Material Breach vs. Minor Breach: Can I Stop Performing?

The rule in one sentence

A material breach by one party discharges the other party's remaining obligations under the contract; a breach that is not material does not. The Texas Supreme Court stated the rule in Mustang Pipeline Co. v. Driver Pipeline Co. in 2004 and has applied it since. The consequence is practical: if the other side's failure was material, you may stop performing, treat the contract as ended and sue for damages. If it was not, you must continue performing and sue for the damages the breach caused, while the contract stays in force.

How Texas courts decide whether a breach is material

Mustang Pipeline adopted the factors in section 241 of the Restatement (Second) of Contracts. Courts weigh:

1. The extent to which the injured party will be deprived of the benefit it reasonably expected. A breach that defeats the purpose of the contract is material; one that leaves the core benefit intact is less likely to be.
2. The extent to which the injured party can be adequately compensated for the part of the benefit it lost. If money fixes it, the breach points toward minor.
3. The extent to which the breaching party will suffer forfeiture if the contract is terminated. A party that has substantially performed and would lose everything stands on firmer ground against termination.
4. The likelihood that the breaching party will cure its failure, considering the circumstances and any reasonable assurances it has given.
5. The extent to which the breaching party's behavior comports with standards of good faith and fair dealing.

No single factor controls, and materiality is ordinarily a fact question. Texas courts also consider whether the contract itself makes a term essential. In Mustang Pipeline, the contract made time of the essence, and the contractor's failure to meet the schedule was held material as a matter of law. When the parties have said in the contract that a term is essential or that a specified failure permits termination, courts generally honor that allocation.

The prior material breach doctrine

The rule has a mirror image. A party who commits the first material breach cannot then enforce the contract against the other side, because its own breach excused the other side's performance. This is the prior material breach defense, and it is raised constantly in contract cases: the defendant argues that it stopped performing only because the plaintiff had already materially breached.

Two refinements from the Texas Supreme Court's 2017 decision in Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc. matter here. First, a breach that is not material does not excuse the other side's performance, so a party who stops performing in response to a minor breach has itself breached and owes damages, while still being able to recover for the earlier minor breach. Second, a later breach does not retroactively excuse an earlier one: each side may recover for the other's breach, with the amounts offset. The court rejected the idea that whoever breached second forfeits all claims.

What happens if you continue performing after a material breach

A party faced with a material breach has a choice: treat the contract as terminated, or treat it as continuing. Texas law does not allow both. A party who, with knowledge of the other side's material breach, keeps performing and keeps accepting the other side's performance has elected to continue the contract. Having made that election, it must perform its own remaining obligations and is limited to a claim for damages for the breach; it can no longer use the earlier breach to justify stopping later.

This is why timing and communication matter so much. The injured party should decide promptly, state its position in writing, and act consistently with it. Continuing to work for weeks after a serious breach, then stopping and citing the old breach, is a weak position.

Example

Suppose a Frisco commercial printer has a one-year supply agreement with a paper distributor: monthly deliveries of a specified stock, net 30 payment, no time-is-of-the-essence clause. In month four the distributor delivers a lower-grade stock. The printer uses it, with some customer complaints, and pays the invoice late, in day 45. In month five the distributor delivers the wrong stock again, and the printer refuses to pay and announces it is ending the agreement. Was the distributor's breach material? The printer was deprived of the quality it bargained for, but it used the goods, the shortfall is compensable by a price adjustment, and the distributor could cure by shipping correct stock. Many courts would call the first wrong shipment minor and the second a closer question, particularly if the printer gave notice after the first and the distributor ignored it. Was the printer's late payment material? Fifteen days late on a single invoice, with no essential-time clause, almost certainly not. The lesson is that the printer's safest path after month four was a written notice demanding conforming stock and reserving rights, not a unilateral termination in month five.

The contract may answer the question for you

Most commercial contracts contain terms that define what the law would otherwise leave to the Restatement factors. Look for:

• Time is of the essence clauses, which make deadlines material.
• Events of default lists, which specify the failures that permit termination.
• Notice and cure provisions, which require written notice and a cure period before termination, regardless of how serious the breach was.
• Termination for convenience rights, which allow exit without any breach, often with a fee.
• Exclusive remedy clauses, which may limit the response to a breach to repair, replacement or credit.

A party who skips a required notice and cure step has breached the contract's procedure even if the underlying breach was material. The termination rules, including how to exit cleanly, are covered in whether a company can terminate a contract early without getting sued.

Sales of goods: a different vocabulary

If the contract is for goods, the UCC in Chapter 2 of the Texas Business and Commerce Code replaces the materiality analysis with its own rules. A buyer may reject goods that fail in any respect to conform to the contract (the perfect tender rule), subject to the seller's right to cure, and may revoke acceptance of goods whose nonconformity substantially impairs their value. Installment contracts have their own standard. These rules are discussed in what to do when a vendor or supplier breaches.

What to do before you stop performing

1. Read the contract for essential terms, default definitions and notice and cure requirements.
2. Document the breach: what was required, what was delivered, when, and the loss it caused.
3. Send written notice identifying the breach, demanding cure within the contract's period (or a reasonable one), and reserving all rights.
4. Decide, and say in writing, whether you are terminating or continuing. Act consistently.
5. Mitigate: line up substitute performance if you terminate.

The question of whether a breach is material is one a litigator can usually assess quickly from the contract and the correspondence, and the cost of getting it wrong, becoming the breaching party in your own dispute, is high enough that the assessment is worth making before the next payment or delivery is withheld. Tina Wysk represents Dallas businesses on both sides of disputes over who breached first and how seriously, in state and federal courts and in arbitration.