Principal Attorney
Not every failure to comply with a business contract gives the other party the right to walk away from the agreement. Under Texas law, the seriousness of the breach matters. A minor failure may support a claim for damages while leaving the contract otherwise enforceable, but a material breach can excuse the non-breaching party from further performance.
That distinction can have major consequences in a commercial dispute. A business that improperly terminates an agreement based on a relatively minor breach may find itself accused of breaching the contract as well. Before withholding payment, terminating a relationship, or refusing further performance, businesses should understand what makes a breach “material” under Texas law.
What Is a Material Breach of Contract?
A material breach is a failure to perform that is significant enough to undermine an essential part of the parties’ agreement.
Texas courts do not determine materiality simply by asking whether a contractual term was violated. Instead, the analysis considers the significance of the breach in the context of the entire agreement and the effect it had on the non-breaching party.
The Texas Supreme Court has explained an important consequence of this distinction: when one party commits a material breach, the other party may be discharged or excused from further performance. When the breach is nonmaterial, the other party generally remains obligated to perform but may pursue damages caused by the breach.
How Do Texas Courts Decide Whether a Breach Is Material?
There is no universal rule that makes every missed deadline, late payment, or incomplete obligation a material breach. Courts examine the circumstances surrounding the agreement and the failure to perform.
In Mustang Pipeline Co. v. Driver Pipeline Co., the Texas Supreme Court identified several factors relevant to materiality. They include the extent to which the injured party lost the benefit it reasonably expected, whether that loss can be adequately compensated, the potential forfeiture suffered by the breaching party, the likelihood that the failure will be cured, and whether the breaching party’s conduct complies with standards of good faith and fair dealing.
Materiality is generally a question for the factfinder, although some circumstances can establish a material breach as a matter of law. This fact-specific analysis is one reason businesses should be cautious about declaring a contract terminated immediately after the other party fails to perform.
A Missed Deadline Can Be Material, but Context Matters
Timing provides a useful example of how the terms of a contract can influence the analysis.
Suppose a construction company agrees to complete a commercial facility by a specific date. A short delay may cause little practical harm in one project. In another, the deadline may be critical because the owner has already signed leases, scheduled a grand opening, or entered contracts dependent upon timely completion.
The language of the agreement matters as well. If the parties expressly state that “time is of the essence,” a deadline may carry substantially greater legal significance.
That issue was central to Mustang Pipeline. The contract required completion of a pipeline by a specific deadline and expressly made time essential to the agreement. The Texas Supreme Court concluded that the contractor’s failure to timely perform constituted a material breach under the circumstances. The result illustrates why two seemingly similar breach of contract cases can produce different outcomes.
Material Breach Versus Minor Breach
Consider a company that contracts with a software provider for a new business platform. The agreement requires implementation, employee training, ongoing support, and monthly performance reports.
If the provider delivers one monthly report several days late but otherwise performs every major obligation, the violation may not deprive the customer of the primary benefit of the agreement. The customer could potentially have a remedy for the failure, but immediately terminating the entire contract could be difficult to justify.
The situation changes if the software provider never delivers a functioning platform. The customer has now lost the central benefit it expected from the agreement, making the argument for material breach substantially stronger.
The consequences of the failure are often more important than the mere existence of a violation.
The “First Material Breach” Can Become Critical
Business disputes become particularly complicated when both parties accuse each other of failing to perform. A vendor may argue that it stopped providing services because the customer failed to make required payments. The customer may respond that payment was withheld only after the vendor stopped meeting essential contractual obligations. Determining which party committed the first material breach can therefore affect whether later nonperformance was legally excused.
This issue can turn an apparently simple collection dispute into broader litigation over the parties’ entire course of performance.
Businesses facing this situation should preserve the records that establish when problems began. Contracts and amendments are important, but so are invoices, payment histories, project records, emails, notices of default, and communications concerning attempts to cure the problem.
Before Terminating a Contract
A company that believes the other party materially breached an agreement should review the contract before taking action. Many commercial contracts establish specific procedures for addressing nonperformance.
Important questions may include:
- Does the agreement require written notice of default?
- Is the breaching party entitled to an opportunity to cure?
- Does the contract define certain violations as material?
- Are there termination provisions governing the dispute?
- Does the agreement require mediation or arbitration?
Failing to follow these provisions can weaken an otherwise legitimate position.
Businesses should also evaluate whether their own performance is current. A party seeking to rely on another’s material breach may face additional complications if it has independently failed to satisfy significant obligations under the same agreement.
What Damages Can Result From a Material Breach?
When a breach causes financial harm, the injured party may pursue damages intended to compensate for losses caused by the failure to perform. Depending on the contract and circumstances, those losses might include unpaid amounts, replacement costs, lost profits that can be established with sufficient certainty, or other damages recoverable under Texas contract law.
Some agreements also contain liquidated damages provisions or limitations on available remedies. In appropriate cases, equitable remedies such as specific performance may become relevant.
The contract itself remains the starting point for determining what each party promised and what remedies may be available after a breach.
Evaluating a Material Breach Before Taking Action
Determining that another party violated a contract is only part of the analysis. A Texas business must also consider whether the failure was material, what the agreement requires before termination, and whether refusing further performance could create additional liability.
At Sul Lee Law Firm, we represent Texas businesses in breach of contract cases and other complex commercial disputes. Our team can evaluate contractual obligations, determine how an alleged material breach affects continued performance, and develop a litigation strategy designed to protect the company’s financial and operational interests.