An Overview of Legal Defenses in Contracts
Navigating the complexities of contract law requires more than understanding your rights and obligations. It also means having a firm grasp of the available defenses that can be raised in the enforcement of legal agreements. In the world of contracts, foreknowledge and preparation can often be the difference between victory and defeat. Contract law defenses play a critical role when contract disputes arise. Moreover, these defenses can, in some cases, completely thwart a party’s ability to succeed on a claim.
Contract law defenses can be based on issues related to the formation of a contract, as well as those raised at the time of performance. In terms of contract formation, defenses include questions of capacity (such as a lack of mental capacity), absence of consideration (for example, performance of an unenforceable promise), fraud, and misrepresentation regarding material facts, or material omissions of a party . Defenses raised at the time of performance include impossibility, impracticability, and frustration of purpose. There are several related and overlapping contract law defenses which apply to breach of contract actions. Each of these defenses will be examined in detail in the sections which follow.
Contract law defenses involve fact specific inquiry which means that the viability of a contractual defenses will depend on the circumstances of each case. While the basic rules of contract law may universally apply, the genesis and resolution of contract disputes will inevitably vary from matter-to-matter. So while contract law defenses can mean the difference between prevailing and falling short in a legal disagreement over a contract, the availability of a contract law defense will depend on the individual facts.
Mistake as a Legal Defense
Mistake is a common contract interpretation tool that is utilized in a variety of contracts. Mistake can be a legal defense to the enforcement of a contract if the parties had an incorrect belief about a fact essential to the substance of the agreement. For example, if a car dealership offers a certain price for a new vehicle when it is actually an amount higher than the market value of the vehicle, but the salesman and dealer believed that the price was accurate, the mistaken price charged may be considered mistake such that the dealership may be able to void the contract and not be required to honor the purchase price of the vehicle at closing.
There are two types of mistake in contract law. Unilateral mistake is mistake in which only one party is mistaken and has his or her own understanding of mistaken information that differs from that of the other contracting party. Mutual mistake is made up of mistake in which both contracting parties are mistaken in their beliefs with respect to a material fact that is part of the substance of the contract.
Mistake as a legal defense is used by a contracting party to void or rescind a contract because the contract was based on mistaken information held by one or both of the contracting parties. Often times, this type of legal defense is raised in real estate contracts containing mutual mistake. That is, when both the buyer and seller of the property think that the property is in one condition but it is actually in an unintended condition, one or both may use mistake as a legal defense against the other to rescind the contract in favor of a newly agreed upon bargain.
Duress and Undue Influence as Defenses
Duress and undue influence can be crucial defenses in contract law that render a contract voidable. Coercing a party into a contract through extortion or threats of physical harm, known as ‘duress’, or using one’s influence to unfairly persuade another into an agreement, harms the fundamental principle of free will in contracts. Contracts induced by duress or undue influence may be invalidated, provided the circumstances surrounding their formation meet the legal standards for these defenses.
While civil law systems require that the coercion of physical harm must be a threat of unlawful violence or actual bodily injury (Civ. C § 1565), the common law requires that the wrongful act that induces the duress are of a nature which would be considered a crime or tort (Restatement(Second) of Contracts § 176). In the common law system, all that is required for a claim of duress to be successful is that the wrongfulness of the act which induces the contract or transaction is "enough to overcome the exercise of free will" (Restatement(Second) of Contracts § 176). Therefore, whatever the means, threat, or sufficient degree of pressure employed to induce such a contract is irrelevant; provided it was duress and not mere persuasion.
In order for there to be undue influence it must appear that the person benefited by the contract exerted insulin pressure upon the testator or grantor, and he as a result thereof did not exercise his independent will but acted under, and in accordance with the will of, the person alleged to have used such influence. Such influence exists when an over-persuading or unconscientious pressure which destroys free agency and constitutes its equivalent is used, this without regard to the nature of the means adopted or the extent of the pressure brought to bear.
In Commercial Finance Corp. v. Schuurman, et al., 293 Wis. 112, 218 N.W.2d 316 (1974), the petitioner was ran as a family business and the owner attempted to transfer the business to his son, however the Petitioner insisted on keeping the company in its name despite the transfer. The Petitioner attempted to obtain financing from the Respondents and the father signed a guaranty on behalf his son’s business’ debts, stating that if he failed to pay the debt, the Respondents could take the assets of the business to satisfy it. She took the matter to civil court in which the circuit court found the father had signed the agreement under undue influence which rendered it voidable.
Another example can be seen in Odgers v. United States Bank Nat’l Ass’n, 611 F.Supp.2d 748 (E.D. Wis. 2009). The defendant in the case was a mortgage loan company whom after a contract dispute attempted to foreclose on the plaintiffs’ property after they fell behind in their mortgage payments. At foreclosure, the property was purchased for only $161,000 despite being worth $182,000. The plaintiffs were unable to get financing due to the creditor’s attempt at foreclosure and the banks’ refusal to give them new financing because of the defending banks’ moving forward with the foreclosure. The plaintiff was able to get financing for less than what they had originally, with the new mortgage being for $155,000 and later obtained a consent judgment against the bank in the amount of $272,855. However, the plaintiff had to prevail upon the same arguments in a different court and received a consent judgment in the amount of $392,000. The defendant in this case attempted to undo the consent judgment by arguing that it was based on an oral agreement of the parties which were not supported by sufficient testimony and that the plaintiffs should have stated this defense in their answer to the initial complaint. However, to prevent any potential hardship in the implementation of the Secret Settlement, the Court declined to further explain its approval of the Settlement Agreement.
Fraud and Misrepresentation as Legal Defenses
Fraud and misrepresentation are also important defenses in contract disputes. These concepts refer to intentional, untruthful statements made by one party, which the other relied on, and which induced them to sign the contract or take other actions. To prove fraud, you have to show that the other party committed fraud intentionally, and that you were harmed by the fraud in some way. A false representation of fact. Knowledge the statement was false. Intent to induce reliance on the statement. Justifiable reliance on the false statement. Harm suffered. The elements for proving misrepresentation are the same as those for fraud, except that misrepresentation does not require intent to deceive. The rules are primarily designed to prevent harm to consumers who may be too unsophisticated to protect themselves from fraud.
Illegality and Unconscionability
Illegality and unconscionability are two of the defenses available in contract law to protect an individual’s interests and to limit the enforcement of an agreement. The doctrine of illegality provides that a contract will not be enforced by a court if the underlying purpose of the contract violates a statute or public policy. For example, in Mullally v. Jones, 43 Ill. 2d 500, 255 N.E.2d 404 (1970), Illinois courts ruled that a contract for the hiring of a professional boxer who did not have a license to box in Illinois was void as against public policy. Similarly, a labor union may not agree to waive an employee’s right under an anti-discrimination statute, such as Title VII of the Civil Rights Act of 1964, 42 U.S.C. §2000e et seq. See Alexander v. Gardner-Denver Co., 415 U.S. 36, 53, 94 S. Ct. 1011, 1022, 39 L. Ed. 2d 147 (1974).
A contract that is both unconscionable and illegal, usually has no legal effect. For example, in Seitz v. Cadle Rock Joint Venture-1, 3:01-cv-04989-WJN, 2003 WL 22862643 (M.D.Pa. Dec. 1, 2003), the court held that a confession of judgment waiver included in a promissory note was unenforceable because it was both unconscionable and illegal. However, if only one of these defenses are implicated, the contract will still generally be regarded as a valid contract, but will be held to be unconscionable and/or only partially enforceable. For example, a contract may be unconscionable, but not illegal, and thus will be enforceable to the extent possible. In parting with an unconscionable contract, a court must deny its enforcement in whole or in part, or otherwise limit the application of any unconscionable provisions, to avoid an unconscionable result. Seitz, 2003 WL 22862643 at *4.
The doctrine of unconscionability prescribes a special degree of fairness in the formation of contracts and is used by courts to unfairly disadvantage one of the parties. The doctrine generally looks at a contract that is so grossly unfair or oppressive that a court overlooks the expression of assent to the offending provision of the contract. (courts essentially conclude that the provision is not binding). For example, in Evergreen Park Christian Church v. Oppemheim, 153 Ill.App.3d 883, 106 Ill.Dec. 635, 506 N.E.2d 1006 (1987), the court held that a contract to purchase a church property was unenforceable because it was unconscionable. In Evergreen, the court held that the parties did not deal on equal terms – the seller of the property was illiterate, the church was a non-profit organization, and the church offered the seller as much as $25,000 less than the fair market of the property. Id. at 637. In addition, sellers were pressured to sign the contract without a realistic expectation that they would receive some compensation for all the valuable property, improvements, and business income lost through the sale of the property. Id.
When the factors of the transaction show an unusual imbalance of bargaining power in the terms and conditions of the agreement, the inquiry in an unconscionability case is whether the "ascribed ‘reasonableness’ is unacceptable ‘unconscionability.’" Konover Prop. Mgmt. v. Development Sys., Inc., 657 A.2d 713, 727 (Conn. 1995).
Impossibility and Impracticability as Legal Defenses
Impossibility describes a situation where an unanticipated event renders it objectively impossible for a party to perform under the contract. Impracticability, on the other hand, is a more flexible concept that can apply in certain situations where a performance is technically possible but would involve significant and unreasonable costs. A good way to explain the differences between the two concepts is to state that impossibility is an objective standard, whereas impracticability is a subjective standard. Also, while both doctrines permit a party to void its obligation under a contract, only the doctrine of impossibility can result in either (1) total failure of consideration or (2) false representation in some circumstances – such as inability to deliver goods or to pay a debt – which gives rise to a rebuttable presumption of fraud .
The doctrine of impossibility has limited application in commercial transactions and typically only applies in circumstances where the subject matter of a contract is destroyed or rendered unavailable prior to performance. The sale of a specific car where the car is destroyed would be an example. In most cases, courts will not excuse performance simply because it has become unattractive or impractical. The doctrine of impracticability is broader and has been described as applying "only" where a change in circumstances occurs "substantially" or "far beyond" the type contemplated by the parties at the time of contracting. The main difference between the two doctrines is that impracticability is available even if performance has not become impossible – i.e., an impracticable performance can still be performed, just would be overly expensive or burdensome.
The following examples provide some guidance for these two doctrines:
Breach of Contract: Anticipatory Breach and Actual Breach
In the context of contract law, "breach of contract" can also be a valid defense to a claim arising out of a contract, when the breach is by the other party. It is possible, and often is, incomplete performance of a contract by one or both parties. This is called "material breach" and it can affect whether or not damages will be awarded.
A party or parties who have not yet fully performed, but, for whom performance is due, may be able to defend against claims by other party/parties if the latter have also failed to perform.
Anticipatory Breach
Parties to a contract are entitled to demand that terms be performed on or before a deadline, and must perform as agreed on or before the specified date. A party’s failure to perform on time allows the other party to sue for breach. If a party communicates to the other party prior to the specified date that performance will not be forthcoming, the unimpaired party does not have to wait until the specified date has passed without any performance by the impaired party. This failure by the impaired party to perform or communicate intentions amounting to a failure to perform, is called "anticipatory breach." Signs of this type of breach are when a party states (orally or in writing) that they will not perform, or acts in a way that indicates they will not perform. For example, if someone states that it’s unlikely they will be able to complete a construction project, that most likely would be anticipatory breach.
Actual Breach
When one party fails to perform on the specified day, it is referred to as "actual breach." For example, a contract for the sale of items such as shoes, wherein the seller of the shoes fails to deliver them on the agreed shipment date.
Material Breach
With regard to contract performance, there is a difference between "material breach" and "minor breach." This is important, as the parties may have remedies available to them for a minor or material breach that are not available in cases of minor breach. A material breach might constitute a defense to a breach of contract claim, or may open the door for a suing party to use the material breach as a basis for claiming inability to perform and seeking an adjustment or abatement of the damages.
Waiver and Estoppel as Defenses to Breach of Contract
Waiver and estoppel, while not often invoked as defenses or bars to the enforcement of a contract, can preclude recovery on a claim. Waiver is generally defined as the voluntary relinquishment of a known right or advantage with full knowledge of the material facts. A waiver can occur in either two ways: a knowing and intentional conduct such as words or acts showing an intention to waive; or conduct of such character as to induce a reasonable belief that such a waiver was intended. Estoppel is generally defined as an impediment to a party making a claim or demand because of his or her previous conduct in which he or she acquiesced to, such conduct or acquiescence having created an appearance that such a waiver was intended. The application of these two defenses depends on the parties, their conduct and the facts. If a party who, with full knowledge of his or her rights, accepts performance by another inconsistent with the performance of the contract, he or she may be deemed to have waived any claim because of non-performance of the contract or such party can be estopped from claiming damages for such breach.
An example of waiver preventing a right to recover is found in ALR which states that, "pursuant to the principle that a party may, by his conduct, elect to treat an otherwise wrongful act as having been consented to and to his doing which he had theretofore made objection but which he now sees fit to permit the defendant to do, a waiver may be effected, not only by express language, but also by a considered passiveness where there is a delay for a substantial period without objection."
For example, in an almost 20 year old New York case, the landlord and tenant entered into a commercial lease that provided for notice when the rent was not paid. It was held that the company’s three-year period between defaults was sufficient in and of itself to provide notice. In the example, the landlord waived its right after the first default because it did not insist on strict compliance, but rather acquiesced to the continued non-payment of rent.
Another example of waiver is where the plaintiff assigned a contract subject to the defendant’s approval, the defendant gave such approval and the plaintiff continued to act as an agent under the contract and accepted payment from the defendant. It was held by the Court that the conduct of the plaintiff constituted an acceptance of the assignment.
Wrap-up: Contractual Defense Strategy
As this post has hopefully made clear, a contract defense is only effective if it is appropriate for the underlying facts and circumstances of the contract in question. Relying on a widely reported case or even a clever anecdote from a conversation at a bar without understanding your own position in relation to the contract is not advisable; without reasoned legal counsel, this approach could severely prejudice your success in defending against a breach of contract action . If you are seeking to establish a contract defense, you should seek formal legal advice in order to ensure that you are relying on the right defenses based on the specific facts and circumstances of the contract in question.