Section 3 Unit 3 Flashcards
contract
is an agreement between two or more parties who, in a “meeting of the minds,” have pledged to perform or refrain from performing some act. A valid contract is one that is legally enforceable by virtue of meeting certain requirements of contract law. If a contract does not meet the requirements, it is not valid and the parties to it cannot resort to a court of law to enforce its provisions.
In terms of validity and enforceability, a court may construe the legal status of a contract in one of four ways:
valid, valid but unenforceable, void, voidable
valid
A valid contract is one which meets the legal requirements for validity. These requirements are explained in the next section.
A valid contract that is in writing is enforceable within a statutory time period. A valid contract that is made orally is also generally enforceable within a statutory period, with the exceptions noted below.
valid but unenforceable
State laws declare that some contracts are enforceable only if they are in writing. These laws apply in particular to the transfer of interests in real estate. Thus, while an oral contract may meet the tests for validity, if it falls under the laws requiring a written contract, the parties will not have legal recourse to enforce performance. An oral long-term lease and an oral real estate sales contract are examples of contracts that may be valid but not enforceable.
Note that such contracts, if valid, remain so even though not enforceable. This means that if the parties fully execute and perform the contract, the outcome may not be altered.
void
A void contract is an agreement that does not meet the tests for validity, and therefore is no contract at all. If a contract is void, neither party can enforce it.
For example, a contract that does not include consideration is void. Likewise, a contract to extort money from a business is void. Void contracts and instruments are also described as “null and void.”
voidable
A voidable contract is one which initially appears to be valid, but is subject to rescission by a party to the contract who is deemed to have acted under some kind of disability. Only the party who claims the disability may rescind the legal effect of the contract.
For example, a party who was the victim of duress, coercion, or fraud in creation of a contract, and can prove it, may disaffirm the contract. However, the disaffirmation must occur within a legal time frame for the act of rescission to be valid. Similarly, if the party who has cause to disaffirm the contract elects instead to perform it, the contract is no longer voidable but valid.
A voidable contract differs from a void contract in that the latter does not require an act of disaffirmation to render it unenforceable.
A contract is valid only if it meets all of the following criteria:
competent parties mutual consent valuable consideration legal purpose voluntary act of good faith
competent parties
The parties to a contract must have the capacity to contract, and there must be at least two such parties. Thus, the owner of a tenancy for life cannot deed his interest to himself in the form of a fee simple, as this would involve only one party.
mutual consent
Mutual consent, also known as offer and acceptance and meeting of the minds, requires that a contract involve a clear and definite offer and an intentional, unqualified acceptance of the offer. In effect, the parties must agree to the terms without equivocation. A court may nullify a contract where the acceptance of terms by either party was partial, accidental, or vague.
valuable consideration
A contract must contain a two-way exchange of valuable consideration as compensation for performance by the other party. The exchange of considerations must be two-way. The contract is not valid or enforceable if just one party provides consideration.
legal purpose
The content, promise, or intent of a contract must be lawful. A contract that proposes an illegal act is void.
voluntary act of good faith
The parties must create the contract in good faith as a free and voluntary act. A contract is thus voidable if one party acted under duress, coercion, fraud, or misrepresentation.
For example, if a property seller induces a buyer to purchase a house based on assurances that the roof is new, the buyer may rescind the agreement if the roof turns out to be twenty years old and leaky.
Capacity to contract is determined by three factors:
legal age, mental competency, legitimate authority
Depending on state law, a contract involving a minor as a party may be either void or voidable. If the law allows a minor to contract, the contract will generally be voidable and the minor can disaffirm the contract.
To be mentally competent, a party must have sufficient understanding of the import and consequences of a contract. Competency in this context is separate and distinct from sanity. Incompetent parties, or parties of “unsound mind,” may not enter into enforceable contracts. The incompetency of a party may be ruled by a court of law or by other means. In some areas, convicted felons may be deemed incompetent, depending on the nature of the crime.
In addition to satisfying the foregoing requirements, a contract that conveys an interest in real estate must:
?be in writing
?contain a legal description of the property
?be signed by one or more of the parties
A lease contract that has a term of one year or less is an exception. Such leases do not have to be in writing to be enforceable.
Certain contracts that fail to meet the validity requirements are voidable if a damaged party takes appropriate action. The enforcement of voidable contracts, however, is limited by statutes of limitation. Certain other contracts which are valid may not be enforceable due to the statute of frauds.
Statute of limitations.
The statute of limitations restricts the time period for which an injured party in a contract has the right to rescind or disaffirm the contract. A party to a voidable contract must act within the statutory period.
Statute of frauds.
The statute of frauds requires that certain contracts must be in writing to be enforceable. Real estate contracts that convey an interest in real property fall in this category, with the exception that a lease of one year’s duration or less may be oral. All other contracts to buy, sell, exchange, or lease interests in real property must be in writing to be enforceable. In addition, listing agreements in most states must be in writing.
The statute of frauds concerns the enforceability of a contract, not its validity. Once the parties to a valid oral contract have executed and performed it, even if the contract was unenforceable, a party cannot use the Statute of Frauds to rescind the contract.
For example, a broker and a seller have an oral agreement. Following the terms of the agreement, the broker finds a buyer, and the seller pays the commission. They have now executed the contract, and the seller can not later force the broker to return the commission based on the statute of frauds.
Electronic contracting
Contracting electronically through email and fax greatly facilitates the completion of transactions. Clients, lenders, title agents, inspectors, brokers, and other participants in a transaction can quickly share documentation and information. Electronic contracting is made possible by the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (E-Sign), which are federal laws. UETA, which has been accepted in most states, provides that electronic records and signatures are legal and must be accepted. E-Sign makes contracts, records, and signatures legally enforceable, regardless of medium, even where UETA is not accepted.
Offer and acceptance
The mutual consent required for a valid contract is reached through the process of offer and acceptance: The offeror proposes contract terms in an offer to the offeree. If the offeree accepts all terms without amendment, the offer becomes a contract. The exact point at which the offer becomes a contract is when the offeree gives the offeror notice of the acceptance.
Offer.
An offer expresses the offeror’s intention to enter into a contract with an offeree to perform the terms of the agreement in exchange for the offeree’s performance. In a real estate sale or lease contract, the offer must clearly contain all intended terms of the contract in writing and be communicated to the offeree.
If an offer contains an expiration date and the phrase “time is of the essence,” the offer expires at exactly the time specified. In the absence of a stated time period, the offeree has a “reasonable” time to accept an offer.
Acceptance.
An offer gives the offeree the power of accepting. For an acceptance to be valid, the offeree must manifestly and unequivocally accept all terms of the offer without change, and so indicate by signing the offer, preferably with a date of signing. The acceptance must then be communicated to the offeror. If the communication of acceptance is by mail, the offer is considered to be communicated as soon as it is placed in the mail.
By changing any of the terms of an offer, the offeree creates a counteroffer, and the original offer is void. At this point, the offeree becomes the offeror, and the new offeree gains the right of acceptance. If accepted, the counteroffer becomes a valid contract provided all other requirements are met.
Any of the following actions or circumstances can terminate an offer:
?acceptance: the offeree accepts the offer, converting it to a contract
?rejection: the offeree rejects the offer
?revocation: the offeror withdraws the offer before acceptance
?lapse of time: the offer expires
?counteroffer: the offeree changes the offer
?death or insanity of either party
A real estate contract that is not a personal contract for services can be assigned to another party unless the terms of the agreement specifically prohibit assignment.
Listing agreements, for example, are not assignable, since they are personal service agreements between agent and principal. Sales contracts, however, are assignable, because they involve the purchase of real property rather than a personal service.
State laws define the extent to which real estate brokers and agents may legally prepare real estate contracts. Such laws, referred to as “broker-lawyer accords,” also define what types of contracts brokers and agents may prepare. In some states, brokers and agents may not draft contracts, but they may use standard promulgated forms and complete the blanks in the form.
As a rule, a broker or agent who completes real estate contracts is engaging in the unauthorized practice of law unless the broker is a party to the agreement, such as a in a listing agreement or sales contract. Brokers and agents may not complete leases, mortgages, contracts for deed, or promissory notes to which they are not a party.
Agents must be fully aware of what they are legally allowed to do and not do in preparing and interpreting contracts for clients. In addition to practicing law without a license, agents expose themselves to lawsuits from clients who relied on a contract as being legally acceptable.
parol
A contract may be in writing or it may be an oral, or parol, contract. Certain oral contracts are valid and enforceable, others are not enforceable, even if valid. For example, most states require listing agreements, sales contracts, and leases exceeding one year to be in writing to be enforceable.
express contract
An express contract is one in which all the terms and covenants of the agreement have been manifestly stated and agreed to by all parties, whether verbally or in writing.
implied contract
An implied contract is an unstated or unintentional agreement that may be deemed to exist when the actions of any of the parties suggest the existence of an agreement.
A common example of an implied contract
A common example of an implied contract is an implied agency agreement. In implied agency, an agent who does not have a contract with a buyer performs acts on the buyer’s behalf, such as negotiating a price that is less than the listing price. In so doing, the agent has possibly created an implied contract with the buyer, albeit unintended. If the buyer compensates the agent for the negotiating efforts, the existence of an implied agency agreement becomes even less disputable.
bilateral contract
A bilateral contract is one in which both parties promise to perform their respective parts of an agreement in exchange for performance by the other party.
An example of a bilateral contract is an exclusive listing: the broker promises to exercise due diligence in the efforts to sell a property, and the seller promises to compensate the broker when and if the property sells.
unilateral contract
In a unilateral contract, only one party promises to do something, provided the other party does something. The latter party is not obligated to perform any act, but the promising party must fulfill the promise if the other party chooses to perform.
An option is an example of a unilateral contract: in an option-to-buy, the party offering the option (optionor) promises to sell a property if the optionee decides to exercise the option. While the potential buyer does not have to buy, the owner must sell if the option is exercised.
executed contract
An executed contract is one that has been fully performed and fulfilled: neither party bears any further obligation. A completed and expired lease contract is an executed contract: the landlord may re-possess the premises and the tenant has no further obligation to pay rent.
