Contract Classifications & Other Considerations Flashcards
Valid contracts can be classified in one or more of the following ways:
Express contracts
Implied contracts
Unilateral contracts
Bilateral contracts
Executory contracts
Executed contracts
Six Classifications = Three Pair
You might notice that the six classifications I have given you naturally cluster into three pairs that can be compared and contrasted for better understanding:
Express vs. implied
Unilateral vs. bilateral
Executory vs. executed
As I take you through each of these classifications, I want you to think about how they differ, one from another.
Contract Classifications
Even though these contracts are established by the parties’ actions rather than a written document or an explicit discussion, they can have all of the legally binding power of more explicit contracts and should be taken seriously.
Most folks might assume that the majority of contracts entered into are formalized, written documents… the stuff of an attorney’s dreams. But in reality, we enter into implied contracts on a daily basis — usually without even thinking twice about it.
Scenario: Everyday Implied Contracts
At the Restaurant
When dining at a restaurant, a customer creates an implied contract with the restaurant. They are expected to compensate the restaurant for the meal. If someone were to try to leave without paying their bill, they would be subject to judicial penalty — a pretty clear sign that this implied contract has the enforceability of law.
Grabbing a Cab
As with the restaurant scenario, when someone hails a taxicab, this creates an implied contract between the passenger and the cab driver. The passenger must compensate the cab driver for the transportation provided at the end of the ride. (Payment of fare is mandatory; tips are discretionary.)
At the Barber
When Joe sits down in the chair and says, “Just a little off the top,” he has entered into an implied contract that obligates Joe to pay the barber for his services. I don’t know about you, Anthony, but, regardless of what kind of contract I’ve entered into, I’m not about to stiff a guy wielding a straight-edge razor!*
*Robots don’t bleed, but some models leak oil.
Social Conventions
As mentioned, social conventions play a large role in creating implied contracts. To avoid errors, oversights, and misunderstandings with those not familiar with a specific service, many professionals will take steps to spell out the terms of implied contracts. Taxicab drivers post rates on the windows of their vehicles. Restaurants post prices on their menus. These efforts make it more clear that their services are for sale, and are not a gift.
Real Estate Best Practices
Because implied contracts are likely to be a source of confusion, a best practice for a license holder is to enter into formalized, written, express contracts whenever possible.
Implied Contracts
Express contracts are oral and written contracts in which the parties explicitly state or express their intentions and their expectations regarding the contract and the exchange of promises. All terms and conditions have been identified and agreed to.
They stand in contrast to implied contracts where the existence of a contract (and the nature of its terms) is simply inferred from the parties’ conduct.
Where You’ll See Them in Real Estate
A listing agreement, a buyer representation agreement, a sales contract, and a lease agreement are all common examples of express contracts that you’ll encounter during your career as a real estate agent.
As mentioned earlier, while you can engage in implied contracts as a real estate agent, a best practice is to avoid it. Additionally, the statute of frauds forbids it in sales contracts involving real property, and most areas require written agency agreements to be in place before the local MLS can be used to market a property.
More Easily Remedied
If one party fails to perform according to the agreed-upon terms of an express contract, the injured party can more easily seek damages and legal recourse.
The express contract agreement essentially serves as a reference in the event of disagreements or disputes. An express contract in written form provides the easiest path of all to remedying a conflict — or even better, preventing one from happening in the first place.
Express Contracts
A bilateral contract is an agreement in which both parties make a promise to perform the actions specified in the contract. This kind of contract creates reciprocal obligations, which is to say that each party has a responsibility to the other. This is the kind of arrangement that is used most often in the business world and is what people typically think of when discussing contracts.
ALL contracts require two parties, but in bilateral contracts BOTH parties make promises.
In a bilateral contract, Party A must promise to do something for Party B, and Party B must promise to do something for Party A. This contract obligates both parties to fulfill certain terms. To satisfy or complete a bilateral contract, all parties involved must carry out their promises.
EXAMPLE
Anna signs a contract with Brandon’s Bulldogs for a male pup from the upcoming litter of “Cuddles,” Brandon’s AKC “Best in Class” Champion French Bulldog. In exchange for the bargain price of $2,500, Anna is promised her pick of the litter. Both parties have made promises.
All the rights, responsibilities, restrictions, and contingencies potentially affecting either or both parties are spelled out in the contract. For example, if a male pup is not produced in this litter, Anna will have the right to choose a female from the litter or wait until the next litter from Cuddles or another breeding bulldog of her choice.
Bilateral Contracts
A unilateral contract is a contract in which one party (the offeror) makes a promise in exchange for a reciprocal act on the part of the second party (the offeree).
So far, it sounds like a regular contract, right? Well, with a unilateral contract, the second party is NOT bound or legally obligated to the agreement, because they made no promise. But the second party retains the OPTION to accept the terms of the exchange if they so choose.
So, in a unilateral contract there are TWO parties but ONE promise.
Once the second party (the offeree) accepts and activates their agreement to the terms of the contract, the first party (the offeror) is BOUND and obligated to fulfill their side of the contract.
Because one party is obligated from the start while the other party has the option to accept terms of the agreement, this unilateral or one-sided contract is said to lack mutuality.
EXAMPLE
When Seth Bullock, U.S. Marshal, of Deadwood, South Dakota, nailed up a federal “wanted” poster to the community bulletin board outside of the main street post office, he was publicizing a unilateral contract between the U.S. government and all its law-abiding citizens. The $500 bounty for “Quick-Step Quinton,” a notorious safe-cracker and bank robber, was the unilateral promise being made.
While no citizen assumed any obligation by virtue of reading the poster, any one of them could, at their option, collect the reward if they were to bring “Quick-Step” to the local authorities. The U.S. government, on the other hand, was obligated to the terms of the contract as soon as they publicized the offer.
Unilateral Contracts
Bilateral contracts are typically the contracts of choice for the business world. The primary example would be the sale of a good or service. A real estate sales contract is a bilateral contract.
Reward offers, contests, and commissions are common types of unilateral contracts that you are likely to encounter.
Again, since both contract classes involve two parties, the distinction between the two is found in the number of parties making a promise.
Bilateral vs. Unilateral Contracts
In general, an executed contract is a contract in which all terms have been fulfilled by all parties.
While there are many kinds of contracts, all contracts become executed contracts once all parties have completed their contractual obligations. And once all promises of a contract have been fulfilled, the contract is considered executed and ceases to exist. It has no further legal power to bind any of the parties and is not considered to have any meaningful legal existence.
EXAMPLE
Amy agrees to pay Shelly the negotiated price for a hand-knitted sweater. Once Amy and Shelly have exchanged goods for funds, as long as there are no further stipulations to their agreement, they have an executed contract. And that contract, by virtue of its completion, ceases to exist.
You might say that Amy and Shelly made sure to tie up all the loose ends on that sweater agreement. But I wouldn’t blame you if you didn’t say that.
Executed Contracts
An executory contract, in contrast to an executed contract, is a contract that has not yet been fully performed. To describe a contract as executory, we are simply identifying its stage of existence rather than describing its nature or purpose.
Most contracts go through an executory stage with the hope and intention of becoming fully executed.
Two Elements of Executory Contracts
For a contract to be considered executory, two things must be present:
A binding contract on multiple parties
One or more of the parties has yet to perform their contractual duties
A Premature Argument
The importance of the distinction between executory and executed contracts can be seen in the ability to bring a case to court. If a contract is not materially complete, the court will be less likely to entertain an argument that the contract is in breach. It would be like reviewing a movie before seeing how it ends.
Once one party to the contract performs and requests the fulfillment of promises made by the other party, then the question of that party’s contract performance can be more easily determined.
Contract to Closing = Executory
When a buyer and seller sign a contract for the purchase of a property, they have entered the executory phase of the contract. They will stay there until the completion of closing, at which point, the contract becomes fully executed.
Oral Real Estate Agreement ≠ Executory 🗣
It’s worth noting that while an oral real estate agreement can eventually become an executed contract, but it is NOT considered an executory contract. In order for any contract to be considered executory, it needs to be binding on the parties to the contract. (Remember the two requirements for an executory contract?)
And, per the statute of frauds, real estate sales contracts must be in writing to be enforceable, so oral real estate agreements are considered voluntary, non-binding understandings — and NOT enforceable contracts.
Execution Confusion 🤷♀️
I should mention that you might, on occasion, hear someone say, “I executed a contract today!” When used this way, the individual is simply saying that they signed a contract today. It does not necessarily mean that the contract has been fulfilled, only that a contract has been created.
Executory Contracts
When an offer is terminated, it can be the result of the actions of either party or as an operation of law.
And, as with contracts, offers can be terminated in a number of ways — not all of them negative. In fact, the best way for an offer to terminate is through its acceptance, which gives birth to a contract!
Here’s a list of the ways an offer can terminate, with a brief explanation of each:
Acceptance: by replacing the offer with a contract
Counteroffer: by rejecting the offer and replacing it with a new offer
Rejection: by rejecting the offer without a new offer being made
Expiration: by allowing the passage of either an expiration date or a reasonable time
Revocation: by withdrawing the offer before acceptance has been communicated
Death or mental incapacity: by the death or mental incapacity of either party before acceptance
Destruction: by the destruction of the subject property of an offer
Improper acceptance: by failing to comply with stipulated manner of acceptance as laid out in the offer
About That Revocation…
An offer can be withdrawn any time prior to the proper communication of the offer’s acceptance — even if a previously stated deadline for acceptance has yet to expire.
But once the offeror has been notified of an offer’s acceptance, the right to revoke the offer has passed.
Offer Termination
Laws regarding contract preparation by licensed real estate professionals will vary state by state. Some states have mandatory promulgated contracts and forms that cover almost every use. Other states, like Arizona, do not have promulgated forms but allow for the completion of preprinted forms with “boilerplate language” that have been prepared by a local REALTOR® association or an attorney.
When that is the case, adding factual information like names, addresses, dates, etc., is usually allowed.
One or More Documents
A contract can be made up of a single document or multiple documents — whatever it takes to provide the essential details of the agreement so that a true meeting of the minds can be had by the parties entering into the contract.
Any modification of a contract should occur by way of an:
Addendum (introduction of new information)
Amendment (the change of existing information) to the contract
Addendum
Once made, new material introduced by an addendum is considered part of the original contract.
Note: Addendum = one. Addenda = more than one.
EXAMPLE
When the property inspection revealed needed repairs to gutters, the buyer insisted that the seller either make the repairs or reduce the purchase price by the cost of those repairs. Since the gutters and the purchase price were both parts of the original contract, no new material is being introduced. An addendum addressing the requested changes to existing terms can be made.
Amendment
Amendments are considered to be correcting or improving the existing contract document. Parties to the contract must date and sign (or initial) any addenda or amendment created.
EXAMPLE
Buyer Bonnie realizes that the swing set in the backyard of the home she is purchasing would be ideal for her grandchildren when they come to visit. She decides to get it included in the original purchase price of the home. Her broker sees to it that an amendment to the purchase contract includes the swing set.
Because the swing set was never a part of the original contract, an amendment is needed.
Addenda vs. Amendments
Here’s a diagram that makes the comparison quick and easy to see!
A venn diagram showing the similarities and differences between addenda and amendments.
Image description
Fill in the Blanks
When using a preprinted form, a best practice is to never leave a blank empty. If the blank refers to something that is not applicable to the particulars of this agreement, say so with “n/a” or something to that effect. You do NOT want there to be any ambiguity regarding that space.
Electronic Records and Signatures
Electronic contracting in real estate is allowed and supported through multiple state and federal acts. Together, these acts recognize the use of electronic records, signatures, acknowledgment, and notarization as fulfilling the written requirement per the statute of frauds.
Perhaps, the best known of these is the Uniform Electronic Transactions Act, which has been adopted by Arizona and codified in the Arizona Revised Statute 44-7007.
It’s worth noting that, while contracts involving the acceptance of offers on real estate are covered by this act, there are some exceptions.
For example, this act does NOT apply to electronic transactions entailing the default, acceleration, repossession, foreclosure, eviction, or the right to cure under a credit agreement secured by a primary residence of an individual or a rental agreement for a primary residence of an individual.
Avoiding the Unauthorized Practice of Law
In addition to what we’ve discussed thus far, you should also avoid massive alterations or crossing out of sections of a preprinted contract or dispensing advice or legal interpretations of the contract.
You can, however, give explanations or address questions regarding factual information that is or should be included in the contract.
Stay in Your Legal Lane
And even with contracts that have been prepared by an attorney, it is considered the unauthorized practice of law if the broker completing the contract is not involved in the transaction as a principal or representative of a principal.
Contract Preparation
Look at you, Anthony. Gobbling up the educational goodness that is this chapter. But before you go, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Key Terms
Here are the key terms you learned in this chapter:
bilateral contract
a contract wherein both parties are obligated to perform in an exchange of promises
executory contract
a contract that has not yet been fully performed (both sides have not yet completed their obligations)
implied contract
a contract created by the actions of the parties rather than by express agreement
unilateral contract
a contract wherein one party makes a promise and is obligated to perform if a second party chooses to accept the offer and perform in exchange for that which was promised
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter:
Contract Classifications
Valid contracts can be classified in one or more of the following ways:
Express contracts
Implied contracts
Unilateral contracts
Bilateral contracts
Executory contracts
Executed contracts
Express contracts are oral and written contracts in which the parties explicitly state or express their intentions. Implied contracts are established by the parties’ actions rather than a written document or an explicit discussion.
ALL contracts require two parties, but in bilateral contracts BOTH parties make promises. In a unilateral contract there are TWO parties but ONE promise.
In general, an executed contract is a contract in which all terms have been fulfilled by all parties. An executory contract, in contrast to an executed contract, is a contract that has not yet been fully performed.
A chart recapping the different types of contract classifications.
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Offer & Acceptance
Offer and acceptance is the series of steps that leads to a contract.
Offeror: The party making the offer
Offeree: The party receiving the offer
Once an offer has been made, the offeree has four possible options regarding the offer:
They can accept it.
They can counter it.
They can reject it.
They can ignore it.
Acceptance of an offer is unconditional, meaning every term and condition is agreed to.
The slightest alteration to an offer is not acceptance but, rather, a counteroffer. In a very real sense, a counteroffer is the combination of a rejection and a new offer, all rolled up into one.
Contract Preparation
Arizona does not have promulgated forms but allows for the completion of preprinted forms with “boilerplate language” that have been prepared by a local REALTOR® association or an attorney.
Courts & Contracts
The courts will take into consideration only that which appears in the written document. This is known as the four corners rule. The courts will interpret any ambiguity in favor of the party NOT responsible for the construction of the contract.
In general, the legal priority of words in a contract looks like this: handwritten > typed > preprinted.
Addenda & Amendments
Any modification of a contract should occur by way of an:
Addendum (introduction of new information)
Amendment (the change of existing information) to the contract
A Venn diagram showing two intersecting circles with the similarities and differences between addenda and amendments.
Image description
Chapter Summary
