In an ideal world, all contracts would be performed precisely per their terms, and everyone would profit and be perfectly content with the outcomes of their business arrangements. Unfortunately, we do not live in an ideal world. Situations may arise where unforeseen events prevent you from turning a profit, performance becomes impossible due to circumstances beyond your control, or there might be a misunderstanding about an essential term of the contract. You may even feel pressured into agreeing to terms that are not in your best interests. In such cases, it is critical to know the defenses to breach of contract claims and excuses for the performance of contracts that may be available to you. 

In this guide, we will explore the various defenses related to contract law, beginning with those based on the formation of the contract, such as lack of capacity, duress, and misrepresentation. Moving forward, our focus will shift to defenses stemming from challenges to the performance of the contract. Here, we'll discuss how unexpected events and the conduct of counterparties can come into play. Finally, we'll review some defenses to enforceability arising from considerations of illegality and public policy.

• Incapacity: A contract's validity fundamentally relies on its proper formation, which requires meeting specific legal criteria to ensure there is mutual understanding and agreement between the parties. In this context, certain individuals are recognized as lacking the legal capacity to enter into contractual agreements, including: 
• Minors: Typically, individuals under the age of majority (18 in most states) are viewed as lacking the capacity to form contracts due to the presumption that they may not fully understand the implications of their agreements or possess the maturity to make informed decisions.
• Mentally Incompetent Persons: This category includes those who, due to mental illness or cognitive impairments, are unable to comprehend the nature and consequences of a contract.
• Intoxicated Persons: Individuals who are significantly intoxicated, whether by alcohol or drugs, at the time of entering into a contract may be considered as lacking the capacity to contract.

It's important to note that while minors are automatically considered incapable of entering binding contracts due to their age, situations involving mental incompetence or intoxication require further evidence. In these cases, the burden of proof falls on the party asserting incapacity to demonstrate the extent of the impairment, whether through medical evaluations, witness testimonies, or other relevant documentation. This evidence should clearly establish that the individual's mental state or level of intoxication significantly compromised their ability to understand and make rational decisions regarding the contract.

Duress, Undue Influence, Misrepresentation, and Fraud: The enforceability of a contract can be significantly influenced by the circumstances surrounding its formation. The presence of any of the following elements can indicate that a party had not entered into a contract freely and with full awareness of its terms:

• Duress: This is when a party feels forced to sign a contract because of threats or coercion, which could involve physical harm or damage to their finances or reputation. This kind of pressure can undermine a person’s free will, making them feel as though they have no other reasonable choice but to agree to the contract. 
• Undue Influence: This arises in situations where one party exerts excessive psychological pressure on another, often in a relationship characterized by an imbalance of power or trust. This type of influence can subtly manipulate the weaker party into agreeing to terms they would not normally accept. 
• Misrepresentation: This involves a party making a false statement of fact, leading the other party to enter into the contract. Misrepresentation differs from fraud as it doesn't necessarily involve an intention to deceive. 
• Fraud: A more severe form of misrepresentation, fraud involves deliberate deception for personal or financial gain. This includes knowingly making false statements, hiding crucial information, or making promises without any intention of fulfilling them, all with the aim of deceiving another party into entering a contract. 

Mistake: When disputing a contract, one defense that parties might assert is the presence of a mistake, which refers to a misunderstanding or incorrect belief about essential facts at the time the contract was formed. Mistakes are categorized into two types: unilateral and mutual (bilateral).

• Bilateral Mistake: Here, both parties share an incorrect belief about a critical fact fundamental to the contract. An example of such a mistake would be if a business purchases a software license from a tech company, with both parties operating under the mistaken belief that the software is capable of certain advanced functionalities, and it later becomes evident that the software lacks these capabilities, rendering it unsuitable for the buyer’s intended use.
• Unilateral Mistake: This happens when only one party is mistaken about the basic fact or assumption that the contract is based on. To assert this defense against the non-mistaken party, it must be shown that the other party knew, or should have known about the mistake. So, in our example above, the business would have to show that the tech company knew, or should have known, of the company’s intended use of the software, failed to correct the misapprehension and sold it to them nonetheless.

Impossibility, Impracticability, and Frustration of Purpose: Contract law recognizes specific situations under which parties may be excused from their contractual commitments in situations where certain unforeseen events, beyond the control of either party, occur after the formation of the contract and fundamentally change the nature of the obligations involved.

• Impossibility: This defense applies when performing the contract becomes physically or legally impossible due to events beyond the control of either party. For example, a landowner contracts with a local construction company to build a residence on a plot of land they own. However, just before construction is set to begin, a change in zoning laws occurs that categorically prohibits the construction of residential properties on that specific plot.
• Impracticability: This defense applies when performance becomes not entirely impossible, but excessively burdensome or unfair due to unforeseen circumstances. For example, a contract to install countertops with a specific type of rare marble becomes impracticable when unexpected tariffs triple the cost of the marble, making it financially unreasonable to fulfill the contract.
• Frustration of Purpose: Frustration of purpose arises when unforeseen events undermine the core reason a contract was formed, rendering the intended use of goods or services substantially irrelevant. For example, a farmer purchasing specialized equipment for a unique crop only to discover after signing the contract that a government regulation unexpectedly bans its cultivation. Though the seller can still deliver the equipment, the farmer's primary purpose – using it for the now-prohibited crop – is completely thwarted.

Waiver and Estoppel: Waiver and estoppel are legal doctrines that can modify the rights and obligations within a contract even after it's been formed. As such, they can be asserted as defenses to a breach of a contract’s original terms. 

• Waiver: A waiver occurs when a party voluntarily relinquishes a known right or claim, which can affect their ability to subsequently enforce that right. This can be done explicitly, through a clear statement or agreement, or implicitly, by actions that indicate an intention to waive the right.  
• Estoppel: Estoppel comes into play when a party is barred from denying or contradicting something they have previously stated or agreed to, especially if the other party has relied on this to their disadvantage. 

Note that while both waiver and estoppel involve a party altering their legal position based on actions, statements, or a failure to act, the key difference is that waiver is about giving up a right, while estoppel is about preventing a party from asserting a right (or defense) because of their previous actions or assurances. For example, if a supplier consistently delivers goods late without objection from the buyer, and the buyer suddenly decides to sue for breach of contract due to a late delivery. In that case, the supplier might claim waiver, arguing that the buyer, by not objecting to past late deliveries, waived their right to strict adherence to the delivery schedule. In contrast, if the supplier had explicitly assured the buyer that a particular late delivery would be acceptable and the buyer, relying on this assurance, made significant business decisions leading to a loss when the delivery was late again, the buyer could claim estoppel, as they relied to their detriment on the supplier's specific representation.

Defenses Challenging Contract Enforceability: Illegality, Unconscionability, and Public Policy: Some contracts are rendered void or unenforceable due to their violation of legal principles, being fundamentally unfair or unconscionable, or contravening established public policy norms.

• Illegality: Illegality pertains to contracts that require illegal actions or have unlawful objectives. Such agreements are automatically considered unenforceable since they should not conflict with established laws or regulatory frameworks. Examples of these contracts include those that involve committing crimes, engaging in fraudulent activities, or participating in any other law-prohibited acts.
• Unconscionability: Unconscionability applies to contracts that are excessively one-sided and unjust, so much so that they are considered to "shock the conscience" of the court. This typically happens when there is a gross imbalance of power or information between the parties, resulting in the exploitation or undue pressure of the weaker party.
• Public Policy: Agreements that are contrary to public policy, while not necessarily technically illegal, are deemed to undermine core societal values through unfairness or harmful consequences, such agreements that involve obstructing justice (witness tampering), exploiting vulnerable individuals (predatory lending), or stifling competition (price-fixing).

Consequences for Parties and Effects on Agreements: When a defense or excuse is properly asserted, courts have several approaches, including: 

• Voiding the Contract: In cases where a contract is found to be fundamentally flawed due to reasons like illegality, impossibility, or fraud at inception, courts will declare such contracts void. This means the contract is treated as if it never existed, being unenforceable under the law.
• Declaring the Contract Voidable: Voidable contracts are those that may be canceled/nullified by a party at their discretion. For example, if a party lacked capacity, or there was an element of coercion or misrepresentation, the party who lacked capacity or was subject to their duress can decide if they want the contract upheld. 
• Reformation: In situations where the terms of a contract don’t accurately reflect the parties' original intentions due to errors or miscommunications, courts may choose reformation, which means altering the agreement to align with the parties' original understanding and intent, essentially rewriting the terms to reflect what was truly agreed upon. Courts will also often reform contracts to remove unconscionable clauses. 
• Recovery in Restitution and/or Reliance: When a court grants relief based on a successful defense, it may order one party to compensate the other through restitution or reliance damages. Restitution aims to undo the unjust enrichment of one party by returning them to their pre-contractual position, typically involving the return of money, property, or benefits received under the flawed contract. Reliance damages, on the other hand, compensate the aggrieved party for the losses incurred due to their reliance on the invalid or breached contract, essentially restoring them to the position they would have been in had they never entered into the agreement.

As you can see, understanding and effectively employing legal defenses, or asserting that your performance (or some aspect of it) should be excused, requires careful consideration and legal expertise. If you're facing a breach of contract claim or encountering challenges in fulfilling your contractual obligations due to unforeseen circumstances, having expert legal guidance can be invaluable. Through AAL’s directory, you can connect with experienced attorneys who have a deep understanding of contract law and can assist you in securing the best possible outcome for your situation.