How can criminal conduct invalidate a contractual agreement?

 

According to Arizona law, three elements must be present in order for courts to view a contract as legally binding and enforceable. In legal terms, these elements are referred to as “offer,” “acceptance,” and “consideration.”  These three elements serve as objective evidence that the contracting parties had a “meeting of the minds.”  In other words, the parties’ verbal communication and conduct demonstrates that both parties knew what they were getting into at the time the contract was agreed upon and signed.  This common understanding is also referred to as “mutual assent.”  Generally, a contract will not be binding when there is not a meeting of the minds and consent of one or both of the parties is not real (at the time the contract is formed).  Sometimes innocent or non-criminal acts will vitiate contractual consent, but the criminal conduct of fraud, duress, and undue influence will almost always extinguish the meeting of the minds.

 

What non-criminal acts can invalidate a contractual agreement?

 

Acts related to mistake, unconscionability, misrepresentation, and impossibility, to name a few, can invalidate a contract under certain circumstances.  While this list represents some of the most common innocent reasons for unenforceability of a contract, it should not be viewed as an exhaustive list.

 

What is mistake?

 

Sometimes a contract is unenforceable because one or both of the contracting parties makes a mistake.[1]  When the mistake is made one of the parties to the contract, it is known as a “unilateral mistake.”  When the mistake is made by both parties, it is known as a “mutual mistake.”  When a unilateral mistake adversely and materially affects the agreed exchange of performances by the parties, then a court can render the contract voidable if “the effect of the mistake is such that enforcement of the contract would be unconscionable, or the other party had reason to know of the mistake or his fault caused the mistake.”[2]  Absent one of these two circumstances, it is unlikely that a court will grant any relief to the mistaken party.  If you think a mistake has been made in your contract, contact an experienced contract attorney today.

 

What is Unconscionability?

 

 

Unconscionability, when dealing with contractual consent, means that the contract, whether it be a specific term or something inherent about the agreement as a whole, is so appallingly unfair that it cannot be allowed to be enforced.  In other words, “no one in their right minds would sign such a contract and no just and honest person of good conscience would accept.”   As mentioned earlier in this article, courts want to ensure that there is a meeting of the minds between parties, but this is hard to believe when the parties are so unbalanced.  For example, the Los Angeles Lakers tell a young basketball player that they will sign him for $800,000 for the 2018/2019 season, but when they draw up the contract for him, they insert a term that he will not actually get paid the $800,000 until year 2028.  This could qualify as unconscionable conduct by the Lakers because no NBA player in their right mind would sign such a contract.  Furthermore, the courts look at imbalance between the parties in determining unconscionability.  Here, there is a desperate and young player looking to make it big against a huge NBA franchise.  If you think the terms of a contract you made were unconscionable, then contact an experienced contract attorney today.

 

What is innocent misrepresentation?

 

Innocent misrepresentation involves a false statement that is made by, and beneficial to, one party.  In innocent misrepresentation, unlike fraudulent or negligent misrepresentation, the party making the false statement must have reasonably believed that it was actually true at the time the contract was made.  For example, a farmer drafted a contract with a vendor to sell the ten fattest pigs in Arizona; however, the farmer was unaware that there was actually a farmer who raised slightly bigger pigs in a remote town up north.  Here, the farmer reasonably believed that his statement was true at the time the contract was signed.  Nevertheless, in order for a party to be entitled to restitution for innocent misrepresentation, the misrepresentation must be material to the transaction.  If the vendor would not have gone through with the transaction had he known the pigs were not actually the biggest in Arizona, then the misrepresentation is probably material to the contract, the courts will likely find the contracts invalid, and the suffering party will be given restitution (not consequential damages).

 

What is impossibility?

 

Sometimes a court will deem a contract as unenforceable because it is impossible or nearly impossible for a party to fulfill the terms they signed to.  For example, if an Arizona company contracts to sell one-hundred crates of chocolate to a vendor, but a freak storm hits and destroys the company’s entire warehouse (including the crates of chocolate) before the sale of the chocolate can be completed, then a court will likely find the contract to be unenforceable because sale of the chocolate is now impossible.

 

What criminal acts will invalidate a contractual agreement?

Conduct during the formation of a contract such as coercion, false statements, threats, or forceful persuasion by one party can invalidate a contract.  Such conduct is addressed by courts as fraud, duress, and undue influence and will almost always extinguish the meeting of the minds.  While other criminal acts made during the signing of a contract can lead to invalidation of such contract, these three are perhaps the most common.

 

What is fraudulent misrepresentation?

 

Under contract law, fraudulent inducement to signing a contract entitles the suffering party to rescind the contract.  Rescission means the contract is set aside as if it never existed.  Then, the suffering party will restored to the condition it was in before entering into the contract, or at least as much as possible, through monetary and consequential damages.  “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”[3]  Arizona case law holds that in proving fraudulent mistake, the suffering party must generally plead nine elements, including:

1) a representation by the other party;

2) the representation’s falsity;

3) the representation’s materiality to the agreement;

4) the other party’s knowledge of the representation’s falsity or ignorance of its truth;

5) the other party’s intent that it should be acted upon by the person and in the manner reasonably contemplated;

6) the suffering party’s ignorance of the representation’s falsity;

7) the suffering party’s reliance on its truth;

8) the suffering party’s right to rely thereon;

9) the suffering party’s consequent and proximate injury.[4]

 

What is negligent misrepresentation?

 

When innocent misrepresentation rises to a not-so-innocent level, it may constitute negligent misrepresentation.  Negligent misrepresentation occurs when one party is unaware of the falsity of a representation that induces the other party to enter into the contract, but the party has no reasonable grounds for believing that such representation is true.  Though not necessarily criminal, negligent misrepresentation allows a suffering party to collect both monetary and consequential damages in being restored to its economic position prior to the contract.[5]

 

What is duress?

 

Duress occurs when one party coerces or forces another party to enter into a contract.  Traditionally, protection from duress only extended to actual or threats of physical violence; however, the definition has since expanded to become much broader.  Acts of duress include, but are not limited to personal threats, economic threats, threats to an individual’s reputation, psychological pressure, and force.  For example, if Frank threatens to burn down Alicia’s house if she does not sell him her Apple stocks, then she would have a strong duress defense in court because she felt like she had no choice but to sell the stocks.  In essence, there was no actual meeting of the minds to the contract.

 

What is undue influence?

 

Another instance that lacks mutual assent is where there is undue influence on a party.  Undue influence occurs when a party takes advantage of another by using a position of trust and coercing the other party to enter into a contract that they otherwise would not have entered into.   While duress involves threats and psychological pressure, undue influence occurs as a result of a superior taking advantage of an inferior.  While an expectation of superiors to not express their opinions or recommendations is impractical, such persuasion can become undue influence when it is excessive.  For example, if your boss continuously requests that you and your co-workers invest a significant amount of money in his startup and bases his work decisions (such as pay raises and promotions) on employee willingness to invest, such conduct is probably undue influence.

 

Will criminal acts not related to the agreement invalidate a contract I have entered into?

 

Generally, committing an unrelated crime will not invalidate a contract that you have entered into.  For example, if you entered into a contract with another party and subsequently were convicted of an unrelated felony, then the contract will still be valid, provided you are still able to fulfill your contractual obligations.  However, if the contract was related to any kind of illegal activity (or any activity against public policy), then it will be invalid under the illegality defense.

 

While contracts you have entered or will enter may appear valid on their face, circumstances surrounding the signing of the contract and terms incorporated therein will affect their enforceability under Arizona law.  When there is not an actual meeting of the minds, courts will be reluctant to enforce such contracts.  If you are concerned that a contract you have entered into may not be enforceable or if you are in need of assistance drafting a strong contract for your business, then give one of our skilled business and contract attorneys a call today.

[1] According to the Restatement (Second) of Contracts § 151, “a mistake is a belief that is not in accord with the facts.”

[2] See Restatement (Second) of Contracts § 153.

[3] See Ariz. R. Civ. P. 9.

[4] See Hall v. Romero, 141 Ariz. 120, 685 P.2d 757 (Ct. App. 1984).

[5] See St. Joseph’s Hosp. & Med. Ctr. v. Res. Life Ins. Co., 154 Ariz. 307, 742 P.2d 808 (1987).

 

Do NOT follow this link or you will be banned from the site! DMCA.com Protection Status