Contractual Obligations: Can They Ignore The Law?

Contracts are a key part of the world of commerce, from real estate transactions to the sale of goods. However, not all promises are contracts, and not all contracts are enforceable by law. While most people assume that all contracts must be written agreements, verbal contracts can be valid under certain conditions. For a contract to be valid, there must be an offer, acceptance, and consideration, meaning something of value is given in return for a promise. If a contract dispute involves fraudulent dealings, a breach of contract lawsuit can be filed, and a court will decide whether the contract should be enforced. Contracts can be found unenforceable on grounds of public policy, to protect the parties involved and society as a whole. Certain contracts contain force majeure clauses, which allow termination or suspension if extraordinary events occur, and some contracts include boilerplate language that cancels the contract if circumstances have made enforcing it impossible.

Illegality of a contract

Illegality in contract law is a concept that renders agreements void and unenforceable if they involve illegal activities or violate public policy. Even if the other requirements of a contract are present, such as the offer, acceptance, consideration, and mental capacity, a court could still deem the contract illegal.

An illegal contract is typically made for an illegal purpose and thus violates the law. For example, a contract that requires an illegal act or conduct from one or both parties will be considered illegal in its entirety. However, a contract can be deemed illegal even if the performance under the contract does not violate the law. Certain activities may not be prohibited by law but are still discouraged by the public, and such activities could also deem a contract illegal.

The illegality itself must relate to the contract, whether it be what is included in the contract or how the contract was entered into. For instance, in Bovard v. American Horse Enterprises (1988), the California Court of Appeal for the Third District refused to enforce a contract for the payment of promissory notes used to purchase a company that manufactured drug paraphernalia. Although the items sold were not illegal, the court refused to enforce the contract due to public policy concerns.

While many illegal contracts are void, there are exceptions where courts may uphold parts of an agreement. For example, if a contract includes an illegal provision that can be removed without altering its core intent, courts may enforce the rest of the agreement. Additionally, if one party was unaware of the illegality or was coerced into the agreement, courts may offer remedies or partial enforcement.

To avoid potential legal issues, it is essential to carefully review and understand the terms of a contract before signing. This includes paying attention to the provisions that may be considered boilerplate language, as they can sometimes contain important details regarding jurisdiction, attorney's fees, and the enforceability of the contract.

Jurisdiction and venue

Jurisdiction refers to the power and authority of a court to hear and adjudicate a matter. By designating a particular state's courts as having jurisdiction, the parties submit to the authority of those courts, even if they would not typically have such jurisdiction. This is especially significant when disputes involve parties from different states or countries, as it determines which state's or country's laws will govern the interpretation and enforcement of the contract.

Venue, on the other hand, is about geography. It specifies the exact court or physical location where disputes will be resolved. When including a choice of venue provision, parties can pursue or defend a claim in a familiar location, using attorneys who are well-versed in the local court's rules and procedures. This can provide a strategic advantage, often referred to as a "home court advantage," as it may be more convenient and cost-effective for the party and their legal representation.

To ensure clarity, jurisdiction and venue clauses should be straightforward and specific. For example, consider the following language: "The state and federal courts located in [city], [state] shall have exclusive jurisdiction and venue with respect to all actions brought by or against any party under or pursuant to this agreement." Such a provision ensures that all parties involved know where they stand legally and which courts will handle any disputes, providing a level of predictability and security.

In addition to jurisdiction and venue, it is also crucial to consider the governing law of the contract. The governing law dictates the rules by which the contract will be interpreted and enforced, and it may have statutory requirements depending on the subject matter of the contract. By combining governing law, jurisdiction, and venue provisions, parties can create a favourable "home court advantage," where their legal representatives are familiar with the applicable laws and procedures.

Verbal agreements

While verbal agreements are sometimes legally binding, they are not easily enforceable. The existence and the specific terms of a verbal contract can be difficult to prove if a dispute arises. As such, it is always best to put a verbal agreement into writing and have it signed by all parties.

To be legally valid, a verbal contract must adhere to certain legal standards. These include:

• An offer of a good or service made by one party to another. The offer must be clear and specific.
• Acceptance of the offer by the other party. This acceptance must mirror the original offer without any modifications, otherwise it is considered a counteroffer.
• The reason for the contract must be lawful.
• Something of value must be exchanged. This could be money or another item of value.
• All parties must enter the agreement without coercion, with full comprehension of the terms, and with the intention of complying with them.

In some cases, a physical written contract is necessary for an agreement to be legally binding. These include:

• When one party covers another's debt obligations.
• Transferring or selling real estate or a plot of land.
• Sale of goods over a certain dollar amount (typically $500, but this varies by state).
• Contracts that will take more than one year to complete.
• When the contract terms go beyond the lifespan of any of the parties involved (e.g., copyrighted materials).

It is important to understand the specific laws in your jurisdiction or consult with a legal professional to ensure that your verbal contract complies with local regulations.

Force majeure

In contract law, a force majeure clause frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs, preventing one or both parties from fulfilling their obligations under the contract.

The interpretation of force majeure varies across legal systems, so it is common for contracts to include specific definitions. For example, some systems limit force majeure to an Act of God, excluding human or technical failures. In contrast, others may include human-induced events such as acts of war, terrorist activities, labour disputes, or interruption or failure of essential systems.

When including a force majeure clause in a contract, it is essential to define the types of events or circumstances that would trigger it. For instance, in a coal supply agreement, the mining company may seek to include "geological risk" as a force majeure event. However, they should have conducted extensive exploration and analysis of their geological reserves before entering into such an agreement.

To invoke force majeure, the event must be unforeseeable and beyond the parties' reasonable control. If a contract does not explicitly include a force majeure clause, a party seeking to exit the agreement must prove that performance has become impossible or impractical.

Contract defences

Firstly, some contracts are required to be in writing, as per the statute of frauds. This includes contracts involving real property, items over a certain value, or those that take more than a year to complete. If a contract is supposed to be in writing but is not, a court may find that it is not enforceable.

Secondly, all the essential terms of a contract must be clear and definite. If one or more essential terms are unclear, a party may argue that the contract is too indefinite to be enforceable. For example, in an agreement between a painter and a restaurant owner, if they do not agree on a price, the painter can argue that the contract is unenforceable.

Thirdly, a party may argue that they lacked the legal capacity to enter the contract. This includes minors (under 18), individuals with mental disabilities, or those who were coerced while under the influence.

Additionally, a contract may be terminated or suspended due to a force majeure clause, which comes into effect if an extraordinary event occurs that is beyond the control of the parties. These events typically include natural disasters.

Furthermore, a party may argue that the other party gave up the right to sue for breach of contract, also known as a "waiver". For example, if a customer approves a change to an order and later demands their money back, they may have waived their right to sue.

Lastly, if a contract involves unfair bargaining power or manipulative practices, it may be deemed unconscionable and invalid.

It is important to note that specific performance, monetary damages, or cancellation may be sought as remedies for a breach of contract. In the case of cancellation, both parties are typically restored to their pre-contractual positions.

Frequently asked questions