Supp. To § 1.7 Void Contracts

[Go To Main]

(A) The following cases cite this section:

(1) Sphere Drake Ins. Ltd. v. Clarendon Nat'l Ins. Co., 263 F.3d 26 (2d Cir. 2001) . The plaintiff sought a declaratory judgment that reinsurance contracts were void and, therefore, not subject to arbitration as set forth in the agreements. The court distinguished ''void'' and ''voidable'' agreements. The former create no contract. Indeed, the phrase ''void contract'' is a contradiction. Such agreements are rare, citing Corbin at § 1.7. Voidable contracts, however, will be enforced unless a party with the power of avoidance exercises that power. The plaintiff claimed that the reinsurance contracts were induced by fraud. Construing precedent, the court held that issues of fraud in the inducement of the contract were subject to arbitration under the arbitration clause. Only if fraud in the inducement is specifically alleged with respect to the arbitration clause of the agreement will a court judicially resolve the question.

(2) Residential Capital, LLC v. Premier Trust Deed Servs., Inc., 2003 Cal. App. Unpub. LEXIS 4729 (Cal. Ct. App. 2003) . The plaintiff's high bid was accepted at a nonjudicial foreclosure sale conducted under the power of sale in a trust deed encumbering residential real property. After the sale, however, the defendant trustee notified the plaintiff that the deed would not be delivered because the trustee had learned that the trustor and beneficiary had agreed to postpone the sale pursuant to a forbearance agreement and payment plan. The plaintiff accepted a refund of the price without waiving its right to sue, which it then pursued in a breach of contract claim for loss of bargain damages of $34,150.90, the difference between its bid price and the value of the property. The trial court held that the sale to the plaintiff was void since the trustee could not deliver the deed after discovering the forbearance agreement between the trustor and beneficiary. On appeal, the plaintiff relied on Corbin's analysis in claiming that the contract was voidable rather than void and only the plaintiff as the innocent party could choose to avoid it. The court concluded that a two-party contract analysis was inapt where other parties such as the trustor and beneficiary were affected. Moreover, nonjudicial foreclosure sales were subject to comprehensive statutory regulation, which was not based on contract principles. The court held that since the deed had not been transferred, the statute limited the plaintiff's claim to restitution, the return of the bid price, which the plaintiff had received from the trustee.

This case is also noted at §§ 1.6 and 89.21 of the supplement.

(B) The following cases are noteworthy:

(1) Topro Services, Inc. v. McCarthy Western Constructors, Inc., 856 F. Supp. 1461 (D. Colo. 1994) . An unlicensed subcontractor had supplied equipment under protest, claiming the equipment was not part of its agreement with the contractor, and sued the contractor for breach of contract and unjust enrichment. Arizona law, which applied to this transaction, makes it unlawful for a contractor to contract within the state without a license, and contractors must offer proof they have licenses before they can file civil actions. Failure of a contractor to obtain a license, according to the Arizona Supreme Court, renders its contracts void. The contractor moved for summary judgment.

In Herman Chanen Constr. Co. v. Northwest Tile and Terrazzo Co. of Montana, 6 Ariz. App. 490, 492, 433 P.2d 807, 809 (1967) , the Arizona Court of Appeals estopped a contractor from asserting the defense of voidness, since the contractor had insisted that the subcontractor ''farm out'' work it was not licensed to do, and thus knew that the subcontractor was unlicensed. In other decisions the Arizona Supreme Court had held that waiver and estoppel can be invoked against a voidable contract, but not against one that is void as against public policy. Hence, though sitting in diversity, the federal district court declined to follow Herman Chanen. Nonetheless, the court denied the defendants' motion, applying an explicit exemption in the Arizona licensing statute.

(2) In re J. Gus Lallande, Inc., 167 B.R. 742 (Bankr. P.R. 1994) , aff'd, 197 B.R. 406 (contract for sale of property located in a flood zone was void under Puerto Rican law, where buyer made known to the realtor who negotiated on behalf of seller the purpose for which it planned to use the property).

(3) Continental Basketball Ass'n v. Ellenstein Enters., Inc., 640 N.E.2d 705 (Ind. App. 1st Dist. 1994) (summary judgment dismissing claim by professional basketball league for amounts owed on agreement for purchase of membership in the league, affirmed; membership was a franchise under the Indiana franchise statute, and purchase was void for failure to comply with statutory requirements).

(4) Myers v. Neb. Inv. Council, 272 Neb. 669, 724 N. W. 2d 776 (2006) . The plaintiff taxpayer brought this class action for an alleged violation of state law concerning the investment of a portion of the state retirement benefit funds. The complaint alleged that the public officials in charge of the defendant had violated their duties in contracting for investment management services that included the buying of options, buying on the margin and engaging in speculative investments. The court held that a taxpayer's right to recover on behalf of a government entity hinged on the distinction between a contract that is void ab initio and a contract that is otherwise unenforceable. A review of the case law indicated that a taxpayer had no equitable right to recover funds from public officers just because they violated a statute. If a statute expressly prohibits a government entity from entering into a contract and avoids the obligation made by such a contract, the contract is void ab initio and funds paid out under such a contract are recoverable by the governmental entity or a taxpayer suing on its behalf. Here, however, the defendant's statutory power to contract for investment management services was not void ab initio and the plaintiff was not entitled to recover against the defendant's officials on that basis.

(5) Golden Pisces, Inc. v. Fred Wahl Marine Construction, Inc., 2007 U. S. App. LEXIS 17527 (9th Cir. 2007) . The plaintiff claimed that the defendant's alleged misalignment of a propeller shaft on the plaintiff's ship required the ship to be towed from Alaskan fishing grounds to undergo costly repairs and miss the fishing season. The defendant relied on provisions disclaiming warranties and limiting remedies in a form contract that the defendant had presented to the plaintiff after forming the oral contract for the repairs. The form was signed by the plaintiff's ship captain, but not the ship's manager. Nor was it signed by the defendant. The trial court held that there was no written contract. Beyond the fact that the form was not signed by the defendant, the court found that the form failed to set forth the essential terms of an agreement. Thus, it found an enforceable oral contract allowing for the recovery of repair costs and lost profits, not subject to any form disclaimer or limitation of remedy. The form contract also contained a provision for the payment of attorney's fees to the prevailing party. The court denied the plaintiff's claim for such fees for the same reason it rejected the defendant's claim that the form disclaimed warranties and limited remedies. On appeal, the plaintiff argued that an attorney's fee provision in such a form contract ought to be enforced when a plaintiff succeeds in proving that the underlying contract is void. The instant court recognized that a ''void'' contract ''is not a contract at all,'' citing the Restatement (Second) of Contracts, § 163, comment a, for the principle that the absence of an effective manifestation of assent precludes the recognition of a contract. The court distinguished divisible contracts where an unenforceable clause could be severed without affecting the remaining provisions of the contract that might include an enforceable provision for attorney's fees. Where, however, the entire alleged contract turns out to be void, severability is impossible. Noting the ''American rule'' in federal litigation that generally precludes the awarding of attorney's fees absent statutory authorization or an enforceable contractual provision, the court held that the district court had not abused its discretion in refusing to award attorney's fees to the plaintiff.

The court's analysis was based on the plaintiff's unique argument concerning ''void'' contracts. An alternate analysis may have been more accurate. The district court found and the appellate court agreed that the parties had entered into an oral contract. There is no discussion of whether the oral contract set forth the essential terms of the contract when it was formed or whether the parties' course of performance supplied the necessary certainty to discover an enforceable contract by conduct. The essential issue was the determination of the operative terms of the agreement. If the oral contract did include sufficient terms to make it enforceable, the issue would be whether the form supplied by the defendant which contained different or additional terms (disclaiming warranties, limiting remedies and providing for attorney's fees) became part of the contract. Since this was a contract for services rather than one for the sale of goods, the Uniform Commercial Code, § 2-207, would not apply. The essential issue, apart from characterizations such as ''void,'' was whether the parties had agreed to modify their oral agreement to incorporate the defendant's boilerplate disclaimers and limitations. As presented in the opinion, the facts indicate that there was no such manifestation of assent. Thus, the result appears to be sound.

Supplement to Notes in Main Volume

1. Bertram v. Benefit Consumer Disc. Co., 286 F. Supp. 2d 453 (M.D. Pa. 2003) . When the plaintiffs, homeowners, brought an action against the defendant, lender, for violation of the Truth-in-Lending Act (TILA), 15 U.S.C. § 1601 et seq., the defendant moved to stay the proceedings pending arbitration, based on an arbitration clause in the parties' contract. Recognizing the major judicial shift from hostility towards arbitration agreements to highly favoring such agreements pursuant to the Federal Arbitration Act (FAA), the court explained that the FAA mandates the enforcement of arbitration clauses except where (1) the entire contract, including the arbitration clause, is void, ab initio, or (2) where the arbitration clause itself is voidable. The arbitration clause was not voidable in this case, nor was the entire contract void ab initio. If a creditor fails to make a disclosure required by TILA, a consumer may rescind the agreement. The provisions of TILA permitting rescission, however, only render the contract voidable, not void. A so-called ''void'' contract lacks any legal existence. Relying on the Restatement (Second) of Contracts, § 7, the court held that a claim that a contract is voidable does not challenge the existence or prima facie validity of the underlying agreement. Rather, it provides a party with a power of avoidance or disaffirmance. Since the entire contract was not void and the arbitration clause was not, by itself, voidable, the court held the arbitration clause to be enforceable.