Contracts Flashcards
(47 cards)
Contract
an agreement between two or more parties who, in a “meeting of the minds,” have pledged to perform or refrain from performing some act.
Valid Contract
A contract that is legally enforceable by virtue of meeting certain requirements of contract law. It is in writing is enforceable within a statutory time period. It is made orally is also generally enforceable within a statutory period, with the exceptions noted below.
Legal Status of Contracts
- valid
- valid but unenforceable
- void
- voidable
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.
Void
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.
Voidable
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.
Criteria for Contract Validity
- Competent Parties
- Voluntary Act of Good Faith
- Legal Purpose
- Mutual Consent
- Valuable Consideration
Competent Parties
The parties to a contract must have the capacity to contract, and there must be at least two such parties. Capacity to contract is determined by three factors:
- legal age
- mental competency
- legitimate authority
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, good faith act
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.
Validity of a Conveyance Contract
- be in writing
- contain a legal description of the property
- be signed by one or more of the parties
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
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.
Electronic Contracting
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.
Offeror
proposes contract terms in an offer to the offeree
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.
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.
Counteroffer
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.
Revocation of an Offer
An offer may be revoked, or withdrawn, at any time before the offeree has communicated acceptance. The revocation extinguishes the offer and the offeree’s right to accept it.
Termination of an Offer
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
Assignment of Contract
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.
Contract Preparation
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.
Oral vs. Written
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.