(a) Whether a party is in breach of contract is determined by the contract. Breach of contract includes a party's failure to perform an obligation in a timely manner, repudiation of a contract, or exceeding a contractual use restriction. A breach of contract, whether or not material, entitles the aggrieved party to its remedies.

(b) A breach of contract is a material breach if the contact so provides [or the breach is a failure to perform an agreed term that is an essential element of the agreement]. Otherwise, the following rules apply:

(1) A breach is material if the circumstances, including the language of the agreement, the reasonable expectations of the parties, the standards and practices of the trade or industry, or the character of the breach, indicate that:

(A) the breach caused or reasonably may cause substantial harm to the aggrieved party, such as costs or losses that significantly exceed the contract value; or

(B) the breach substantially deprived or is likely to may substantially deprive the aggrieved party of a substantial benefit it reasonably expected under the contract.

(2) A material breach of contract is material occurs if the cumulative effect of nonmaterial breaches is material.

Uniform Law Source: Restatement (Second) Contracts § 241.

"Aggrieved party": Section 1-201. "Agreement": Section 1-201. "Contract": Section 2B-102. "Information": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.

a. Approved a motion to delete a list of acts that are material. Vote: 11 - 0 (Feb. 1997)

b. Rejected a motion to delete the definition of material other than by contract and to point to common law rules. Vote: 5 - 6 (Feb. 1998).

c. Approved reference to terms that are an essential element of agreement. Vote: 6-5 (Feb. 1998)

1. Nature of a Breach. A party must conform to its contract. A breach of contract occurs whenever a party acts or fails to act in a manner required by the contract. Encompassed in this term are failures to make timely performance, breach of warranty, late delivery, repudiation, non-delivery, and exceeding contractual limitations, etc. What is and is not a breach is determined by the contract and, in the absence of contract terms, by this Article.

2. Breach Related to What Remedies Apply. For purposes of remedies, Article 2B distinguishes between immaterial and material breaches. A similar distinction exists in Article 2 and Article 2A except for acceptance or rejection of a single delivery of a product. The concept also corresponds to common law and the Restatement (Second) of Contracts. A similar standard exists in international law. See Convention on the International Sale of Goods (CISG) Art. 25 ("A breach ... is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person ... would not have foreseen such a result."); UNIDROIT Principles of International Commercial Law art. 7.3.1 ( "A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.").

If one party fails to conform to the contract, the aggrieved party is entitled to remedies for breach. The aggrieved party's right to cancel the contract and refuse to perform its further obligations, however, hinges on whether the breach was material. A party may not cancel the contract for a non-material breach. For immaterial breaches, the remedy is an action for damages. If the breach is material, however, it may cancel. Restatement (Second) of Contracts § 237 expresses the rule as follows: "[It] is a condition of each party's remaining duties to render performances ... under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time." See 2B-601. Under Article 2B, as in Article 2, an intermediate remedy lies in the right of a party whose expectations of future performance are reasonably impaired by the other's acts or words, to suspend performance and demand adequate assurance of future performance by the other party.

The basic policy is that, while parties are entitled to the contract performance for which they bargained, some breaches are sufficiently immaterial that they do not justify forfeiture of the entire bargain. This does not contemplate a right to not perform, but a rule that prevents forfeiture for minor flaws. For example, a one day delay in payment may or may not be material. A failure to fully meet general, advertised claims of handling 10,000 files may not be material where the licensee's needs never exceed 4,000 if the system handles 9,999 and the contract did not expressly require 10,000 files

The material breach concept, which permeates U.S. and international law, rests on the common law belief that it is better to preserve a contract despite minor problems and the related belief that allowing one party to cancel for minor defects may cause unwarranted forfeiture and encourage unfair opportunism. Materiality relates to the aggrieved party's perspective and the benefits it expected from full performance of the contract. The distinction between material and non-material breach applies to performance of both parties.

3. Contract Terms. The materiality concept provides a flexible standard. That flexibility, however, creates uncertainty. It is important, therefore, that materiality hinge on the terms of the contract. The contract defines what is material. That can happen in three ways. The first two involve either expressly providing a remedy for a particular breach (e.g., failure to meet "X" test permits cancellation of the contract) or expressly defining a particular breach per se material. In either case, there is no reason to ignore what the parties have stated to be important to their bargain. The third involves what, under common law, is described as "express conditions." These are express contract terms conformance to which is a precondition to the performance of the other party. Here, the express agreement conditions the remedy.

Illustration 1. In a development contract, the parties agree that the final product must meet 10 specifications before it is acceptable. One condition provides for operation at no less than 150,000 rev. per second. The product fails to meet that standard, falling short by a relatively small amount. Meeting that conditions was an express standard; failure to perform is justifies refusal of the product.

Illustration 2. In a contract for a database for use as a mailing list assume that no specific delivery date is specified. The product is delivered somewhat later than expected. Whether the breach is material hinges on the effect of the delay on the value of the contract.

Illustration 3. A contract requires delivery of a database program but does not expressly describe the characteristics required of the program. The database fails to function in a manner comparable to other similar programs. Materiality hinges on whether the defect causes substantial harm to the licensee.

4. What constitutes a material breach? A statute cannot define materiality in detail any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The key lies in defining an appropriate reference point. Subsection (b) emphasizes two elements: contract terms and the extent to which breach causes significant harm to the aggrieved party. See Rano v. Sipa Press, 987 F.2d 580 (9th Cir. 1993); Otto Preminger Films, Ltd. v. Quintex Entertainment, Ltd., 950 F.2d 1492 (9th Cir. 1991) ("breach ... is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance").

The Restatement (Second) of Contracts lists five significant circumstances: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the 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 to offer to perform will cure the failure, taking into account all 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 comports with standards of good faith and fair dealing. Restatement (Second) of Contracts § 241 (1981).

The factors in subsection (b) are not exclusive. Courts should draw on common law cases. For example, the concept incorporates questions about the motivation of the breaching party. A series of minor breaches may constitute a material breach where the motivation for this conduct involves a bad faith effort to reduce the value of the deal to the other party or to force that party into a position from which it will be forced to relinquish either the entire deal or, through re-negotiation, aspects of the deal that are otherwise important to it.