Breach of contract occurs when one party fails to fulfill their contractual obligations. A contract is a legally binding agreement between two or more parties, and a breach of contract can result in serious consequences for both parties. This can be anything from a contract to paint a house, a car financing agreement, or a loan between friends. While a legitimate contract is enforceable and binding, there are often defenses for a party that fails to perform their side of the contract. In New Jersey, there are several defenses that a defendant can use to defend against a breach of contract claim.
How do Parties Know a Contract is Made?
The first step in determining what defenses are appropriate for a breach of contract claim is to determine whether a contract exists in the first place. For a contract to be formed, certain elements must be present, including:
- Offer and acceptance: One party must make an offer to enter into a contract, and the other party must accept that offer. The offer must be clear and definite, and the acceptance must be unequivocal.
- Consideration: Consideration is something of value that each party gives to the other. It can be money, goods, services, or anything else that has value.
- Intention to create legal relations: Both parties must intend for the agreement to be legally binding. If the parties don't intend to create legal relations, the agreement won't be enforceable.
- Capacity to contract: Both parties must have the legal capacity to enter into a contract. This means that they must be of legal age, mentally competent, and not under duress or undue influence.
While this may seem simple, it can often be a very contentious point of litigating. Both sides need to agree to the contract, and both sides must be shown to benefit from the contract. Without these requirements, no contract exists and the analysis stops there.
Contract Defenses
Once the parties have stablished that there is a contract, the next step is determining whether the breaching party, the defendant, has a reasonable defense to justify their breach.
Impossibility of Performance
One defense to a breach of contract claim is the impossibility of performance. If the defendant can prove that performance of the contract is impossible, they may be excused from performing their contractual obligations. For example, if a contractor enters into a contract to build a house, but the house burns down before construction is complete, the contractor may be excused from completing the project due to the impossibility of performance.
The key to this defense is to show the event that made the completion of the contract impossible was not one of the parties. Often, this defense arises when the government prohibits completion of the contract by law or ordinance.
Unconscionability
Another defense to a breach of contract claim is unconscionability. Unconscionability occurs when a contract is so one-sided that it is unfair to one party. A court may find a contract unconscionable if one party had significantly more bargaining power than the other and took advantage of that power to create an unfair agreement. If a court finds a contract unconscionable, it may refuse to enforce the contract.
This defense often takes the form of consumer cases, where a regular consumer would not have the same bargaining power as a more powerful organization., and it would be unfair for the court to enforce the contract.
Mutual Mistake
A mutual mistake defense can be used when both parties made a mistake regarding the terms of the contract. If both parties were mistaken about a material term of the contract, the contract may be unenforceable. For example, if two parties enter into a contract for the sale of a car, but both parties mistakenly believe that the car has a certain feature that it does not, the contract may be unenforceable.
Duress
Duress occurs when one party is forced to enter into a contract against their will. If a party can prove that they entered into a contract under duress, they may be excused from performing their contractual obligations. For example, if a person signs a contract under threat of physical harm, the contract may be unenforceable due to duress.
Duress can be performed through physical or mental pressure to enter the contract. The use of duress makes the contract voidable by the party who suffered the distress.
Frustration of purpose
Often hand in hand with impossibility, frustration of purpose defense applies when the purpose of one party entering the contract is no longer available. The often cited cases for this comes from the so-called “coronation cases” from English courts, in which payment obligations of parties who had leased rooms to see the king’s coronation were thwarted when the parade was postponed. Similar to impossibility, this defense is not available when the party breaching the contract is responsible for the frustration of purpose.
Fraud
Fraud is the intentional misrepresentation of an important fact in a contract. The presence of fraud in a contract makes the contract voidable by the party upon whom the fraud was perpetrated. Fraud can be an affirmative misrepresentation or a concealed failure to disclose a known fact. Claims of fraud under a contract are often made to get out of a “bad deal” by one party to the contract.
Statute of Limitations
Finally, the statute of limitations can be used as a defense to a breach of contract claim. In New Jersey, the statute of limitations for breach of contract claims is six years. If the plaintiff waits too long to file their claim, the defendant may argue that the claim is barred by the statute of limitations.
Effect of Bankruptcy
While the above defenses may void a contract and allow for breach, absent another agreement by the parties entering the contract the parties will need to litigate to determine if the defenses are applicable. A party filing for bankruptcy, however, has other options. This includes the ability to reject an executory contract. An executory contract is a contract under which both parties still owe an obligation to the other.
In bankruptcy, the debtor (or a bankruptcy trustee) gets to decide whether to perform or refuse to perform obligations under these agreements. Until it is decided, the non-debtor party must still perform their obligations under the contract. If the debtor does want to accept the contract, they must perform al obligations under the contract to become current.
Conclusion
In conclusion, there are several defenses that can be used to defend against a breach of contract claim in New Jersey. If you are facing a breach of contract claim, it is important to consult with an experienced attorney who can help you evaluate your options and develop a strong defense.
