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.