Defenses Against a Contract
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Understanding the enforceability of a contract requires one to understand certain vocabulary that characterizes the contract.
What is an enforceable and a valid contract?
An enforceable contract is one that courts will order parties to perform or to pay consequences for not performing. A contract is valid when all essential elements are present and it is enforceable. The absence of any key element makes the contract invalid. A contract is unenforceable when the non-performing party has a justifiable reason for non-compliance with the promise. Example: Naomi agrees to sell Barry a specific piece of equipment for $1,000. The next day, Naomi notifies Barry that she cannot fulfill the contract. Barry is angry and wonders what are his rights in the situation. From the facts, it appears that all of the elements of a valid contract are present. The agreement has an offer, acceptance, and consideration. The contract may not, however, be enforceable. The contract is for the sale of goods for more than $500. As such, the contract must be in writing to be enforceable. If there is not sufficient written evidence of the agreement between the parties to satisfy the statute of frauds, the contract may not be enforceable. Note: Validity and enforceability are legal terms that have specific definitions. Most legal terms have precise and specific meaning, which is critical when drafting contracts.
What is a void contract?
A void contract is an agreement that lacks an essential requirement for validity and enforceability. An example of a void contract is one that has an illegal purpose or constitutes fraud in the execution. A voidable contract, on the other hand, is an agreement where at least one party has the right to withdraw from the promise made without incurring any legal liability. Defenses that make the contract voidable include, fraud in the inducement, incapacity, duress, mutual mistake, etc. Example: Michelle enters into an agreement with William to sell him an industrial-grade chemical that is highly regulated and illegal to sell in unauthorized transactions. If the transaction between Michelle and William is not specifically authorized under existing regulations, then it would be illegal. As such, it is a void contract. A void contract is automatically invalid, whereas a voidable contract is enforceable until a party with the legal right to do so decides to void the contract. Only the innocent party (or party with the defense to enforceability) has the ability to render the voidable contract void. In some cases a contract is voidable by both parties and either one can withdraw. If the innocent party transfers a voidable contract, then the acquiring party loses the right to void the agreement. If the non-innocent party transfers the contract, the innocent party may still void the contract. The innocent party has the ability to ratify a voidable contract (i.e., make it valid). An innocent party who fails to void the contract upon learning of the defense that makes the contract voidable thereby ratifies the contract. Example: Tara enters into a contract with Norman while he is intoxicated from taking a prescription medication. As such, the contract is voidable by Norman because, at the time of the agreement, he lacked mental capacity to enter into a contract. Norman must inform Tara of his intent to void the contract very soon upon regaining mental capacity; otherwise, the agreement will be ratified by his failure to give notice of his intention to void it.
What defenses make a contract void (rather than voidable)?
A contract is void if the contract is unconscionable, has an illegal purpose, or its enforcement would violate public policy. Some courts will void the entire contract, while courts in other jurisdiction will sever the void provisions and enforce the other terms. Each of these defenses to contract enforcement is discussed below. Note: Certain jurisdictions may have laws or regulations that cause an agreement to be illegal or to violate public policy. Further, the standards for what violates public policy is largely based on public sentiment about a particular issue. Naturally, public sentiment changes depending upon the norms, values, culture and customs of a given area.
What is unconscionability?
Unconscionability is when the facts of the contract or the circumstances surrounding its formation make enforcement of the contract unthinkable. Unconscionability is broken down into procedural and substantive unconscionability. Note: Unthinkable generally means that the contract is so one-sided in nature that it is fundamentally biased in favor of one party against the other party. Further, the reason for the bias is that the agreement is not the product of fair dealing or bargaining between the parties. One party is generally under some form of undue pressure that the favored party uses to her advantage. In essence, the negotiation is tainted and it would violate the purpose of the law to enforce it against the disadvantaged party.
What is procedural unconscionability?
Procedural unconscionability regards the circumstances surrounding the formation of the contract. Basically, one party is presented with a contract in a situation where she lacks a meaningful chance to read, evaluate, or understand those terms. This often comes about when contract terms are written inconspicuously within the contract, such as in the fine print at the bottom of a page. Other unconscionable situations include when the contract is written in dense legalese that is difficult for a person of reasonable intelligence to understand, or presenting the contract to an individual when she lacks the ability to effectively read the contract or is in an extremely imbalanced bargaining position. Example: Presenting a newby skydiver with a disclaimer once she is in the sky and about to jump out of the airplane for the first time would be unconscionable. The agreement generally biases the skydivers rights to bring a tort action against the skydiving company. Since the skydiver lacks understanding and a reasonable opportunity to educate herself as to the terms of the agreement, it will likely be unconscionable. Example: Gina is leaving town to escape a storm coming to the area. The water and power have been shut off from her home. While on the road to evacuate the area, Gina pulls into a hotel to stay for a few hours. The hotel, knowing of Ginas plight, charges her $1,000 per night for the room, rather than the typical $29.99 per night. If Gina enters into a contract to pay the higher rate, she would be able to challenge the enforceability of the agreement due to unconscionability.
What is substantive unconscionability?
Substantive unconscionability is when a contract is so incredibly unfair or oppressive in its terms that it is unthinkable to enforce those terms against a party. This may include a contract that does not provide a party a reasonable remedy under the agreement. Arbitration clauses are routinely challenged on this ground. Some contracts that place extreme penalties or damages for a breach that in no way represents the amount of loss or risk incurred by the parties are deemed substantively unconconscionable. Liquidated damages clauses in contracts are also routinely challenged on this ground. A provision of a contract that produces a huge detriment to one party, without providing the other party a reasonable benefit may also be challenged. Courts may also look at the disparity between the price charged to a customer and the cost of the item to the seller. This may come up in the context of tying arrangements between goods (which is also an antitrust law issue). Example: Nora signs up for an ocean cruise. She lives in Virginia and the cruise leaves from Florida. The agreement includes an arbitration clause that mandates arbitration of any disputes with arbitrators chosen by the cruise line and located in Oregon. Since nearly all of the passengers live in the Southeastern United States, the choice of Oregon as a forum is used to oppress the customers in any attempt to assert their rights against the cruise line. Nora may be able to challenge the arbitration agreement as being substantively unconscionable.
What is a contract that is illegal or violates public policy?
These contracts either violate a law or promote an objective sought to be reduced or eliminated by law or regulations. Contracts that call for conduct constituting a crime, tort, violation of a regulation or administrative policy, restraint of trade, interference with contractual relations, or violation of consumer protection practices fall in this category. Other contracts that violate public policy are those that include provisions or clauses absolving parties of liability for intentionally harmful conduct. Example: Sarah is very angry with Cliff. She hires Tommy to beat up Cliff. She agrees to pay Tommy $50 for his services. Before carrying out the assault on Cliff, Tommy has a change of heart and attempts to back out of the deal. Sarah threatens to sue Tommy for his breach of contract. In this situation, the contract between Sarah and Tommy would be void as illegal. You cannot validly contract with someone to commit a crime.
What is mental incapacity and how does it affect contract enforceability?
Mental incapacity of a party to a contract destroys the ability for the parties to have a meeting of the minds. One party lacks the capacity to appreciate the nature and consequences of her actions. Therefore, mental incapacity gives rise to a defense for the incapacitated party and makes it voidable at her choice. Example: Fran enters into a contract with an encyclopedia salesman when she is temporarily under the influence of prescription medication. Once she regains mental capacity, she will be able to void the contract due to her lack of capacity. Note: The incapacitated party must void the contract within a reasonable time of regaining capacity and learning of the agreement.
How does mental incapacity affect a minor childs ability to contract?
Most states consider a person below the age of 18 years to be a minor. State statutes deem the minor child to lack the mental capacity to appreciate the nature and consequences of her actions. As such, a contract with a minor child is voidable. This is true even if the minor misrepresents her age at the time of entering the contract. The minor child has the right to void the contract at any time prior to reaching the age of majority and, in most states, for a reasonable time after obtaining majority. Certain contracts for necessities (e.g., food, clothing, shelter) with minors are enforceable to the extent of their fair value. Example: Clara is 16 and enters into a contract to purchase a new corvette. 10 days after driving off of the car sales lot, she decides to return the car. The dealer does not want to accept return of the car. The dealer sues Clara for breach of contract. Clara will likely be able to defend the action based on the ground that she was a minor and had the right to void the contract at any time before she reaches the age of majority (18 in most states). Note: If a party is unduly harmed by unknowingly entering into a contract with a minor, the party may have a right of restitution against the minor or her guardian.
How does mental impairment (such as illness) affect a contract?
Mental impairment causes a party to lose the capacity to contract. Contracts entered into during a state of mental impairment are voidable at the insistence of the impaired party. To be eligible to disaffirm the contract, the mentally impaired party must either: be in such a state that she cannot understand the nature and consequences of the transaction, OR Example: Over the years, Ralph has been a collector of antique goods. Ralph now suffers from Alzheimers disease and can no longer collect these antiques. One day, Donald, a local pawnbroker, visits Ralph and offers to purchase most of his antiques. Ralph agrees to sell him all of the antiques for a given price. Donald is unaware of Ralphs condition at the time of making the offer. In this situation, Ralph (or his appointed guardian) would be able to disaffirm this contract. Ralph lacked the capacity to understand the agreement and can therefore void the contract. not be able to perform the contract (and the other party is aware of this inability). Example: Derek for years worked as a arborist, specializing in removing large trees in residential neighborhoods. Derek now suffers from Alzheimers disease, which generally prevents him from practicing his trade. When a local contractor begins building a home in the neighborhood, Ralph approaches the contractor and offers his services to remove a tree that is inconveniently located on the property. The contractor is aware of Ralphs mental illness, but, given the great price, is willing to see if Ralph can do it. The contractor agrees to pay Ralph $1,000 to remove the tree. In this situation, the parties have seemingly entered into a valid contract. Due to Ralphs condition, the contractor knew (or should have known) that Ralphs impairment would prevent him from performing the agreement. As such, Ralph (or his appointed guardian) could disaffirm the contract. If a party regains his mental capacity before voiding the contract, she must disaffirm the contract within a reasonable amount of time of learning about it. If she fails to do so, she will be deemed to have accepted the contract. Note: Examples of situations in which a party is mentally impaired include: dementia, insanity, mental retardation, and intoxication from drugs or alcohol. Video Resource: http://thebusinessprofessor.com/mental-capacity-to-contract/
What is duress and how does it affect contract enforceability?
Duress is a form of coercion or pressure on another person to take a certain action (such as entering into a contract). Normally, it entails some sort of threat; even though not every threat is improper. If a party claims duress in entering into the contract, the court will look to the facts of the threat to determine whether duress exists. What is the threatening partys purpose in making the threat? If the threat would harm the other party, but would not benefit the threatening party, then it points to duress. The court may examine whether there is a prior history of unfair dealing by the party making the threat that makes it more likely to cause the threatened party to enter into the contract. The court will also determine whether the threat was sufficient to cause the party to unwillingly consent to the contract. The court must make a subjective determination, which means that it is evaluating the situation based upon the age, experience, sophistication, or other general characteristics of the threatened party. Example: MaryAnn tells Ginger that if she does not sell MaryAnn her hula dress that she will tell the world about Gingers affair with the Skipper. If Ginger sells MaryAnn her watch, she may be able to later sue to regain the property on the grounds that she entered into the agreement because of duress. Note: Actions that have been found to constitute duress include: threat of criminal or tortious conduct, extortion of money, threats of a lawsuit that is obviously an abuse of the civil process, blackmail, refusal to perform other valid contracts, and threat of termination of employment. Generally, physical duress is deemed void, while economic duress is generally voidable by the party subject to duress.
What is undue influence and how does it affect contract enforceability?
Undue influence is where one party stands in some position of power or authority over another party and uses that position to coerce the other persons actions. This is very common in fiduciary relationships, such as parent-child, employer-employee, doctor-patient, etc. A party claiming undue influence generally must demonstrate that she was in a position of weakness. The court will determine if any special characteristics of the influenced party (e.g., age, illness, mental state, intoxication, etc.) augmented the possibility that the party was unduly influenced. Example: The attorney-client relationship is a fiduciary relationship. Contracts between an attorney and client are frequently rendered unenforceable on grounds of undue influence. The burden is on the attorney to demonstrate that the contract was fair, the client was aware of the risks and the attorneys interest in the contract, and the attorney encouraged the client to seek counsel.
When does a mistake by the parties affect contract enforceability?
There are situations where a mistake by one or both parties as to the material facts surrounding the contract can make the contract voidable by one or both parties. Mistakes, in the context of contract enforceability, are generally separated into mutual and unilateral mistake.
What is a mutual mistake and how does it affect contract enforceability?
A mutual mistake is a mistake by both parties about the basic facts or assumptions of the contract. There is variation in the common law as to whether there has to be a mistake in the basic assumptions surrounding the contract or whether the mistake has to concern the subject matter of the contract. In either case, if this misunderstanding materially affects the agreement, the contract is voidable by the adversely affected party. Example: Tim enters into a contract with Bob to sell him a classic painting that Tim inherited from his grandparents. Tim and Bob both believe that the painting is an early print by famed artist, Auguste Renoir. The parties later find out that the painting is not by Renoir, but is by another famous artist, Claude Monet. The value of the painting is roughly the same. In this case, either party may void the contract, as each party materially misunderstood the terms of the agreement.
When will a unilateral mistake make a contract voidable?
A unilateral mistake about the basic assumptions of the contract will only make the contract voidable when the non-mistaken party knew or had reason to know of the other partys mistake. In such a case, the effect of enforcing the contract against the mistaken party must be unconscionable and the non-mistaken party would not suffer a substantial hardship by voiding the contract. If the non-mistaken party did not know about the other partys mistake, then the standard for voiding the contract is higher. Generally, the contract must not yet have been performed or the parties must be easily restored to their pre-performance positions. The mistake must be substantial, and the mistake must directly relate to some computational or clerical error in the construction of the terms of the agreement. Example: David enters into an agreement with Alicia to sell her a gold necklace. While David never told her so, Alicia believes that the necklace is made of 24K gold. In reality, the necklace is made of 10K gold and is far less valuable than Alicia believes. When Alicia finds out the true composition of the necklace, she refuses to go through with the contract. If David sues her for breach of contract, Alicia may be able to defend the claim on the grounds that there was a unilateral mistake. Of course, she will likely have to show that David knew about her erroneous belief and that it would cause her a substantial undue hardship.
Are there special situations where a mistake does not give rise to a defense?
Yes. No defense exists if the mistaken party knowingly assumed the risk of the mistake; is grossly negligent in making the mistake; violates a legal duty; fails to act within her duty of good faith and fair dealing; or intentionally fails to read the contract. Example: Delila enters into a contract to have Jim paint her house. Jim sends her a contract that says that he will use latex paint. After Jim is done painting, Delila says that she assumed that Jim would oil-based paint. She does not want to pay Jim the full price for his services, as she now wants to have the house repainted in oil-based paint. In this case, if Delila intentionally failed to read the contract, she will likely be unsuccessful in asserting a defense of unilateral mistake.
What is misrepresentation and how does it affect contract enforceability?
Misrepresentation is an intentional or unintentional misstatement of facts by a party. If a party enters into a contract based upon a material or fraudulent misrepresentation by another party, then the contract may be voidable by the relying party. The question of voidability turns on whether the misrepresentation was material or whether it was fraudulent. A misrepresentation is material if it would induce a reasonable person into entering the contract, or the misrepresenting party knew or should have know that it would induce the other party. A fraudulent representation is where the misrepresenting party knows that the representation is false and intends to induce the other party into relying on it. Reliance is reasonable if it is based on all of the facts of the situation and subjective characteristics of the deceived party (age, education, experience, etc.). Example: In an earlier example, Tim enters into a contract with Bob to sell him a classic painting that Tim inherited from his grandparents. In the scenario, Bob and Tim are mistaken about the true artist of the work. If Tim intentionally or inadvertently misrepresents the artist, then Bob would be able to back out of the contract. Note: Intentional misrepresentation can lead to criminal charges for fraud.
Do opinions or misrepresentations about the state of the law make a contract voidable?
No. Except in limited circumstances, a lack of knowledge of the law (including a misrepresentation by one party to another) is not a defense to a violation of that law. Ignorance of the law is no excuse. Despite this general rule, misrepresentations about the law may make a contract voidable if: the misrepresentation is pursuant to a fiduciary relationship or other relationships of trust, Example: Jim is an attorney representing Dora in the sale of a business. Jim erroneously informs Dora that the law requires that she undertake numerous legal actions in order to facilitate the sale of the business. As it turns out, the law does not require many of these legal actions. Based upon Jims advice on the legal process, Dora enters into an agreement to pay Jim $15,000 to assist with the transaction. Dora soon learns that many of the previously discussed legal actions are not necessary. She now believes that she does not really need Jims assistance with the deal. She attempts to void the contract based on Jims misrepresentations as to the state of the law. In this case, she will probably be able to do so. As Doras attorney, Jim is a fiduciary and is thus required to provide an accurate account of the state of the law. In this situation, Doras mistake as to the state of the law justifies voiding the contract. the other party claims to be an expert, Example: Todd is a manufacturer of cement building materials. Ellen owns her own environmental consulting business. Ellen approaches Todd and informs him that he is subject to liability under the Environmental Protection Act for failure to conduct routine environmental inspections of his facility. In reality, Todds type of business is exempt from conducting annual inspections. Todd enters into a contract with Ellen to perform an environmental inspection. Once Tom learns of that the law does not require these inspections, he seeks to void the contract with Ellen based upon mistake of law. Because Ellen held herself out to be an expert in the field, Todd relied upon her in entering the contract. As such, he will likely be able to void the contract. the maker has access superior access to the facts of the situation, or Example: Roger is interested in purchasing Serenas floor cleaning business. Serena discloses all of the information about her cleaning business. As part of this disclosure she states that the cleaning process that the business uses is not subject to regulation by state or federal environmental agencies. Roger enters into a contract with Serena to purchase her business. After entering the contract, Roger learns that the EPA regulates the amount of floor chemical that Serena uses in her scrubbing machines. Serena has consistently exceeded these amounts over the years, and she claims that she was completely unaware of the regulations. Roger is scared that the business will be subject to litigation in future years because of these past practices. Serenas incorrect representation about the state of the law likely makes the contract voidable by Roger. Note: In the above example, this type of misrepresentation could constitute fraud if Serena knew about the environmental regulation of the product and failed to disclose this information. the statement is made by a person posing as a disinterested party. Example: Adam visits Pamelas auto sales business. He is interested in purchasing a 1991 model corvette as a hobby car. When talking with Pamela, they begin discussing the insurability of the vehicle and its status as a classic vehicle. One of Pamelas employees poses as a disinterested customer and tells Adam that the corvette definitely qualifies as a classic vehicle for insurance purposes. Later, Adam learns that the corvette is not insurable as a classic car and the insurance rates are incredibly expensive. Because the individual causing the mistake of law was not really a disinterested party (he is an agent of Pamela), this situation may give rise to a claim to void the contract. Generally, the above exceptions to the general rule that mistakes of law do not make a contract voidable exist to prevent individuals from taking advantage of others who are in special relationships with them.
How does duress or undue influence by a third party affect contract enforceability?
Duress or undue influence by third parties may give rise to a voidable contract. The idea is that there is no mutual assent in a contract entered into as a result of duress or undue influence. As such, the party unduly influenced may void the contract. Example: John is looking for a supplier of silicone for his toy manufacturing business. One of his current providers of rubber material, RubberTek, offers to supply the silicone at a far higher price than some of the competitors. In negotiating with RubberTek, its agent indicates that RubberTek will stop supplying John with any rubber products if he chooses to purchase silicone from a competitor. This would breach an existing contract that John has with RubberTek; however, RubberTek knows that the interruption may put John out of business. Pursuant to RubberTeks threats, John enters into a contract to purchase the higher-cost silicone. John immediately searches for a new supplier of all rubber material. Once he has done so, he seeks to void the contract with RubberTek. John may be able to void the contract based upon RubberTeks duress in influencing John to enter into the agreement. Note: The party subject to duress or undue influence must act to void the contract within a reasonable time of the duress or undue influence ending.
What remedies are available to parties to a void contract?
In some cases, the court will review the facts of the situation and make equitable determinations as to the status of the void contract. The court may reform the contract based upon the basic elements of the agreement. Further, the court may make restitution to any parties suffering a detriment under the agreement. Example: Adrian enters into a contract with Ilene that is rendered void. Under the contract, Adrian performed $500 worth of services for Ilene. Even though the contract is not enforceable, Adrian will likely be entitled to receive from Ilene the reasonable value of her services. This remedy is to avoid Adrian suffering a detriment and Ilene receiving an unfair advantage.