chapter 14 - essential characteristics of contract law

legal recourse options for a non-defaulting party

(1) Accept the earnest money as liquidated damages (2) Sue the defaulting party for specific performance (3) Sue the defaulting party for money damages

five criteria of a valid contract:

(1) Competent parties (2) Mutual agreement (3) Lawful objective (4) Consideration (5) In writing

three situations of breach which give the innocent party the option of terminating the contract are:

(1) Renunciation (2) Breach of Condition (3) Fundamental Breach

Capacity to contract is determined by three factors:

(1) legal age (2) mental competency (3) legitimate authority

2 conditions in order for a liquidated damages clause to be upheld

(1) the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term. (2) the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.

In terms of validity and enforceability, a court may construe the legal status of a contract in one of four ways:

(1) valid (2) valid but unenforceable (3) void (4) voidable

Bilateral contract

- A bilateral contract is one in which both parties promise to perform their respective parts of an agreement in exchange for performance by the other party. - example of a bilateral contract is an exclusive listing: the broker promises to exercise due diligence in the efforts to sell a property, and the seller promises to compensate the broker when and if the property sells.

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.

what is the difference between a void contract and voidable contract

- A void contract is an agreement that does not meet the tests for validity, and therefore is no contract at all. - A voidable contract is one which initially appears to be valid, but is subject to cancellation by a party to the contract who is believed to have acted under some kind of disability.

Executed vs. Executory contract

- An executed contract is one that has been fully performed and fulfilled: neither party bears any further obligation. A completed and expired lease contract is an executed contract. The landlord may re-possess the premises and the tenant has no further obligation to pay rent. - An executory contract is one in which performance is yet to be completed. A sales contract prior to closing is executory. While the parties have agreed to buy and sell, the buyer has yet to pay the seller and the seller has yet to deed the property to the buyer.

Express vs. Implied contract

- An express contract is one in which all the terms and covenants of the agreement have been clearly stated and agreed to by all parties, whether verbally or in writing.

implied contract

- An implied contract is an unstated or unintentional agreement that may be considered to exist when the actions of any of the parties suggest the existence of an agreement. - example of an implied contract is an implied agency agreement

a contract that conveys an interest in real estate must:

- Be in writing - Contain a legal description of the property - Be signed by one or more of the parties

Oral vs. Written 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

Contracts may be also be classified as being:

- Oral or written - Express or implied - Unilateral or bilateral - Executed or executory

Termination of a contract, also called cancellation and discharge, may occur for any of the following causes:

- Performance - Infeasibility - Mutual agreement - Operation of Law

valid but unenforceable contract

- State laws declare that some contracts are enforceable only if they are in writing - An oral long-term lease and an oral real estate sales contract are examples of contracts that may be valid but not enforceable.

A suit for specific performance

- an action brought in a court to compel a party to carry out the terms of a contract. - A party would be made to perform his or her obligations under threat of contempt of court.

void contract

- 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 - For example, a contract that does not include consideration is void. Likewise, a contract to extort money from a business is void

Fundamental Breach

- any breach to a contract that is so fundamental. - Any fundamental breach permits a party to terminate the performance of a contract. - This also entitles a party to sue for damages.

voidable contract

- contract which initially appears to be valid, but is subject to cancellation by a party to the contract who is believed to have acted under some kind of disability - For example, a party who was the victim of duress, coercion, or fraud in creation of a contract and can prove it may disaffirm the contract

Anticipatory breach

- occurs where one party announces, in advance of the due date for performance, that he or she intends not to perform on his or her side of the bargain. - The innocent party may sue for damages immediately when the breach is announced.

Breach of Condition

- occurs where the party in default has committed a breach of condition. - When a party is accused of failing to perform under a contract they may respond that they have not breached the contract because any performance they were to render was conditional

Statute of Frauds

- requires that certain contracts must be in writing to be enforceable. - concerns the enforceability of a contract, not its validity

Some common occurrences that cause default are:

- signing contract without reading it - ignoring the real estate contract - Miss the expiration date in the real estate contract

unilateral contract

- unilateral contract, only one party promises to do something, provided the other party does something. The latter party is not obligated to perform any act, but the promising party must fulfill the promise if the other party chooses to perform. - An option is an example of a unilateral contract

when is a contract terminated

- when fully performed by the parties - Partial performance, if the parties agree - Sufficient performance, if a court determines a party has sufficiently performed the contract, even though not to the full extent of every provision

what is default in a real estate contract

- when one party to the contract fails to fulfill the terms of the agreement. - It is not a crime to be in default of a real estate contract. However, the party found to be in default can be sued in court for failure to perform and for damages resulting from defaulting.

what is the contract that does not have to be in writing

A lease contract that has a term of one year or less is an exception

define liquidated Damages

A predetermined amount of money stipulated in the contract to be the total amount of compensation the non-defaulting party should receive upon breach by the other party

Which contract provision allows for the transfer of the contract to another person? A.) Assignment of a Contract B.) Operation of Law C.) Transfer Clause D.) Execute Clause

A.) Assignment of a Contract

What is an important legal feature of a contract? A.) It represents a "meeting of the minds." B.) It must use precise wording in a document. C.) It is not voidable. D.) It can be created only by an attorney.

A.) It represents a "meeting of the minds."

Mike signed a rental agreement for his friend Norm. What must be enforced for this contract to be binding? A.) Power of Attorney B.) Power of Use C.) Waiver of Attorney D.) Attorney At Use

A.) Power of Attorney

infeasibility

An otherwise valid contract can be canceled if it is not possible to perform

Under contract law what is an irreparable break in a legally binding contract called? A.) A failure to perform B.) A material breach of contract C.) A failure of compliance D.) A breach of agreement

B.) A material breach of contract

The guardian for a mentally incompetent party enters into an oral contract with another party to buy a trade fixture. What is true about this contract? A.) It does not meet validity requirements. B.) It is possibly valid and enforceable. C.) It must be in writing to be valid. D.) It is valid but unenforceable.

B.) It is possibly valid and enforceable.

What occurs when a party refuses to perform his or her obligations under a contract? A.) Breach of condition B.) Renunciation C.) Breach of performance D.) Fundamental breach

B.) Renunciation

Which of the following contracts must be in writing to be enforceable? A.) A parol contract B.) A six-month lease C.) A two-year lease D.) An executory contract

C.) A two-year lease

What occurs when one party refuses to form his or her side of the bargain on the due date or performs incompletely? A.) Anticipating breach B.) Real estate breach C.) Actual breach D.) Contract breach

C.) Actual breach

What does the Statute of Frauds concern? A.) Validity B.) Mutual agreement C.) Enforceability D.) Consideration

C.) Enforceability

An unscrupulous investor completes a contract with a buyer to sell a property the investor does not own. What is true about the sale contract for this transaction? A.) It is voidable. B.) It must be in writing. C.) It is void. D.) It is illegal yet potentially enforceable.

C.) It is void.

An exclusive listing is an example of a A.) unilateral contract. B.) implied contract. C.) bilateral contract. D.) oral contract.

C.) bilateral contract.

What describes an action brought into court to compel a party to carry out the terms of a contract? A.) A legal remedy B.) A suit for damages C.) A suit for fundamental breach D.) A suit for specific performance

D.) A suit for specific performance

A contract that conveys an interest in real estate must A.) include a title closing entity. B.) include a listing of all past and present liens against the property. C.) include all outstanding liens against the property. D.) contain a legal description of the property.

D.) contain a legal description of the property.

If a seller fails to comply with a contract he or she will be in A.) contempt of court. B.) breach of agreement. C.) breach of law. D.) default.

D.) default.

In a breach of contract the non-defaulting party is A.) obligated to fulfill the contract. B.) compensated for breach of contract. C.) held accountable for the performance of his or her agent. D.) released from any further obligations of the agreement.

D.) released from any further obligations of the agreement

acceptance definition

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.

define contract

NOT a legal form or a prescribed set of words in a document, butvrather the intangible agreement that was made in "the meeting of the minds" of the parties to the contract.

lawful objective

The content, promise, or intent of a contract must be lawful. A contract that proposes an illegal act is void.

Operation of Law

The rights and liabilities of parties to a contract may be changed by the application of law.

are some contracts only valid if they are in writing

Yes, 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

What does the Statute of Limitations require that parties to a contract who have been damaged or who question the contract's provisions do

act within a statutory period

Which contract provision allows for the transfer of the contract to another person

assignment of a contract

Statute of Limitations

estricts the time period for which an injured party in a contract has the right to bring a lawsuit against the other party.

define 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.

breach of contract

failure to perform according to the terms of the agreement

valid contract

is in writing and enforceable within a statutory time period

define Money Damages

may be awarded to the aggrieved party as restitution or to compensate him or her for expenses incurred as a result of a transaction.

actual breach

occurs when one party refuses to form his side of the bargain on the due date or performs incompletely.

renunciation

occurs where a party refuses to perform his obligations under the contract. It may be either express or implied.

in a breach of contract, the non-defaulting party is

released from any further obligations of the agreement

metal agreement / offer and accept

requires that a contract involve a clear and definite offer and an intentional, unqualified acceptance of the offer.

novation

substitution of contracts