Yes, sometimes, businesses do enter into contracts they really should not have entered into. Yes, sometimes businesses get “signers’ remorse” and do not want to fulfill the contract. Yes, sometimes businesses feel that what they are being asked to do under a contract is not fair, or proper, or not what they feel they agreed to.
At Rosenbaum & Taylor, P.C., “sometimes” is every day. We are always hearing from clients, and prospective clients, who are considering whether they can cancel a contract they have entered into, whether they have to fulfill their contractual obligations, and whether what they are being asked to do is what is called for in the contract.
Oftentimes, the business attorneys at Rosenbaum & Taylor, P.C. see that the contract terms could be clearer and could be more favorable to our client and wish we could go back in time and re-draft the agreement. If we could turn back time, we would resolve their issues and business disputes by fixing the contract they signed. Until our time machine is ready, we work with them to advance their positions, fight business disputes and often, work with them to draft better contracts they can use going forward.
How Does the Cancellation Section of the Contract Read?
Our analysis of what a client’s options are to cancel, modify, or otherwise avoid, the provisions of a contract the client has signed, always begins with the words used in the contract itself.
The contract itself will, or should, contain provisions, or language, addressing issues such as if the contract can be canceled, under what circumstances the contract can be canceled, how the contract can be canceled, what the parties’ obligations are, if any, if the contract is canceled, what laws will govern interpretation of the contract and if there are any damages if the contract is canceled and if so, how they will be calculated.
A party to the contract may make all kinds of demands and pronouncements about issues related to the cancellation of the agreement, but the contract language itself will, or at least should, address issues related to canceling the agreement. Sometimes, we get calls from clients, or prospective clients, very concerned that a party they have contracted with has stated that it will cancel the contract.
We also get calls from clients, or prospective clients, who are interested in canceling a contract. In either case, we look first at what, if anything, the contract says about the particular problem, or circumstance, that is leading to the potential cancellation.
For a more extensive discussion of contractual interpretation, please visit our recent article on how contracts are like sports.
Can the Contract Be Canceled?
If the contract sets forth a way to terminate the contract, the party seeking to cancel the contract must follow the cancellation provision very carefully. But what if there is no termination or cancellation clause in the contract?
Under New York law, if the contract does not contain a termination clause, or if the contract does not have a set endpoint, or term, then either party can generally terminate, or cancel, the contract after providing reasonable notice to the other party. That notice of cancellation, or termination, will relieve the parties of future performance obligations, but will not affect their obligations from before the agreement or contract was terminated or canceled.
Can a Party Just Declare It Is Canceling the Contract?
We recommend that clients do not take it upon themselves to determine how to handle a circumstance in which they want to cancel a contract or be relieved of some or all of their performance obligations under the contract. At Rosenbaum & Taylor, P.C. we have seen far too many instances in which a party does not take the right approach to contract cancellation issues. Those parties then suffer consequences that would likely have been avoidable had we been able to share our expertise, and our experience to advise them before they took action.
Has the Other Party Breached the Contract?
If one party is in breach of its obligations under the contract it signed, the non-breaching party can terminate, or cancel, the contract. For example, if one party was to provide, or perform, certain services or products and failed to do so, the other party is relieved from paying for the services or products it did not receive. Often, contracts contain conditions that need to be met. If that party that was to fulfill the condition fails to do so, the other party is often not required to fulfill its obligations, which may include not paying.
Is the Contract Enforceable?
Often, contracts contain provisions, or sections, that are not enforceable. When we consult with a client, or a prospective client, who is seeking to get out of a certain part of a contract it has signed, our top business attorneys check to see if the provision the client does not want to follow is enforceable. We look to see whether the other party is likely to have a strong claim for breach of contract if the client does not follow the provision.
We review the contract, and the section at issue, to see whether the client would have a strong defense if it were faced with a breach of contract claim. That analysis, based on our extensive knowledge and experience, helps us to give our clients the best advice, which often helps to avoid lawsuits in the first place and which helps us handle any lawsuits the client may become involved in.
What Could Make a Contract, or Part of a Contract Unenforceable?
There are several reasons why a contract may be unenforceable.
Fraud
If a party has been defrauded, it may be able to avoid having to perform the obligations set forth for it in the contract. The clearest example is if one party forges the other party’s signature on the contract, or causes that signature to be forged. A contract not signed by the parties is generally not enforceable.
Another example of fraud is when one party makes additions, deletions, or other changes to the agreement language after the contract has been signed and does not make the other party aware of them, thereby effectively tricking the other party into signing a version of the contract that it did not agree to.
A third example is when one party tricks the other party into signing the agreement by making untrue statements about something significant related to the agreement. The other party may have a good claim that it was defrauded if it can demonstrate that it would not have signed the contract had it known the truth.
At Rosenbaum & Taylor, P.C., we recommend that our clients protect themselves from fraud, as best they can, by working with us to make sure that they have read and understand any contract before they sign it and by having us make sure that the contract contains the things they agreed to – nothing more and nothing less.
Based on our experience, we also recommend that our clients investigate any claims that the other party is making on any significant issue related to the contract. We generally draft any key representations into the contract language itself, to protect our clients from any future issues regarding what was discussed or claimed as part of the contract negotiation.
Consideration
Generally speaking, consideration, in a legal context, is something of value. To be enforceable, a contract must involve an exchange of something of value. Without consideration, the contract is not enforceable. For example, someone goes into a café and buys a donut. The café receives the dollar and the customer receives the donut. Both parties to the transaction have received consideration.
Broadly speaking, consideration can also take the form of a party’s promise to do something it is not legally required to do (like buy a donut) or the form of a party’s promise not to do something it is legally allowed to do (like a promise not to sue).
Consideration can be considered invalid consideration if, under New York law, the consideration is not acceptable. Consideration may be found unacceptable: when one party is already legally bound to perform the obligations it has under the contract; when the consideration is more like a gift; when the consideration is for something that has already occurred; or when the consideration is based on a promise to perform that is not definite enough, or gives the party who is to perform the option not to perform.
Legality and Public Policy Issues
Courts do not enforce contracts for illegal services.
Some contracts, and some contract provisions, have been found by New York courts to be against public policy. For example, some waiver provisions, penalty provisions and damages provisions have been found to be void as against public policy and therefore not enforceable. Contract provisions that unnecessarily and unjustifiably restrict competition (like certain non-compete provisions) have also been found to be unenforceable, based on public policy considerations.
What Damages Are Due If the Contract Is Canceled?
Look for an upcoming article from us on contract damages, but for now, we will just say that canceling a contract can have certain penalties or costs associated with it, from economic, relationship and reputation perspectives. The right strategy, at the negotiation, drafting, and (if it happens), at the cancellation stage, can help maximize damages owed to the non-breaching party, or minimize damages owed by the breaching party. At Rosenbaum & Taylor, P.C., we have the experience to navigate those strategies, no matter which side our clients are on.
We’d be happy to speak with you about your contract issue, to see how we can help.
