Valid Contracts Flashcards
is a term used to describe consideration that is deemed sufficient or appropriate for that which is offered in exchange.
If the consideration given is not comparable in value to that which is being offered, the agreement could be looked at as a gift rather than a valid contract — or, in some instances, as evidence of bad faith in the negotiation.
Valuable Consideration
A legally enforceable agreement must create legal rights for all parties involved in the contract and contain the five essential elements of a legally valid contract. They are:
Offer and acceptance (mutual agreement/assent)
Consideration
Legally competent parties
Reality of consent
Lawful objective
Let’s examine each element a little more closely.
Contract Essentials
Consideration
Consideration carries a unique meaning when it comes to contracts. For a contract to be legally enforceable, there must be consideration from each party.
Something of Value
Consideration is something valuable that each party exchanges to demonstrate that they agree to the contract’s terms.
It can be a promise, money, property, forbearance, or services. In many transactions, consideration is met in the form of a promise for a promise. That said, money is also a popular form of consideration.
Without consideration, a contract is not legally binding. The legal principle is that a person cannot do something of value without receiving something of value in turn. This basically means that each party must give up something to gain something.
A contract can be deemed invalid if the consideration given by one party is considered insufficient compared to what is received from the other party in exchange.
Valuable Consideration vs. Good Consideration Good consideration (aka goodwill) such as love and affection, can be acceptable in exchange for valuable consideration. But when this happens, the term gift is used to describe the exchange (usually seen in transactions where property is given to a relative).
Consideration = Exchange of Promises
In a real estate contract, the exchange of promises acts as consideration. The buyer promises to pay the purchase price for the property, and the seller promises to transfer the deed.
Note: Earnest money is NOT consideration because it is evidence of good faith to fulfill a promise, but is not the promise itself.
EXAMPLE
Seth provides Cameron with housing. That in and of itself is not a contract. Why? Because Cameron must offer Seth something in return, such as money or a promise to help out with housekeeping or property maintenance in exchange for the housing. Without the exchange of promises, the arrangement is missing an essential element of a valid contract: consideration.
Don’t worry, Cameron will come through with some consideration. He may be a goofball, but he’s not a freeloader!
Notes
For a contract to be valid and legally enforceable, the parties involved in the contract must be legally competent. Some refer to this as having capacity to enter into a contract.
Having capacity implies two things:
The individual has reached the age of majority (18 years of age in Arizona) or had their disabilities of minority removed by a court.
The individual is not mentally incompetent or intoxicated by drugs or alcohol.
Age of Majority
The term age of majority means that a person is considered a legal adult.
Age of majority laws protect minors from entering into agreements that they might not understand. For that reason, if a minor enters into a contract, the contract is considered voidable. But it’s voidable for the minor only. The adult is bound to the contract if the minor holds them to it.
A contract entered into with a minor will become valid when the minor reaches the age of majority if they do not exercise the right to void the contract within a reasonable time of achieving legal age.
Mental Competency
Two types of individuals cannot enter into a contract:
Those who have been declared mentally incompetent by a judge
Those who are temporarily incapable of comprehending contracts
The second group includes individuals who might be temporarily mentally incompetent because of alcohol intoxication, drug use, or other reasons.
For Their Own Protection
The purpose of mental competency laws is to protect individuals from agreeing to terms they do not fully understand. Therefore, all contracts entered into by individuals declared by a judge to be of unsound mind are void.
If an individual was temporarily mentally incompetent when they entered into an agreement, that contract would be voidable at the individual’s option once they have returned to a state of sound mind.
In order for a person of unsound mind to enter into a valid contract, someone with power of attorney for that person would have to act on their behalf.
A representative with power of attorney is called an attorney-in-fact.
Corporations as Legally Competent Parties
It might surprise you to know that a corporation can be operated as a legally competent party to a contract and take on all the rights, responsibilities, and obligations that a person can.
That being the case, I move that robots be considered people, too.
Legally Competent Parties
The term lawful objective speaks to the idea that a contract cannot require any illegal activities or outcomes. A contract with lawful objective conforms to all relevant laws and statutes.
A contract that involves illegal conduct is considered void and is unenforceable from inception in a court of law.
EXAMPLE
A contract created by a seller who wishes to sell a property that had been declared hazardous by the EPA due to a leaking underground storage tank would be considered a void contract. The property cannot legally be sold in that condition.
A buyer who purchased this property and learned of the condition afterward could back out of the agreement because the contract was void from the beginning.
Lawful Objective
Voidable Contracts
Voidable contracts are potentially valid contracts where at least one party has the option to rescind or terminate the contract without penalty.
Voidable contracts often involve a party who is incapable of legally entering into a contract. A minor or an adult incapacitated by mental illness or the influence of medication or alcohol are the two most common examples of this.
Additionally, contracts entered into under duress or as a result of fraud or misrepresentation are also voidable (by the injured party).
Voidable Contracts with Minors 🚸
Voidable contracts entered into by a minor can be valid at the option of the minor. A minor can force performance on the other party, but that party cannot force performance on the minor. (Remember our Ace study with young Josh and old-enough-to-know-better Michael?)
Once a minor chooses to perform, the contract converts from voidable to valid.
In Arizona, anyone under 18 years of age is considered a minor for the purposes of contractual capacity.
Voidable Contracts with Adults
An adult who enters a contract while incapacitated by way of mental illness or the influence of drugs or alcohol has the option of voiding that contract:
During their illness or incapacitation
For a reasonable time following their recovery from that incapacitation
Once the temporarily incapacitated adult has chosen to perform, the contract is considered valid if it meets the other essential elements of a valid contract.
Ratified and Disaffirmed Contracts
When a party performs their obligation to a contract that they could have rescinded, they are said to have ratified that contract.
This can happen with voidable contracts entered into by underaged or temporarily incapacitated individuals who might choose to perform their obligation to the contract.
Void vs. Voidable
This brings up an important distinction between void and voidable contracts. Voidable contracts require a party to disaffirm the contract before it is rendered unenforceable. Voids contracts are unenforceable from the start.
Voidable Contracts
Statute of Frauds
The statute of frauds is a state-level law that requires certain types of contracts to be set out in writing to be enforceable.
Statute of Frauds: Arizona Edition
According to Arizona Revised Statute 44-101, this would include the following real estate related contracts:
Leases of more than a year in length
Agency representation (listing agents and buyer agents)
Agreements involving the conveyance of real property
Mortgages, trust deeds, promissory notes, deeds
Wills
Exceptions
There are notable exceptions to the statute of frauds requirement that real estate related contracts be in writing:
A lease with a term of less than a year
Commission split agreements between brokers and salespersons
General partnerships
The sale or purchase of personal property under $500
The Purpose
The purpose of the statute of frauds is to prevent fraud that can more easily occur with oral contracts. The statute of frauds focuses on enforceability rather than validity.
It should be noted that some oral contracts can be enforced, just not those covered by the statute of frauds.
Also, while those covered by the statute of frauds can’t be enforced, the possibility of the defaulting party getting sued for damages still might exist.
EXAMPLE
If Jerry were to orally agree to the sale of his apartment to Newman, but then had second thoughts, Newman could give Jerry an earful. But what Newman couldn’t do is successfully sue Jerry to force him to sell. Why? Because, according to the statute of frauds, all real estate purchase contracts MUST be in writing.
Therefore, in this instance, either party can rescind their offer without legal consequence.
Parol Evidence Rule: A Legal Sidekick
One of the primary motivations for the statute of frauds is to prevent the fraudulent use of oral contracts. That intent is strengthened with the help of a “legal sidekick” (my term of endearment) known as the parol evidence rule.
The parol evidence rule is the legal concept that says that oral evidence can be used to support a written contract but can NOT be used to contradict one — particularly a written contract that is clearly intended to be the final expression of the agreement.
Parol Contracts
Parol contracts are orally created contracts or the oral modification of written contracts. Their enforceability depends on the circumstances surrounding their creation.
Statute of Frauds
Statute of limitations has to do with state and federal laws establishing time limits for bringing certain kinds of legal actions. All claims must be filed prior to the statutory deadline or the legal right to press a claim is barred.
EXAMPLE
If Jerry decides to sell his apartment to Newman but fails to disclose a problem with the wiring on the seller’s disclosure form, and Newman does not discover the issue until after the statute of limitations expired, Newman has no legal recourse against Jerry for what would otherwise be a legitimate cause of action.
The same holds true even if Newman discovered the problem before the statute of limitations expired but didn’t file suit until after the date had passed.
Statute of Limitations in Arizona:
Arizona’s statute of limitations covers a variety of real estate-related matters. Those specifically focused on contracts include:
Breach or default of a written contract: 6 years
Breach or default of an oral contract: 3 years
Specific performance to convey real property: 4 years
Wrongful interference: 2 years
Validity < Statute of Limitations
The main thing you need to remember is this: A legitimate complaint for a performance failure related to a valid contract will not be considered if the statute of limitations has expired.
Extenuating Circumstances
The purpose behind state and federal statute of limitations laws is to ensure that claims are made in a reasonable time and manner while pertinent evidence is still “fresh” and to prevent the lingering cloud of concern about a possible suit well after the disputed action or event has taken place.
Understand that there can be extenuating circumstances that can stop, pause, or speed up the clock with respect to the statute of limitations in a particular situation.
Professional legal advice should always be sought in claims involving the statute of limitations.
Statute of Limitations
The doctrine of laches is another legal principle that courts use to deny dated claims.
Under this doctrine, unreasonable delay or negligence in asserting or defending one’s rights can create a legal bar to equitable relief if a delay or negligence has importantly affected the status of the person responsible for the violation. Think of this as the “use it or lose it” rule. If you don’t use your right to bring suit, you eventually lose it.
Doctrine of Laches vs. the Statute of Limitations
Don’t be fooled into thinking that the doctrine of laches and the statute of limitations are the same thing. On the other hand, don’t feel bad if you’re having trouble differentiating between the two.
Both are concerned with making sure legal claims are made within a reasonable time frame, but the statute of limitations is focused on the statutory time limit for making a claim, while the doctrine of laches relies on the court’s discretion as to whether or not a plaintiff has waited too long to make a claim.
Scenario: Joanie & Chachi’s Patio Problems
In early fall, Joanie contracts with Chachi to build a patio behind her home. Within a few months of completion, however, Joanie notices the patio’s surface has begun to crack quite significantly. She decides not to make an issue of it right then because she doesn’t want the patio torn up and redone just as warmer weather and entertainment season have returned.
Days turn to weeks, and weeks turn to months. And, before you know it, a number of years pass before Joanie finally decides to take action and file suit against Chachi for defective construction.
In Joanie’s state, the statute of limitations for suits for defective construction is six years after the discovery of the defect, so:
If Joanie attempts to file suit more than six years after she discovered the cracks, the statute of limitations would bar recovery and deny her claim.
If Joanie attempts to file suit five years after she discovered the cracks, even though she filed before the statute of limitations had run out, Chachi could assert a defense of laches, contending that his ability to defend himself has been hurt by Joanie’s unreasonable delay in making a claim of a known defect.
In the second scenario, Chachi’s laches defense would be heard, and a judge would have to render a decision based on all the facts presented.
Joanie & Chachi’s patio with a bar, a grill, and a pond.
Doctrine of Laches: Viewer Discretion Advised
Unlike the statute of limitations, which is pretty cut-and-dry, the doctrine of laches is case-specific and depends on the discretion and judgment of the courts.
Doctrine of Laches
Chapter Summary
All good things must come to an end, Anthony. So it is with life, and so it is with 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:
contract
a legally enforceable and binding agreement between parties wherein a promise to do or not do something is given in exchange for valuable consideration
consideration
something of value exchanged by the parties as evidence of agreement to the terms of a contract
enforceability
possessing the essential elements necessary to be legally binding and obligate performance; used to describe the compelling nature of a valid contract
goodwill
good consideration, such as love and affection, that can be exchanged for valuable consideration in a contract or agreement; the exchange of which is generally seen as a gift on the part of the party giving up the valuable consideration
null and void
lacking legal or binding force; invalid
parol contract
an orally created contract or the oral modification of a written contract; enforceability depends on circumstances surrounding creation
statute of frauds
a law which requires certain types of contracts, including those conveying interest in real property, to be in writing to be enforceable
statute of limitations
a legal concept that establishes time limits for bringing certain kinds of legal actions
validity
possessing accuracy and, in context of contractual status, being legally binding and enforceable
void
lacking legal or binding force; used to describe a contract that is either illegal or impossible to complete
void contract
a contract lacking legal or binding force; often used with phrase “null and void”
voidable contract
a contract wherein the wronged party has the option to perform, enforce, or void the contract
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter:
Five Essential Elements
The main points to remember about the five essential elements of contracts are…
The term offer and acceptance is another way to describe the meeting of the minds that has to occur for a valid contract to come about.
Valuable consideration is a term used to describe consideration that is deemed sufficient or appropriate for that which is offered in exchange. Good consideration, such as love and affection, is thought of as a gift.
Having capacity (legally competent parties) implies two things:
The individual has reached the age of majority or had their disabilities of minority removed by a court
The individual is not permanently or temporarily mentally incompetent
For there to be reality of consent, the parties must enter the contract:
Of their own free will
With all the information needed to make a sound decision
The term lawful objective speaks to the idea that a contract cannot require any illegal activities or outcomes.
An infographic showing the five essential elements of a contract.
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Four Legal Categories of Contracts
Once a contract has been created, it falls into one of four legal categories:
Valid
Void
Voidable
Unenforceable
A valid and enforceable contract meets all the essential, basic requirements of the law and accurately reflect the contracting parties’ intentions.
From inception, a void contract has no legal effect and could not be completed even if the parties wanted to. Null and void is a term you’ll hear with void contracts.
Voidable contracts are potentially valid contracts where at least one party has the option to rescind or terminate the contract without penalty. Minors or adults incapacitated by mental illness or the influence of medication or alcohol are the two most common examples of parties that can void contracts.
When a party performs their obligation to a contract that they could have voided or rescinded, they are said to have ratified that contract. In these instances, the other party is bound to the contract.
An unenforceable contract is one that has (or had) the potential of being a valid contract, but its enforcement is barred by some attribute of the contract or technicality of law.
A chart recapping valid, unenforceable, void, and voidable contracts.
Image description
Restrictions on Contract Enforcement
Three common restrictions on the enforcement of valid contracts are:
Statute of frauds
Statute of limitations
Doctrine of laches
The statute of frauds is a state-level law that requires certain types of contracts to be set out in writing to be enforceable. This includes most real estate-related contracts, such as agency relationship agreements and contracts involving the conveyance of real property.
Statute of limitations has to do with state and federal laws establishing time limits for bringing certain kinds of legal actions. A legitimate complaint for a performance failure related to a valid contract will not be considered if the statute of limitations has expired.
Think of the doctrine of laches as the “use it or lose it” rule. If you don’t use your right to bring suit, you eventually lose it.
Chapter Summary
