This article has been written by Prithviraj Dutta. It aims to understand the various defenses that are provided by the US Contract Law. For this purpose, explanations in relation to the capacity to contract in relation to minors, lack of mental incapacity, intoxication, and lack of the requisite signatory authority have been explained in detail. After this, the defense of the “Statute of Frauds”, assent-based defenses, policy-based defenses and relevant cases have been discussed to ensure a better understanding of all the available contract defenses.

Table of Contents

Introduction

Contracts consist of agreements on a varied number of topics. An individual can make a contract to buy a real estate property, and the same individual can also make a contract to hire someone to look after his pet.

In relation to contractual obligations, if one of the concerned parties fails to perform their part as their obligation to the contractual provisions, they would have said to commit a breach of contract. Breaches involve the following:

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  • No performance at all by the concerned party.
  • When the party does not follow the terms of the contract.
  • When the concerned party is not able to fulfill his contractual obligations within the required time frame. 

If it can be proved in a court of law that the contract was breached, then the victim, as a remedy, gets what they had been initially promised as per the terms of the contract. In many situations, the way to handle a breach of contract is mentioned and stated in the contract itself. The aim of US Contract law is to place the party who has been harmed in the same economic position as if the breach had not taken place. The default remedy for the party who has been harmed is monetary damages. The court may also award specific performance in cases where damages are not sufficient. In such cases, the branching party has to try to fulfill the terms of the contract.

There are certain scenarios where a person might have a reason that is valid for having breached the contract. This is where the contract defenses available come into play and all aspects of the same have been discussed in detail in this article.

What are contract defenses

A person may have a lot of valid reasons for having committed a breach in relation to the terms of the contract. These valid reasons are known to be contractual defenses. Many defenses go right to the core of whether there was the existence of a valid agreement.  

The most commonly found contract defenses are as follows-

  • The concerned contract had to be in written form. This defense falls under the category of “Statute of Frauds”. For instance, the sale of real property must be in written form.
  • If the terms of the contract had never been agreed upon by the parties, then it could be claimed that the contract was indefinite. This can be taken to mean that neither of the parties had agreed to the deal being final, and the court would not be in a position to discern the essentials even by implication. 
  • The person against whom the case can be filed can defend himself by claiming that there had been a mistake in relation to some important fact in the contract. 
  • If the person against whom the case has been brought is able to prove that he lacked the entire capacity that was required while entering the contract, then the contract becomes voidable. This defense is more often seen to be successful in cases related to minors and people who are not able to enter the contract with the requisite mental capacity.
  • A person can claim that he had been induced by fraud to enter into the contract.
  • Courts do not enforce agreements when the contractual terms are unfair, i.e., they are heavily one-sided. This usually takes place when the bargaining power between the parties is in a heavy imbalance. The party with more bargaining power takes advantage of the situation by making clauses that are heavily unfair and might even waive the rights of the other party.
  • A contract is not enforceable if the material or object in reaction to the terms of the contract is not legal. Examples of this might include gambling contracts.

Capacity to contract

According to Section 12 of the Restatement (Second) of Contracts, any person entering into a contract has the complete legal capacity to be held liable for all the duties that he agrees to undertake. This is unless the person concerned is a minor, mentally incapacitated, or intoxicated. A minor is known to be any person who is under the age of eighteen or twenty-one depending upon the jurisdiction concerned. A contract that has been entered into by a minor is voidable at the discretion of the minor. This means that the contract is valid as well as enforceable until the minor takes action that results in disavowing the contract. When a minor opts out of the contract, under such circumstances, he cannot be held liable for breach of the contract. The law is of the opinion that minors are too immature, naive, or inexperienced to negotiate on similar terms with adults. The court, as a result, would not hold them accountable for entering into contracts of any kind.

Under circumstances where a party is unable to understand the nature and consequences of any agreement that the party has entered into, then the law would treat that party as lacking the mental capacity to form a contract that has been binding. The party, though, would not be relieved from any contractual duties until a court formally adjudicates the issue after taking evidence that is related to the party’s mental incapacity. This is only if there is not already an existing order that declares the party to be incompetent or insane. Similar to agreements with minors, agreements with a mentally incapacitated person are considered voidable at the party’s discretion. A guardian or personal representative may, however, ratify an agreement for the incapacitated person. This results in the agreement being converted into a legally binding contract. 

Contracts that have been entered into by a person under the influence of alcohol or drugs are also voidable at the discretion of the person. This is only if the other party knew or had a reason to know the degree of impairment. In practical situations, courts rarely show sympathy for defendants trying to avoid contractual duties on the grounds that they were intoxicated. However, if the sober party tries to take advantage of the party that was intoxicated, the court would intervene to void the contract. Parties who are intoxicated by prescription medicine would be treated in the exact same way as people who are mentally incompetent or insane. They are generally relieved more easily than those who have been intoxicated by the use of non-prescription drugs or alcohol.

A minor

Even though a minor can enter into some contracts legally, they are also given some special legal protection that would entitle them to void a contract or choose a contractor to enforce it. This is provided under Section 14 of the Restatement (Second) of Contracts.

However, when it comes to contracts related to minors, there are some exceptions. These are contracts for entry into education or contracts for necessities that are deemed to have fair terms. More often than not, the test of whether the contract benefits the minor is taken into account. If the contract benefits the minor, then the contract cannot be voided. However, if the contract’s terms are not helpful or benefit the minor in some way, then the contract becomes much more likely to be viable. 

It is also important to note that when minors attain the age of majority, they might lose the ability to void the contract. The reasoning behind this is that after attaining a majority, the courts would no longer be perceived to be minors under the law, and therefore, they would be bound by the terms of the contract in the same way as adults are. The minor will be considered to have ratified the contract if he fails to disaffirm the contract within a reasonable time span after he attains the age of majority. However, there is no definitive test for determining a reasonable time span. A contract can be ratified orally or in writing. Ratification can also take place through conduct, where the person who was originally a minor actively induces the opposite party to perform. If both the concerned parties start exchanging performances after the minor has attained majority, then it would fall under ratification by conduct.

Unavoidable transactions

There are some obligations that are held to be unavoidable in many jurisdictions. These agreements include those that have been made by the minor to support his illegitimate child, a bail bond in order for him to obtain bail and an agreement by an employee who is a minor not to make use of his employer’s trade secrets.

Sales by a guardian

People aware of a minor’s right to disaffirm contracts are reluctant to deal with minors and make contracts with them. Therefore, statutes allow the guardian of the infant to make the contract on his behalf. Under normal circumstances, these sales have to be with the approval of the court but are not disaffirmable once the court approves of them. 

Lack of mental capacity

Another situation where a person might lack contractual capacity is if they lack the required mental capacity. People suffering from certain mental illness or psychological conditions are often in a position to void a contract, or they can have their guardians do so if they are considered mentally incompetent. This is provided under Section 15 of the Restatement (Second) of Contracts.

Different states in the United States have a variety of tests to prove mental capacity. However, a lot of the states put emphasis on the “appreciate effects” test for calculating mental and therefore contractual capacity. The aim is to evaluate whether or not the person concerned was capable of understanding what they were involved in and if they were in a position to recognize the effects of that relationship. Irrespective of how each state interprets mental incompetence, the final decision in most cases is taken by the court. 

In the case of Heights Realty Ltd. v. Philips, (1988), an eighty-four-year-old woman entered into a listing agreement with a real estate agent. Following this, the agent refused to sell the property since he had found a willing and able buyer. The woman was stated to be in a condition of mental decline for a few years. Her mental condition had been deteriorating for quite some time, and her family members elaborated on how they had noticed confused and erratic behavior, mismanagement of her activities, as well as lapses of memory. A psychiatrist testified that the woman was entering the contract with the purpose of entering into the contract, but she was not in a mental position to understand the detailed provisions of the contract. During the course of the proceedings, she was judged to be mentally incompetent and was represented by a conservator. The Court in this case gave the judgment that a combination of psychiatric and anecdotal evidence was adequate enough to prove that the seller had established mental incompetence. 

Intoxication

Being in a position of intoxication also enables a party to void a contract, but only under exceptional circumstances, and it is not a rule. This is provided under Section 16 of the Restatement (Second) of Contracts)

While determining whether intoxication can negate contractual capacity, the court always looks at the severity of the intoxication and the knowledge of the opposite party about the intoxication. 

Under normal circumstances, the intoxication has to be quite severe for the contract to be held voidable, and the intoxicated party must attempt to rescind the contract within a reasonable period of regaining their full consciousness and to recognize their mistake in entering into the concerned contract. If they fail to do this, in all likelihood, the contract would be enforceable.

Lacking the requisite signatory authority

Another way, and the most commonly found in business contexts, is that the individual who signed the contract lacked the essential signatory authority. 

All employees of a particular company are not allowed to sign business contracts on behalf of the employer. This power has usually been reserved for the directors of the company and delegated to the board of directors. This is done by passing a resolution during a board meeting. 

When a person signs a contract without having the required signatory authority, the contract becomes difficult to enforce. The better thing to do in this scenario is to re-send the contract and ensure that the right signatory signs it.

Statute of Frauds 

A legal doctrine characterized by the need for certain documents to be in written form is known as the Statute of Frauds. The contracts that are most often seen to be covered by the Statute of Frauds are those for the sale of land, agreements comprising goods worth more than $500, and contracts that have a duration of one year or more. 

The doctrine of the Statute of Frauds is for the prevention of fraud or other forms of injury. The evidentiary function helps in providing documentation and proof of the fact that a binding legal document exists. The cautionary purpose helps in making the parties more serious and makes them more intent to enter into the contract.

The Statute of Fraud differs between the different states of the United States. In cases where the Statute of Frauds finds its application, the defendant can use it as a defense when the burden of proof is on the plaintiff.

Contracts that have been covered under the Statute of Frauds

The following kinds of contracts are covered under the Statute of Frauds. These are:

  • Promises that have been made in relation to marriage. For instance, an engagement ring that has been given as a gift.
  • The duration of contracts that will take one year or more to be completed.
  • Contracts for the sale of land. Leases are not normally included unless they are for one year or more.
  • Contracts that have been entered into for the sale of goods above a specific amount. $500 is the usual amount.
  • Contracts where one individual assures the payment of debt of another individual. 
  • Promises to pay the debt of an estate from the executor’s personal funds.

Requirements for the Statute of Frauds

  • It is a pre-requisite that both parties have to sign the agreement. Otherwise, the contract is not enforceable.
  • If the quantity of goods that have been specified in the written agreement is distinct from what has been shown in writing.
  • Written rejections of the concerned agreement have to be provided within a reasonable time frame. 
  • It has to be ensured that the written correspondence has been dispatched in a proper manner. Incorrect addresses or other failures would result in invalidation.
  • A contract ceases to be valid if a mistake by one of the parties at the time of entering into the contract leads to a material effect on the exchange that has been agreed upon.

Assent-based Defenses

Mistake 

“Mistake” can be used as a defense against the enforcement of a contract when at least one of the parties had a belief that was not coherent with facts in relation to the terms of the contract. Mistakes are considered to be beliefs that end up inducing a party to enter into agreements. This “mistake,” however, does not include mistakes that are in relation to the actual execution process of the agreement. 

Mistakes can be mutual. This means that both parties shared the same mistaken assumption. Mistakes can also be unilateral, which means that only one of the concerned parties was under a false assumption. 

A mutual mistake comprises four essential characteristics

  1. The mistake was committed by both parties at a time when the contract was made.
  2. It is essential that the mistake involves a basic assumption on which the contract was made. 
  3. The mistake has to materially affect the agreed-upon exchange.
  4. The contract is only voidable by the party that has been adversely affected by the mistake. 

A basic assumption is synonymous with the material facts of the agreement. It is essential that the mistaken belief affects the exchange to the degree that the imbalance becomes so large that it results in it being unfair to enforce the contract. In the case of Reener v. Kehl (1986), two sellers made a decision to sell leases on two thousand acres of undeveloped land near Yuma, Arizona. A buyer approached the two sellers, wanting to lease the land to grow Jojoba, a shrub whose seeds produce oil on the land. The land seemed apt for commercial jojoba production. Both parties were under the impression that there was adequate water to sustain the commercial production of jojoba. Following the contract being signed, the parties came to know that there was not enough water under the land to sustain the jojoba production. The buyer, therefore, wanted to void the contract. In this case, the contract was found to be voidable because both parties were under the impression and had made the “basic assumption that there was enough water to sustain the commercial production of jojoba. This “basic assumption” resulted in affecting the contract because the concerned parties only entered into the contract because the parties had the “basic assumption” that there was adequate water to sustain the production of jojoba. 

The final point that was given in the case was that only the party that had been adversely affected could avoid the contract. In this particular case, only the buyer could avoid the contract because he was the one who had suffered an adverse loss. The concerned sellers had already received their money, but the buyers could not make proper use of the land. 

However, a caveat to this rule is that the affected party can only avoid the contract on the condition that he did not assume the risk of making the mistake. In contrast to this, when it is apparent from the agreement that one of the parties was assuming a risk, the occurrence of the danger that could be anticipated previously would not constitute a mistake. In such a situation, the contract cannot be avoided. It is also essential to understand that if the concerned parties enter into a contract without having the relevant information required, they would not be able to avoid the contract only because the relevant information would prejudice one of the parties. For example, a seller, without mining his own land, agrees to sell the land. After the selling of the land, he discovers that there were valuable minerals under the land that he had not mined. In such a scenario, there will be no grounds to void the agreement. The seller in this case, without having the relevant information, agreed to sell the property and enter into the agreement. Therefore, it is automatically assumed that he was well aware of the risk of selling something that was more valuable than what was known to him. 

Unilateral mistakes take place only when one of the concerned parties makes the mistake. The requirements of a unilateral mistake are the same as those of a mutual mistake. However, one of the following must exist in addition which are-

  • The effect of the mistake committed is such that the enforcement of the contract becomes unconscionable.
  • The party that did not commit the mistake should be aware of the other party’s mistake.
  • The mistake that had been committed by the party was due to the fault of the other party.

Unilateral mistakes are often found in construction cases where bids can be miscalculated. A contract becomes “unconscionable” when the valuations exchanged are not proportionate. Whether a contract is unconscionable varies from case to case on the basis of the facts of the case. For example, if a contractor submits that a bid was $60,000 less than what it would been in normal circumstances because the contractor had made a computation error, the court may declare the agreement unenforceable by determining the necessary facts to be sufficient to make the enforcement of the contract unconscionable. However, if the bid is only $3,000 less than what it would have been under normal circumstances, then the court could consider the agreement enforceable. However, if the company that made the bid is aware of the fact that the bid was unusually low since all the other bids placed were $60,000 more than the contractor’s bid, then it would strongly favor the finding of a unilateral mistake. In such a scenario, even small mistakes are sufficient to make the contract unenforceable. 

Misunderstanding

Misunderstanding has been covered under Section 20 of the Restatement (Second) of Contracts). In situations where a mistake takes place regarding the terms of a contract, it might result in the parties becoming unsure about their obligations as per the terms of the contract. If the misunderstanding is of such a serious nature that the parties could not have said to have “a reasonable meeting of minds,” the contract becomes unenforceable. As an illustration, two parties have attached different meanings to the same term. In cases where parties have attached different meanings to the same terms but one party is unaware of the other party’s assumption, they will be bound by the other party’s assumption. For example, a buyer and seller form an exchange related to chickens. The buyer believes the category of chicken to be “broiling chickens.” However, the other party, the seller, believes that there are two kinds of chickens, namely stewing and broiling chickens, and it is known to him that the buyer wants broiling chickens. In such a circumstance, the seller would have to give broiling chickens to the buyer, even if he had meant to offer stewing chickens. 

Misrepresentation 

Misrepresentation is defined as incorrect assertions of facts that lead to reliance on the part of the other party. The misrepresentation of the statement concerned has to be important or material to make the defense applicable. Misrepresentation can stop the enforcement of a contract and make the contract voidable. Grounds for reforms to the contract could also be provided for fairness.

A party might be deceived, but that might not inherently void the contract due to misrepresentation. In the case of Phelps v. McQuade (1917), the Court stated in its decision that overstating a person’s wealth to obtain a financial agreement to purchase jewelry would not make the contract unenforceable. The wealth status of the purchaser was not considered to be a required component of the agreement concerned, and therefore lying about it would not be considered a material misrepresentation. On the other hand, if the seller sells cubic zirconium but represents the same as a diamond, then it would fall under the category of material misrepresentation, as that misrepresentation directly goes to the nature of the item that was up for sale.

It is also essential to note that misrepresentations can be innocent. The part that ends up making the false assumption might not know that the assumption is false. This results in the contract being unenforceable if the misrepresentation results in the causation of a substantial variance between reality and what the other party believed. As an illustration, if, during the negotiations of a  real estate transaction, one party by mistake over represents the square footage on an article by a minimal amount, it does not necessarily provide grounds for the contract to be avoided. However, if it is found out that the misrepresentation was intentional and the other party had relied on the statement, then the contract results in being unenforceable. 

By providing these defenses of mistake, misunderstanding, and misrepresentation, the Contract law of the United States ensures the protection of parties from being bound by agreements that they should not have been bound by. These defenses are consistent with the usual contract law goals of protecting the people’s expectations. 

There are some essential elements that have to be proved while making a claim of misrepresentation-

  • The person claiming misrepresentation has to prove that the opposite party has misstated a material fact. It is not a requisite that the statement was said intentionally or negligently.
  • The person claiming misrepresentation had relied on the concerned material statement.
  • The court could justify the person’s reliance. 
  • The person claiming misrepresentation underwent pecuniary damage because of the said misstatement. 

Fraudulent Misrepresentation

According to Section 164 of the Restatement (Second) of Contracts (1984), a misrepresentation becomes actionable only under two circumstances:

  • If the misrepresentation is fraudulent.
  • If the misrepresentation is material.

A misrepresentation falls under the category of being fraudulent when it has been done with the intention of inducing the other party to enter the contract and when one of the following is true:

  • The maker is aware that the assertion he has made is not true.
  • The maker lacks the confidence that he has stated or implied while making the assertion.
  • The maker is aware that he lacks the basis he has stated or implied for the assertion. 

It is essential that the assertion made is false and that it is made with the intention of misleading the other party. A Fraudulent Misrepresentation is actionable even though it might not be important to a reasonable person or the party concerned that is hearing it. 

Material Misrepresentation

Material Misrepresentations are grounds to declare a court void. A misrepresentation falls under the category of being material if, under normal circumstances, it is likely to induce a reasonable individual to agree to a contract. The test for determining misrepresentation in such a scenario is to determine the mindset of the person who makes the false assertion, not the impact of that assertion. 

Justifiable Reliance

The party that claims misrepresentation has to essentially prove that he justifiably relied on the statement of the other party. However, it is important to note that in recent years, the requirement for the rule to be justified has not been rigorously enforced. This is especially held true in cases where the misrepresentation had been done intentionally.

Misrepresentation of Fact

The misrepresentation concerned has to be a misrepresentation of fact and not a misrepresentation of opinion. Misrepresentation of Opinion is often held to be trade talk and therefore is not acceptable.

The difference between Opinion and Fact

The difference between an opinion and a fact can be very thin. For instance, if a used car has been declared “mechanically perfect,” then it can be said that this was a fact and not an opinion. Courts today are more determined to properly differentiate between facts and opinions. 

Under certain circumstances, however, the relationship between parties can be of such a nature that even actions become enforceable. An instance of this is the presence of a fiduciary relationship between the parties, or the person who makes the statement claims to be an expert. For illustration, if a jeweler says that he is an expert and, according to him, a jewel costs $2,000, then the opposite party might claim that such an opinion is a misrepresentation. 

Concealment and Non-Disclosure of Information

Misrepresentations are defined as affirmative statements. However, in cases where a party merely fails to disclose information, it is much more difficult to establish a case of misrepresentation. 

Duress

Duress has been covered under Section 175 of the Restatement (Second) of Contracts. The defense of duress is available to all those defendants who can prove that they were unfairly coerced to enter a contract or even to modify the contract. Today, the use of this defense is much more broad and recognized due to the fact that previously it could only be used under circumstances where a party’s person or property was in serious danger. However, today, any wrongful act overcoming the free will of a party would be applicable in the defense of duress. An important general rule in cases of duress is that if an individual threatens another with a particular act, it becomes irrelevant in such scenarios if he would actually have the right to commit that act. This is if the threats that have been given are abusive and oppressive in nature. 

Threat to breach a contract

The most commonly used form of duress in contract law occurs when one of the concerned parties threatens to breach the contract until it is tilted in his favor. The modern rule acknowledges duress in such situations, and if the given threat results in such injury, that injury is irreparable and could not have been avoided except by a lawsuit.

The nature of the remedy in cases of duress is restitution. The party who opts for this defense has been entitled to receive an amount that is sufficient to undo the enrichment that the other party obtained through the use of threats.

Policy-based Defenses

Contracts that do not confer to the law and are against Public Policy

To make a contract enforceable, it has to be ensured that the subject matter of the contract is not illegal and that the parties are in a position to legally perform the terms of the agreement. This has been covered under Section 178 of the Restatement (Second) of Contracts. Some illustrations of violating agreements that are unenforceable are agreements that are formed by violating gambling laws, agreements that restrain trade in violation of antitrust laws, and agreements that violate usury laws. They do this by setting maximum interest rates.

Public Policy

Even under circumstances where the subject matter of the agreement concerned is not per se illegal, a court might void a contract that could end up violating public policy. There have been many cases where courts have invalidated agreements where the called-for performance ended up being injurious to the public interest or interfering with their safety or welfare.

In the case of Matter of Baby M (1988), Mr. and Mrs. Stren found out that they were not in a position to naturally conceive children. Therefore, they entered into a surrogacy contract with a third party, Mrs. Whitehead. This contract provided that, in exchange for a fee, Mrs. Whitehead would be inseminated with the sperm of Mr. Stern. Mrs. Whitehead was supposed to deliver the child and give up her parental rights to Mrs. Stern, who would then adopt the child.

However, after the child was born, Mrs. Whiterhead became emotionally attached to the newborn. She subsequently refused to give up the baby. The Supreme Court of New Jersey found out in this case that the contract of surrogacy was in violation of state public policy and was therefore unenforceable. The Court stated a list of public policy considerations that included the state’s interest in protecting children from separation from their parents that was not required and the interest of the state in prohibiting payments that were in relation to abortion. 

Non-Compete Agreements

While non-compete clauses are normally upheld, it has been observed that the courts still invalidate those arguments that limit trade unfairly. In many cases, courts have modified and rectified agreements that have contained non-compete clauses in relation to business and employment when they have exceeded the usual threshold of what is considered to be reasonable. In accordance with the Restatement Second of Contracts, Section 186, a promise unreasonably restrains trade if it ends up limiting competition in any business or prevents the promisor from exercising gainful employment. 

A promise to not compete would not be upheld under the following circumstances-

  • The restraint is more than what is essential to protect the legitimate interests of the employer.
  • The interest is likely to injure the interests of the public and is outweighed by the hardship to the employee. 

In Valley Medical Specialists v. Farber (1999), Valley Medical Specialists sued a former employee. The employee was an internist and pulmonologist with specializations in AIDS and HIV treatment and was sued for enforcing a three-year non-compete clause in his contract. The clause for non-compete comprised a five-mile radius from several branches of the medical facilities of the defendant and covered two hundred and thirty-five square miles. There was also an absence of any emergency medical treatment, and it covered the entire practice of medicine. The Supreme Court of Arizona in this particular case invalidated the concerned agreement because the agreement had involved the practice of medicine of the physician. The agreement was invalidated because it restrained the public and the patients from choosing their own doctors. The court also stated that a restraint has to be reasonable in scope in relation to the subject matter, both geographically and in terms of duration. In this particular case, the restriction imposed was unreasonable because the geographical areas it covered were unreasonable, emergency treatment was included in the restrictions, and it covered all practice areas.

Exculpatory Provisions

Exculpatory provisions are defined as those particular provisions that deliberately try to limit the liability for injuries. Usually known as “hold harmless” clauses, the signer promises to avoid suing for injuries that have been sustained by him during the course of the activities that are run by the defendant. These activities are often related to activities that are commonly considered dangerous. 

In the case of Marcella MCGrath v. SNH Development (2009), the plaintiff, McGrath, collided while she was snowboarding at Crotched Mountain Sea Area. The collision was with a snowmobile operated by an employee. Mcgrath had assumed the risk of a personal injury and had released the defendants from any liability for injury that resulted from negligence by signing particular agreements.

During the proceedings, McGrath cited two public safety laws. The arguments put forth were that these laws regulated snowmobiling and that the contract allowed the defendant to use statutory safety rules. The Court, in its judgment, rejected this argument because the public safety laws could be enforced by the state and not a citizen. McGrath continued his arguments by stating that the ski resort had gotten into a special relationship with all its customers since it was operating as a place of public accommodation. The Court, in its judgment, did not accept this argument because a ski resort was not entitled to duties of public service. The Court opinionated that although the ski provider was providing a public service, it was not of that great importance to the public for the creation of a special relationship. The Court also stated in its judgment that the agreement was not for providing an essential service, and therefore McGrath did not have to compulsorily sign the concerned agreement. 

Unconscionability 

Some contracts become void on the grounds of public policy because they turn out to be heavily one-sided. A contract is rendered unconscionable under circumstances where one of the parties lacks meaningful bargaining power while entering the contract and is unfairly favoring the other party. 

Contracts containing unreasonable limitations of liability are often seen as one-sided agreements. In the case of Eric Lucier, et al. v. Angela M. Williams, et al. (2004), the Supreme Court of New Jersey stated that the limitation of liability clause was not enforceable as against public policy since a home inspection should have led to a proper evaluation of a home’s fitness for purchase and also because professionals should be held to the standards of the industry. 

To find out whether the contract negotiation process was unfair to the extent that it rendered the contract unenforceable, the courts have to make use of a combination of factors:

  • If the parties concerned had used a standardized agreement that had been executed by the parties who had unequal bargaining power.
  • If the parties had the chance to read or had the opportunity to become familiar with the concerned document. 
  • If fine print had been used in that portion of the contract that contained the provision.
  • The relationship of the parties comprised factors like notice, unfair surprise, and assent.

For unconscionability to be established, it is also essential that the terms of the contract were unfair and that these terms were dependent on the commercial reasonableness of the concerned transaction. The mere fact that prices might be too high or too low cannot render a contract unenforceable. In the case of Toker v. Westerman (1970), the Court stated that unconscionability could be found in cases where the negotiating proceedings are dominated by the party who receives a benefit from the unfair bargain. A contract might be voided in its entirety or modified when unconscionability is found.

Click-wrap agreements are defined as those agreements that require customers to check boxes and indicate their assent to specific terms and conditions. These agreements are very common on e-commerce websites. Under normal circumstances, if they are found to be sufficiently clear, they are upheld. Vernon et al. v. Quest Communications International Inc. et al. (2013) is a case where the plaintiffs had signed up for Quest’s “Price of Life” program, which made it a requirement for customers to sign up for at least two years. Under the agreement, they would receive a discounted rate for the retention of the services of the company. The customers who had taken up the agreement plan but canceled early were subjected to a $200 cancellation fee. The customers were informed that they would be able to locate the terms of the subscriber agreement by means of an automated voice message. This message would direct them to a web page. All the customers that enrolled over the internet needed to click a box. This meant that they were agreeing to the terms and conditions that also included an arbitration clause and waived the rights of the customers to bring a class action lawsuit, which had been stated in bold, italicized terms. There was also the presence of a welcome agreement that gave the customers information about the provisions related to arbitration and the limitations on liability. The customers in this particular case who were charged with cancellation fees sued and argued that the agreement was unconscionable and that the terms of the agreement were provided in a convoluted matter. The customers were required to go online to look for the terms of the agreement.

The Court, in its judgment, stated that the concerned customers had a chance to read the terms of the agreement. The Court also stated that there was no unfair use of fine print. It was also stated that the customers were provided with a notice of the arbitration agreement, that it was conspicuous to an extent that was reasonable, and that the customers had given their unambiguous consent. Therefore, the court concluded that the concerned judgment was not unconscionable. While the Court agreed that the terms of the agreement were not entirely consumer-friendly, they were not unfair to the extent to be deemed unconscionable. 

Adhesion Contracts

A lot of the business contracts that exist today are adhesion contracts. A major chunk of the contracts that exist today are standardized. This means that the contracts comprise a large number of non-negotiated pre-draft terms that have been put forth by one party and scope for negotiation regarding only a few aspects of the deal. The party for which the standard contract had been drafted possesses substantial bargaining power over the opposite party to the transaction. Such contracts are known as Adhesion contracts, and they are characterized by complex, unclear terms that often favor the drafter and have been printed in small font. 

The courts have always been hesitant to enforce adhesion contracts. This is because the courts have generally relied on the theory that the concerned non-drafter has not given his assent to the bargain. 

A person who attempts to avoid the enforcement of an adhesion contract has to prove the two following points:

  • The contract that is brought before the court is an adhesion contract.
  • The contract is in violation of 
  1. His reasonable expectations  
  2. Is unconscionable.

After the plaintiff has proved that the contract was an adhesion contract, he also has to prove that his reasonable expressions were thwarted by the provisions of the contract or that the concerned contract was unconscionable. The Court can analyze if the reasonable expectations of the person had been thwarted by analyzing if a reasonable person in his position would have expected that the clause that is under question is present in the contract. A plaintiff might be allowed to avoid a contract under circumstances where a very unusual and burdensome clause has been stuck into the fine print on the back of a standard form of a contract and may go against his “reasonable expectations.” 

Tickets, Stubs, and Other Pseudo Contracts

More often than not, adhesion contract cases consist of plaintiffs who were aware that they were entering the contract. The court has to answer only one question: whether the court should refuse to enforce the contract on the grounds that it was unfair or that the plaintiff had not understood the requisite details. If a person parks his car and then is handed over with a ticket snub, then in such scenarios he is likely to assume that the stub is only a receipt that would help him recognize his car and get it back. Now if the stub is inclusive of a lot of fine print on it in which the owner of the parking lot discards liability for negligence, etc., the court is likely to give a decision that the person concerned was totally unaware of having made a contract at all and that the fine print was not effective.

The Second Restatement has tried to deal with this problem. Under Section 211 of the Act, a document would be binding on a party only if the person signed or manifested his assent to it. Thus, as given in the above example, the parking lot owner would have to prove in court that the customer gave signs of being aware of the contractual provisions on the ticket concerned. He would also have to prove that any other person, in normal circumstances, would expect to find the same provisions in the ticket. The parking lot would find these terms difficult to establish. 

Varieties of Unconscionability

There are certain elements that render the clause or an entire contract unconscionable. These elements may be put into two categories:

  • Procedural Unconscionability–  Procedural Unconscionability is known as when one of the parties has been induced to enter into the contract without having any other choice. Therefore, there is a presence of oppressive clauses that misleading sellers might put forward to illiterate customers. Sellers in such scenarios put forward unfair adhesion contracts where bargaining becomes almost impossible. 

There are several factors that might prove unconscionability. –

  1. When the stronger party believes that there is no reasonable probability of the weaker party fully performing the contract.
  2. When the stronger party is well aware that the weaker party would not be in a position to obtain substantial benefits from the concerned contract.
  3. When the stronger party is aware that the weaker party will not be in a position to reasonably protect its interests. The reasons behind not being able to protect their interests are ignorance, illiteracy, incapacities that could be both physical and mental, and their inability to understand the terms of the agreement.  
  • Substantive Unconscionability– A clause in a contract is considered substantively unconscionable if it is unduly unfair and is very one-sided. A lot of cases of substantive unconscionability are related to either an excessive price or modifications that are unfair to the buyer or the seller’s remedies.

Illegality

Ilegal contracts are of various kinds. These contracts range from those that have been explicitly barred by statutes to those that have been deemed to be illegal by judicial decisions and are rendered to be against “public policy.” Some kinds of illegal contracts have been explained below:

  • Gambling Contracts: Usually, contracts that involve wagering are considered illegal and therefore not enforceable. The most commonly found contracts that are not deemed to be enforceable are as follows
  1. A bet that takes place between the defendant and plaintiff concerned. The winner will not be in a position to sue the loser for obtaining the money received from winning the bet.
  2. Contracts, where money has been lent for the purpose of gambling, and the person who lends the money is aware of this.

Legality in cases of underlying wagers: The legal status of a specific wagering contract depends on whether the concerned wager results in the commission of a crime. We can understand this better through an illustration. In states where lotteries are run by the government, in such scenarios, an agreement between two individuals about sharing ownership of a winning ticket would normally be enforceable. On the other hand, if two people make an agreement to share ownership of an entry that has been made illegally, it would not be upheld because the wager concerned is illegal in itself.

  • Contracts to buy a business that is illegal: When contracts are made with the knowledge that the ownership and scope of operations of the contract involve illegal operations, under such circumstances, the contract would not be enforceable. 

For example, Person A agrees to buy a corporation from  Person B whose primary business is the manufacture of drug paraphernalia, such as road clips and bongs. B, for this purpose, signs promissory notes as part of the purchase price. However, he fails to make the payment on time. B sues A.

This contract would not be enforced because the manufacture of the drug paraphernalia goes strongly against public policy, and therefore the court would not protect the business interests of the parties concerned. This was stated explicitly in the case of Bovard v. American Horse Enterprises (1988).

  • Usurious Contracts: All states in the United States have their own usury statute. This statute determines the legal rate of interest for specific kinds of loans. The rate is limited to a particular figure. A contract that has clauses asking for interests above the legal rate is not enforceable. In such cases, the creditor concerned is not even in a position to recover a lower interest rate.

Licensing Agreements 

Under circumstances where a particular statute restricts a person from engaging in a particular business or corporation in the absence of a license or permit, the contract for performance by such individuals would be held illegal. This is if the statute concerned has a regulatory purpose that protects public policy and the interests of the public outweigh the enforcement of the promise in the contract; in such scenarios, the contract would be held illegal.

Impairment of Family Relations

It has been often seen that the court gives judgments against parties that try to contract in the area of family relations, particularly marriage. In situations where parties by contract try to vary the usual treatment of relationships like marriage, reproduction, etc., in such cases the courts usually refuse to enforce the contracts on the grounds that they go against public policy. Prenuptial agreements are classic examples of how courts have historically hesitated to enforce agreements attempting to modify the rules that regulate family relationships. However, in modern times, the courts have become more open to enforcing prenuptial agreements. This can be seen in half of the states enacting the Uniform Premarital and Marital Agreements Act. This Act makes voluntarily signed prenuptial agreements enforceable in two particular scenarios-

  •  During the signing of the agreement, it was not unconscionable.
  • The signer was either provided with reasonable as well as fair disclosure of the opposite party’s financial condition or could have reasonably interpreted the financial condition. He can also, by choice, waive in writing any such disclosure.

Agreements that relate to Cohabitation

The 21st century has seen the advent of live-in relationships. There might be situations where, after the relationship breaks, one of the individuals claims that both of them have entered into an oral agreement on some financial arrangement. This agreement could include the sharing of assets that are obtained during the time of the relationship. Traditionally, courts did not accept the enforcement of such live-in relationships on the grounds that they amounted to payment for sex and were therefore illegal. In the case of Hewitt v. Hewitt (1979), the Court stated that they were against the enhancement of “a private agreement over marriage.” However, modern times have seen the emergence of some courts that are ready to enforce such agreements. The court in the case of Marvin v. Marvin (1976), analyzed how the distribution of property that has been acquired in a non-marital relationship can be determined. The Court in this case agreed to the plaintiff’s claim of an express contract and stated that implied contracts could be found in such scenarios.

Relevant case laws

Kobe Bryant v. Scoreboard Inc. (1999)

Facts

In the case of Kobe Bryant v. Scoreboard Inc. (1999), in 1966, then seventeen-year-old Kobe Bryant decided to skip college and directly go to the NBA. Soon after Scoreboard Inc. contacted the agent of Kobe Bryant, Tellem. They were hoping to make a deal with Kobe Bryant and offered Bryant money for the purposes of autographs and personal appearances on behalf of Scoreboard Inc. Kobe Bryant, still being a minor, rejected the offer of Scoreboard Inc. and signed a counteroffer. The counteroffer, in turn, decreased the maximum amount of prepaid autographs from seventy-five hundred to five hundred. Blaser made a claim that he signed the counteroffer and placed it in his file. However, the copy of the debtor, i.e., Scoreboard Inc., had been misplaced, and they only had a copy that had been signed by Bryant. Under the given agreement, Bryant was set to obtain ten thousand dollars as compensation. On turning eighteen, Bryant encashed the agreement. Bryant commenced his duties under the contract and continued performing them for a year and a half. After this, Bryant got over it and claimed that a fully executed contract was non-existent. Scoreboard Inc. filed for bankruptcy soon after and sold Kobe Bryant’s contract. Bryant disagreed because of the fact that the debtor had never put his signature on the counteroffer. Bryant claimed that the contract he created was voidable because he had entered into it while he was still a minor.

Issues

  1. Was Kobe Bryant legally bound to his contract with The Scoreboard Inc., although they had sold the contract? 
  2. Was he still a minor when he signed the contract?

Judgment

Kobe Bryant’s objection to the sale of Scoreboard Inc. was overruled. This is because Bryant ratified the contract on turning eighteen as soon as he deposited the check for ten thousand dollars. The Court also opinionated that Kobe Bryant had performed his duties that were provided to him under the concerned contract by signing autographs. Emphasis was also placed on the fact that Bryant had not disputed the contract until 1988.

Sparrow v. Domenico (2012)

Facts

The case of Sparrow v. Demonico (2012) is about two sisters, Sparrow and Susan Demonico. Frances Sparrow, the plaintiff in this case, had filed a suit against her sister Susan Demonico and her husband David Demonico. Sparrow had sought an order, having declared that she had a one-half interest in a home and real property owned by the deceased mother of the sister. Susan, on the other hand, argues that she and her husband David were the primary owners of the family home, having lived in it for many years, as portrayed by a recorded deed. Before the commencement of the trial, Sparrow and Demonicos had been involved in voluntary mediation that had resulted in an agreement that stated that the Demonicos would sell their family property and then make a payment of $100,000 from the sale proceeds to Sparrow. During the evidentiary hearing of the motion, Susan faced a mental breakdown and began to slur her words, became less coherent, and wept uncontrollably. Therefore, David and Susan left early, but they gave their counsel permission to execute a settlement agreement as their representative. Susan stated in her testimony that she had stopped taking her prescribed antidepressant medicine recently. No other witnesses were present at the hearing. The Trial Court had denied the motion of Sparrow and had come to the conclusion that the mental condition of Susan had prevented her from having the capacity to contract during the execution of the settlement agreement. Sparrow appealed against the judgment

Issues

  1. Whether Susan Domenico had the required mental capacity at the time of agreeing to the settlement?
  2. What was the degree to which medical evidence or evidence of experts was required to prove or disprove mental incapacity?

Judgment

The Court stated in its judgment that without the presence of essential medical or expert evidence, claims of mental incapacity that had been made during the time of entering into a contract cannot be considered valid. The emotional distress as well as the instability in behavior that had been claimed by Susan were not enough to prove a direct impact on her ability to enter into a contract. The lower court had committed an error in not providing Susan with the right to enforce the concerned agreement.

Lucy v. Zehmer (1954)

Facts

In the case of Lucy v Zehmer (1954), A.H. Zehmer the defendant in this case on the evening of 20 December 1952, had been drinking alcohol in a bar. He was approached by his acquaintance in this case, the plaintiff, W.O. Lucy. Lucy had also been drinking and took the initiative to buy additional drinks for Zehmer. The two got into a conversation where Lucy made an offer to make the purchase of a farm that Zehmer was the owner of. He offered $50,000. Zehmer had always refused to sell the farm, although Lucy had made the offer on many instances before. Zehmer had drafted an agreement on the back of a bar receipt where he stated his intent to sell the farm to Lucy for $50,000. Lucy, on examination of the agreement, asked Zehmer to include his wife’s agreement to sell the property. At first, the wife refused to sign the agreement, following which Zehmer told her that the entire thing was done as a joke. Following this, the wife signed the agreement as well, but neither of them made an attempt to communicate to Lucy that all of it was done as a joke. Lucy offered Zehmer $5 to complete the deal. Zehmer, at this stage, realized that Lucy was serious, and he told Lucy that the agreement was done as a joke.  Lucy, following this, enlisted his brother to help him raise $50,000. Lucy again informed Zehmer of his intention to purchase the land. Zehmer refused, following which Lucy sued him for specific performance. The Trial Court, in its judgment, stated that Lucy was not entitled to a specific performance, and Lucy appealed.

Issue

  1. Did a valid contract exist under the given circumstances?

Judgment

The Court stated that the evidence was proof of the fact that the plaintiff had been warranted into believing that the contract was a representation of a serious business transaction. There was reasonable belief to prove a good faith sale related to the purchase of the farm. A person cannot make a claim that he was joking when, in fact, his words and conduct would go on to make a reasonable person believe that the agreement was valid. The mental assent of the parties was not essential while entering the contract. The undisclosed intention of the party is not essential when his conduct proves otherwise. The attorney of the defendant had also made the admission that he was not too drunk to enter into a contract. The plaintiff’s reasonable belief in the given case was enough to enforce the contract.

Halpern v. Greene (2009)

Facts

In the case of Halpern v. Greene (2009), a boxer named Greene challenged the enforcement of a personal services management agreement that the boxer had entered into with two managers. These two managers were not licensed by the State of New York and were attempting to collect on the agreement stating that it was valid. The managers had paid for thirteen of the first fourteen fights with Greene. These expenses included those that were related to travel, promotion, etc. Both the managers had put in significant efforts through negotiations and contracts to help Greene achieve a “Top Ten World Ranking.” They had tried to cut major deals with promoters to get the boxer into matches that were televised. The managers were also successful in acquiring a thousand-dollar-per-week contract for Greene to spar with other boxers.

The agreement was laid out, stating how Greene would be compensated. It was also stated how both the managers would receive one-third of the boxer’s income, along with reimbursement for the expenses of training as well as travel. The promoters would make an investment of $225,000 for the boxer’s career.

Greene’s father was also a defendant in the case. They challenged the management agreement on the grounds that the plaintiffs were not licensed promoters or matchmakers as required by the New York State Athletic Commission. 

Issue

  1. Whether the management agreement between boxer Greene and the two managers is valid?

Judgment

The Court, in its judgment, refused to enforce the management agreement between boxer Greene and the two managers because it went against the public policy of New York as well as the United States of America. The Court, however, in this particular case, was willing to entertain a claim that was made outside the contract. The Court did not accept the claim of dismissal of the managers. This kept space open for the managers to recoup all those financial contributions that were direct and separate from the earnings that the boxer had earned.

Conclusion  

Contract defenses are essential in protecting the interests of people who have a proper and justified reason to avoid obligations in relation to the terms of the contract. The US Contract law gives protections to all kinds of people and situations: minors, people lacking the capacity to enter a contract, when contracts are illegal, contracts that go against public policy and interests, etc. The various defenses that are available to the person help in the prevention and limitation of liability in situations where the breach of the contractual terms had a valid reasoning behind them.

Frequently Asked Questions (FAQs)

What is the difference between a material and a minor breach of contract?

Breaches of contract can be of two types: material and minor. The obligations and remedies of the parties depend on the nature of the breach that occurred. A breach is considered to be material if the failure of the breaching party related to the contractual terms results in the opposite party getting something substantially different from the specified contract. There are certain factors that are essential for determining materiality: the benefit that the non-breaching party receives, if the non-breaching party can be sufficiently compensated for the damages; the extent of performance of the party that has breached the contract; the hardship faced by the party who has breached the contract; the negligence or willful behavior of the party who has breached the contract; and the likeness of the party who has breached the contract to perform the remaining of the contract. A minor breach, on the other hand, occurs if the party who has breached the contract fails to perform some part of the contract but the opposite party still receives the item that had been promised in the contract.

What is a contract defense, and why does a party use it in a court of law?

A contract defense is defined as a justification for a party to avoid performing and limiting or preventing liability for performing a breach of the terms of the contract. Parties use contract defenses to dispute the formation, performance, and enforcement of the terms of a particular contract. There are various kinds of defenses available to a party, ranging from incapacity to a contract, assent-based defenses, policy-based defenses, and the “Statute of Frauds” which help a party prevent or limit liability.  The courts, being convinced that there has been a valid use of these defenses, can stop the enforcement of a contract and limit the liability of the party making valid use of contract defenses.

Can impossibility be a reason for a party not being able to fulfill their obligations as provided by the terms of the contract?

Yes, the doctrine of impossibility can excuse the performance of a contract if an event takes place that is unforeseeable and makes it impossible or highly unlikely for the party to fulfill their obligations in relation to the contractual terms. In specific circumstances, the impossibility of performance can validly justify a party not having performed their contractual obligations. An instance of this would be when a painter, as per the terms of his contract, is not able to paint a home because he fractured his hand during the course of fulfilling the contract. The courts have to determine if the performance of the contract was actually impossible or just burdensome.

Can a party make use of the defense of waiver in relation to the enforcement of a contract?

Yes, a party can make use of the defense of waiver in relation to the enforcement of a contract. A party that claims this defense has to prove to the court that the other party had given up their right to sue them. When a party, being well aware, gives up their rights under a contract, it is known as a waiver. For instance, a baker gets an order from the opposite party to make a giant chocolate cake. However, the baker finds out that he does not have the essential ingredients to make the cake. On informing the other party, they inform the baker to make a vanilla cake with chocolate frosting and then come to pick up the cake later. The opposite party also makes a payment for the vanilla cake. Now, if after one week the party calls the baker demanding their money back, the baker can argue that the opposite party waived their right to sue because they had approved the vanilla cake.

What is the difference between a defense and a counterclaim in a dispute arising out of contractual terms?

A defense comes as a response to claims made by the opposing party, providing arguments as to why they would not succeed. A counterclaim, on the other hand, is defined as a separate claim that has been brought by a defendant party against the party making the initial claim. Therefore, it can be concluded that the counterclaim has been made by the defendant against the plaintiff, and the defense comes as a response by the defendant in relation to the plaintiff’s claim.

References

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