost all real estate sale contracts have language which creates a cancellation option for the seller if the buyer is late in closing, even if the buyer is unavoidably delayed. You know those provisions as “time of the essence” clauses. Courts do not like time is of the essence clauses since they attempt to make any infraction grounds for cancellation of the contract. Perhaps that is the reason the Arizona Association of Realtors altered their form purchase agreement by providing for a three day notice provision in the Arizona purchase contract requiring the non-defaulting party to give a three day written notice to the defaulting party to perform so as to avoid unnecessary lawsuits being filed.
There are many situations that can arise when this distinction between trivial and material breaches become important. In one Arizona case a couple contracted for a new home. When the house was completed but before closing the purchasers noticed a small scratch in the bathtub. The contractor had it repaired but it was still slightly noticeable. The buyers claimed entitlement to a new tub or in the alternative they were entitled to walk from the contract because of the breach by the contractor. The court determined that to replace the tub required that the contractor knock out the bathroom wall to the outside to get the old tub out and a new tub in. The cost would be exceptional given the effect of a minor scratch which was barely visible.
The court resolved that dispute by determining that the scratch did, in fact, create a breach of the contract. However, the court found it was a trivial breach – not a material breach. Therefore, the court found the owners were not entitled to a new tub or to walk from the contract but were required to close escrow and purchase the house but the owners retained the right to sue the contractor for damages. The court noted that the measure of damages was to have the house appraised assuming it had a tub without a scratch and then perform a second appraisal valuing the house with the tub with the barely-visible scratch. I suspect the owners quickly settled with the contractor.
From that case we see the difference in the effect of a small or trivial breach and a material breach. With a trivial breach the injured party’s remedy is to sue for damages but is required to perform on the contract. If the breach is a material breach the injured party would be free to not perform its contractual obligations and may also be entitled to damages as a result of the other party’s breach of the contract.
What about the situation where the seller contracts with a buyer to sell a home to the buyer and then refuses to close escrow? Assume all the inspections were performed and the buyer is ready, willing and able to close. Buyer gives seller a three day notice and seller still won’t close. Perhaps seller has received a much higher offer from another party or simply has seller’s remorse. No doubt a court would look at that as being a material breach. However, in a given situation, how do we know if a breach is a substantial breach or not?
A material breach is defined as a violation of a contract that so substantially affects the contract that the injured party can cancel the transaction. That definition is nice but it does not offer a bright line distinction between a small, trivial breach and a material breach. For instance, what if a buyer learns, just before close of escrow, that contrary to what the seller represented, there are termites and they have done a thousand dollars’ worth of damage to the house buyer is purchasing. Is that significant enough to permit buyer to walk from the transaction? What if it is five thousand dollars’ worth of damage? At some point it would be clear that it is a material breach of the agreement. Many cases fall in the “gray” area where it is difficult to say whether it is trivial or material.
When the matter is unclear the court is going to look at a number of matters. First and foremost, did the parties contract that the particular item was a very important matter? For instance, some people have a chemical sensitivity handicap. Those persons are apt to want a clause that there has been no use of certain types of chemicals at or in the home they are acquiring. If the seller indicates to the negative and the buyer later learns that is untrue and the buyer is experiencing physical reactions to what would not bother any person without such a sensitivity, it could well be a material breach. In such a case a buyer should put in a specific clause that it is extremely important to the buyer that no such chemicals were used at the residence and that is a matter of extreme importance to the buyer. Then the court can look at that language and easily find that the breach was material.
Time is another factor. As mentioned above court view ‘time of the essence’ clauses as mere boilerplate language unless the parties do really consider certain times for performance to be critical and so state in the agreement. Then a court is apt to view a breach of such a provision as material.
So is there any test to apply? Courts will look at certain factors to determine whether a breach is material or not. Some of those factors are: 1) the extent to which the injured party will be deprived of the benefit which he reasonably expected; 2) the extent to which the injured party can be adequately compensated for in money for the part of that benefit of which he will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or offer to perform will cure his failure, taking into account all of the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform conforms with standards of good faith and fair dealing. So, the bottom line is that courts tend to look to what really happened and decide whether certain actions should be penalized or not. The mere recital that, say, ’time is of the essence’ in a contract, is not likely to transform trivial actions into a material breach.
So, as usual, the law does not provide us with an exact guideline to follow in all cases. One has to view the situation and analyze all the circumstances and attempt to divine what a judge might say and do under the facts presented. The one rule we can walk away with here is that if something is very important to you or to your client then spell it out and note in the contract that it is a material provision and but for that matter you or your client would not even have entered into the contract. That would be a strong signal to a judge, in the event of breach by the other party, that the breach is a material breach. Good luck!