Month: May 2016

Common Contract Defenses – What Renders a Contract Void or Voidable?

A breach of one’s contract can cause substantial financial and organizational disturbances.  Of course, not all breach is the same — in some cases, breach is in retaliation of a prior breach, and in others, the contract which has been breached was invalid to begin with.  To address this variation, there are numerous potential defenses to a breach of contract lawsuit.

Understanding the various contract defenses is of particular use in helping further our understanding of how to draft and execute solid, unassailable contracts.  When one considers the potential fail-states of contracts, and the applicable defenses to said fail-states, certain best-standards for drafting and executing contracts are made clear.

Voidable and Void Contracts

Certain defenses render the contract at-issue void or voidable.  In other words, the defense to breach of said contract is not that the breach was necessarily justified, but rather that there was no valid contract to breach.

A voidable contract is one in which the victimized party may choose to end the contract or choose to continue with it as though it were valid.  This is put in place to allow for a contract to continue if it would be beneficial for the victimized party.

A void contract is one in which the contract is deemed so fundamentally unfair that it must be rendered invalid by default.

If any of the following defenses are asserted and succeed, then the breaching party cannot be held liable.

Incapacity/Incompetency

If a contracting party lacks the capacity or competency to enter into the contract at-issue, then the contract will necessarily be rendered invalid.  The situations in which a contracting party may be deemed incompetent are quiet varied, however.

Minor Age

A person who has not reached the age of majority may still enter into a contract, but is deemed by the law as lacking the capacity to enter into a contract.  As such, though a minor can enter into a contract, they are also entitled to void their contracts at a whim.  This makes it somewhat risky to enter into a formal contract with a minor in which substantial goods or services are involved.  Worth noting is that if the minor party does not void the contract and subsequently reaches the age of majority, the contract can no longer be voided.

Mental Incapacity

Generally speaking, mental illness does not by default render a person incapable of entering into a valid contract, but if a person is incapable of making decisions for themselves in a legal context, then it is highly likely that they are incapable of entering into a valid contract.  Persons who require legal guardians or live-in caretakers are likely candidates for this defense.  Circumstances also plays a role, of course.  Though a mentally ill person may be reasonably capable of entering into certain contracts, other contracts may be beyond their capabilities of understanding.  The courts tend to consider the circumstances in a holistic manner.

Intoxication

Drug or alcohol-induced intoxication at the time of contract formation may render that contract invalid, but this situation is a bit more tricky than either age-based or mental-based incapacity.  In nearly every state, the courts have a tendency to hold intoxicated persons responsible for their actions while intoxicated.  Thus, though a contracting party may have lacked the capacity to enter into a valid contract due to their intoxication, it is not a guaranteed defense.  Oftentimes, some additional evidence of wrongdoing is necessary, such as evidence of the intoxicated person having been manipulated into entering the contract.

Illegal Purpose

This may seem somewhat obvious, but it bears mention: a contract with an illegal purpose is void on its face.  For example, a contract between two home invaders to split their stolen earnings cannot be enforced, as theft is illegal.  Contracts involving banned or otherwise non-legal products (such as imported meats that have not been cleared by the FDA) are similarly invalid and thus any breach is unenforceable.

Mistake

A shared mistake may result in an invalid, voidable contract, if the mistake involves some element of the contract that is fundamental to the essence of the contract itself.  For example, if a contract involves the sale and delivery of potatoes, but each party mistakenly thought that the potatoes would be of a certain variety (one party thought it would be russet, the other thought it would be red), then the contract might be rendered voidable.

Unconscionable Circumstances

There are some situations in which a court might find that the overall circumstances are unfair, unjust, or otherwise unconscionable to a degree such that the contract must be rendered void for the sake of positive public policy.  If the courts were to find the contract valid, then it might lead to further injustice.  For example, suppose that a contract is formed in which one party does not have access to legal counsel and is relatively uneducated.  The contract is disproportionately favorable to the other party, who has access to expert legal counsel and who is himself relatively well-educated.  If the contract involves significant assets, a court might find the circumstances unbalanced to a degree that is unconscionable.

Inducement

Improperly inducing a party to contract is grounds for rendering said contract invalid.  There are several ways by which a party may improperly induce another party to enter into a contract.

Duress

Occurs when one party is induced to enter into a contract by threats.  Duress requires that no reasonable alternative action have been available.

Undue Influence

Occurs when there is an inherently imbalanced relationship between the parties, and the party with more power uses this imbalance to influence the victimized party to enter into the contract that operates against their well-being.  For example, a nursing home caretaker may unduly influence one of the nursing home members, a lonely old lady, to include him in her Will.

Misrepresentation

Occurs when one party intentionally misrepresents the facts by outright lying, concealing facts, or withholding relevant information that they are legally required to reveal.

Affirmative Defenses to Breach

In addition to the above defenses, in which the defending party asserts that the contract itself was invalid, there are affirmative ‘excuse’ defenses in which the defending party asserts that their breach was justified in some way.

These excuses include but are not limited to: a) the defendant was could not perform their obligations under the contract due to various barriers preventing such performance, whether those barriers were created by the plaintiff or simply imposed by circumstance; b) the plaintiff breached the contract first, in anticipation of further breach; and c) the defendant’s performance of their obligations under contract were dependent on a third-party event’s occurrence, which did not happen, thus leaving the defendant unable to perform.

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By understanding the range of defenses available in contract cases, you can draft better contracts.  As a general rule, for example, the fewer third-parties relied on, the better (to avoid an affirmative defense due to failure of a third-party).  It is also riskier to contract with a minor due to the fact that the minor can void the contract at any time prior to the age of majority.  These best-practices are driven by a knowledge of potential contract defenses.

An Introduction to Breach of Contract

Fundamentally, a contract is a legally binding promise between two or more parties.  Once a contract has been established, each of the parties is obligated to perform their duties under the contract.

Contracts require adequate consideration, which is a bargained-for benefit or detriment.  Without adequate consideration, the contract promise will constitute a gift, which is generally unenforceable under contract law (though there are exceptions to the rule).

Confused?

Suppose that an uncle promises his niece that he will purchase her a luxury purse as a gift.  Unfortunately, extenuating financial circumstances force the uncle to choose a different, cheaper gift.  If the niece decides to sue her uncle for breach of contract, she will most likely fail, as there was no legally enforceable contract, as the uncle did not promise the purse in exchange for adequate consideration.  If the niece had reciprocated the promise with an exchange of adequate consideration, she may have a better case.  If the niece had agreed to paint her uncle’s house in exchange for the purse, then the uncle’s promise would not be a gift and the oral contract might be legally enforceable.

It is worth noting, however, that even if there is a legally enforceable contract, unless the plaintiff-niece can prove that she has suffered damages as a result of the breach, she would likely be unable to successfully litigate the case.

Though there are an almost endless variety of contracts and provisions that define each party’s duties, all contracts are subject to certain basic rules of contract law.

If one of the parties has violated a contractual obligation, then they have breached the contract.  There are many potential conflicts that may arise between contracting parties, such as delays, product or service quality concerns, and pricing concerns, among others.  Whether the contract fails or continues after breach depends on whether the breach was material or immaterial.

To summarize, for a breach of contract claim to succeed, the plaintiff must show that:

• There was a valid, enforceable contract.

Remember, there must be adequate consideration.  Pure gift-giving is not enforceable under contract.

For an introduction to the process of offer and acceptance by which many valid contracts are formed, please read our article here.

• The contract was breached.
• The plaintiff suffered damages, and there is a legal remedy.

For example, if the defendant delivered an item an hour later than the contract required, but the plaintiff did not suffer any losses or other damages as a result, then the plaintiff would not be able to recover in a breach of contract suit against the defendant.

• Various contract defenses do not apply.

Let’s focus on the specifics of breach.

Material vs. Immaterial Breach

There are two forms of breach: material and immaterial.

A material breach is a breach of primary contractual obligations, thus rendering the spirit – or core – of the contract broken.  Material breach usually results in a failure of the contract, after which the plaintiff can sue to recover damages.

An immaterial breach is a breach of secondary contractual obligations, which by their very nature do not end the contract.  It can be quite difficult to recover damages for immaterial breach, as the breach necessarily involves a secondary aspect of the contractual bargain.  To recover damages for immaterial breach, the plaintiff would have to show that they specifically suffered damages as a result of said immaterial breach, and not due to some other influencing factors.

In simpler terms, material breach covers more essential terms of the contract, while immaterial breach covers less inessential terms of the contract.

Though a plaintiff can potentially recover damages for both material and immaterial breach, the likelihood of success is far greater for a plaintiff suing for material breach.

Importantly, a contract can be written to explicitly state that violation of certain provisions will constitute a material breach.  Consider this option when drafting your contracts, so that you can better protect your rights under contract.

Let’s consider an example to further illuminate the differences between a material and immaterial breach.

Suppose that there is a breach of contract case involving a defendant who sold their used television set to the plaintiff, a buyer on the opposite end of the city.  The two parties signed off on a written contract, which contained provisions guaranteeing that the television would meet certain technical criteria.  Perhaps the contract also guaranteed that the television would be delivered in a week, at a particular time-of-day.  None of these provisions explicitly provided that violation would constitute material breach.

The defendant delivered the television to the plaintiff on the correct day, but due to unforeseen traffic conditions, the television was delivered an hour late.  The plaintiff’s inspection revealed that the television was in good shape, however, and that it met all the technical criteria that they had agreed to as per the contract.

Given the facts, it is unlikely that the plaintiff will be able to show that the defendant’s conduct constituted a material breach, rather than an immaterial breach.  Certainly, a late delivery is unfortunate, but assuming that the television will be used for a number of years, an hour delay in delivery (especially given that the television met all other criteria) is most likely immaterial.

Had the television not met the technical criteria requested in the contract, the plaintiff may have a solid claim for material breach of the contract.

Of course, the facts – if adjusted – may allow for the delay to be considered a material breach.  Suppose that the reason for the specific delivery was so that the television could be used for a business presentation to a room of potential investors.  The late delivery meant that the television could not be setup in time for the presentation, however.  Though it would be difficult to calculate the damages suffered, the plaintiff may be able to argue that the late delivery in such circumstances constituted material breach.

To avoid confusion , your contracts should explicitly state which provisions – if violated – would constitute material breach, and to further minimize potential conflict, you can also include provisions that dictate damages owed upon breach.