| WHAT A CONTRACT IS NOT
Bars to a Contract
Q. May someone make a contract to do or sell something illegal?
A. No. The courts will not help someone collect an illegal gambling
debt, or payment for
illegal drugs or prostitution. The law treats these contracts as if they
never existed - they are
unenforceable or void. This is the contract defense of illegality.
Similarly, some contracts that are not specifically outlawed nonetheless
will not be
enforced if a court determines that enforcement would violate public policy.
An example
would be a contract to become a slave, which may not be prohibited by
any specific statute but
offends the law's view of what kinds of contracts society will permit.
Money On the Line
What if it is illegal to gamble in your state, but you go on line
and gamble over the Internet
using your credit card? Chances are you will still have to pay your
losses. The website
operator may be in violation of local law, and you may be also. But
your credit card agreement
probably requires you to pay your gambling debts regardless, and until
this area is regulated
and controlled you must assume that when you put your money on the
line, online, that you
may never see it again – exactly the bargain you make whenever
you gamble |
Q. What if the contract became unenforceable because something
made it illegal after
the people agreed to it?
A. Generally speaking, the Constitution forbids lawmakers from
passing laws that would
impair the rights people bargain for in contracts. Therefore, a contract
is usually considered by
courts in light of the law which applied at the time the contract was
made -unless the change
in the law involves a compelling public policy.
For example, a contract between a railroad and a property owner who leased
a right-ofway
to the railroad provided that the railroad was not responsible for any
fire damage to the
property caused by locomotives. Later, the state legislature made it illegal
to fail to keep
certain precautions against fire damaging an adjoining property. The court
held that,
even if that law would have made the contract illegal (because it didn't
include the newlyrequired
precautions), because it was passed after the contract was made it did
not affect the
contract.
Typically, however, courts say that because of a change in public policy
as a result of the
change in the law, they will not enforce the old contract. Obviously,
a contract to sell someone
a slave could not be enforced after slavery became illegal; neither could
you enforce a contract
to purchase a banned assault rifle that was made before the ban went into
effect. This works
both ways: a contract that was illegal when made usually will not be enforced,
even though it
would be legal if entered into today. One case involved a contract which
violated wartime
price-controls, entered into when those controls were in effect, which
one of the parties
wanted enforced after the war. The court ruled that a contract that was
so damaging to the
public good when made (and when no change in the law was anticipated)
should never be
enforced. To do so would have been to provide an incentive to enter into
illegal contracts in
the hope that they will someday be enforceable a bad prescription for
effective public policy.
Q. Does the same hold true for a contract to do something immoral?
A. The courts will only enforce a moral code that the law (or
"public policy") already reflects,
such as laws against prostitution or stealing. You may feel that X-rated
movies or fur coats are
immoral, but as long as they're legal, they can be the subjects of enforceable
contracts.
Is It or Isn't It a Contract
The principles discussed will go a long way toward determining if
people have formed a
contract. You now know that a contract has to be made between willing,
competent parties.
Also, the contract must concern a legal subject matter. The preceding
section also discussed
many aspects of consideration.
Applying these principles isn't always easy. Sometimes special protections
in the law
complicate matters. If successfully invoked, only one of these may
be needed to provide a
complete defense against someone claiming you owe him or her money
or something else you
supposedly promised. It would prompt a court to resolve the dispute
as if there never were a
contract. Since the contract is void, neither party may enforce its
terms in court against the
other.
Other contracts are voidable, but not automatically void. What's the
difference? A
contract produced by fraud is not automatically void. People who are
victimized by fraud have
the option of asking a court to declare that contract void, or to
reform (rewrite) it. On the other hand, if they went along with the
contract for a substantial period of time, they could lose their right
to get out of it. This is called ratification, and is based on the
idea that they have, by their actions, made it clear that they are
able to live with the terms. A checklist of contract defenses appears
in this section. |
Q. May a contract that I am a party to but that was made against
my will be enforced
against me?
A. No. A contract that someone agrees to under duress is void
in most states. Duress is a
threat or act that overcomes someone's free will. The classic case of
duress is a contract signed
by someone "with a gun to his head." Because this kind of duress
is very rare - and often very
hard to prove - the defense of duress is rarely successful.
Duress goes beyond persuasion or hard selling. Persuasion in bargaining
is perfectly legal.
It also isn't duress when you say, "I would never pay that much for
a Yugo if I had a choice."
You do have a choice - to buy a nice Taurus instead. But if you want that
mauve Yugo, you
"have to" pay what the owner demands. In contrast, duress involves
actual coercion, such as a
threat of violence or imprisonment.
Q. Are there other kinds of duress besides physical threats?
A. Duress is a suspension of your free will. Besides being done
by threats of physical
violence, it may be duress to threaten to abuse the court system to coerce
your agreement.
There is also economic duress. That was alluded to earlier when the contractor
demanded
more money after his workers went on strike and you needed your house
painted before you
left the country. This isn't the same as "driving a hard bargain."
Rather, the contractor had
already made a deal. When the contractor threatened to withhold his part
of the deal, he left
you with no practical choice but to agree. The classic case is where the
supplier of a necessary
ingredient or material threatens, on short notice and at a critical time,
not to deliver it - in
violation of an existing contract - unless he or she gets more favorable
terms. Courts have set
aside contracts made under such economic duress.
Q. What should I do if someone forces me to sign a contract under
duress?
A. Once you get out of danger, see a lawyer who can tell you
how to protect yourself. The
lawyer can help you determine whether you have assumed any obligation,
and what legal
rights you might have besides disavowing the contract. It's important
to act quickly. The
courts are especially skeptical of a claim of duress made long after the
danger has passed.
Q. Are there other uses of unfair pressure, less severe than
duress, that void a contract?
A. There is a contract defense called undue influence, which
doesn't involve a threat. Rather,
it's the unfair use of a relationship of trust to pressure someone into
an unbalanced contract.
Undue influence cases usually involve someone who starts out at a disadvantage,
perhaps due
to illness, age, or emotional vulnerability. The other person often has
some duty to look out
for the weaker one's interests.
An example would be a court-appointed guardian who "persuades"
his twelve-year-old
charge to lend him $25,000 from his trust fund, free of interest. The
loan contract would be
unenforceable because of undue influence, regardless of whether the minor
otherwise had the
capacity to make a contract.
Q. What is fraud?
A. A contract can be canceled by a court because of fraud when
one person knowingly made a material misrepresentation that the other
person reasonably relied on and that disadvantaged
that other person. A material misrepresentation is an important untruth.
In many states, it
doesn't have to be made on purpose to make the contract voidable.
Consider our earlier example involving a car sale. You offered to sell
your Yugo to a
friend. Suppose you knew it had no transmission, and you knew she wanted
it for the usual
purpose of driving it. You told her it was working fine, and she relied
on your statement. Then
the contract you made may be set aside on the grounds of fraud.
Here, there is no issue of the statement being merely the seller's opinion,
or exaggerated
"sales talk" puffery which people know not to believe literally.
You didn't merely say it was a
great car when really it was a mediocre car. Saying it's "great"
is just an opinion, while fraud
requires an outright lie, or a substantial failure to state a material
fact about an important part
of the contract. For that reason - and because corrupt people often know
well the fine line
between fraud and puffing - actual fraud that will invalidate a contract
is a lot less common
than people think.
When Someone Forces You To Sign
Between the defenses of duress and undue influence, you should never
have to fear a court
holding you liable for a contract that someone forces you to sign.
Both concepts are hard to
define, though, and people often use them interchangeably. Also, their
limits vary from one
state to another. If you think either might apply to an agreement
you want to get out of, see a
lawyer. |
Q. If I enter into the contract under a mistaken impression,
does that affect the
contract's validity?
A. Probably not, assuming the other party didn't know about your
mistake. This defense,
unilateral mistake, is almost impossible to prove, even if the mistake
is about the most
important terms of the contract. If allowed liberally, it would lead to
a lot of abuse. People
would claim they made a mistake in order to get out of a contract they
didn't like, even though
they had no valid legal defense. Therefore, courts hardly ever permit
such a defense, and even
then, only in specialized business cases.
Q. When is unilateral mistake ever a defense?
A. Courts have permitted a mistake defense most commonly if there
has been an honest error
in calculations. The calculations must be material to the contract, and
the overall effect must
be to make the contract unconscionable (discussed below), that is, unfairly
burdensome. Such
mistakes often happen when a unit of government puts public work out for
bid. If a contractor
mistakenly bids five million dollar to construct a bridge and a road,
when the true cost to build
the bridge alone was five million dollars, he or she might be able to
raise this defense. Even
then, however, if several months have elapsed and the government has materially
relied on the
mistaken figures before the mistake is discovered (for example, by taking
a number of steps to
move the process forward), then it would be unfair to the government to
cancel the deal, and
the defense would probably fail. (But see the discussion of reformation
in the section on
remedies.)
Of course, if you explicitly state your mistaken idea, the other party
has a duty to correct
you. Then the issue is no longer one of mistake but of fraud. In our car-sale
example, suppose
the car's heater worked, but not too well, and you, the seller, knew that.
Under contract law, if
you and your friend hadn't discussed it, you probably wouldn't have to
tell your friend about it.
But suppose your friend told you, "The best thing about this car
is that it's so hard to find a
Yugo with a perfect heater." Then you would be obliged to tell your
friend that the heater was
faulty. If you didn't, many states would permit your friend to set aside
the contract, or would
allow your friend to collect damages for repairs required on the heater.
Having said this, the best defense is a good offense. Don't assume anything
important or
questionable. Ask the questions now -- before you sign.
Q. What if both sides make a mistake?
A. Then you don't have the "meeting of the minds" discussed
earlier. Or perhaps more
accurately, the minds aren't meeting with the facts. Then, in order to
avoid injustice, the court
will often set aside the contract, under the theory of a mutual mistake.
The classic case of mutual mistake occurred when someone sold a supposedly
infertile
cow for eighty dollars. It turned out soon afterward that the cow was
pregnant, which made
her worth $800. The court ruled that since both parties thought they were
dealing with a
barren cow, the contract could be set aside.
Q. Does that mean that contracts always have a built-in guarantee
against mistakes?
A. No. As you can imagine, this is a very tricky and unpredictable
area. After all, many people
make purchases on the understanding that the object is worth more to one
person than to the
other. You wouldn't pay $80 for a cow if she were not worth at least $80.01
to you. That is,
you figure you're somewhat better off with the cow than with the $80.
(Economists call this
amount the "marginal benefit.") Similarly, the seller would
not sell her if she were worth more
than $79.99 to the seller. Both people have to be getting some benefit
to agree to the sale. In
the case of the cow, both buyer and seller understood clearly -- but mistakenly
- that the cow
could not get pregnant. It's as if they made the contract for a subject
that turned out not to
exist.
Various courts draw the line between $80.01 and $800 at different places,
if they are
willing to draw it at all. Competent legal advice about the law in your
state is crucial if you are
considering voiding a contract because of a mistake.
Q. What are statutes of limitations?
A. These are laws setting time limits during which a lawsuit
can be brought. The typical
deadline for bringing a contract action is six years from the time the
breach occurs. The idea
of this policy is that everyone is entitled, at some point, to "close
the book" on a transaction. It
encourages people to move on and reduces the uncertainty that, for example,
businesses
would face if they could be sued for breaching contracts that no one alive
in the organization
remembers.
Changing Situations
Q. What if it becomes physically impossible to perform a contract?
A. Suppose that you hire a contractor to paint your house on
Thursday, and it burns down
Wednesday night through no fault of your own. Then the contract will be
set aside, because
there's no way to perform it. You won't have to pay the painter, under
the doctrine of
impossibility of performance. Both of you are out of luck. The same is
true if the contract
covers a specific kind of product, and it becomes unavailable because
of an act of God, such
as an earthquake or blizzard. Courts usually will not enforce such a contract.
For example, suppose you contract to deliver one hundred barrels of a
specific grade of
oil from a specific Arabian oil field by a certain date. Then an earthquake
devastates the oil
field, making recovery of the oil impossible. You're probably off the
hook under these
circumstances.
This doctrine is also known as impracticability of performance, which
reflects the fact
that it may apply even if performance is not literally impossible, but
is still seriously
impractical.
Q. What if changing circumstances make it much more costly to
fulfill the contract, but
it's still possible to do what the contract promised?
A. The courts probably would enforce the contract, on the grounds
that the new circumstances
were foreseeable, and that the possibility of increased costs was or could
have been built into
the contract. For instance, suppose again that you contract to deliver
one hundred barrels of
Arabian oil. This time, fighting breaks out in the Persian Gulf, interrupting
shipping and
greatly increasing the cost of the oil. When a court considers these facts,
it's likely to say that
you should have foreseen the possibility of fighting and built that risk
into the price. The
contract will stand.
Q. What if the contract can be performed, but to do so would
be pointless?
A. Sometimes a change in conditions doesn't make performance
impossible or impractical, but
it does make performance meaningless. The legal term for this is frustration
of purpose. One
famous case decided around a century ago involved a party that rented
an apartment in
London to view the processions to be held in connection with the coronation
of the King of
England. Because of the King's illness, the coronation was postponed.
The court excused the
renter from paying for the room. Through no fault of his own, the whole
purpose of renting it -
which the people who owned the room knew - had disappeared. Such cases,
though, are rare
indeed. More typically, you take your chances when you make a contract
in expectation of
some third party's or outside force's action; many contracts have a term
to that effect built in.
There are three important criteria for a contract to be set aside for
frustration of purpose.
First, the frustration must be substantial - nearly total, and with almost
no chance at improved
benefit. Second, the change in circumstances must not be reasonably foreseeable.
Third, the
frustration must not have been your fault.
Should the Buyer Still Beware
The well-known Latin maxim caveat emptor"--let the buyer beware"--is
a strict rule placing
the risk in a transaction with the buyer. Under this rule each party
is protected only by
inspecting and analyzing a potential transaction, because there is
no remedy if there is a
hidden problem. In fact, this "ancient" law really predominated
only in the 19th and early 20th
centuries, when the idea of "the sanctity of the contract"
reigned. More common are the
principles of "just prices" and fair dealing in transactions.
They are part of religious law,
medieval law, and more recently statutory law - particularly the consumer
fraud acts
prohibiting unfair or deceptive acts and practices. Having said that,
every buyer should
recognize that the first line of defense is common sense, and not
depend on a sympathetic
judge to save him or her from a bad deal. |
Q. May someone have a contract set aside because it simply isn't
fair?
A. It is possible, but not likely. Courts have a powerful weapon
called unconscionability (from
the word "conscience") at their disposal. Unconscionability
means that the bargaining process
or the contract's provisions "shock the conscience of the court."
For example, selling $10,000
worth of rumba lessons to a ninety-five-year-old widow living on social
security would
probably be held unconscionable. An unconscionable contract is grossly
unfair. Its terms
suggest that one party took unfair advantage over the other one when they
negotiated it. The
courts are reluctant to use this weapon, but consumers have a better chance
with it than
anyone else, especially in installment contracts.
The important thing to remember is that you shouldn't rely on unconscionability
in
making a contract. Though courts sometimes will void contracts on these
grounds, the
application of unconscionability is uncommon and uneven. Make the effort
to understand all
the terms of a contract. After all, it's also "unconscionable"
to let someone take advantage of
you.
Fill In the Blanks
There are many kinds of form contracts. One is the kind you simply
have to sign if you want
to get insurance or a loan, or if you're financing a car. These are
called contracts of adhesion -
if you want the deal, you have to "adhere" or stick to the
terms. "Click box" contracts for
software or other computer-related merchandise, or access to websites,
are also contracts of
adhesion.
Another common kind of form contract is one with numerous blanks on
it, which can be
filled in with the names of the parties, the monetary terms, dates,
etc. These are used
commonly for the sale of homes and for leases on real estate. There
are two main points to be
aware of regarding these forms, which can be purchased at stationery
stores:
First, while they may be standardized, there's no such thing as a
"standard contract."
Many innocuous-looking forms are available in several different versions,
each fulfilling the
same function - for example, an apartment lease - but each subtly
different. One might be a
"landlord's" contract, where
the preprinted terms are more favorable to the landlord, while a
nearly identical one is a "tenant's" contract. In any event,
don't let anyone tell you it's
"standard." Insist on
crossing out or changing any term you don't like. If the other party
refuses to accept changes that are important to you, then don't sign
the contract. In today's
economy, there is usually more than one source for the product or
service you want.
Second, fill in all the blanks! A contract with your original signature
but containing blank
spaces can be like a blank check if altered unscrupulously. Be sure
all blanks are filled, either
with specific terms or straight lines to indicate that nothing goes
there. And insist on your own
copy with the other side's original signature.
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