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LITIGATION

February 16, 2014

HOW TO GET OUT OF CONTRACTS

 

Every person enters into various contracts every day. Whenever two parties agreed to meet at a certain place and time, they enter into a contract. A promise to deliver or do anything for anyone is a binding contract. Penalties for violation of such contracts can be minimal and can reach millions of dollars. That is why every person should know and realize consequences and obligations arising from contracts. While most authors try to show how to enter into a contract, this article is addressing a diametrically opposite purpose, namely, how to legally escape contractual obligations penalty-free. The following defenses can help to justify avoidance or rescission of agreements, oral and written.

 

Lack of Consideration

 

Whatever one party promises to do for another party is called "consideration" (a legal detriment to a party). For example, in consideration of payment of monthly rent by a tenant, the landlord agrees to provide an apartment. This contract is called a lease agreement. The agreement is a contract. If there is no consideration given by a party, the contract can be voided. In case of oral agreements, intent of the parties controls interpretation of the terms, unless the written agreement showing such intent has been executed.

 

Invalid Offers

 

Contract offers are considered to be invalid if:

 

  • they are made in jest even if it is accepted;

  • they were made by way of an auction or another type of solicitation of bids (as a basis for potential negotiation);

  • offers were only advertisements ("Cars for $10.00 apiece"), unless the number of items, price, specific description and date of sale are specified;

  • an offer contains indefinite terms, such as absence of terms with regard to price, quantity, quality, time and delivery.

 

This contract invalidity defense is usually coupled with the offeree's acceptance defenses listed below.

 

Invalid Acceptance of Offers

 

When offers made by an offeror are accepted by an offeree, the contract is formed. In case an offer is found by courts to be invalid, or there was no acceptance, then the corresponding contract is not enforceable or void. Contracts become unenforceable due to invalid acceptance when:

 

  • an offeree did not know about the offer while performing an act required by that offer, for example, a subcontractor is not entitled to a building owner's bonus for finishing the project by a certain date since he had to finish that job anyway;

  • performance was made by an unintended offeree (the offer was extended to another party); acceptance of services was made by offeree's silence, unless an offeree benefits from the rendered services and knows that compensation for these services is expected by the service provider;

  • an offeree accepted goods by silence (telling nothing to the offeror) if an offeree did not keep them;

  • an offeree modified the offered terms (then it becomes a counter-offer) or made them conditional on fulfillment of other terms;

  • an offeror or an offeree died or became legally unable to enter into the contract, even if the offeree learned of the offeror's death or legal incapacity after sending the acceptance;

  • a reasonable time to accept has expired, provided that the offer did not establish a deadline for acceptance. That period starts from the date of receiving such an offer, not the date of sending the offer. Revocation of the offer becomes effective when the offeree receives it.

 

Lack of Substantial Performance

 

One of the reasons for contract unenforceability is lack of substantial performance by the other party. In other words, another party did not do what it was supposed to do. That defense can be invoked when the default of performance cannot be cured within a reasonable period of time or the defaulter failed to cure after being given notice. There is no clear definition of what is a substantial performance since this is a subjective position supportable by experts in that particular area. Delay constitutes a lack of substantial performance if that delay severely damages the other party or the contract specifically states that "time is of the essence." Otherwise, the delay can be cured by the performing party.

 

Defective Products

 

A party can refuse to pay to a product supplier if the products turn out to be defective. Such defective goods cannot be accepted by an offeree (purchaser). If they were accepted, then they must be properly rejected as soon as the defects are uncovered. That rejection is valid if the defects significantly impaired the value of these goods in total. For example, an agricultural combine can be rejected if its transmission cannot properly switch gears. That defect substantially impairs the combine's performance and decreases its value. The whole combine can be returned back to its manufacturer.

 

Statute of Frauds

 

Oral agreements are as good as written agreements. Proof of agreed upon terms can be accomplished through testimonies of witnesses, acts of parties and documents supporting or showing the intent of parties. Most states have a Statute of Frauds requiring certain transactions to be put in writing since corresponding oral contracts will not be enforceable in case of their breach.

 

Contracts are unenforceable because they were oral and not in writing, such as contract for sale or lease (for more than a year) of real estate, a promise to pay debt of another person (unless it is done to protect own interest), made in consideration of marriage (except unconditional promises to marry), sale of goods in excess of $500, or calling for performance for more than a year.

 

Impossibility of Performance

 

Impossibility of performance will discharge all parties from their responsibilities under contract. For example, destruction of goods through no fault of either party will make their delivery impossible, e.g., a middleman's agreement with a retailer could not be performed and middleman was thus discharged from legal responsibility.

 

Frustration of Purpose

 

A rare, but appropriate under some circumstances, basis for contract unenforceability is elimination of the contract purpose by intervening acts of other parties (doctrine of "frustration of purpose"). The applicability of this defense depends on the level of foreseeability of the intervening events and totality of such frustration. An example of this is a contract between a supplier of electrical bulbs and a Brazilian tribe willing to purchase the bulbs in view of a scheduled opening of a local electrical power plant. If the plans for such plant opening are unexpectedly cancelled, then the purpose of purchasing of electrical bulbs is frustrated by that unanticipated intervening cause.

 

Misrepresentation of Facts

 

Misrepresentation of facts refers to the distortion or obscurement by one party of a material fact on which a second party relied while entering into the contract. Examples of misrepresentation: concealing defects in goods, disclosing only half truthful statements, failing to tell the other party about a wrongful assumption of a known fact.

 

Unconscionable Contracts

 

Unconscionable contracts are so unfair to one party that the contract becomes unenforceable, usually with respect to consumers induced to sign contracts via high pressure sales techniques or who misunderstood the requirements and conditions. Such contracts hide procedurally unfair terms in the fine print, contain exorbitant price or limit buyer's remedy (waiver of buyer's defenses, prohibiting buyer's recovery in case of product defects, limiting remedies to useless options, giving a seller the right to repossess items sold on credit regardless of payoffs on some of them).

 

Intoxication

 

Can a drunk person enter into contract and then claim that she was so drunk that she could not understand what she was doing?

 

Answer: Intoxication can void a contract if an intoxicated person could not understand the terms of a deal and the other party was aware or should have been aware of that fact.

 

A Party is a Minor

 

A contract can be unenforceable if a minor negotiated and signed the contract. That means a party will not be able to enforce conditions of the contract against said minor.

 

Minors can void (voidable contract) or ratify (upon reaching the age of majority) their contracts. The other party is entitled to return of the goods back from the defendant-minor or can avoid the contract if a minor lied about her age.

 

Signature Under Duress

 

If one of the parties can prove that the contract was signed under duress, that is the party's signature was extracted by physical or mental coercion, then the contract is null and void.

 

Duress is defined as coercion of a party to execute a contract against the free will of that party. For example, a person signs a check, or a deed transferring a house title to a stranger, under a threat or act of violence, imprisonment (retaining a person in a confined space), victim's property detention or breach of contract.

 

Mental Disability

 

A party entering into and executing any legal document must be in sound mind and mentally stable. Medical proof of the party's mental disability can justify nullification of the contract signed by the disabled person. For example, a testator signing a will must be of sound mind, clear memory and under no duress. This condition is verified by at least two or three witnesses whose signatures must be notarized by a notary public.

 

A contract signed by a mentally infirm person is voidable upon proof of such infirmity at the time of signing that contract.

 

Personal Performance

 

Parties can be relieved from their obligations in case of death or disability of a third party who is essential to the performance of the parties. For example:

In case of personal performance which is difficult to replace, agreements requiring the individual's skill and knowledge, such as an athlete's match or singer's concert, or magician's show, can be cancelled by death or physical disability of the performer.

 

Meeting of Minds

 

Parties may contemplate different things while signing a contract and therefore cannot reach agreement about the terms. For example, one party considers a settlement amount of a bodily injury claim to be inclusive of property damage and another party believes that it was not. The intent of the parties can be proved through documents and witness testimonies.

 

Lack of meeting of the minds means that the parties did not know about the misunderstanding and had different beliefs about the terms. However, the contract will be formed on the terms understood by an innocent party if the other side knew about the meaning of an ambiguous term.

 

There is no meeting of minds if all parties made a mutual mistake about the quality and existence of the subject matter.

 

Force Majore

 

Fires, floods, earthquakes, labor strikes, civil wars and other acts of God can relieve a contractual party from fulfillment of its obligations under a contract. A so called "force majore" provision delineating such calamities is usually included in business contracts.

 

Illusory Promise

 

An illusory promise is a promise which does not commit the promisor to do anything. For example, a seller gives a promise to sell an unlimited number of goods up to $5.00 apiece within thirty days. Since there is no consideration was given to support that promise and the terms were not clearly defined, the contract based on such illusory promise is unenforceable.

 

Violation of Public Policy

 

Agreements violating public policy of the state or country will not be enforced by courts. For example, an agreement between an employer and employee to never report a labor law violation to government authorities will not be enforceable since such an agreement would be against public policy.

 

Violation of Law

 

A contract between criminals to commit a criminal act or other acts violating civil, criminal or any law is illegal and unenforceable.

 

Illustrations of illegal contracts: gambling or wagering contracts, contract for services without appropriate licenses or permits, unreasonably broad (duration, geographical restrictions) non-competition contracts, or lending contracts made in violation of state usury laws.

 

Violation of Terms

 

If any obligation under a contract is not met by a party within the time frame provided under the contract, the other party can cancel the contract and claim damages. Consequently, the terms must be stated so clearly that neither party can take advantage of contract language ambiguity to avoid its obligations under contract.

 

Condition Precedent

 

A contract can provide for meeting of a condition precedent by one or more parties before a covenant, or contract obligation, becomes effective. This means that a certain act or event must take place prior to the contract terms becoming operable. For example, arrival of a cargo ship to a port is a condition precedent to the fulfillment of the terms between the cargo unloading company and land-based cargo shipping company.

 

Bankruptcy

 

As a rule, declaration of bankruptcy relieves a party from various financial obligations, including obligations under certain contracts. The bankruptcy court pays the creditors a fraction of the bankrupt person's assets, if any. Bankruptcy is used by people and companies to avoid payment of debts in extreme circumstances.

 

Counterclaim

 

Sometimes a contract breaching party can avoid fulfillment of its promises under contract by accusing the other party of a wrongdoing. For example, a patient may refuse to pay her dentist's bill because of low quality of dental work, or pay a hospital bill because it is inflated and unreasonable. This defense can be appropriate if there is proof of such malfeasance.

 

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