Contract
An agreement between two or more competent persons to do or not do certain things in exchange for consideration"
"Every contract is either express or implied, either unilateral or bilateral, and either executory or executed."
"An agreement to sell a car, deliver lumber, or rent an apartment is a contract.
And if it meets minimum legal requirements, it can be enforced in court"
"However, that a real estate licensee may not draft the original language for a contract"
"Anyone other than a lawyer who drafts a contract for someone else may be charged with the unauthorized practice of law.
Legal Classifications of Contracts
Every contract is either express or implied, either unilateral or bilateral, and either executory or executed
Express
One that has been put into words.
It may be WRITTEN or ORAL.
Each party to the contract has stated what he or she is willing to do and has been told what to expect from the other party.
Most contracts are express
Implied
(Contract by implication)
Is created by the ACTIONS OF THE PARTIES, not by express agreement.
Ex. "A written lease agreement expires, but the tenant continues to make payments and the landlord continues to accept them.
Both parties have given their implied consent to a new lease contract.
Unilateral
A contract is unilateral if only one of the contracting parties is legally obligated to perform.
That party has made ONE PROMISE to do a particular thing if the other party does something else.
But the other party hasn't promised to do anything and isn't legally obligated to do anything."
Ex. "In an open listing agreement, a seller promises to pay a real estate broker a commission if the broker finds a buyer for the property.
The broker doesn't promise to try to find a buyer, but if he does find one, the seller is obligated to pay.
An open listing agreement is a unilateral contract.
Bilateral
Formed when each party (TWO) PROMISES to do something, so that both parties are legally obligated to perform.
Most contracts are bilateral.
Ex. In a purchase agreement, the seller promises to transfer title to the buyer, and the buyer promises to pay the agreed price to the seller.
This is a bilateral contract. Each party has made a promise, and both are obligated to perform.
Executory
One that has NOT YET FULLY PERFORMED, or is in the process of being performed
Executed
Contract has been FULLY PERFORMED.
In this sense, the terms "executed" and "performed" mean the same thing."
"Note, "executed" also has another meaning in connection with contracts.
Execution of a contract (or execution of a will, a deed, or some other legal document) can simply refer to signing it, as opposed to performing or fulfilling it.
In this sense, the party or parties who have executed a document have signed it and taken any other steps needed to make it legally effective (for example, in the case of a will, having it witnessed).
Which meaning is intended in a particular case will usually be clear from the context.
Elements of a Valid Contract
4 elements are needed for a valid and binding contract that will be enforced by a court:
1. legal capacity to contract,
2. mutual consent,
3. a lawful objective, and
4. consideration."
5. in writing (if real estate contract)
Capacity
The ability to enter into a legally binding contract.
A person must be mentally competent and at least 18 years of age to have the capacity to contract."
"The first requirement for a valid contract is that the parties must have the legal capacity to enter into a contract.
A person must be at least 18 years old to enter into a valid contract, and he must also be competent.
Age Eighteen
Eighteen is the age of majority in California.
Minors (those under the age of 18) do not have capacity to appoint agents or to enter into contracts.
If a minor signs a contract, it is voidable by the minor; that is, it cannot be enforced against her."
"The purpose of this rule is to prevent people from entering into legally binding agreements when they may be too young to understand the consequences.
In California, most types of contracts entered into by minors are voidable, as just discussed.
However, real estate contracts entered into by minors are void.
A purchase agreement signed by a minor cannot be enforced by either party.
Emancipated minor
A minor who has been legally emancipated may enter into any type of contract.
For example, a 17-year-old who is married is considered emancipated and may enter into a contract to buy real estate.
A minor can be emancipated in three ways:
1. by marrying,
2. by serving in the military, or
3. by court order.
When a minor who has been emancipated by court order enters into a real estate transaction, copies of the emancipation documents should be given to the escrow company so it will know that the minor has the capacity to carry out the transaction.
Competent
A person must also be mentally competent to have capacity to contract.
If a person has been declared incompetent by a court, any contract he signs is void.
If a person was probably incompetent when a contract was signed, but wasn't declared incompetent until afterwards, the contract is voidable at the discretion of the court-appointed guardian.
(Note that the fact that a person is receiving psychiatric treatment doesn't necessarily mean that he's incompetent.)
A contract entered into by a person who is temporarily incompetent�for example, under the influence of alcohol or drugs�may be voidable if she takes legal action within a reasonable time after regaining mental competency.
Necessities Exception
There's an exception to these capacity rules.
If a minor or an incompetent person contracts to buy necessities (such as food or medicine), he is required to pay the reasonable value of those items.
Representing Another
Often, one person has the capacity to represent another person or entity in a contract negotiation.
For instance, the affairs of minors and incompetent persons are handled by parents or court-appointed guardians; corporations are represented by properly authorized officers; partnerships are represented by individual partners; deceased persons are represented by executors or administrators; and a competent adult (but not a minor) can appoint another competent adult to act on his behalf through a power of attorney.
In each of these cases, the authorized representative can enter into a contract on behalf of the person represented.
Aliens
An alien (someone who isn't a U.S. citizen) has essentially the same property rights as a citizen and may acquire and convey property freely.
However, aliens are subject to certain property transfer reporting requirements.
Convicts
Those convicted of crimes and serving time in prison aren't automatically deprived of all of their civil rights.
As a general rule, they don't forfeit their property, nor are they prevented from obtaining or transferring real property.
Mutual Consent
(Mutual Assent)
(Mutuality)
(A Meeting of the Minds)
"The agreement of both parties to the terms of the contract, effected by offer and acceptance."
When a valid offer is accepted, a contract is formed.
"Mutual consent is the second requirement for a valid contract.
Each party must consent to the agreement.
Once someone has signed a contract, consent is presumed, so no contract should be signed until its contents are fully understood.
A person can't use failure or inability to read an agreement as an excuse for nonperformance.
An illiterate person should have a contract explained thoroughly by someone trustworthy."
"It is achieved through the process of offer and acceptance.
Offer
A contract offer shows the willingness of the person making it (the offeror) to enter into a contract, and that has definite and stated terms.
To be valid, an offer must meet two requirements.
1. It must express a willingness to contract. Whatever words make up the offer, they must clearly indicate that the offeror intends to enter into a contract.
2. It must be definite and certain in its terms. A vague offer that doesn't clearly state what the offeror is proposing is said to be illusory, and any agreement reached as a result is unenforceable."
"Note that an advertisement that lists a property's price is not considered a contract offer; it is merely an invitation to negotiate.
Offeror
Party who makes an offer to form a contract
Terminating an Offer
Sometimes circumstances change after an offer has been made, or perhaps the offeror has had a change of heart.
If an offer terminates before it is accepted, no contract is formed.
There are many things that can terminate an offer before it is accepted, including:
-revocation by the offeror,
-lapse of time,
-death, insanity or incompetence of the offeror,
-rejection of the offer, or
-a counteroffer.
Revoke
The offeror can revoke the offer at any time until she is notified that the offer has been accepted.
To effect a proper "offer and acceptance," the accepting party must not only accept the offer, but must also communicate that acceptance to the offeror before the offer is revoked.
Acceptance
An offer can be revoked at any time until acceptance has been communicated to the offeror.
To create a binding contract, the offeree must communicate acceptance to the offeror in the manner and within the time limit stated in the offer (or before the offer is revoked).
If no time or manner of acceptance is stated in the offer, a reasonable time and manner is implied."
"Many offers include a deadline for acceptance.
If a deadline is set and acceptance isn't communicated within the time allotted, the offer terminates automatically.
If no time limit is stated in the offer, a reasonable amount of time is allowed.
What is reasonable is determined by the court if a dispute arises"
"The offeree's acceptance must be free of any negative influences, such as fraud, undue influence, or duress.
If an offer or acceptance is influenced by any of these negative forces, the contract is voidable by the injured party.
Death or Incompetent
If someone makes an offer and then dies or is declared incompetent before the offer is accepted, the offer is terminated.
Rejection
Also terminates an offer."
"Once the offeree rejects the offer, she can't come back later and create a contract by accepting the offer.
Ex. Valdez offers to purchase Carter's house for $785,000.
Carter rejects the offer the next day.
The following week, Carter changes her mind and decides to accept Valdez's offer.
But her acceptance at this point doesn't create a contract, because the offer terminated with her rejection.
Offeree
The person to whom the offer was made to
Counteroffer
(Qualified acceptance)
"It is actually a rejection of the offer and a tender of a new offer.
An offeree makes a counteroffer when she accepts some of the terms of the original offer, but changes other terms.
Instead of either accepting or rejecting the offer outright, the offeree "accepts" with certain modifications.
This happens when some, but not all, of the original terms are unacceptable to the offeree.
When there is a counteroffer, the roles of the parties are reversed: the original offeror becomes the offeree and can accept or reject the revised offer.
If he chooses to accept the counteroffer, that creates a binding contract.
If the counteroffer is rejected, the party making the counteroffer can't go back and accept the original offer.
The original offer was terminated by the counteroffer.
Fraud
The requirement of mutual consent is not fulfilled if one of the parties can prove that his consent resulted from a negative factor, such as actual or constructive fraud.
"Misrepresentation of a material fact to another person who relies on the misrepresentation as the truth in deciding to enter into a transaction
Actual fraud
Intentional
"Occurs when the person making the statement either knows that the statement is false and makes it with an intent to deceive, or doesn't know whether or not the statement is true but makes it anyway.
For example, a seller who conceals cracks in the basement and then tells the buyer that the foundation is completely sound is committing actual fraud.
A promise that's made without any intention of keeping it can also be considered actual fraud.
Constructive fraud
Unintentional
"Occurs when a person who occupies a position of confidence and trust, or who has superior knowledge of the subject matter, makes a false statement with no intent to deceive.
For example, if a seller innocently points out incorrect lot boundaries, that may be considered constructive fraud.
Undue influence
Using one's influence to pressure a person into making a contract, or taking advantage of another's distress or weakness of mind to induce him to enter into a contract."
A contract signed as a result of undue influence is voidable by the party subjected to that undue influence.
Duress
Compelling a person to do something�such as enter into a contract�against her will, with the use of force or constraint or the threat of force or constraint."
A contract entered into under duress is voidable.
Lawful Objective
The third requirement for a valid contract is a lawful objective.
Both the purpose of the contract and the consideration for the contract must be lawful.
Examples of contracts with unlawful objectives are a contract requiring payment of an interest rate in excess of the state's usury limit, or a contract relating to unlawful gambling.
If a contract doesn't have a lawful objective, it's void.
Sometimes contracts contain some lawful provisions and some unlawful provisions.
In these situations, it may be possible to sever the unlawful portions of the contract and enforce the lawful portions.
Consideration
The fourth element of a valid contract is consideration.
Consideration is something of value exchanged by the contracting parties; either a benefit to the party receiving it or a detriment to the party offering it.
It might be money, goods, or services, or a promise to provide money, goods, or services.
Whatever form it takes, the consideration must be either a benefit to the party receiving it or a detriment to the party offering it.
The typical real estate purchase agreement involves a promise by the buyer to pay a certain amount of money to the seller at a certain time, and a promise by the seller to convey title to the buyer when the price has been paid.
Both parties have given and received consideration.
While consideration is usually the promise to do a particular act, it can also be a promise to not do a particular act.
For example, Aunt Martha might promise to pay her nephew Charles $1,000 if he promises to stop smoking.
As a general rule, a contract is enforceable as long as the consideration has value, even though the value of the consideration exchanged is unequal.
A contract to sell a piece of property worth $220,000 for $190,000 is enforceable.
However, in cases where the disparity in value is quite large (for example, a contract to sell a piece of property worth $300,000 for $95,000), a court may refuse to enforce the contract.
This is particularly likely to happen if the parties have unequal bargaining power (for example, if the buyer is a real estate developer and the seller is elderly, uneducated, and inexperienced in business).
Writing Requirement
There is a fifth requirement:
they must be put into writing and signed, as required by the statute of frauds.
Statute of frauds
A state law that requires certain types of contracts "(including most contracts related to real estate transactions) to be in writing and signed.
A contract concerning real estate is subject to the statute of frauds.
Only the types of contracts covered by the statute of frauds have to be in writing; other contracts may be oral.
Valid Real Estate Contract
Must have:
1. Capacity
2. Mutual consent (offer and acceptance)
3. Lawful objective
4. Consideration
5. In writing -The statute of frauds requires nearly all real estate contracts to be in writing
California statute of frauds
Applies to:
1. an agreement that will not be performed within a year of its making;
2.any agreement for the sale or exchange of real property or an interest in real property;
3. a lease of real property that will expire more than one year after it was agreed to;
4. an agency agreement authorizing an agent to purchase or sell real property, or lease it for more than one year;
5. an agency agreement authorizing an agent to find a buyer or seller for real property, if the agent will receive compensation; and
6. an assumption of a mortgage or deed of trust.
Statute of frauds- Writing
The "writing" required by the statute of frauds does not have to be in any particular form, nor does it have to be contained entirely in one document.
A note or memorandum about the agreement or a series of letters will suffice, as long as the writing:
1. identifies the subject matter of the contract,
2. indicates an agreement between the parties and its essential terms, and
3. is signed by the party or parties to be bound."
"If the parties fail to put a contract that falls under the statute of frauds in writing, the contract is usually unenforceable.
However, occasionally a court will enforce such an unwritten agreement.
This might occur if there is both evidence that the contract exists and evidence of its terms, and if the party trying to enforce it has completely or substantially performed her contractual obligations.
This is rare; the safest course is to put a contract in writing.
If a contract is partly printed and partly handwritten (like a filled-out contract form) and there's a conflict between the handwritten and printed portions, the handwritten portion takes precedence.
It's presumed to be a more reliable indication of the parties' intent than the printed portion.
In California, when certain types of contracts are negotiated in Spanish, Chinese, Korean, Tagalog, or Vietnamese between a business and a consumer, the consumer must be given a translated copy of the contract before signing the English version.
This requirement applies to many consumer contracts, including loans for personal, family, or household purposes; "Article VII" loans; reverse mortgages; and residential rental agreements for a period longer than one month.
(It doesn't apply to listing agreements, buyer representation agreements, or purchase agreements, however.)
Also, when a financial institution negotiates a loan secured by residential real property in one of the five languages listed, the borrower must be given either a translated copy of the contract or a translated summary of its terms within three business days after applying for the loan.
Legal Status of Contracts
4 terms are used to describe the legal status of a contract:
1. void, -No contract at all. An agreement for which there is no consideration.
2. voidable, -Valid until rescinded by one party. A contract entered into as a result of fraud.
3. unenforceable, -One or both parties can't sue to enforce. A contract after the limitations period expires.
4. valid -Binding & enforeable. An agreement that fulfills all of the legal requirements.
Void
A contract that doesn't fulfill one of the basic requirements we've discussed may be void as a result.
A contract is void if:
-there is no consideration,
-a party is mentally incompetent,
-a minor is party to a real estate contract,
-the objective is unlawful, or
-a party's signature is forged.
"When a contract lacks an essential element, so that it has no legal force or effect."
"A void contract is no contract at all; it has no legal effect.
Both parties can disregard it.
The parties are in the same position they'd be in if they had never attempted to make a contract.
This most often occurs because one of the essential elements, such as mutual consent or consideration, is completely lacking."
"A void contract may be disregarded.
Neither party is required to take legal action to withdraw from the agreement, because there is really nothing to withdraw from.
"A void contract may be disregarded.
Neither party is required to take legal action to withdraw from the agreement.
Voidable
A contract is voidable if signed as a result of fraud or other negative factors.
Non-real estate contracts signed by a minor are also voidable.
If a contract is voidable by one party, it is unenforceable by the other party.
In some cases, a contract that fails to meet one of the basic requirements is voidable.
This means that one of the parties has the right to withdraw from the contract if she chooses to do so.
If a minor signs a non-real estate contract, it is voidable by the minor or his or her
legal guardian.
"When one of the parties can choose to rescind the contract, because of lack of capacity, fraud, undue influence, or distress."
"A voidable contract appears to be valid, but has some defect giving one or both of the parties the power to withdraw from the agreement.
For instance, a contract entered into as a result of fraud is voidable by the defrauded party.
Unlike a contract that is void from the outset, a voidable contract can't simply be ignored.
Failure to take legal action within a reasonable time may result in a court declaring that the contract was ratified.
(In some cases, the injured party may want to continue with the agreement; if so, she may expressly ratify it.)
Unenforceable
When a contract cannot be enforced in a court of law because its contents cannot be proved, or it is voidable by the other party, or the statute of limitations has expired before a lawsuit is filed."
This is often a problem with unwritten contracts.
Lack of proof can also make a written contract unenforceable.
If a written contract is too vaguely worded and the parties are unable to prove what they intended it to mean, a court will refuse to enforce it.
An unenforceable contract is one that can't be enforced in court for one of the following reasons:
1. its contents cannot be proved,
2. it is voidable by the other party, or
3. the statute of limitations has expired.
When a contract is voidable by one party, the other party is said to have an unenforceable contract.
One other thing that can make a contract unenforceable is the statute of limitations.
The statute of limitations is a law that sets time limits for taking legal action.
Someone who fails to file a lawsuit within the time limit for that particular kind of suit loses the right to sue.
In California, the statute of limitations requires most contract lawsuits to be filed within four years after the breach of contract occurred if the contract was in writing.
If the contract was oral (unwritten), the time limit is two years.
Once the time limit set by the statute of limitations has passed, a lawsuit to enforce the contract can no longer be brought.
Contents Cannot Be Proved
This problem is usually associated with oral agreements.
Even if the law doesn't require a certain kind of contract to be written, it's a good idea to put it in writing.
A written contract helps avoid confusion and misunderstanding, and also makes it easier to prove the terms of the agreement in court, if necessary.
A contract that is in writing must clearly state all of its terms.
Vaguely worded contracts are considered illusory and unenforceable.
Contract Voidable by Other Party
If a contract is voidable by one of the parties, it is unenforceable by the other party.
(Note that the party who has the option of voiding the contract can choose instead to enforce the contract against the other party.)
Statute of Limitations Expired
A statute of limitations is a law that sets a deadline for filing a lawsuit.
Unless an injured party files suit before the deadline set by the applicable statute of limitations, his legal claim is lost forever.
The purpose of a statute of limitations is to prevent one person from suing another too many years after an event, when memories have faded and evidence has been lost."
"Every state has a statute of limitations for contracts.
If one of the parties to a contract fails to perform her obligations (breaches the contract), the other party must sue within a certain number of years after the breach.
Otherwise, the limitations period will run out and the contract will become unenforceable."
"In California, the statute of limitations generally requires lawsuits concerning written contracts to be filed within FOUR years after their breach, and lawsuits concerning many oral contracts to be filed within TWO years after their breach."
Once the time limit set by the statute of limitations has passed, a lawsuit to enforce the contract can no longer be brought.
Doctrine of laches
Related to the concept of statutes of limitations.
Laches is an equitable principle that courts can use to prevent someone from asserting a claim after an unreasonable delay.
A court may also bar a legal claim under the doctrine of laches.
Unlike the statute of limitations, which sets a specific deadline for filing a claim, the doctrine of laches can be used whenever there was an undue delay or failure to assert a claim or right.
For instance, suppose a property owner knowingly stands by while a neighbor builds a house that encroaches a few feet onto his property.
He then sues, demanding that it be torn down.
Because the property owner's unreasonable delay caused the neighbor harm, the court may use the doctrine of laches to deny the requested remedy.
This would apply regardless of whether she filed before the time limit set by the statute of limitations.
Valid
If an agreement has all of the essential elements, can be proved in court, and is free of negative influences, it's a valid contract that can be enforced in a court of law.
Discharging a Contract
Once there is a valid, enforceable contract, it may be discharged by:
1. full performance, or
2. agreement between the parties.
A contract can be discharged by full performance, or by rescission, cancellation, assignment, or novation.
Full Performance
Full performance means that the parties have performed all of their obligations; the contract is executed.
For example, once the deed to a property has been delivered to the buyer and the seller has received the purchase price, their purchase agreement has been discharged by full performance.
Agreement Between the Parties
The parties to a contract can agree to discharge the contract in any of the following ways:
1. rescission,
2. cancellation,
3.assignment, or
4. novation.
Rescission
(A contract to destroy a contract)
When a court rescinds a contract, the parties are required to undo the steps they've taken to carry out the contract.
This will put them back in the positions they were in before they entered into the contract.
When the parties agree to rescind their contract, each returns anything the other had already given in performance of the contract.
"When a contract is terminated and any consideration given is returned, putting the parties as nearly as possible back into the position they were in prior to entering into the contract."
Sometimes the parties to a contract agree that they would be better off if the contract had never been signed.
In such a case, they may decide to rescind the contract.
A rescission is sometimes described as "a contract to destroy a contract."
To rescind a purchase agreement, the buyer and the seller sign an agreement that terminates their original agreement and puts them as nearly as possible back in the positions they were in before they entered into it.
If any money or other consideration has changed hands, it will be returned.
In certain circumstances, a contract can be rescinded by court order (rather than by agreement between the parties).
"A rescission is a termination of the contract that returns the parties to their original positions.
In the case of a purchase agreement, the seller refunds the buyer's good faith deposit and the buyer gives up her equitable interest in the property.
The rescission can be by agreement, or it can be ordered by a court at the request of one party when the other party has breached the contract."
The victimized party has the option of going through with the contract or getting out of it.
Unlike a void contract, a voidable contract is legally binding unless action is taken to undo it. The party wishing
to withdraw must ask a court to rescind the contract.
Unless the party with the right to have the contract rescinded takes legal action within a reasonable time, the court may rule that the contract has been ratified.
When a contract is voidable by one party, the other party is said to have an unenforceable contract.
Cancellation
A cancellation does not go as far as a rescission.
When the parties agree to cancel their contract, they terminate it without undoing the steps they've already taken.
In canceling a contract, the parties agree to terminate it without undoing whatever steps they've already taken.
If money has changed hands, the party who received it is allowed to keep it.
The parties agree to terminate the contract, but previous acts are unaffected.
For example, money that was paid prior to the cancellation is not returned.
Good faith deposit
When entering into a purchase agreement, a buyer generally gives the seller a deposit to show that she's acting in good faith and intends to fulfill the terms of their agreement.
"The seller is entitled to keep it if the buyer defaults on the contract.
If the buyer and seller agree to terminate the contract and the seller refunds the good faith deposit to the buyer, the contract has been rescinded.
If the parties agree that the seller will keep the deposit, the contract has been canceled.
Assignment
Unless the contract says otherwise, one party can assign his or her interest to a new party without the consent of the other original party.
Assignment doesn't actually discharge the contract, since the assignor remains secondarily liable.
"When one party transfers her rights and obligations under the contract to another party, but remains secondarily liable."
"Sometimes one of the parties to a contract wants to withdraw by assigning his interest in the contract to another person.
As a general rule, a contract can be assigned to another unless a clause in the contract prohibits assignment.
Technically, assignment doesn't actually discharge the contract.
The new party (the assignee) assumes primary liability for the contractual obligations, but the withdrawing party (the assignor) is still secondarily liable."
"One exception to the rule that a contract can be assigned unless otherwise agreed: a personal services contract can't be assigned without the other party's consent, unless there is a clause in the contract expressly forbidding that."
Contracts that are specific to one person, such as a hazard insurance policy, typically cannot be assigned.
Novation
When one party is completely replaced with another, or one contract is completely replaced with another, and all liability under the original contract ends"
In a novation, a new party takes the place of one of the original parties, and the withdrawing party is released from liability.
Substitution of a new agreement for an old agreement between the same parties is also referred to as novation.
"Has two generally accepted meanings.
One type of novation is the substitution of a new party into an existing obligation.
If a seller releases the original buyer from a purchase agreement in favor of a new buyer under the same contract, there has been a novation.
The first buyer is relieved of all liability connected with the contract.
Novation may also be the substitution of a new obligation for an old one.
If a landlord and a tenant agree to tear up a three-year lease in favor of a new ten-year lease, that's a novation."
"Nova" Latin for new.
Assignment vs. Novation
The difference concerns the withdrawing party's liability.
When a contract is assigned, there is continuing liability for the assignor.
In a novation, on the other hand, the withdrawing party is released from liability, because she was replaced with another person who was approved by the other party.
Novation, unlike assignment, always requires the other party's consent.
Breach of Contract
Occurs when one of the parties fails, without legal excuse, to perform any of the promises contained in the agreement.
When a breach occurs, the 4 possible remedies are:
1. rescission,
2. compensatory damages,
3. liquidated damages, or
4. specific performance.
Failure to perform a agreed, without legal excuse
The injured party can seek a remedy in court only if the breach is a material breach."
To be entitled to sue for breach of contract, the non-breaching
party must be ready to carry out her side of the bargain.
So before filing a lawsuit, the non-breaching party is usually required to make a tender. A tender is an unconditional offer to perform as agreed.
Material breach
A breach is material when the promise that has not been fulfilled is an important part of the contract.
Time is of the essence
Many standard contract forms state that "time is of the essence."
That phrase is used to warn the parties that timely performance is crucial and failure to meet a deadline would be a material breach.
If one party misses a deadline, the other party may choose whether to proceed with the contract or use the time is of the essence clause as the basis for ending it.
Remedies for Breach of Contract
4 possible legal remedies for a breach of contract:
1. rescission (sometimes court ordered),
2. compensatory damages,
3. liquidated damages,
4. specific performance
Compensatory Damages
The standard remedy for breach of contract is compensatory damages. The court orders the breaching party to pay the other party a sum of money, to compensate him for losses resulting from the breach.
"Financial losses that a party suffers as a result of a breach of contract are referred to as damages"
"The most common remedy for a breach of contract is an award of compensatory damages.
This is a sum of money that a court orders the breaching party to pay to the other party, to compensate the other party for losses suffered as a result of the breach of contract.
Compensatory damages are generally intended to put the nonbreaching party in the financial position she would have been in if the breaching party had fulfilled the terms of the contract."
"A typical purchase agreement doesn't have a liquidated damages provision that applies if it's the seller who breaches instead of the buyer.
If the seller breaches the contract, the buyer can sue for compensatory damages.
Liquidated Damages
Liquidated damages is money one party agrees in advance to accept as her remedy if the other party breaches.
A good faith deposit is often treated as liquidated damages.
"An amount that the parties agree in advance will serve as full compensation if one of them defaults."
"The parties to a contract sometimes agree in advance to an amount that will serve as full compensation to be paid in the event that one of the parties breaches the contract. This sum is called liquidated damages."
"Although a liquidated damages provision limits the amount of compensation the nonbreaching party will receive, it benefits both parties by making it easier to settle their dispute without going to court.
It's sometimes difficult for the nonbreaching party to prove the extent of the actual damages she suffered; a liquidated damages provision makes that unnecessary.
In a real estate transaction, the buyer's good faith deposit is often treated as liquidated damages.
If the buyer breaches the purchase agreement, the seller is entitled to keep the deposit as liquidated damages.
The seller usually can't sue the buyer for an additional amount.
(Note that California has special rules that govern liquidated damages clauses in purchase agreements.)
Anticipatory Repudiation
(By Breaching Party)
"Sometimes there is an anticipatory repudiation by one of the parties.
An anticipatory repudiation is a positive statement by the defaulting party indicating that he will not or cannot fulfill the terms of the agreement.
When this happens, no tender is necessary as a basis for a legal action."
When one party repudiates the contract by making a definite statement that he is not going to perform as agreed, the other party can sue without making a tender.
Tender
(By Non-Breaching Party)
To be entitled to sue for breach of contract, the non-breaching party must make a tender.
A tender is an unconditional offer to perform his side of the bargain.
A tender is not required when there has been an anticipatory repudiation by the breaching party.
"An unconditional offer by one of the parties to perform his part of the agreement, made when it appears that the other party is going to default."
"A tender is an unconditional offer by one of the contract parties to perform his part of the agreement. It is frequently referred to as "an offer to make an offer good."
A tender is usually made when it appears that the other party is going to default; it is necessary before legal action can be taken to remedy the breach of contract."
"If a buyer has reason to believe the seller doesn't plan to complete the sale, the buyer tenders by attempting to deliver to the seller the full payment promised in the purchase agreement.
When the seller refuses to accept the money and deliver the deed, the seller is in default.
Specific Performance
In an order of specific performance, the court directs the breaching party to carry out the contract as promised.
When a damages award would be an adequate remedy, a court generally won't order specific performance.
"A remedy for breach of contract in which the court orders the defaulting party to perform as agreed in the contract."
"A legal action designed to compel a breaching party to perform the contract as agreed.
For example, if a seller breaches a purchase agreement, a court could issue an order of specific performance, requiring the seller to sign and deliver a deed to the buyer, fulfilling the terms of their contract.
Specific performance is usually available as a remedy only when monetary damages would not be sufficient compensation.
Specific performance may be an appropriate remedy for a seller's breach of a purchase agreement, because a piece of real estate is unique; there's no other property that's exactly like the one the seller agreed to sell.
Payment of damages would not enable the buyer to purchase another property just like it.
Damages
Losses that a person suffers because someone else has breached a contract or otherwise failed to fulfill a legal obligation.
1. A contract can be valid and binding even though:
A. it is not supported by consideration
B. it does not have a lawful objective
C. it is not put into writing
D. there was no offer and acceptance
C. it is not put into writing
2. To have legal capacity to contract, a person must have:
A. reached the age of majority
B. been declared competent by a court
C. a high school diploma or general equivalency certificate
D. All of the above
A. reached the age of majority
3. An offer to purchase property would be terminated by any of the following, except:
A. failure to communicate acceptance of the offer within the prescribed period
B. revocation after acceptance has been communicated
C. a qualified acceptance by the offe
B. revocation after acceptance has been communicated
4. A counteroffer:
A. terminates the original offer
B. will result in a valid contract if accepted by the other party
C. Both of the above
D. Neither of the above
C. Both of the above
5. Tucker sends Johnson a letter offering to buy his property for $400,000 in cash, with the transaction to close in 60 days. Johnson sends Tucker a letter that says, "I accept your offer; however, the closing will take place in 90 days." Which of the fol
D. All of the above
6. Which of these could be consideration for a contract?
A. $163,000
B. A promise to convey title
C. A promise to not sell the property during the next 30 days
D. All of the above
D. All of the above
7. An executory contract is one that:
A. is made by the executor of an estate for the sale of probate property
B. has not yet been performed
C. has been completely performed
D. has been proposed but not accepted by either party
B. has not yet been performed
8. A void contract is one that:
A. lacks an essential contract element
B. needs to be rescinded by the injured party
C. can be rescinded by agreement
D. can no longer be enforced because the deadline set by the statute of limitations has passed
A. lacks an essential contract element
9. A voidable contract is:
A. not enforceable by either party
B. enforceable by the injured party
C. void unless action is taken to rescind it
D. None of the above
B. enforceable by the injured party
10. The statute of frauds is a law that requires:
A. all contracts to be supported by consideration
B. unlawful provisions to be severed from a contract
C. certain contracts to be unilateral
D. certain contracts to be in writing and signed
D. certain contracts to be in writing and signed
11. A contract can be discharged by all of the following except:
A. novation
B. performance
C. cancellation
D. breach
D. breach
12. Brown and Murdock have a five-year contract. After two years, they agree to tear up that contract and replace it with a new ten-year contract. This is an example of:
A. novation
B. rescission
C. duress
D. specific performance
A. novation
13. Graves and Chung are parties to a contract that doesn't prohibit assignment. If Chung assigns his interest in the contract to Stewart:
A. Graves isn't required to fulfill the contract
B. Graves can sue for anticipatory repudiation
C. Chung remains sec
C. Chung remains secondarily liable to Graves
14. A clause in the contract provides that if one party breaches, the other will be entitled to $3,500 and cannot sue for more than that. This is a:
A. just compensation provision
B. compensation cap
C. satisfaction clause
D. liquidated damages provision
D. liquidated damages provision
15. The McClures agreed to sell their house to Jacobsen, but then they breached the contract by refusing to go through with the sale. If Jacobsen wants a court order requiring the McClures to convey the house to her as agreed, she should sue for:
A. damag
B. specific performance
Lapse of time
An offer expires due to the passing of a stated period of time in which one can accept the offer.
Mailbox rule
In California, an acceptance that's mailed is considered effective as soon as it is placed in the mail, rather than when it is received by the offeror.
Negative fraud
Keep in mind that it isn't necessary to make misleading statements to commit fraud.
Concealment of a material fact can also be considered fraud.
For instance, if the seller knows of a serious defect in the wiring, yet does not disclose this fact to the buyer, it is actual fraud.
Sometimes concealment of a material fact is called negative fraud.