Can I get out of that Contract?

Can I get out of that Contract?

You may have signed a contract for your small business that you really shouldn’t have.  Or you are being asked to perform under an agreement and just think that such demand is not what you agreed to or just grossly unfair.   Is there any way to get out of that contract or that specific provision?

Determine what the Contract states

The other party to the agreement may demand all kinds of things, but before you get defeated, you’d better make sure that the contract actually obligates you to do what the other party demands.  Read the agreement in its entirety.  What does it state with respect to your particular problem?

Can you terminate the contract?  Check if the language of the agreement itself offers a way out of the obligation by terminating  according to its terms.

Sometimes contractual obligations have conditions.  In other words, you don’t have to perform unless the other party has fulfilled the condition.

If the contract in fact contains your obligation to do x y or z, you may be out of luck without more.  In most cases, courts will look first and foremost at the plain meaning of the agreement as it is written.  Courts do not care about what you or the other side were thinking at the time or what you expected the agreement to state.

The court presumes that an executed agreement documents the intention of the parties and you have to overcome this presumption in order to fight the enforcement of the contract against you.

Is the Contract enforceable?

Next, lawyers would check if the contract that you signed or the particular provision that you don’t like, is enforceable.  In other words, if the other party takes you to court for breach of contract, would you have a viable defense?  Would the court take that contract and enforce it against you?

Several possible scenarios come to mind that typically make an agreement or one or more of its provisions unenforceable.

The Basics

In order to be enforceable, a contract must be an agreement between at least two people exchanging something of value (consideration).  No consideration, no contract.  Also, if the language is so ambiguous that nobody can tell what it means and there is no indication outside of the written contract for the parties’ intention, there is no agreement to enforce.

Fraud

If you have been defrauded in the context of the contract, you may be able to avoid being obligated to perform.  The obvious example is when someone forged your signature on a contract.  Or if someone makes changes to the contract at the last minute and fails to notify of such changes, so that you literally get tricked into signing a contract that you did not approve.

Another example is when someone tricks you into signing a document by making false statements relating to the agreement.  Had you known the truth, you would have never signed the contract in the first place.

But these examples are rare and usually hard to prove.  You can protect yourself by always reading the contract prior to signing and making sure it states exactly what you think it should state.  You should also do your own investigations as to any representations that are being made to you in connection with the contract.  Ideally, these representations should be repeated and explicitly being written into the contract.  Otherwise it just may be very hard to prove that your were told “such and such” prior to signing.

Also, watch out for a provision that states the opposite:  a disclaimer by you that you did not rely on any representations not specifically stated in the contract.  This puts an even greater responsibility on you to conduct appropriate due diligence before signing the contract.

Is the Contract Illegal or against Public Policy?

For obvious reasons, courts will not enforce illegal contracts; A contract to provide illegal services (think prostitution) is void.

Then there are contracts or provisions that are against New York public policy and therefore not enforceable.  You are more likely to encounter this scenario  in day to day business dealings.

Contract Penalties

The prime example for a contract provision that violates New York public policy is a provision for penalties.   New York courts will not enforce contractual penalties that have no relation to the loss suffered by the non breaching party and such loss would actually be possible to determine without undue difficulties.    “Public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority.”

For example, picture a commercial lease that requires a tenant to pay for certain utilities that are normally paid by the landlord.  The lease further provides that if the tenant fails to pay the electricity bill and landlord pays such bill, tenant automatically has to pay landlord 150% of the amount paid by the Landlord.  I think that would be unenforceable as a contract penalty.  Read more about contract penalties v. liquidated damages here.

Contracts that restrict Competition

Then there are contracts that could have a negative effect on competition.  Again, New York believes an undue restriction of competition in the marketplace is against its public policy.  Whenever a contract clause has the ability to restrict competition, enforceability depends on the reasonableness of such restriction.  It may be reasonable to restrict a seller of a business from opening the same exact business right next door, but it is probably unreasonable to forbid the same seller to engage in a similar business for all times and eternity.

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

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