When does failure to pay become a material breach of contract?

Question

As a follow-up to Work for hire as a contractor without payment, can you withhold IP?, when does failure to pay become a material breach of contract?

Answer 1

Materiality

I actually don't think you mean "material" in this context but I'll deal with it anyway.

Something is material when it has a non-insignificant impact on the performance of the contract. A breach that is not material would not support a claim in court for the breach. For example, a breach from which no damages flowed would be immaterial.

In that sense, because the failure to pay when required always incurs a cost on the recipient - either the cost of borrowing the money they haven't got or the interest lost on money they could have invested its immediately material.

Conditions (essential terms) and warranties (inessential terms)

This is what I think you are asking.

A condition is a major term which is essential to the contract. Breach of a condition entitles the injured party to terminate the contract and to treat its obligations as at an end, and/or sue for damages for loss suffered as a result. The injured party has to exercise one of two choices:

1. Affirm (confirm) the contract, or
2. Treat itself as no longer under an obligation to perform the contract - but rights which had accrued up to that time continue.

In either case, the injured party can, but is not obliged to, sue for damages.

A warranty is a minor term of the contract which is not essential to the main purpose of the contract. If a warranty is breached, the contract does not come to an end.

Whether a term is a condition or a warranty depends on whether it is essential or non-essential to the contract. For example, a term is essential if it is so important that the promissee would not have entered the contract unless what was promised was definitely going to happen. A term can be expressly made a condition by express provision (Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10) - this is what the term "time is of the essence" actually does with respect to time.

Is payment a condition or a warranty?

In most contracts, that the principal will pay the contractor is a condition. However, when they will pay is usually a warranty. That is, the contractor can terminate if the principal doesn't pay but can't terminate if the principal is late paying.

Of course, if the principal has a bona fide reason for not paying, e.g. that the contractor's entitlement to payment or the amount of the payment is in dispute (and providing the principal pays the undisputed amount) then the principal is arguably not in breach for not paying because it is not known if there is a payment that should be made. It may emerge that when the dispute is ultimately resolved that the principal was in breach, however, it would be a brave contractor that purported to terminate a contract because the principal might be in breach of what might be a condition.

Assuming that there is no dispute, then the term becomes a condition when the payment is so late that "the promissee would not have entered the contract unless what was promised was definitely going to happen." How late is too late depends on the individual circumstances of the case - industry norms around late payment, prior dealing between the principal and the contractor, previous waiver of payment terms within the contract, the amount etc.

In some cases (e.g. settlement of share purchases) 1 microsecond may be too long; in others (e.g. construction contracts), 3 months might not be long enough.