To most organisations, contracts are pivotal to the success of their business. Whether an organisation is in the business of selling goods or services most viable businesses will engage the services of third parties at some point during the life of that business. Such third party services will often be governed by the law of contract. Therefore, it is important that businesses understand the key principles of contract, especially as it relates to their business or industry. This article focuses on contracts that are unenforceable in the state of New York, United States. New York is a global city and many organisations may have the need to do business in New York either directly or indirectly through third parties.
Among the many possible reasons why a contract in New York may be unenforceable, this article focuses on three key reasons why certain contracts will be void or voidable in New York.
Mutual Mistake — The general rule is that where parties to a contract entered into that agreement under a mutual mistake of fact, then that contract may be voided. In order to rely on a mistake of fact as the basis of voiding a contract, the mutual mistake must be fundamental and go to the heart of the agreement. It is not enough to void a contract on this basis if the mutual mistake was merely superficial and not substantial enough to affect the performance of the contract. It is also a requirement that the mistake existed at the time the parties entered into the contract. Thus, if the parties both had a mistaken belief that it is fundamental to the performance of the agreement the contract will be voidable by the party to be charged and thus subject to recession or reformation.
Unconscionability — This generally relates to the fairness of a contract. In assessing whether a contract is unconscionable you look at the substance of the contract and/or the procedure of formation. A contract may be made unconscionable either by the unfair terms of the contract or by the unfair procedure engaged in the formation of the contract. A contract may be deemed unconscionable if a party to the contract is denied reasonable choice in relation to the terms of a contract and the terms of the contract are unreasonably more favourable to the other party.
New York law prohibits fraudulent or deceptive business practices as these are contrary to public policy. Thus, any contract that is fundamentally deceptive or misleading will be contrary to public policy and will be unenforceable. There are indeed other reasons why the enforcement of a contract may be contrary to public policy such as exemption from liability in negligence, excessive interest rate, and the commission of misdemeanour or felony.
Statute of Frauds — The statute of frauds provides that in order for certain contracts to be valid and enforceable they must be evidenced in writing. A contract made in consideration of marriage must be reduced to writing to be valid. However, there is no requirement for a written contract if there is a mutual promise between the parties to marry. Further, if a contract cannot be performed within one year or performance cannot be completed within a lifetime then such contracts will not be enforceable unless they are put in writing. For example, any lease exceeding one year will be void unless the contract is in writing. A contract that can reasonably be performed within a year but which actually takes longer than a year to complete will still be valid even if it is not in writing.
Further yet, a contract that guarantees a debt must be in writing in order to be enforceable. An agreement to compensate a party for services rendered in the negotiation of a loan must also be writing in to be enforceable. The statute of frauds rule applies to an agreement to compensate a party for negotiating the rental, sale, lease or exchange of real estate; therefore such an agreement must be in writing if it is to be enforceable. However, there is no requirement to reduce an agreement to writing in order for it to be enforceable if the agreement is to compensate an attorney or a licensed real estate salesman or broker in relation to the sale, lease or rental of real estate.
Contract law can be complex with far-reaching consequences — please contact us if you require more information on this topic.