PublicationsRe: Contract Defenses for Businesses Contracts are part of the lifeblood of commerce - we couldn't do business without them. As a business owner, you should be sure to carefully review any contract before you sign. Make sure you understand and agree with its terms, and by all means get advice form your lawyer before you commit yourself. Inevitably, however, problems arise after a contract has been signed. In many of these cases, though, there are contract defenses which could work in your favour. Your lawyer can advise you about your specific situation. Here's a brief description of some frequently-used defenses. Changing Situations. Sometimes changing circumstances make a contract impossible to perform. Suppose that your business hires a contractor to make repairs on a building, but the building burns down before work starts 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 contractor, under the doctrine of impossibility of performance. 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 book 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 impracticable. Sometimes changed circumstances radically change the costs of performing a contract, without making it literally impossible to do so. 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. Statutes of Limitations. Statutes of limitations are laws setting time limits during which a lawsuit can be brought. Let's say another business is suing you for breach of contract, alleging that a number of years before you failed to live up the terms of an agreement. The typical deadline for bringing a contract action is six years from the time the alleged breach occurs. If the supposed breach took place before that time,or whatever time is specified in your state, you would have an excellent defense against the suit. 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. Fraud. If you feel that you entered into a contract because you were seriously misled, you might be able to have the contract set aside because of fraud. To prove fraud, you have to show that the other party made a false statement of a material fact, and that you relied on the statement and suffered harm as a result. "Material" means that the untrue fact was important to the deal and would affect the terms you'd agree to if you knew the truth. In some states, this misrepresentation does not have to be made on purpose to make the contract voidable. Note that we're talking about past or present "facts" - not predictions of the future or mere exaggeration and opinion. Calling something "economical" or "fine" is mere puffery, sales talk about doesn't rise to the level of fraud. Mistake. Sometimes it seems unfair to hold a party to a contract they entered into by mistake, but this is a slender reed indeed on which to seek to avoid a contract. The other party's fraud is very different from your mistake, assuming the other party didn't know about your mistake. The defense of 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, mostly in specialized business cases. 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, 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 dollars 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. In general, the best defense is a good offence. Don't assume anything important or questionable. Ask the questions now - before you sign. The foregoing comments are of a general nature, and are not intended nor should they be used as a substitute for legal advice or opinions which can be rendered only when related to specific fact situations. |