Author: keeton

When including an arbitration clause in your contract, the parties may choose between two different forms of arbitration: binding and non-binding.

Binding arbitration is perhaps the most common form. A binding arbitration forces the parties to accept the decision of the arbitrator as the final, legally applicable decision. The decision in a binding arbitration cannot be appealed. After binding arbitration has completed, a court of law is required (assuming that the contract itself is valid) to enforce the decision made by the arbitrator.

Nonbinding arbitration gives the involved parties the option of accepting an arbitrator’s decision. If one of the parties is unhappy with the decision of the arbitrator and would like to proceed with court-based litigation, they are free to do so.

For contracting parties looking to minimize uncertainty, binding arbitration is generally a better choice (as non-binding arbitration may end up being quite costly due to the added costs of arbitration + traditional litigation).

As an initial matter, it is worth keeping in mind that arbitration is a choice open to all involved parties at any point in the dispute process (pre-dispute or otherwise!) so long as they agree to it. It is much safer to include an arbitration clause in the contract to force arbitration in the event of a dispute, but in the event that no arbitration clause has been written into a contract, the involved parties can still agree to arbitration if they prefer it.

If you are setting up a contract for which you’d like to avoid a potentially high-conflict, lengthy process of litigation (in the event that the contractual relationship breaks down), it’s worth including provisions that govern alternative dispute resolution. Specifically, you’ll want to consider writing a contract that explicitly references an arbitration strategy.

Don’t be alarmed by the unfamiliar terminology! These concepts are actually quite easy to understand, so let’s break them down.

Across the United States, the process of civil litigation – in which a lawsuit is filed, the plaintiff and defendant assert their claims and counterclaims, a judge presides, and the court (typically a jury) comes to a decision based on the weight of the evidence – is the default process for resolving a contractual dispute. The problem with litigation is that it can be a lengthy, expensive process that takes several years to resolve, and pits the involved parties against each other, thus escalating existing tensions.

In recent times, however, many savvy businesses and contracting individuals have realized that pushing a dispute through litigation can lead to a lose-lose situation for both parties. The expense, delay, and conflict typical of civil litigation may damage the position of both parties in the long run. Instead, parties often choose to engage in alternative dispute resolution.

Arbitration is a form of alternative dispute resolution that sidesteps the civil litigation process, and is an excellent choice for parties that would like to hold each other to their agreements without having to risk the potential expense, delay, and adversarial conflict inherent to formal civil litigation.

When a contractual dispute is being arbitrated, a neutral arbitrator (often a lawyer or judge specializing in arbitration) is brought in to examine the evidence and hear each side’s arguments, and is subsequently empowered to make decisions regarding the associated claims.

Structuring a solid contract is all about minimizing risk and uncertainty at every step of the process.

In most cases, parties want to ensure that there is a shared understanding as to the provisions of the contract. When parties reach a clear and mutual understanding, this necessarily minimizes the risk of a lawsuit later on.

A well-drafted sale of goods contract will specifically address the expectations of each party with regard to the type and quality of the goods. A service contract will indicate the timeline for the provision of such services, as well as the cost expectations. Provisions relating to the choice of law and venue may be included to minimize the uncertainties of legal interpretation – for example, an employment contract might require the application of California law, which will render the interpretation of certain contract provisions quite differently than the laws of other states.

Though a lawsuit may seem unlikely when you first enter into a contract, conflict is sometimes unavoidable. As such, properly drafting a contract requires that the parties account for the real risk of litigation. One common way for minimizing this risk is the implementation of a limitation of liability clause.

What is a Limitation of Liability Clause?

A limitation of liability clause can be written in a multitude of ways, but generally speaking, it is a provision or set of provisions that work to limit or otherwise circumscribe the potential damages of a breach of contract.

Let’s sift through this legal terminology with a short example.

Imagine that you are a contractor, and you would like to enter into a contract to help renovate a client’s kitchen. The contract is well-defined and adequately describes the services to be rendered, the timeline, and the costs involved. As an extra precaution to protect yourself, however, you consider a limitation of liability clause, primarily because of the potential for damages in a breach of contract situation.

Suppose that you renovate the kitchen, but the client feels that the quality of the materials used is insufficient and therefore constitutes a breach of contract. If the client were to sue you for breach of contract, they might assert substantial damages based on an estimation of the costs of hiring you, plus the cost of re-renovating with a different contractor. Though you conducted the renovation for, say, $20,000, the various damages asserted by the client later on might add up to much more, perhaps $50,000 or higher.

With a clear, unambiguous, and uniquely tailored limitation of liability clause, you can prevent this risk of substantially higher damages than expected. A limitation of liability clause can be used to set a flat damage amount in the event of breach, or it can indicate some other agreed-upon value (perhaps the cost of the services in total – here, $20,000).

Limited liability clauses can be specifically tailored to suit the needs of the contracting parties: flat damage amounts (otherwise known as liquidated damages) can be imposed, damages in the event of delay or other issues of minor breach can be limited, and breaching parties can be forced to indemnify (to pay) the non-breaching party for the costs of litigation.

The Enforceability of Limitation of Liability Clauses

Whether a particular limitation of liability clause will be enforceable depends largely on state law governing the contract, the unique circumstances of the case, and the drafting of the limitation of liability clause itself. Though the intricacies of state enforcement of limitation of liability clauses are not within the scope of this article, you can better ensure that your clause is enforced by drafting your limitation of liability clause according to certain accepted standards.

Clear and unambiguous.
In states where limitation of liability clauses are acceptable, they are generally not enforceable unless the provisions are written clearly and unambiguously such that the contracting parties were truly aware how the clause would affect their right to recover damages.

The clause should clearly specify the circumstances under which it applies. Concise clauses tend to be more readable and more unambiguous, so do make an attempt to write cleanly and in a way that avoids excessive verbosity. The intent of the contracting parties should be expressed in an obvious manner.

Visual prominence.
The courts in some states have occasionally refused to enforce limitation of liability clauses in situations where the language of the clause was not visually prominent enough. It is recommended that you capitalize, bold, or otherwise “highlight” your limitation of liability section to ensure that even a casual scan of the contract would reveal its existence.

Maintain the balance of power between the parties.
As a matter of public policy, many states require that the balance of power between the contracting parties be relatively equal. If one party enjoys a significantly stronger position at the bargaining table, or is significantly more sophisticated, this may count against enforcement of the limitation of liability clause. As a rule, courts typically do not want to enforce provisions where one of the parties was not an equal or knowledgeable partner.

Discussion between the parties.
A limitation of liability clause is not likely to be enforced if a mutual understanding has not been reached. Though this should be resolved through clear and unambiguous drafting, it will certainly help if you discuss the details of the clause with the other contracting parties. Sufficient engagement not only helps to ensure that a mutual understanding has been reached, but may also minimize conflict by opening up communication between the parties.

The provisions of a contract must be interpreted and enforced in accordance with the laws of a particular country and/or state.  Application of different national and state laws can have significant effects on enforceability of the contract.

For example, in the state of California, employee non-compete agreements are generally void.  In the state of New York, on the other hand, employee non-compete agreements can be enforced – in limited circumstances – but are highly dependent on the facts.  Thus, whether a non-compete clause is enforceable may ultimately depend on what law is used to interpret the underlying contract.

In the event of a breach of contract, ambiguity over applicable law and jurisdiction can lead to an extensive preliminary legal dispute that requires additional time, effort, and expense to litigate.  To put it in simpler terms: parties generally want to litigate their contract disputes in accordance with the law that gives them the greatest advantage.  An employer attempting to enforce a non-compete agreement might prefer to apply New York law over California law.  A Florida-headquartered, U.S.-based company receiving shipments from a Chinese company might prefer to apply Florida law in interpreting the shipping contract.

The reality is that many contracting parties will fight tooth-and-nail to secure the legal framework and courts that are most advantageous to their arguments.  If it is in the best interest of a contracting party to invalidate the contract, then it should be assumed that they will make an attempt to apply the laws of a particular state or country that would invalidate the contract.

Fortunately, when drafting a contractual agreement, the preferred law can be chosen by the contracting parties through the insertion of a choice-of-law clause (otherwise known as a governing law clause), thus minimizing the uncertainty and costs associated with choice-of-law disputes.  Most reasonable parties seeking to draft effective contracts therefore negotiate the governing law before later disputes arise.

Choosing an Unambiguous Governing Law

If you are interested in selecting a U.S. state law to serve as the governing law of your contract, it pays to be aware of the limitations.  Primarily, U.S. courts cannot enforce a governing law clause unless there is some reasonable nexus (connection) between the subject matter of the contract and the state law selected to govern the contract.  Whether the court determining the enforceability of your governing law clause will find that there is a reasonable nexus is dependent on the circumstances, and as such is not completely predictable.  The presence of certain factors does improve the possibility that a court will find your governing law provision enforceable, however.

The following factors are likely to favor the enforceability of your governing law clause.  This is a non-exhaustive list.

• The physical residence or presence of one of the parties in the state.
• The manufacture, distribution, or sale of goods takes place in the state.
• Services are rendered, fully or partially, in the state.
• One of the parties does significant other business in the state.
• The state of incorporation of a corporate entity involved in the contract matches the governing state law.
• The contract was signed in the state.

Let’s run through a simplified example to highlight the issue without too much legalese.

Suppose that two parties enter into a contract for services.  One party is offering building renovation services – we’ll call them RenovateCorp – and the other party is a landlord purchasing those renovation services for one of their buildings.  We’ll call him Landlord.  The Landlord is located in California.  RenovateCorp has its physical headquarters in Texas.  The building to be renovated is located in Colorado.

If the contract is governed by either California, Texas, or Colorado law, it is likely to be enforceable.  Each of these states has an obvious and significant connection to one of the parties, or a significant connection to the content of the agreement itself (i.e. the renovation of the building).

What if the contract is governed by some other state law, however?  Finding a reasonable connection between the governing law and one of the parties (or the content of the agreement) becomes more difficult, but is not necessarily impossible.  If RenovateCorp has a regional office in New York, for example, that might serve as a reasonable connection to the application of New York governing law.  This connection might be strengthened if it could be shown that some of the design-work for the building’s renovation was conducted at the New York regional office.  If RenovateCorp was incorporated in New York, that would further strengthen the governing law claim.

We finally arrive at a general rule: you should choose a governing law that is directly related to the parties or the content of the agreement itself.  If you do not, make sure that there are substantial enough connections between the governing law and one of the parties (or the content of the agreement).  Otherwise, you may find that the governing law clause is unenforceable.

Selecting the Applicable Jurisdiction

When drafting a governing law clause into your contract, do not ignore the jurisdiction clause.

A governing law clause indicates what state and/or national law you would like to apply to your contract.

A jurisdiction clause indicates which courts you would like to apply the governing law.  It controls the venue in which your legal dispute will be heard.

This difference may seem confusing at first.  Many laypeople assume that a state or federal court can only apply its own law.  In reality, however, state courts can apply the laws of other states.  A California court can interpret and apply Texas law, for example.  A New York court can interpret and apply Florida law.  In certain circumstances, courts can even interpret and apply the laws of other countries.

Ambiguity over jurisdiction can lead to additional disputes and litigation, so – just like governing law – it is best negotiated while drafting the contract.  Jurisdictional choice might seem minor at first, but there are several reasons for negotiating jurisdiction: convenience, familiarity, bias (it is generally accepted that a party in its home state will enjoy a minor advantage against an out-of-state party), and cost.

Exclusive vs. Non-Exclusive Jurisdiction

When drafting your jurisdiction clause, you can make jurisdiction exclusive or non-exclusive.  Exclusive jurisdiction limits litigation to the specified venue.  Non-exclusive jurisdiction does not limit litigation, but simply allows for litigation at a particular venue.

Let’s compare.

Suppose that a contract is drafted to indicate New York governing law, and non-exclusive jurisdiction.  The parties are from California and New York.  As jurisdiction is non-exclusive, a lawsuit can be filed in both California and New York courts.  If jurisdiction were exclusive to New York, however, then a lawsuit could not be filed in California or any other state besides New York.

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Governing law and jurisdictional ambiguity in your contract can lead to extensive, costly litigation.  Knowledgeable parties draft governing law and jurisdiction clauses to avoid issues down the line.

The type and texture of contracts that parties can form are extremely diverse.  Correspondingly, the remedies for a breach of contract are also diverse, but it is the circumstances surrounding one’s contract that will determine which remedy applies.

What remedies are contracting parties entitled to in the event of breach?

Liquidated Damages

In some contracts, the parties agree to a set amount to be paid out if something goes wrong.  This contractually agreed-to payout is known as “liquidated,” or “agreed,” damages, and it takes precedence over any other remedies that would have otherwise been available.  Liquidated damages are acceptable so long as the amount agreed-to in the contract is a reasonable estimation of the harm caused by breach, even if the liquidated damages amount is not quite accurate.  To put it in simpler terms: liquidated damages must reasonably approximate the damages caused by breach.

Imagine that two persons enter into a contract.  One of them will perform monthly maintenance on the other’s appliances for $100 every month.  Perhaps there is a liquidated damages provision giving $200 as a remedy for breach.  This liquidated damages amount would probably be seen as reasonable, as one could argue that it accounts for an instance of breach and an extra month to allow for the maintenance person to find a replacement client.

At first it may seem that liquidated damages opens the door for contracting parties with greater bargaining power to bully those contracting parties with less bargaining power into accepting a liquidated damages remedy in order to do business.  In reality, however, the use of liquidated damages benefits the legal system.  Because contracting parties agree to a set payout, this reduces the risk of expensive, lengthy litigation to determine the actual damages amount in the event of breach.  Further, because material terms are already explicitly laid out in the initial contract, liquidated damages may also encourage early settlement.

Of course, you may find yourself in a situation where the liquidated damages provision of your contract is not a reasonable estimation of the harm caused by breach.  If the liquidated damages amount is too large (or perhaps, too small), then the court may step in and require that actual damages for breach be shown.

Specific Performance

In certain circumstances, a mere damages remedy will not suffice.  In such cases, the court may require that the defendant actually push forward and fulfill their end of the contract.  This is known as specific performance.

Generally, specific performance is a potential remedy in cases where the product or service involved in the contract is unique and irreplaceable, such that a money remedy would not allow the victim to secure a suitable alternative.  Some examples of unique services or products include a performance by an artist or the purchase of a parcel of real estate.

It is worth noting that it is much easier to prove that money damages are “inadequate” with regard to real estate, as real property is presumed unique.  With other products and services, however, your attorney will have to work hard to prove that a damages remedy is inadequate.

Importantly, the court may weigh against specific performance if it would simply not be feasible to enforce it.  There are numerous structural reasons enforcement might be “infeasible,” but the courts are also hesitant to enforce specific performance in situations where the defendant would have to work closely with the plaintiff in order to fulfill their contractual obligations.  For example, the court may weigh against specific performance in a employment contract litigation if the defendant would have to work side-by-side with the plaintiff for an extended period of time.  The courts are certainly aware of the psychological stresses that defendant would have to contend with in operating in close proximity of the plaintiff who brought the suit against them.

Rather than risk protracted litigation, many contracting parties will agree to specific performance as the sole remedy for breach.  This specific performance remedy can be written directly into the contract, and by doing so, the parties ensure that the contract will be completed.

Rescission, or Acting as Though the Contract Never Existed

Rescission allows for a contracting party to revoke, or rescind, the contract even after it has been signed and executed.  Perhaps the simplest way to think about rescission as a remedy is to look at it as a way for one party to prevent an ongoing contract from further harming them.  Rescission is not a damage remedy – it is an equitable remedy – but after rescission is complete, one may bring a suit to recover any money owed by other contracting parties.

It is not uncommon for one of the parties to bring a suit to recover money owed after rescission is complete.  A contract may be rescinded after products and services have already been exchanged, and so, even if the contract is rescinded, there may be unpaid debts to account for between the two parties.

California Civil Code section 1689 lists the specific circumstances under which a contract may be rescinded.  Though the following list is not exhaustive, under section 1689, a contract may be rescinded when:

• Both parties consent to rescission.
• Consent of the rescinding party to enter the contract was obtained by mistake, fraud, undue influence, duress, or menace.
• Consideration fails due to the fault of the non-rescinding party.
• Consideration becomes void from any cause.
  • For example, if a minor entered into a contract, any consideration that the minor gave would be void, as minors cannot legally enter contracts.
• The contract is unlawful for causes that do not appear in its terms or conditions and the parties are not equally at fault.
• The contract would have a negative effect on the public interest.

Rescission is a remedy that requires timely action.  If you believe that you may have a case in which rescission is a legitimate option, it is crucial that you file a lawsuit as soon as possible.

Standard Damage Remedies

Standard damage remedies for breach of contract fall into one of the following categories: 1) expectation, 2) reliance, and 3) restitution.   Let’s examine them in turn.

Expectation Damages

Expectation damages are a measure of the potential monetary gain that the victim of breach would have been entitled to had the contract been fulfilled.  Expectation damages are measured by the difference between the monetary amount actually earned or given during the course of the contract, contrasted with the amount that would have been earned or given had the contract been fulfilled rather than breached.  In effect, expectation damages repairs the breach of contract for the injured party by financially “completing” the contract.  It is usually calculated by balancing lost profits and incidental damages against expenses that were avoided through non-performance of the contract.

Reliance Damages

Whereas expectation damages attempt to place the injured party in the monetary position where they would have been had the contract been fulfilled, reliance damages attempts to repair breach by placing the injured party in the monetary position where they would have been had the contract never been formed.  In effect, reliance damages compensate the injured party for the damages suffered as a result of relying on the breaching party’s promise to fulfill their end of the contract.

For example, imagine that a man enters a contract to sell his car in good condition, and reasonably spends money on maintenance and cleaning for his car to prepare it for sale.  If the would-be buyer breaches the contract and decides not to purchase the car, then the buyer may be liable for reliance damages for the maintenance/cleaning, so long as those damages can be proven with reasonable certainty.

Restitution Damages

In some breach of contract cases, primarily in partial performance cases, restitution damages may be available as a remedy.  Restitution damages attempt to fix the monetary imbalance of breach by affecting the monetary position of the breaching party – not the injured party.  The breaching party is put in the position it would have been in had the contract never been formed.  In effect, any monetary benefits the breaching party enjoyed as a result of the contract are “returned” to the injured party.  Consider, for example, a situation in which a carpenter offers his services to a client.  The carpenter is hired to build handmade cabinets in the client’s home over the course of a week.  Imagine that, halfway through the week – and after the carpenter has already completed several built-in cabinets – the client refuses to pay for work completed and refuses to pay for the finished project.  The carpenter may then sue for restitution damages, so that he can receive payment for the “value received” by the breaching client for the cabinets already built.

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Contracts are highly malleable, and can be written so as to provide for certain remedies, as desired.  Understanding the potential remedies for a breach of contract is an important step towards drafting a contractual agreement that is suitable for all involved parties.

 

Warranties in Contracts for the Sale of Goods

The legal landscape for purchasing goods has changed drastically over the years, from “buyer beware” to the implementation of a system that protects buyers through implied/express warranties.  If you are considering a sale of goods contract, it is absolutely beneficial to understand the various obligations and entitlements of the contracting parties.

Consider this scenario: a buyer and a seller want to commit to an exchange using a SignatureConfirm contract.  The seller would like to exchange their used refrigerator to the buyer for $1,000 in cash.  Neither of the parties are merchants, which is to say that neither of the two interested parties deal in the relevant good (here, consumer electrical appliances) as per their occupation, or present themselves as having specializing knowledge as to industry practices relevant to the transaction.

Naturally, each party would like to protect themselves from the possibility of a contract gone awry, and as such, certain legal concerns begin to crop up.

What law or set of laws apply to the sale?

Is the buyer protected?

What recourse does the buyer have if the goods do not meet their quality expectations?

Let’s consider these concerns in turn.

What laws apply?

In every state except for Louisiana, the Uniform Commercial Code, or UCC, applies to the sale of new and used goods.  The UCC does not apply to real estate or service contracts, which can lead to some confusion – there are a great many service contracts that involve the sale of goods, and a great many sales contracts that involve the limited application of services – but in effect it is actually quite simple.

Suppose that the contract for the refrigerator sale discussed above involves a limited service engagement as well.  The seller will not only give the buyer the fridge, but will also take the time and effort to install the fridge in the buyer’s kitchen.

Despite the fact that services are being rendered, this is still a sale of goods contract, as the sale of goods is the dominant element of the contract.  The installation is not the core of the contract, though it may be important to the value exchanged.  Clearly an installation service would be ineffectual without goods to install.

The UCC has broad applicability in a contract scenario.  It not only governs the dynamics of contract formation, breach, and damages, but also governs the various warranties that attach to contracted-for goods.

How is the buyer protected?

Both express and implied warranties protect the buyer from the possibility of a “dud” product exchange.

An express warranty is an affirmative promise made by the seller concerning the goods.  The warranty need not be written (it can be an oral guarantee), but for the purpose of suing for breach of contract, it is certainly better from an evidentiary perspective to have any express warranties made by the seller written into the contract.

The seller may expressly warranty any number of things: they may convince the buyer that the good(s) will meet certain safety tolerances, or that it will be composed of certain high-quality materials.  Ultimately, what constitutes an express warranty is whether the seller’s affirmative promises formed the partial or full basis of the contractual bargain.  To put it more simply, the question of whether an express warranty exists depends largely on whether the buyer’s agreement to enter the contract depended – at least in part – on the seller’s statements.

For example, suppose that the seller of a used refrigerator states affirmatively to the buyer (whether written into the contract or orally promised) that the refrigerator will have a working ice-grinder.  The buyer is only interested in purchasing refrigerators with a working ice-grinder.  Pleased, the buyer agrees to the deal.  The seller’s statements here clearly constitute an express warranty.  If the ice-grinder does not work, then the buyer will likely have a legal claim against the seller.

An implied warranty is a guarantee relating to the quality or nature of the goods being sold, but it is automatic – it does not require any affirmative statement or promise on the part of the seller.  The imposition of implied warranties on goods helps to shield buyers from potentially unscrupulous sellers by setting certain minimum standards for the goods.

There are two primary implied warranties under the UCC – an implied warranty of merchantability, and an implied warranty of fitness for a particular purpose.

The implied warranty of merchantability is only applicable to non-merchant sellers.  It specifically attaches only to merchant sellers, and that too, only to merchant sellers who are selling a good that they commonly sell on the marketplace.  For example, a clothes merchant who decides to sell a single customer a watch does not make an implied warranty of merchantability as to the watch.  Under the implied warranty of merchantability, the seller is liable for any goods that are not fit for their ordinary purpose.  If the goods do not adequately perform their ordinary purpose, then the seller has breached their implied warranty of merchantability.

For non-merchant sellers of goods, the warranty that may actually apply is the implied warranty of fitness for a particular purpose.  For the implied warranty of fitness for a particular purpose to attach: 1) the seller must possess some knowledge or expertise concerning the goods at-issue; 2) the seller must have reason to know or must actually know that the buyer will be using the goods for a particular, non-ordinary purpose; and 3) the buyer must rely on the seller’s knowledge or expertise.  Ultimately, the implied warranty of fitness for a particular purpose is intended to force the seller to disclose all and any relevant details concerning the goods.

Let’s continue with the refrigerator example.  Suppose that the buyer makes it clear to the seller that they would like to setup the refrigerator for a particular, non-ordinary purpose – the summers in his city are quite warm, and the buyer hopes to benefit from leaking cold air from the refrigerator, creating an ambient cold in the kitchen.  The seller is aware of this particular purpose.  The seller is not a specialized appliance merchant, but has owned the fridge for some years and is aware of its abilities and limitations.  The fridge is air-tight and has an advanced system that prevents any ambient cold leakage.  The buyer is not aware of this.  If the seller were to move forward with the sale, it would likely be a breach of the implied warranty of fitness for a particular purpose.

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When entering a contract for the sale of goods, be aware of the various warranties – both express and implied – that may attach.  A strong warranty can provide peace of mind for the buyer, while no warranty can lead to conflict later on.

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.

The SignatureConfirm service empowers you to write and send electronic copies of contracts to clients and partners – among others – and to receive validated e-signatures indicating their assent.

We do not provide pre-written contracts to users, nor are we involved in contract negotiations.  As such, it is important that users learn the basic mechanics of contract formation so as to minimize potential conflict between the contracting parties and to help ensure that contracts sent through the Service are valid and enforceable under the law.

Contract Formation – The Fundamentals

In every state, the mechanics of contract formation are based on the same basic elements: in order for a valid contract to be formed, there must be mutual assent to the terms of the agreement, and the contracting parties must each incur some kind of bargained-for detriment (in legal circles, known as consideration) as a consequence.

As this terminology may be a bit unfamiliar and confusing at first glance, let’s break these terms down into simpler component parts.

Mutual assent is an umbrella term that covers the process of offer and acceptance between contracting parties.  In the offer and acceptance process, the ultimate goal is for the contracting parties to reach an “agreement of the minds.”  This back-and-forth is the fundamental building block of contract formation.

Offer

An offer is put forth by the offeror.  An offer must indicate the willingness of the offeror to bind himself or herself to the terms of the contract.

Acceptance

Acceptance of the offer is made by the offeree.  Similarly, an acceptance must indicate the willingness of the offeree to bind himself or herself to the terms of the contract.  In a standard bilateral contract, the offeree must also communicate their acceptance to the offeror.

Intention and Communicating Acceptance

As stated above, acceptance requires an expressed intention – a willingness to bind oneself to the terms of the contract – and this can sometimes present an issue in oral contracts and other types of contracts where it is not entirely clear that the offeree has expressed a clear willingness or intention to accept the terms.

By using SignatureConfirm to send contracts, however, clarity of intent is maximized.  Offerees are sent a signature code which enables them to read the contract and sign with their digital signature, thus giving an objective indication of their intent to bind themselves to the contract.  The acceptance is also communicated expressly.

Mirror Image Rules and Consistent Terms

Offer and acceptance is often seen as an organic, back-and-forth process.  The first and most important piece of this puzzle is understanding the common law mirror image rule, which applies in California and New York, among other states, and applies primarily to non-merchant sellers.

For merchant sellers, the Uniform Commercial Code (UCC) usually applies in a sale of goods, with a different set of rules and expectations.

Under the mirror image rule, for an acceptance to be valid, it must indicate a willingness to accept the terms of the offer exactly.  If any of the terms differ, then the acceptance will be considered a counter-offer instead.

Suppose, for example, that a man wants to sell his old television set to an online buyer.  The two parties are discussing this potential sale over a series of emails.  The seller offers the television set for $150.  Perhaps the buyer compliments the seller and shows a clear interest in purchasing the television set, using language that favors the sale, but with one important change: the buyer will purchase the set for $100.  Ultimately, the buyer’s response was not an acceptance, but was a counter-offer.  The seller is not required to deliver the television set to the buyer for $100.  The seller may, however, agree to the counter-offer, and in doing so, would therefore end the back-and-forth by accepting this counter-offer.

Worth noting is that only relevant terms need to be matched under the mirror image rule.  Missing terms may be supplied by a court in certain limited circumstances, as well.  In the above example, if the buyer had accepted the pricing and delivery terms, but indicated that for the sale to go through the seller would have to say “hello” when they exchanged the goods, this modification term would likely be considered irrelevant.  The buyer’s reply would therefore be an acceptance, and not a counter-offer.

Consideration is a negotiated detriment that is being promised as part of the contractual exchange.  Consideration can be quite varied, but it must be a reasonable, bargained-for detriment.  In simpler terms, proper mutual consideration is the exchange of something of value.

Consideration can be a simple promise of monetary payment (promising to give $1,000 in exchange for a person’s services, for example) or a promise to perform services for someone in exchange for an item of value, or something complicated like agreeing not to sue someone (which you might be legally entitled to do) in exchange for a monetary settlement.

Crucially, consideration must be given by every party in a contract.  If there is no consideration, then the contract will not be valid.  Gifts are therefore not proper consideration.  Whether you use SignatureConfirm to send your contract or not, you cannot create a valid contract in which only one party suffers a detriment.

Invalid Contracts

Keep in mind that there are several factors that will render your contract invalid if they are proven.  They are legal incapacity, illegality, and duress, misrepresentation, and undue influence.

Legal Incapacity

A contract is invalid if one of the contracting parties did not have the legal capacity to agree to its terms.  This incapacity may be a consequence of age, mental disability/illness, or intoxication at the time of acceptance.

A minor is legally enabled to enter a contract, but is uniquely allowed to void their contract unilaterally.  This can make it especially risky to contract with a minor.

Mental incapacity does not mean any mental disability or issue.  A contracting party may have a mental disability or illness that does not necessarily affect their capacity to contract.  Basically, a party is not legally capable of entering a contract if their mental state renders them incapable of understanding the nature, meaning, and effect of the contract and its terms.

Whether a party’s intoxication at the time of contract formation affected their capacity to contract depends on the level of intoxication and the circumstances at the time.

Illegality

A contract is invalid if the purpose of the contract is illegal.  For example, if two parties contract to share the spoils of a robbery, and one of the parties refuses to share the spoils, the contract cannot be enforced against the violating party.

Duress, Misrepresentation, Undue Influence

Manipulating or otherwise inducing a party to enter into a contract through unreasonable, unethical means (for example, abusing one’s position as a nursing home employee to unduly influence seniors at the home to change the beneficiaries of their estate plan), will make the contract invalid.

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Though the law varies between jurisdictions, certain fundamental rules apply to contracts in all states.  Understanding the mechanics of contract formation helps to minimize conflict between parties and exposes the parties to less risk further down the process.