If you or your company has been sued for breach of contract, you might be wondering what types of defenses are at your disposal. Here are the most common defenses to a breach of contract claim:
CONTESTING THE ELEMENTS
Contesting the elements is a defense because the plaintiff has the burden of proving the breach. As a result, if you are defendant you may attempt to demonstrate
- The parties did not have a valid contract;
- The plaintiff failed to perform and had no excuse;
- It (the defendant) performed or had an excuse for not performing and/or
- The plaintiff was not harmed or the harm was not as bad as the plaintiff claims
THE BREACH WAS MINOR AND NOT MATERIAL
A defendant may also claim that even if the contract was a breach, the breach was minor and not material to the agreement. For example, if you opened a new office and if you ordered desks were suppose to delivered on Monday but they were delivered on Wednesday due to a problem with the delivery truck, you will unlikely to recover any money if you didn't have any damages.
AFFIRMATIVE AND EQUITABLE DEFENSES
There is a number of common affirmative and equitable defenses that must be pleaded when you answer a complaint.
- Accord and Satisfaction. Accord and satisfaction is a settlement of an unliquidated debt. For example, a builder is contracted to build a homeowner a garage for $35,000. The contract called for $17,500 prior to starting construction, to disburse $10,000 during various stages of construction, and to make a final payment of $7,500 at completion. At completion, the homeowner complained about inferior work quality and refused to make the final payment. After a mutual settlement agreement, the builder accepted $4,000 as full payment.
- Absence of Condition Precedent. In a contract, a condition precedent is an event that must occur before the parties are obligated to perform. For example, an insurance contract may require the insurer to pay to rebuild the customer's home if it is destroyed by fire during the policy period. The fire is a condition precedent. The fire must occur before the insurer is obligated to pay.
Bad Faith. The plaintiff acted unethically, unlawfully, or in bad faith. For example, the plaintiff misrepresented an important fact
that was the basis of the contract, a fact that could have induced the other party to sign it. This is referred to as the doctrine of unclean hands and is grounded in public policy to not award damages to those who have acted in bad faith.
- Bankruptcy. Unless there is a claim for fraud if the defendant filed bankruptcy the defense would stop recovery.
- Duress. A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will. in A & G Const. Co., Inc. v. Reid Brothers Logging Co., Inc., 1976 For example, if someone was immediately threatening harm to your family members unless you signed a contract, that contract would in all likelihood not be enforceable.
- Estoppel. The purpose of equitable estoppel is to preclude a person from asserting a right after having led another to form the reasonable belief that the right would not be asserted, and loss or prejudice to the other would result if the right were asserted. The law imposes the doctrine as a matter of fairness. Its purpose is to prevent someone from enforcing rights that would work an injustice on the person against whom enforcement is sought and who, while justifiably relying on the opposing party's actions, has been misled into a detrimental change of position (see generally Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175, 184 ). For example, if one of your suppliers regularly accepts late payments from you, it would be prevented from canceling the contact based on non-payment after a reasonable amount of time.
- Failure to Mitigate Damages. Even if the plaintiff is able to prove a breach and can quantify its damages, those damages will be offset to the extent the plaintiff failed to mitigate them.
- Fraud. In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury (see, Channel Master Corp. v Aluminum Ltd. Sales, 4 N.Y.2d 403; New York Univ. v Continental Ins. Co., 87 N.Y.2d 308, 318). "The true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong" or what is known as the "out-of-pocket" rule (Reno v Bull, 226 N.Y. 546, 553; Hanlon v MacFadden Publ., 302 N.Y. 502). Under this rule, the loss is computed by ascertaining the "difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain" (Sager v Friedman, 270 N.Y. 472, 481). Damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained (see, Cayuga Harvester v Allis-Chalmers Corp., 95 AD2d 5). Under the out-of-pocket rule, there can be no recovery of profits which would have been realized in the absence of fraud (Foster v Di Paolo, 236 N.Y. 132; AFA Protective Sys. v American Tel. & Tel. Co., 57 N.Y.2d 912). The plaintiff must plead each element of fraud specifically in order to prevail.
- Illegality. Illegal contracts are, as a general rule, unenforceable. However, "[w]here contracts which violate statutory provisions are merely malum prohibitum, the general rule does not always apply. If the statute does not provide expressly that its violation will deprive the parties of their right to sue on the contract, and the denial of relief is wholly out of proportion to the requirements of public policy * * * the right to recover will not be denied." (Rosasco Creameries v Cohen, 276 N.Y. 274, 278.)
- Impossibility, Impracticality, Frustration of Purpose. The defense of impossibility to perform under a contract is available when there is an unanticipated event that could not have been foreseen or guarded against in the contract. Estates at Mountainview v. Nakazawa, 38 AD3d 828, 829 (2d Dept. 2007), quoting Kel Kim Corp. v. Central Mkts, 70 NY2d 900 (1987). The somewhat related doctrine of frustration of purpose applies when the frustrated purpose is so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. Crown IT Services, Inc. v. Olsen, 11 AD3d 263, 265 (1st Dept. 2004). The doctrine of frustration of purpose does not apply unless the frustration is substantial. Rockland Development v. Richlou, 173 AD2d 690 (2d Dept. 1991). The doctrine of impossibility or impracticability of performance is frequently asserted by a party who has contracted to perform work, labor, and services. The defense of frustration of the venture is frequently asserted by the party who has contracted to pay for it. Corbin on Contracts §77.1. Whether a party will be excused from performance on the ground of impracticability or frustration turns on the foreseeability of the event occurring, the fault of the nonperforming party in causing or not providing protection against the event occurring, the severity of harm, and other circumstances affecting the just allocation of the risk.
- Lack of Consideration. A transaction that lacks consideration is not an enforceable contract. Lack of consideration means that one party was not obligated to do or refrain from doing anything. A common example is a gift. Under the traditional principles of contract law, the parties to a contract are free to make their bargain, even if the consideration exchanged is grossly unequal or of dubious value (see, Spaulding v Benenati, 57 N.Y.2d 418; Hamer v Sidway, 124 N.Y. 538; 3 Williston, Contracts § 7:21, at 390 [Lord 4th ed]; 476*476 Restatement [Second] of Contracts § 74, comment e; § 79, comment c). Absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny (Spaulding v Benenati, supra, at 423). It is enough that something of "real value in the eye of the law" was exchanged (see, Mencher v Weiss, 306 N.Y. 1, 8; see also, Weiner v McGraw-Hill, Inc., 57 N.Y.2d 458, 464). The fact that the sellers may not have had a property right in what they sold does not, by itself, render the contract void for lack of consideration (see, Wahl v Barnum, 116 N.Y. 87, 95 [relinquishment of disputed claim is valid consideration even though the claim is in fact invalid]; Spaulding v Benenati, supra, at 423 ["expectancy that customers will return to the seller's former location" is legally sufficient consideration]; see also, Restatement [Second] of Contracts § 74, comment e [contract for quitclaim deed valid, even though the seller has no interest in the property]; 3 Williston, Contracts § 7:21, at 391 [Lord 4th ed]).
Laches. Laches is defined as "such neglect or omission to assert a right as, taken in conjunction with the lapse of time, more or less great, and other circumstances causing prejudice to an adverse party, operates as a bar in a court of equity." (2 Pomeroy, Equity Jurisprudence [5th ed.], § 419, pp. 171-172). The essential element of this equitable defense is delay prejudicial to the opposing party (Marcus v. Village of Mamaroneck, 283 N.Y. 325, 332. The defense of laches is independent of the statute of limitations in that it requires examining
the reasons for the delay in filing the claim, how the delay affected the defendant, and the length of the delay.
- Mistake. Several different types of mistakes may make a contract unenforceable. In one type, both parties make a mistake as to an existing material fact of the agreement. The mistake must concern an assumption upon which the contract was made that in turn has a significant effect on the agreement. For example, if a buyer and a seller both think that a baseball card is authentic when it is in fact a copy, this is a mistake and the contract is voidable. The rules in this area are complex.
- Statute of Frauds. The statute of frauds requires certain contracts to be in writing to reduce the chances of fraud. Common business contracts that must be written include real estate contracts, contracts that by their terms cannot be performed within one year, and contracts for the sale of goods for more than $500.
- Statute of Limitations. Centuries ago, there was no fixed time to start a lawsuit. The Statute of Limitations was enacted to protect defendants against defending old lawsuits after a reasonable time has passed. The law has specific provisions that prescribe how long a plaintiff has before starting a lawsuit. If you fail to commence your lawsuit within the statute of limitations, your case is generally dismissed. In New York, the statute of limitations for breach of contract is 6 years.
- Unconscionability. An unconscionable contract has been defined as one which "is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms. (See 1 Corbin on Contracts, § 128, p. 400.)" (Mandel v Liebman, 303 N.Y. 88, 94.) The doctrine, which is rooted in equitable principles, is a flexible one and the concept of unconscionability is "intended to be sensitive to the realities and nuances of the bargaining process" (Matter of State of New York v Avco Fin. Serv., 50 N.Y.2d 383, 389-390). A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made — i.e., "some showing of an `absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party' (Williams v Walker-Thomas Furniture Co., 350 F.2d 445, 449)." (Matter of State of New York v Avco Fin. Serv., supra, at 389; see also, Jones v Star Credit Corp., 59 Misc 2d 189, 192.)
- Undue Influence. The concept of undue influence does not readily lend itself to precise definition or description. But New York courts, long ago, had established the criteria by which undue influence is to be determined: "It must be shown that the influence exercised amounted to moral coercion, which restrained independent action and destroyed free agency, or which, by importunity which could not be resisted, constrained the testator to do that which was against his free will and desire, but which he was unable to refuse or too weak to resist. It must not be the promptings of affection; the desire of gratifying the wishes of another; the ties of attachment arising from consanguinity, or the memory of kind acts and friendly offices, but a coercion produced by importunity, or by a silent resistless power which the strong will often exercise over the weak and infirm, and which could not be resisted, so that the motive was tantamount 54*54 to force or fear * * * lawful influences which arise from the claims of kindred and family or other intimate personal relations are proper subjects for consideration in the disposition of estates, and if allowed to influence a testator in his last will, cannot be regarded as illegitimate or as furnishing cause for legal condemnation" (Children's Aid Soc. v. Loveridge, 70 N.Y. 387, 394-395; see, also, Smith v. Keller, 205 N.Y. 39, 44; Matter of Schillinger, 258 N.Y. 186, 1