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© 2010 Rockwell Publishing Legal Classifications of Contracts Contracts may be classified according to certain basic characteristics. Every contract is: express or implied unilateral or bilateral executory or executed
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© 2010 Rockwell Publishing
Lesson 6: Contract Law
Principles of California Real Estate
© 2010 Rockwell Publishing
Introduction
Contract: An agreement between two or more competent persons to do, or not do, certain things in exchange for consideration.
© 2010 Rockwell Publishing
Legal Classifications of Contracts
Contracts may be classified according to certain basic characteristics.
Every contract is:express or impliedunilateral or bilateralexecutory or executed
© 2010 Rockwell Publishing
Legal Classifications of Contracts Express vs. implied
Express contract: One that has been put into words, oral or written.
Implied contract: Created by the actions of the parties, not express agreement.
Most contracts are express, not implied.
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Legal Classifications of Contracts Unilateral vs. bilateral
Unilateral contract: Only one party is legally obligated to perform as promised.
Bilateral contract: Both parties promise to do something and are legally obligated to perform as promised.
Most contracts are bilateral.
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Legal Classifications of ContractsExecutory vs. executed
Executory: Contract has not yet been performed, or is in the process of being performed.
Executed: Contract has been fully performed.Note that “executed” may also refer to a
contract that has just been signed.
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• Contract• Express or implied• Unilateral or bilateral• Executory or executed
SummaryLegal Classifications of Contracts
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Elements of a Valid Contract
A valid contract requires: parties with legal capacity mutual consent lawful objective consideration
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Contract is not legally binding unless all parties have legal capacity to enter into it.
Two requirements for legal capacity: age mental competence
Elements of a Valid Contract Contractual capacity
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Generally, person must be at least 18 (age of majority) to enter into contract.
Someone under 18 is minor.Minors do not have capacity to appoint
agent or enter into contract.
Parent or legal guardian may enter into binding contract on minor’s behalf.
Contractual CapacityAge
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Void: Contract has no legal effect. Neither party can enforce it.
Real estate contract in which one party is a minor is void.
Other contracts (not related to real estate) signed by minor are voidable by minor.
Other party can’t enforce contract.Minor can choose to enforce contract,
through parent or guardian.
Contractual CapacityAge
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Exception: Emancipated minor may enter into any type of contract, including real estate. (Copies of emancipation documents should be part of closing.)
Minor may be emancipated by:marriage (even if divorced)military servicecourt order
Contractual CapacityAge
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Mentally competent: Of sound mind.If one party has been declared mentally
incompetent, contract is void.Guardian can enter into contracts on
behalf of incompetent person.
If someone enters into contract while temporarily incompetent, contract may be voidable.
Contractual Capacity Mental competence
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Aliens may enter into contracts to transfer property, although they may be subject to certain reporting requirements.
Incarcerated persons may also contract to buy or sell property, subject to public safety limitations.
Contractual Capacity Aliens and convicts
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• Capacity• Age of majority• Mental competence • Aliens and convicts
Summary Contractual Capacity
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Contract is legally binding only if both parties have consented to its terms.
Once contract is signed, consent is presumed.
No one should sign contract without understanding its contents.
Elements of a Valid Contract Mutual consent
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Mutual consent is sometimes called mutual assent, mutuality, or meeting of the minds.
Mutual consent is achieved through offer and acceptance:
Offeror makes offer to offeree. If offeree accepts offer, contract is
formed.
Mutual Consent Offer and acceptance
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Offer terminates if before acceptance:offeror revokes offertoo much time passesofferor dies or becomes incompetentofferee rejects offerofferee makes counteroffer
If offer terminates before accepted, no contract formed.
Offer and Acceptance Termination of offer
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Offeror can revoke offer any time before acceptance.
Offeror must notify offeree of revocation.Even if offer was supposed to remain
open until particular date, offeror can revoke it before that date.
Termination of OfferRevocation
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Offer with deadline for acceptance expires automatically when that date or time arrives.
Offer without deadline expires after reasonable amount of time.
Termination of Offer Lapse of time
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If offeror dies before offer is accepted, offer is terminated and no contract is formed.
If a court determines offeror is mentally incompetent, offer is terminated.
Termination of OfferDeath or insanity
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Rejection terminates offer.After rejecting offer, offeree can’t change
mind and accept it.Contract formed only if offeror still wants
to proceed.
Termination of OfferRejection by offeree
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Counteroffer: When offeree agrees to some terms in original offer, but changes one or more terms.
Although sometimes called qualified acceptance, counteroffer is rejection of original offer and tender of new offer.
Roles of parties are reversed.
Termination of Offer Counteroffer
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Offer and AcceptanceCommunication of acceptance
To create binding contract, offeree must communicate acceptance to offeror before offer terminates.
Acceptance effective as soon as it is mailed, rather than when it is received.
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Negative Forces Affecting Consent
Acceptance must be freely given.Contract voidable by victimized party if
he can show consent resulted from:fraudundue influence duress
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Negative Forces Affecting ConsentFraud
Fraud: Misrepresenting material fact to someone who relies on misinformation.
Material fact: Information that is likely to affect a decision.
Fraud is either actual or constructive.
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Negative Forces Affecting ConsentFraud
Actual fraud: Person making misrepresentation knows or should know that it’s false:
intentional deceit, orstatements made without knowing
whether they’re true.
Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads someone.
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Negative Forces Affecting ConsentFraud
It isn’t necessary to actually make misleading statements to commit fraud.
Simply concealing material fact may be fraud.
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Negative Forces Affecting ConsentUndue influence
Undue influence: Taking advantage of one’s influence over another, or their weakness of mind or distress, to pressure them into contract.
Persuasion strong enough to overpower will, so consent isn’t truly voluntary.
May involve abuse of special relationship based on trust: broker-seller, attorney-client
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Negative Forces Affecting ConsentDuress
Duress: Compelling someone to do something against their will, using force, constraint, or threats.
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Elements of a Valid ContractLawful objective
Contract’s purpose (and consideration exchanged) must be lawful or contract is void.
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Elements of a Valid ContractConsideration
Consideration: Something of value exchanged by contracting parties.
Money, property, services, or promise to do something (or not do it).
In typical real estate sale:seller’s promise to convey titlebuyer’s promise to pay agreed price
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Elements of a Valid ContractStatute of frauds
Statute of frauds: State law that requires certain types of contracts to be in writing, and signed.
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Statute of FraudsContracts must be in writing
California’s statute of frauds applies to any contract:not performed within one yearfor sale or exchange of real estate
(purchase agreement)for lease of property, if term is greater
than one year
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Statute of FraudsContracts must be in writing
Statute of Frauds (cont’d): authorizing agent to buy or sell real
estate (power of attorney) authorizing agent to find buyer or seller
for real estate (listing agreement, buyer representation agreement)
assumption of mortgage or deed of trust
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A contract subject to statute of frauds is unenforceable if it isn’t in writing and signed.
However, oral real estate contract may still be enforced in unusual circumstances, such as when purchase price has been paid.
Statute of FraudsNoncompliance
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Any form of writing will suffice, including notes, letters or memos, so long as they:
identify contract subject matter and show agreement between parties, and
are signed by party to be bound.
Statute of Frauds
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Contract may be printed, handwritten, or both.
If conflict between printed and handwritten parts, handwritten part takes precedence.
If party disputes whether contract was in writing, statute of frauds may not be used as defense.
Statute of Frauds
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• Mutual consent• Termination of offer• Counteroffer• Fraud, undue influence, duress• Lawful objective• Consideration• Statute of frauds
SummaryMutual Consent/Other Contract Elements
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Legal Status of Contracts
Four terms are used to describe legal status of a contract:
voidvoidableunenforceablevalid
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Legal Status of ContractsVoid
Void contract: No legal effect whatsoever.
Parties are in same position they’d be in if they had not attempted to contract.
Contract can be disregarded.Occurs most often when one of the
essential contract elements is lacking.
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Legal Status of ContractsVoidable
Voidable contract: Contract appears to be valid, but has some defect giving one or both parties power to withdraw.
Examples:non-real estate contract entered into by
minor (voidable by minor or guardian)contract entered into as result of fraud,
undue influence, or duress
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Voidable contract is binding unless party asks court to rescind contract.
Withdrawing party must take legal action within reasonable time.
Otherwise, court may rule that contract has been ratified.
Legal Status of ContractsVoidable
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Legal Status of ContractsUnenforceable
Unenforceable contract: One that can’t be enforced in court because:
its contents can’t be proved (oral contract or written contract that is vaguely worded)
other party has voidable contract statute of limitations has expired
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Statute of limitations: Sets time limit for filing a lawsuit; party who misses deadline loses right to sue.
California statute of limitations: breach of written contract: 4 yearsbreach of oral contract: 2 years
Legal Status of ContractsUnenforceable
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Court may also bar claim under doctrine of laches.
Legal principle that allows court to decide unreasonable delay in asserting claim prevents legal action.
Different from statute of limitations, which sets specific deadline for filing claim.
Legal Status of ContractsUnenforceable
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Legal Status of ContractsValid
Valid contract:has all essential elementsis free from negative influencescontents can be proved in courtstatute of limitations hasn’t expired
If one party fails to perform as promised, other can sue to have contract enforced.
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Summary Legal Status of Contracts
• Void• Voidable • Unenforceable• Valid
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Discharging a Contract
Once there is a valid, enforceable contract it may be discharged by:
full performance, oragreement between parties
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Discharging a ContractFull performance
Most contracts are discharged by full performance:
each party performs as promised, andcontractual relationship ends
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Discharging a ContractAgreement between parties
The parties to contract may also agree to discharge contract in following ways:
rescissioncancellationassignmentnovation
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Discharging a ContractRescission
Rescission: Parties sign written agreement to end contract and undo steps already taken.
If either party paid money or gave property, it’s returned.
Parties return themselves to positions they were in before contract was formed.
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Discharging a ContractCancellation
Cancellation: Parties agree to terminate contract without undoing steps taken.
Money paid before cancellation is not returned (mainly, good faith deposit).
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Discharging a ContractAssignment
Assignment: One party (assignor) withdraws and assigns his interest to new party (assignee).
Original contract not really discharged.Assignee has primary liability, but
assignor has secondary liability.If assignee defaults, other party can still
sue assignor.
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Generally contract can be assigned without permission, unless:
contract has clause forbidding assignment, or
personal service contract (usually not assignable without permission).Example: listing agreement.
Discharging a ContractAssignment
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Discharging a ContractNovation
Novation: Substitution of new party or new obligation between same parties.
Always requires consent of other (original) party.
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Discharging a ContractAssignment vs. novation
When contract is assigned, there is continuing liability for the assignor.
With novation, there is no continuing liability for withdrawing party.
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Summary Discharging a Contract
• Discharge• Full performance• Rescission• Cancellation• Assignment• Novation
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Breach of Contract
Breach of contract: When one party fails, without legal excuse, to perform any of the promises contained in agreement.
If one party breaches contract, other party may have right to sue.
A breach may be material or minor.
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Four legal remedies for breach of contract:
rescission compensatory damages liquidated damages specific performance
Remedies for Breach of Contract
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Remedies for Breach of ContractRescission
As explained earlier, rescission is termination of contract that returns parties to their original positions.
Rescission may be:by agreement between parties, orcourt-ordered remedy for breach of
contract.
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Remedies for Breach of ContractLiquidated damages
Liquidated damages: Remedy parties agree to in advance, with provision in contract.
If one party breaches, other party is entitled to agreed sum of money (liquidated damages).
Liquidated damages are only remedy; can’t sue for more.
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Remedies for Breach of ContractLiquidated damages
In real estate transactions, buyer’s good faith deposit often treated as liquidated damages for seller, if buyer breaches contract. (Note special CA rules regulating these deposits.)
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Remedies for Breach of ContractCompensatory Damages
Compensatory damages: Amount of money court orders breaching party to pay other party, to compensate them for losses incurred as a result of breach.
Most common remedy for breach of contract.
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Remedies for Breach of ContractSpecific performance
Specific performance: Court orders breaching party to perform contract as agreed.
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Remedies for Breach of ContractSpecific performance
Specific performance not always granted.Court may decide damages are adequate
compensation.
Generally, specific performance awarded only if subject of contract is unique.
Court may be willing to grant specific performance to real estate buyer.
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Breach of ContractTender
Tender: Unconditional offer by one of the parties to perform as agreed.
Before party can sue for breach of contract, non-breaching party must show he is ready to carry out his side of bargain (deliver deed or fund purchase).
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Summary Remedies for Breach of Contract
• Rescission• Compensatory Damages• Liquidated damages• Specific performance• Tender