Chapter 12
MISCELLANEOUS DEFENSES
I. ILLEGALITY
A. Generally: In general, if a contract is found to be "illegal," the court will refuse to enforce it.
B. Kinds of illegal contracts: Here are some of the kinds of contracts frequently found to be illegal and thus unenforceable: (1) "gambling" or "wagering" contracts; (2) lending contracts that violate usury statutes; (3) the pursuit of "maintenance" and "champerty," arrangements by which one person improperly finances another's lawsuit; and (4) the performance of services without a required license or permit.
1. Non-compete covenants: A very important type of possibly illegal contract is a covenant not to compete. In general, if a non-compete agreement is unreasonably broad, it will be held to be illegal and not enforced.
a. Sale of business: If the seller of a business is selling its "good will," his ancillary promise that he will not compete in the same business as the purchaser will be upheld, provided that it is not unreasonably broad either geographically or in duration.
b. Employment contracts: Employment agreements often include a clause by which the employee agrees not to compete with his employer if he leaves the latter's employ. Such covenants are closely scrutinized by courts, and will be enforced only if they are designed to safeguard either the employer's trade secrets or his customer list. Even where these objectives are being pursued, the non-compete will be struck down if it is unreasonably broad as to geography or duration.
i. Divisibility: If a non-compete is overly broad, most courts today will enforce it up to reasonable limits. Some courts apply the "blue pencil" rule, by which the clause will be enforced only if it can be narrowed by striking out certain portions (so that a ban on competing in "Ohio and Pennsylvania" could be modified by striking out "and Pennsylvania," but a ban lasting for "20 years" could not be modified by reducing it to "five years," since this would require redrafting, not merely striking). Most courts today, however, do not follow the blue pencil rule, and will "redraft" the non-compete to bring it back to within reasonable limits.
2. Cohabitation: Many courts refuse to enforce cohabitation agreements, i.e., agreements regarding property division entered into by couples who are living together without marriage. But a growing minority of courts now enforce such living-together arrangements, at least where they do not explicitly trade sex for money.
C. Enforceability: As a general rule, neither party to an illegal contract may enforce it. This is not an ironclad rule. In general, contracts that are still wholly executory are less likely to be enforced by the court than those that have been at least partly performed.
1. Wholly executory: If the contract is completely executory (i.e., neither party has rendered any performance), there are only a few situations where the court will allow one party to recover damages for breach:
a. Ignorance of facts: Where one of the parties is justifiably unaware of the facts which make the contract illegal, and the other is not, the former may usually recover. (Example: Owner hires Electrician to perform electrical work; Owner does not know that Electrician is unlicensed. Owner may enforce the contract, even if he discovers the illegality before any work is done or payments made.)
b. Wrongful purpose: Where only one party has a wrongful purpose, the other may recover for breach, at least if the wrongful purpose does not involve a crime of serious moral turpitude. (Example: A sells diamonds to B knowing that B plans to smuggle them into an Eastern Bloc country, where such importation is not allowed. A may recover for breach before money or goods changes hands, even if A knew of the proposed smuggling at the time of signing.)
c. Statute directed at one party: If the statute is designed to protect one party, the person for whose protection the statute is designed may enforce the contract or sue for its breach. (Example: A agrees to sell stock to B, in violation of Blue Sky laws. B, as an investor whom the statute is designed to protect, may enforce the contract.)
2. Partly- or fully-performed illegal contracts: Where one or both parties have partly or fully performed, the courts are more willing to enforce the contract or at least grant a quasi-contractual remedy. The three above situations will generally lead to enforcement as in the wholly-executory situation. Also:
a. Malum prohibitum: If the conduct is illegal even though it does not involve moral turpitude (a contract involving "malum prohibitum" rather than "malum in se"), the court may allow the partly-performing party to recover at least the restitutionary value of his services. (Example: Where a contractor fails to obtain a permit or license, and the permit or license is merely a revenue-raising rather than public-protection mechanism, the contractor may be able to recover the value of the work he has done.)
b. Pari delicto: If one party, although blameworthy, is much less guilty than the other party, he may use the doctrine of "pari delicto" to gain enforcement. This may only be used where the plaintiff is not guilty of serious moral turpitude (but may be used even by a plaintiff who knew of the illegality). (Example: If Bank lends money to Contractor for Contractor to build a house, even though Bank knows that Contractor is not licenced, there is a good chance that Bank will be held not to be "in pari delicto," and will thus be permitted to recover on the loan. But if Bank financed a cocaine deal, Bank's conduct would be found to be of serious moral turpitude, so the pari delicto doctrine would not apply, and Bank could not recover.)
c. Divisibility: Finally, if a divisible part of the contract can be performed on both sides without violating public policy, the court will enforce that divisible portion. (Example: Owner contracts to have Plumber supply a bathtub, and to install the bathtub. Plumber does not have a license. A court might hold that Plumber cannot recover that portion of the contract attributable to services, but might still allow Plumber to recover for the value of the tub he supplied.)
II. DURESS
A. Generally: The defense of duress is available if D can show that he was unfairly coerced into entering into the contract, or into modifying it. Duress consists of "any wrongful act or threat which overcomes the free will of a party."
1. Subjective standard: A subjective standard is used to determine whether the party's free will has been overcome. Thus even though the will of a person of "ordinary firmness" might not have been overborne, if D can show that he was unusually timid, and was in fact coerced, he may use the defense.
B. Ways of committing: Here are some of the acts or threats that may constitute duress: (1) violence or threats of it; (2) imprisonment or threats of it; (3) wrongful taking or keeping of a party's property, or threats to do so; and (4) threats to breach a contract or commit other wrongful acts.
1. Abusive or oppressive acts: If one party threatens another with a certain act, it is irrelevant that the former would have had the legal right to perform that act — if the threat, or the ensuing bargain, are abusive or oppressive, the contract will be void for duress. (Example: Client hires Lawyer to prepare Client's defense against criminal charges, for a flat $10,000 fee. The night before the trial is to begin, Lawyer tells Client, "Double the fee, or I'm resigning from the case." Client agrees. A court will probably hold that given the timing of Lawyer's threat, the threat and/or the ensuing bargain were abusive or oppressive, in which case the court will not enforce the modification.)
C. Threat to breach contract: Most commonly, duress arises in contract cases because one party threatens to breach the contract unless it is modified in his favor; the other party reluctantly agrees, and the question is whether the modification is binding. In general, courts apply a "good faith" and "fair dealing" standard here: if the party seeking modification is using the other's vulnerability to extract an unfair advantage, the duress defense is likely to succeed. If, by contrast, the request for modification is due to unforeseen difficulties, the duress defense will probably fail.
III. MISREPRESENTATION
A. Generally: If a party can show that the other made a misrepresentation to him prior to signing, he may be able to use this in either of two ways: (1) he may use this as a defense in a breach of contract action brought by the other; or (2) he may use it as the grounds for rescission or damages in a suit in which he is the plaintiff.
1. Other party's state of mind: P does not generally have to prove that the misrepresentation was intentionally made. A negligent or even innocent misrepresentation will usually be sufficient to avoid the contract, if it is made as to a material fact.
2. Justifiable reliance: The party asserting misrepresentation must show that he justifiably relied on the misstatement.
3. Fact, not opinion: The misrepresentation must be one of fact, rather than of opinion. (Example: A salesman's statement, "This is a very reliable little car," is probably so clearly opinion, or "puffing," that the buyer cannot rescind for misrepresentation by showing that the car in fact breaks down a lot. But, "This car gets 30 miles per gallon in city driving," is an assertion of fact, so it can serve as the basis for a misrepresentation claim.)
C. Non-disclosure: As a general rule, only affirmative statements can serve as the basis for a misrepresentation action. A party's failure to disclose will generally not justify the other party in obtaining rescission or damages for misrepresentation. But there are some exceptions, situations where non-disclosure will support an action:
1. Half truth: If part of the truth is told, but another part is not, so as to create an overall misleading impression, this may constitute misrepresentation.
2. Positive concealment: If a party takes positive action to conceal the truth, this will be actionable even though it is not verbal. (Example: Seller plasters over wooden beams in the house he is selling, to conceal termite damage.)
3. Failure to correct past statement: If the party knows that disclosure of a fact is needed to prevent some previous assertion from being misleading, and doesn't disclose it, this will be actionable.
4. Fiduciary relationship: If the parties have some kind of fiduciary relationship, so that one believes that the other is looking out for his interests, there will be a duty to disclose material facts.
5. Failure to correct mistake: If one party knows that the other is making a mistake as to a basic assumption, the former's failure to correct that misunderstanding will be actionable if the non-disclosure amounts to a "failure to act in good faith." (Example: Jeweler lets Consumer buy a stone, knowing that Consumer falsely believes that the stone is an emerald when it is in fact a topaz worth much less. This would probably be such bad faith that it would constitute misrepresentation.)