Contract Law: Defenses And Their Legal Implications

If you've been accused of breaching a contract, there are several potential defences to consider. These include arguing that the contract was invalid, that you had a good reason for not fulfilling your obligations, or that the other party gave up their right to sue. For instance, if you are a minor or have a mental disability, you may argue that you lacked the capacity to enter into a contract. Alternatively, you could argue that the contract is too indefinite to be enforceable, or that a third party's actions prevented you from fulfilling your obligations. Other defences include the statute of frauds, which requires certain contracts to be in writing, and the doctrine of res judicata, which bars a plaintiff from suing the same defendant twice for the same claim.

Duress, fraud, and undue influence

Duress refers to a situation where a party is forced or coerced into a contract through threats or violent, physical, or other actions. This could include threatening to physically harm someone or their family, damaging their property, or threatening to defame or ruin their reputation. Economic duress is another form, where one party threatens to commit a wrongful act that would jeopardize the other party's financial well-being or property, leaving them no reasonable choice but to agree to the contract. In such cases, the contract may be deemed voidable, allowing the aggrieved party to exit the contract.

Undue influence is similar to duress but is based on exploiting a relationship rather than making explicit threats. It involves using unfair persuasion or one's power to manipulate another party into a contract. This could include taking advantage of a vulnerable person or exploiting the nature of a relationship to gain an advantage. Undue influence often involves isolated, dependent, or vulnerable individuals, such as the elderly in nursing homes. The key distinction between duress and undue influence is the presence of a direct threat in the former.

Fraud, while not the focus of this discussion, is another critical defense in contract law. It involves intentional deception or misrepresentation of facts by one party, inducing the other party to enter into a contract. Fraudulent misrepresentation can render a contract voidable, as it undermines the validity of the agreement.

These defenses are essential in contract law as they protect individuals from being coerced, manipulated, or deceived into agreements that may not be in their best interests. They uphold the principle of free will and ensure that contracts are entered into voluntarily and with full understanding.

Incapacity and minors

Incapacity is a well-known defence to contract enforceability. It occurs when one of the parties is not legally capable of forming a binding agreement. The law recognises three categories of individuals who lack the capacity to contract: minors, individuals with psychological disabilities, and intoxicated persons.

Minors, typically those under 18, are considered to lack the capacity to make a contract. This means that a minor who signs a contract can either honour the deal or void the contract. However, there are some exceptions to this rule. For example, in most states, a minor cannot void a contract for necessities like food, clothing, and lodging. Furthermore, a minor can only void a contract for a lack of capacity while still a minor. Therefore, if a minor turns 18 and hasn't done anything to void the contract, the contract can no longer be voided.

An example of a minor voiding a contract is if a child entered into an agreement to mow their neighbour's lawn, but then sold their lawnmower. This action would indicate an intention to disaffirm the contract. However, the disaffirmation must happen before the minor comes of age, and the minor cannot pick and choose which parts of the contract to set aside.

Intoxicated persons may also lack the capacity to contract. Courts typically decide that those who are voluntarily intoxicated should not be permitted to evade their contractual duties but must assume responsibility for the outcome of their self-induced changed mental state. However, if a party is so impaired that they are incapable of comprehending the type and outcome of the agreement, and the other sober party benefits from the impaired party's condition, the contract may be voidable by the intoxicated party.

Illegality and public policy

For instance, a contract that involves a term that is against public policy, such as one that encourages adultery, would be considered illegal. This is because public policy illustrates that people should never be penalized for practising their constitutional rights. For example, a worker who is fired for exercising a statutory right, such as refusing to engage in illegal activity, can file for breach of public policy.

However, there is uncertainty in this area of law, and it can be challenging to determine when a contract breaches common values or public policy. Courts approach these cases by considering the common values of society, and if a contract is found to breach these values, it will be void for common law illegality. For instance, in Pearce v Brooks (1865) LR 1 Ex 213, a contract for the hire of a carriage used for prostitution was deemed illegal due to public policy.

It is important to note that public policy violations do not always necessitate a criminal offense. An example of this is requiring a license to trade with certain dangerous types of animals. The requirement may be primarily for revenue, but it also serves the public benefit by ensuring these animals are not introduced into the country through illegal means.

The legality of an agreement is determined by whether it is legally valid and enforceable by law. An agreement between two parties is legally valid if a sensible third party who is not involved in the contract makes and accepts an offer. This is known as the legality of the object. Unless expressly prohibited by law, the recognition and object of a contract can be legally binding.

Mistake and misrepresentation

Mistake

Mistake refers to an erroneous belief regarding existing facts, which induces parties to enter into agreements. It is derived from common law, and there is no simple definition that governs the grounds for claiming a mistake. There are three broad categories of mistake: common, unilateral, and mutual. A common mistake occurs when both parties make the same mistake, causing the contract to be fundamentally different from what was intended at the time of formation. A unilateral mistake happens when one party is mistaken, and the other party knows or ought to have known about the mistake. This mistake must relate to the fundamental nature of the contract for it to be void. Mutual mistake means the parties are at cross-purposes with each other.

Misrepresentation

Misrepresentation is a false assertion of fact, which may excuse defendants from their contractual obligations. There are three forms of misrepresentation: an untrue statement of fact or law made by one party to another, which induces the other party into entering the contract. Negligent misrepresentation occurs when a commercial relationship exists, and a disputed contract is examined to determine if the offending party has upheld their duty of reasonable care regarding their representations. Innocent misrepresentation can also occur, as seen in Phelps v. McQuade, where overstating one's wealth to secure a financing agreement did not make the contract unenforceable, as the purchaser's wealth status was not considered essential to the agreement.

Affirmative defences and estoppel

When responding to a breach of contract claim, it is important to raise as many legal defences as possible, including affirmative defences. Affirmative defences refer to the party raising the defence (the person suing for breach of contract) having the burden of proof of the defence if the dispute goes to trial.

One such affirmative defence is estoppel. Estoppel can be claimed when one party makes a statement excusing the performance of the agreement, and the other party relies on that statement. In such cases, the first party can be prevented from later denying that statement and claiming a breach. For example, if you tell the other party that they do not have to perform part of the contract, you cannot later change your mind and claim that they breached the contract by non-performance. Written proof of the other side excusing your non-performance strengthens the defence of estoppel.

Other affirmative defences include the statute of frauds, which states that some contracts, including those involving real property, are required to be in writing and signed to be enforceable. If a contract is supposed to be in writing but is not, a court may find that the contract is not enforceable. Another affirmative defence is that all the essential terms of a contract must be clear, or the contract may not be enforceable. If one or more essential terms of the contract are not clear, the contract may be argued to be too indefinite to be enforceable.

Additionally, if a party was not legally able to agree to the contract, they might argue that they lacked capacity. For example, minors or the mentally ill do not have the capacity to contract and can argue that the contract is not enforceable against them. Similarly, if a party's primary purpose for entering the contract is frustrated by a supervening event, the duty to perform may be discharged.

Other defences to a breach of contract claim include res judicata, which bars a plaintiff from suing the same defendant twice for the same claim or relitigating an issue decided in the first suit. Furthermore, a plaintiff cannot maintain a contract claim when the contract is unconscionable, marked by gross disparity in value and oppressive influences in the exchange. A plaintiff also cannot maintain a claim when they were the ones who made a misrepresentation, which is a false assertion of fact. Lastly, a plaintiff has the burden of proving each element of a valid contract: mutual assent, consideration, and sufficient definiteness. The defendant may argue that one or more of these elements have not been proven.

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