David, J.
This case involves a $1.3 billion Master Services Agreement (“MSA”) entered into between the State of Indiana, acting on behalf of the Family and Social Services Administration, (“State”) and International Business Machines, Corp. (“IBM”) to modernize and improve Indiana’s welfare eligibility system. Although the MSA was supposed to last ten years, the State terminated it less than three years in, citing performance issues on the part of IBM. Both parties sued each other for breach of contract.
At issue is whether IBM’s breach of the MSA was “material.” The trial court found that the State failed to prove the breach was material, looking at the MSA as a whole, and in light of the benefits received by the State. The Court of Appeals majority reversed the trial court on this issue, finding that IBM’s breach went to the “heart of the contract” which the Court of Appeals majority determined was defined by the policy objectives of the MSA. Both the trial court and the Court of Appeals majority cite to the common law Restatement (Second) of Contracts § 241 factors for analyzing the materiality of a breach. However, here, the MSA itself sets forth the standard for assessing the materiality of a breach. The MSA also provides performance standards and indicators to measure IBM’s performance. The policy objectives of the MSA are incorporated into those performance standards. Consistent with Indiana’s long tradition of recognizing the freedom to contract, we hold that when a contract sets forth a standard for assessing the materiality of a breach, that standard governs. Only in the absence of such a contract provision does the common law, including the Restatement, apply.
In this case, the contract provides that in order to terminate the MSA for cause, the State had to prove a breach or a series of breaches by IBM that were “material considering this Agreement as a whole[.]” (MSA § 16.3.1(1)(A), (C).) We hold that under the facts and circumstances of this case, looking at the performance standards and indicators provided in the MSA, IBM’s collective breaches were material in light of the MSA as a whole. With the exception of its material breach analysis, we summarily affirm the Court of Appeals on all other issues. Indiana Appellate Rule 58(A)(2). [Footnote omitted.] We reverse the trial court’s finding that IBM did not materially breach the MSA and we remand to the trial court for calculation of the parties’ damages consistent with this opinion, including any appropriate offsets.
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We hold that when a contract provides the standard for assessing the materiality of a breach, that standard governs. Only in the absence of such a provision does the common law, including the Restatements, apply. In this case, the MSA provides the standard to assess whether IBM materially breached the MSA.
The trial court erred in determining IBM did not materially breach the MSA. In determining whether IBM materially breached the MSA, the trial court should have considered the State’s dissatisfaction with IBM’s performance and IBM’s failure to meet certain Schedule 10 metrics, despite IBM’s payment of liquidated damages. The trial court should not have considered the economic downturn, natural disasters and the surge in HIP applications to justify IBM’s performance failings in light of the MSA, which provided IBM with mechanisms to address these issues. The trial court also should not have considered the State’s motive in terminating the MSA. The trial court also erred in determining that the benefits received by the State precluded a finding of material breach where both parties benefited from the MSA and it is IBM’s performance, not these benefits, that the trial court should have assessed. Finally, while the Policy Objectives themselves did not place a contractual requirement on IBM, to the extent these objectives were incorporated into other parts of the MSA, i.e., the performance standards, and also the construction and interpretation provision, they are a factor to be considered when assessing whether IBM’s collective breaches were material.
Because IBM failed to perform satisfactorily as determined by the State (and by its own admission), consistently failed to meet certain timeliness metrics, and failed to assist the State in achieving its Policy Objectives, we hold that IBM did materially breach the MSA through its collective breaches in light of the MSA as whole. We therefore reverse the trial court’s finding that IBM did not materially breach the MSA. We summarily affirm the Court of Appeals on all other issues including: affirming the trial court’s award of $40 million in assignment fees and $9,510,795 in equipment fees to IBM, affirming the trial court’s denial of deferred fees to IBM, and reversing the trial court’s award of $2,570,621 in early termination close out payments and $10,632,333 in prejudgment interest to IBM. We also remand the case to the trial court to determine the amount of fees IBM is entitled to for Change Orders 119 and 133, and for calculation of the parties’ damages consistent with this opinion, including any appropriate offsets to the State as a result of IBM’s material breach of the MSA.
Rush, C.J., Dickson and Rucker, J.J., concur.
Massa, J., not participating.