The parties to life sciences contracts often want the protection of an express right to terminate a contract if the other side's breach of it is sufficiently serious to them. Most often that contractual right is expressed as material breach. Usually that right to terminate is tempered by a period in which the transgressor can cure the breach, if cure is possible.
In this final article in our series, we look at how material breach and cure are interpreted by the courts/arbitrators under English law.
Material breach - meaning in case law
A contracting party always has the ability to terminate a contract for repudiatory breach of contract, irrespective of its wording, but only when the other party evinces an intention no longer to be bound to the contract and/or if the breach is so fundamental that it goes to the heart of the contract. That is a very high hurdle to overcome.
A step down from this is where the parties have agreed in the contract that they can terminate for material breach. But what does "material" mean?
The answer to that question can depend on the wording of the contract and the factual circumstances. Material breach is obviously something less than repudiatory and more than immaterial. Case law provides some clues to the factors to be taken into account, such as:
- the natural meaning of the word, in its contractual and commercial context;
- the effect on the innocent party of its breach; and
- the curability of the breach can be a relevant factor.
In short, whether a breach is material or not is a question of judgment made at the time (and judged after the event), with no straightforward pre-existing rules to make the task any easier. This gives judges/arbitrators maximum flexibility to dispense justice, but makes it tricky for a party to exercise the right with confidence.
So in life sciences contracts, calling material breach, other than where the contract expressly provides that non-payment of a sum due is material, is a risky business. Risky because if one alleges material breach and the right to terminate that comes with it but gets that wrong, one has directly committed a repudiatory breach.
In practice, material breach clauses in their simplest form are rarely successfully invoked. If one can, it is best to write into the contract with a bit more specificity what is sufficiently important to the parties to trigger a material breach termination procedure.
A further factor to consider in triggering a termination for breach is that such rights have a shelf life i.e. if not used within a reasonable period from the right arising, then the right can be lost. This issue can be mitigated if the breach is a continuing one.
Material breach clauses often contain provisions that set out that if the breach is capable of remedy, then the wronged party should give notice of the breach and a given length of time for the breaching party to remedy/cure the breach.
These provisions raise two further knotty problems: Is the breach capable of remedy/cure? And what does remedy/cure actually involve?
Courts/arbitrators are more inclined to find that a breach is curable than not. To decide that a material breach cannot be remedied/cured would potentially give the wronged party a bit of a windfall.
As to what constitutes remedy/cure, the case law is more in favour of it meaning putting right for the future i.e. not putting right the damage already done. In other words, stopping doing more wrong rather than undoing the past. The thinking here is that for damage already done there is always the remedy of damages for breach to compensate the wronged party, whether termination then occurs or not dependent on whether further damage has been stopped or not.
Get more from our contract disputes toolkit
We hope you've found the latest article in our 'Life sciences contract disputes toolkit' helpful in identifying and managing potential dispute risk areas. To recap on any of the topics covered to date, you can access other articles in the series below:
Our global Life Sciences team is experienced in the full breadth of issues raised by contractual relations (in addition to IP rights) and can help clients understand the balance of risk attribution to avoid problems arising. Where matters do escalate, they can help to minimise risks during the dispute and afterwards. To talk further on any of the issues discussed in this series, or to help maximise your commercial position in a contract, please contact Andrew Smith or Patrick Duxbury.