Chapter 11 - Contracts

Lawful Subject

A contract must be for a lawful (legal) purpose and not contrary to public welfare. For example: An agreement between two parties to rob a bank would not be a valid contract since the subject of the agreement is unlawful.

Consideration

A contract must specify a sufficient consideration. Either valuable or good consideration may be sufficient.

Formal Contract

A formal contract Is written, contains all the elements of a valid contract, and may be recorded in the public record. A formal contract is enforceable under the Statute of Frauds. One definition of a formal contract is ''a contract that is wholly written and under seal'' In past years, the existence of a seal was a significant matter, but today a seal is a formality that does not affect the validity or enforceability of the contract.

Seal

A notary public applies a stamp or impresses a seal to the documents to attest to the authenticity of the signatures of the parties. The seal of a notary public, called an acknowledgment, should not be confused with the world ''seal'' as used in connection with contract law. The word ''seal'' does not refer to the acknowledgment. The seal is the placement of the word ''seal'' or the letters ''L.S.'' Locus Sigilli, following the signatures of the parties.

Competent Parties

A valid contract is an agreement between 2 or more competent parties. Minors, persons who are declared as incompetent by the courts, and persons known to be mentally incompetent do not have the capacity to contract. A contract made with an incompetent party is voidable. The incompetent party may void the contract and cannot be held accountable for performance.

Voidable Contract

A voidable contract is a valid agreement that can be enforceable. However, one or both of the parties to the contract can cancel or revoke the contract at any time. A voidable contract can be legally rejected by one party and is said to have a defect. Voidable Contract Reasons: Reasons that can make a contract voidable include: -Failure to disclose a material fact -A mistake, misrepresentation, or fraud (fraudulent activities) -A breach of contract -A minor enters into a contract with an adult -Lack of capacity: a party was unable due to intoxication or other impairment, to understand and form a contract.

Implied Contract

An implied contract exits when some or all of the terms and conditions can be assumed by the nature of the agreement or the words and actions of the parties. An implied contract can be either oral or written, or could be an implied provision of another contract. Example: Paul painter agrees to paint the outside of John Homeowner's house for $800. The basic agreement of the contract is clearly understood. Paul is not expected to use interior-grade paint since the nature of the transaction implies that Paul will use exterior-grade paint.

Informal (Parol) Contract

An informal contract, or parol contract is an oral agreement (made solely by word of mouth) or a partially written contract between the parties that may or may not contain all the elements on a valid contract and is not recorded in the public record. An informal contract can be valid, and legal, but is not enforceable under the Statute of Frauds. Oral contracts are referred to as parol contracts

What are the 4 essential elements necessary to create a valid contract?

Essentials of a Valid Contract 1. Lawful Subject 2. Offer & Acceptance 3. Consideration 4. Competent Parties

Classification of Contracts

Express Contract VS Implied Contract Bilateral Contract VS Unilateral Contract Executory Contract VS Executed Contract Formal Contract VS Informal (parol) Contract Void Contract VS Voidable Contract

Assignment of Contracts

The sale, transfer, or subrogation of rights in a contract is called an assignment The party who grants the rights is the assignor The party who receives the rights is the assignee An assignment is a contract between the assignor and the assignee. Most contracts are assignable unless prohibited in the agreement. The assignor of a contract is not relieved of performance as a result of assignment. If the assignee fails to perform, the assignor is responsible for performance of the contract as originally agreed.

Offer & Acceptance

There must be an offer and acceptance, agreement, or meeting of the minds. A metal understanding of the terms of the contract is reached when an offer made by one party is accepted by another party, and communicated to all parties.

Executed Contract

When all parties have fully performed, the contract has been executed. Example: On the date specified in the contract, the parties meet at the attorneys office. All contingencies has been satisfied. Both parties acknowledge performance by the other. The buyer pays the money due, and the seller delivers a valid deed. Both parties have fully performed; the contract has been executed.

Void Contract

a contract that has no legal force or binding effect (inherently unenforceable) A void contract cannot be performed under the law. Criteria: A contract can be void as a result of meeting one of the following criteria: -It requires a party to perform an act that is impossible or illegal -It became illegal due to changes in the laws or government policy -It was legal, but was declared null by the courts because it violated a fundamental principle such as fairness, or is against public policy

An exemption to the Statute of Frauds

exists when a buyer makes a partial payment and either takes possession of, or makes improvements to the property.

Valuable Consideration

is money or anything of value that can be converted to money. This includes cash, personal property, real property, or enforceable promises.

Acknowledgement

is necessary if a document is to be recorded in the public records.

Executory Contract

must be accompanied by a sufficient consideration. However, once a contract is executed, the sufficiency of the consideration will not come into question.

The Statute of Frauds

provide protection against fraud in the sale of real property. It requires a contract for the transfer of a right or interest in land to be in writing in order to be enforceable. It does not make oral real estate sales contract illegal or invalid. Real Estate Sales contracts, leases for more than 1 year, deeds, mortgages, and option contracts are covered by the statute of frauds. Any documents that purports to convey a right or interest in land must be in writing to be enforceable. An executed oral real estate sales agreement that reaches a successful conclusion legal. The courts will not overturn an executed oral real estate sales contract.

The Statute of Limitations

provides time limits during which parties are allowed to bring legal action to enforce their rights under a contract. The periods allowed for various types of contracts are as follows: Oral Contracts: If a contract is entirely oral, action must be brought within 4 years. Written Contracts: A contract in writing may be enforced if action is brought within 5 years A contract, which is partially oral & partially written, can be enforced based on whether the portion in dispute is oral or written and in accordance with the time limits indicated above.

Express Contract

A contract is considered to be an express contract if all terms and conditions are specified and agreed to by the parties. In this case, a complete understanding exits. An express contract can be either oral or written.

Executory Contract

A contract is considered to be executory if any terms or conditions remains to be performed (something that still needs to be done) Example: An owner has agreed to sell and a purchaser has agreed to buy the owner's property. Both have signed an agreement, which requires the owner to make certain repairs before the closing, and the purchaser to apply for and obtain certain financing in order to conclude the transaction. At this time, the agreement is executory; something remains to be be done

Creation of a Contract

A contract is created when the offer of one party is accepted, and acceptance of the offer is communicated to the person who made the offer. Communication of acceptance indicates a complete meeting of the minds exits. A contract does not exist until communication has taken place. Delivery of a contract to all parties is proof that communication has taken place.

Bilateral Contract

In a bilateral contract, both parties to the contract mutually agree to be bound to performance of the terms and conditions specified. One party exchanges a promise to perfect an act based on a promise of the other party. A promise is given in exchange for a promise. Example: If John Homeowner promises to pay a commission upon the sale of his house, and Bob Broker promises to advertise and use his best efforts to sell the house

Unilateral Contract

In a unilateral contract, only 1 party expressly agrees to perform an act. Only the one who agrees to perform the act is bound by the terms of the contract. One party gives a promise of performance based on performance by the other party. A promise is given in exchange for an act Example: John Homeowner promises to pay a commission to Bob Broker only if Bob finds a purchaser for John's home

Good Consideration

Love and affection, which are incapable of being expressed in terms of money.