Policy-Based Defenses

• Author: Franklin G. Snyder, Mark Edwin Burge
• Pages: 307-332

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UNIT 16: POLICY-BASED DEFENSES 307

Unit 16

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CONTRACT DEFENSES

Part Four

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Policy-Based Defenses

FOCUS OF THIS UNIT

Enforceability is what makes a contract different from a mere agreement.

Enforceability means that the parties can enlist the coercive power of the government

to make the breaching party do what it promised to do (in some cases), or pay

damages for failing to do so (in far more cases). As a consequence, the “private”

agreement between the parties has a “public” aspect to it. While the private ordering

agreed to by the parties predominates, the public at large actually has some interest

in those things to which the private parties can and cannot agree. For these reasons

several defenses to otherwise enforceable contracts are what we call “policy-based.”

There is some enforcement that the government simply will not do.

Enforcement is Good, Except When It Isn’t. The common-law system of

contracts rests on a general premise that enforcing private agreements is a good thing

and is therefore an important public policy of the state. Governments have many

other policies, however, and sometimes those policies conflict with the policy that

parties should be free to contract as they see fit.

Illegal Contracts. Very early on, for example, courts would not uphold

contracts that were themselves illegal (such as contracts to fix prices in violation of

antitrust law), or that called for the commission of crimes or torts (such as murder or

property damage), or that violated public morals (such as gambling or prosti tution).

The basic rule with respect to such contracts is that they are void (not merely

voidable). This means that if A has paid B $10,000 to kill C, and B fails to do so, A

cannot bring a contract claim to recover the payment. If a customer fails to pay a

prostitute or a drug dealer for goods or services, or a prostitute or drug dealer fails to

deliver what was promised, no contract remedy generally exists. We will see later

that in some cases courts may order restitution of benefits conferred in some more

technical categories of illegality (which would not include murder, prostitution, or

illegal drugs).

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308 CHAPTER V: CONTRACT DEFENSES

Against Public Policy. In many situations, a particular contract is not

specifically illegal, but enforcing the deal would require the court—an agency of the

government—to act contrary to other important government interests.

For purposes of analyzing these “public policy” types of cases, it is useful to

start with a simple framework. First, is there a significant public policy involved?

Such policies may be found in statutes or in the common law, but the initial step is to

figure out exactly what the policy is. Second, would enforcement of the contract

conflict with that policy? What exactly is the interference that is threatened? Third,

do the public policy concerns outweigh the public interest in enforcing contracts

generally? These situations can vary a great deal from one jurisdiction to the next,

making it difficult to make any categorical statements about American law here.

Consider, for instance, the In re Baby M surrogacy contract from the beginning of the

course. What New Jersey found unenforceable might find a welcome home in another

state. Review Chapter 8 (“Unenforceability on Grounds of Public Policy”) of the

Restatement (Second) of Contracts (§§ 178 – 199) to get a general feel for the current

state of public-policy analysis in contract law.

As you might gather, public policy is often in the mind of the beholder. Courts

(and legislatures, too) can and do strongly disagree amongst themselves over the

existence of particular policies, over whether particular contracts conflict with those

policies, and over how conflicting policies should be weighed against one another.

Three of the most common and important categories of contracts that involve public

policies are (1) contracts that restrict competition, (2) contracts that limit tort

liability, and (3) contracts that impair family law obligations. We already saw the

third category in the Baby M case, so the readings below will address the first two.

Unconscionability: Policing Fairness. Beyond the long-established concept of

contracts against public policy is the much more recent doctrine of unconscionability.

Historically, the common law did not let people out of bad bargains unless they fell

under one of the assent-based defenses—fraud, misrepresentation, duress, undue

influence, or mistake. In some contracts, no one has lied, no threat has been made,

no party’s free will has been taken away, and no party has made a fundamental

mistake. Despite the absence of traditional defenses, the deal itself seems so unfair

that courts will refuse to enforce it. These were sometimes said to be contracts that

“no honest man would offer and no sane man would sign.” Despite its noble intentions,

unconscionability doctrine has proven to be a particular challenge in its actual

application.

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