Contract Law Principles and Essential Elements

Contracts are not always towering stacks of paper drafted by attorneys. They are formed by intentions, and the law categorizes them by how those intentions are expressed.

An express contract is created through the stated intentions of the parties. The key word is stated. These stated intentions in an express contract can be communicated using spoken words, or they can be communicated using written words. If a seller says, "I will sell you my farm for $500,000," and the buyer says, "I accept," they have formed an express contract.

Conversely, an implied contract is formed by the actions of the parties. It is formed by the conduct of the parties rather than by spoken words. When you sit down in a diner and order a coffee, you do not explicitly promise to pay the $3 bill, but your actions imply an agreement to do so. In real estate, however, we deal almost exclusively in express, written contracts to ensure precision and enforceability.

At its core, a contract is an exchange. What exactly is being exchanged determines how the contract operates.

Bilateral vs. Unilateral Contracts

A bilateral contract involves a promise exchanged for a promise from another party. Think of "bi" meaning two promises. A standard real estate sales contract is an example of a bilateral contract. The seller promises to transfer the deed, and the buyer promises to pay the purchase price. Both parties are on the hook to perform.

A unilateral contract involves a promise exchanged for the actual performance of a specific act. "Uni" means one promise. One party makes a promise, but the other party is not legally obligated to act; they only reap the benefit if they choose to perform. A real estate option contract is an example of a unilateral contract. If a buyer purchases an option to buy a parcel of land within six months, the seller must sell if the buyer exercises the option, but the buyer is completely free to walk away.

The Timeline of Performance: Executory vs. Executed

A contract's classification changes as it moves through time.

• An executory contract is an agreement in which one or more parties still have obligations to perform. When a buyer and seller sign a real estate purchase agreement, it is an executory contract prior to the closing of the transaction. They have agreed, but the deed hasn't transferred and the money hasn't moved.
• An executed contract is an agreement in which all parties have completely fulfilled their promised obligations. The closing is finished, the keys are handed over, and the contract's lifecycle is complete.

To be a valid contract, the agreement must contain all essential legal elements. A valid contract is fully enforceable in a court of law. If an agreement is missing even one of these pillars, the legal structure collapses.

1. Competent Parties

Contracting parties must be of legal age to be considered legally competent, and they must possess sound mental capacity to be considered legally competent. The law protects those who lack this capacity.

• Minors: A contract signed by a minor is a voidable contract at the discretion of the minor. The adult is bound, but the minor has the legal power to walk away.
• Mental Incompetence: If a person has been formally adjudicated by a court as mentally incompetent, they entirely lack the capacity to contract. A contract signed by a person formally adjudicated by a court as mentally incompetent is a void contract.
• Intoxication: Intoxication at the time of signing can render a contract voidable by the intoxicated person, provided they were so impaired they could not comprehend the nature of the agreement.

2. Mutual Assent (The Meeting of the Minds)

Mutual assent is the complete agreement of all parties to the terms of the contract. It is commonly referred to in legal circles as a "meeting of the minds." Achieving mutual assent is a two-step dance: it requires a clear offer by one party and an exact acceptance of an offer by another party.

Offer: An offer is a proposal made by an offeror to enter into a legal agreement with an offeree. An offer is not a binding contract. Because it is merely a proposal, an offeror may revoke an offer at any time prior to receiving communication of the offeree's acceptance.

Acceptance: Acceptance is the unconditional agreement to the exact terms of an offer.

What happens if a seller receives an offer for $300,000 but crosses it out and writes $310,000? Any modification to the terms of an offer constitutes a counteroffer. A counteroffer permanently terminates the original offer; the buyer's $300,000 offer is now dead and cannot be revived. Instead, a counteroffer creates a brand new offer. This mechanically reverses the roles of the original offeror and offeree—the seller is now the offeror, and the buyer is the offeree.

Finally, a contract is formed only when acceptance is communicated back to the offeror. Signing a document in a dark room means nothing until the other side is notified.

3. Consideration

Consideration is something of legal value offered by one party as an inducement to perform. It is the "skin in the game."

Consideration takes many forms:

• Money serves as valid consideration in a contract.
• Real property serves as valid consideration in a contract.
• Personal services serve as valid consideration in a contract.
• A legal promise not to act serves as valid consideration in a contract. This legal promise not to act is also known as forbearance.

The law distinguishes between two types of consideration:

1. Good consideration refers to love and affection exchanged between relatives in a contract (e.g., a father deeding a house to his daughter).
2. Valuable consideration refers to items with a measurable monetary value.

The Great Exam Trap: Earnest Money There is a pervasive myth in real estate that you must have a deposit to make a contract binding. This is false. Earnest money is not a legal requirement to form a valid real estate contract. Furthermore, earnest money does not serve as the legal consideration in a real estate purchase contract. So, what is the consideration? The mutual promises to buy and sell constitute the valuable consideration in a real estate purchase agreement.

4. Lawful Objective

A lawful objective means the purpose of the contract must not violate the law. You cannot seek the court's help to enforce a contract to distribute illegal narcotics or commit arson. A contract for an illegal purpose is automatically a void contract.

Even if the four pillars appear to be present, the "meeting of the minds" must be genuine. If consent is manipulated or broken, the contract's validity is compromised.

• Fraud: Fraud is the intentional misrepresentation of a material fact used to induce a party to enter a contract. A contract entered into based on fraud is a voidable contract by the deceived party.
• Duress: Duress involves the use of force to compel a person to enter into a contract, or the use of physical threats to compel a person to enter into a contract. A contract signed under duress is a voidable contract by the victimized party.
• Undue Influence: Undue influence involves abusing a position of trust to manipulate someone into entering a contract (e.g., an unethical caretaker forcing an elderly patient to sell their home cheaply). A contract signed under undue influence is a voidable contract by the victimized party.
• Mistake of Fact: A mistake of fact occurs when a party holds an erroneous belief about an essential contract term. Importantly, a mutual mistake of material fact can render a contract voidable by either party. If both buyer and seller genuinely believed the property included a specific tract of timber, but a subsequent survey reveals it does not, they shared a mutual mistake that destroys the foundation of their agreement.

Based on the elements and the reality of consent, every contract falls into one of four distinct legal statuses. Understanding the precise difference between these terms is paramount.

The Statute of Frauds

For centuries, courts struggled to resolve disputes where parties argued over spoken promises ("he said, she said"). To prevent this, the legal system developed a safeguard. The Statute of Frauds is a legal doctrine requiring certain contracts to be in writing to be legally enforceable.

In your profession, the Statute of Frauds governs two major scenarios:

1. The Statute of Frauds requires real estate sales contracts to be in writing.
2. The Statute of Frauds requires real estate leases exceeding one year in duration to be in writing.

To be valid under this doctrine, the Statute of Frauds requires real estate contracts to be signed by the parties to be bound by the agreement. Because of this rigid rule, an oral contract for the sale of real estate violates the Statute of Frauds. Consequently, an oral contract for the sale of real estate is unenforceable. Even if the buyer and seller shake hands and perfectly agree on price and terms, neither can sue the other to force the sale if someone changes their mind.

The Statute of Limitations

Finally, if a contract is breached, the wronged party does not have an infinite window to seek justice. The Statute of Limitations sets a specific time limit for filing a lawsuit to enforce contract rights. If a buyer breaches a written contract, and the seller waits ten years to sue, the court will dismiss the case because the statutory time limit has expired. The right to enforce the contract has evaporated with time.