Materiality: Overview, definition, and example
What is materiality?
Materiality refers to the significance of a fact, event, or breach in a contract. It helps determine whether an issue is important enough to affect the parties' rights, obligations, or the overall agreement. If something is considered material, it means it has a meaningful impact on the contract, and ignoring it could lead to financial loss, legal consequences, or termination rights.
For example, in a supply contract, a late delivery of one day might not be material, but a delay of several months could be, especially if it disrupts the buyer’s operations.
Why is materiality important?
Materiality prevents minor issues from escalating into legal disputes while ensuring that significant breaches or changes are properly addressed. Contracts often use the term to specify which obligations must be met strictly and which can allow for some flexibility.
For businesses, materiality clauses provide clarity on what qualifies as a serious issue versus a minor one. This helps parties avoid unnecessary legal action and focus on key risks that truly impact the contract’s purpose.
Understanding materiality through an example
Imagine a company hires a marketing agency to deliver an advertising campaign by a specific deadline. The contract states that “timely delivery is of material importance.” If the agency delivers the campaign one day late, it might not be considered a material breach. However, if the campaign arrives after a major seasonal sales event, rendering it useless, that delay would likely be material, allowing the company to terminate the agreement or seek damages.
In another example, an investor agreement might state that any material changes in a company’s financial condition must be disclosed. If the company experiences a minor drop in revenue, it may not be material, but if it faces bankruptcy risks, that would be material and require disclosure.
An example of a materiality clause
Here’s how a materiality clause might appear in a contract:
"A breach of this Agreement shall be considered material if it substantially affects the rights, benefits, or obligations of either Party."
Conclusion
Materiality helps distinguish between minor contract issues and significant breaches that impact the agreement’s purpose. By defining what is material, businesses can ensure that serious issues are addressed while avoiding unnecessary disputes over trivial matters. Including clear materiality clauses in a contract helps protect both parties and ensures that obligations are fairly enforced.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.