National Real Estate Exam: Contracts

4 elements required of every contract

CLOC:

(C)ompetent Parties

(L)egal Object

(O)ffer and acceptance

(C)onsideration

valid contract

contains all the essential elements and is binding and enforceable upon both parties to the contract.

voidable contract

has all of the elements necessary to create the contract and is enforceable but is subject to rescission by one of the parties to the contract.

It is legally sufficient and recognized by law and, therefore, binding on the parties. However, it can be made void. But, if the injured party does not take any action, the contract is considered valid and enforceable.

What can make contract generally voidable?

- was a minor

- was misled

- did not agree to contract voluntarily

- later found to have lacked competency at time of entering contract

void contract

Has no force or effect in law, so it will not be enforced in a court of law. A contract is void if it is missing any of the essential elements of a contract: competent parties, a legal object, mutual consent, consideration or, in some cases, being put in writing.

Statute of Limitations

specific period of time available, to take action to enforce a contract, set by state

laches

This principle allows a court to declare a contract unenforceable due to neglect or undue delay in bringing about a legal claim or asserting a right even though the Statute of Limitations has not expired.

capacity to contract

Each party to the contract must be legally competent in order to be capable of contracting.

Statute of Frauds

The purpose of this statute is to prevent perjury and dishonest conduct in proving the existence and terms of certain important contracts.

parol evidence rule

requires that evidence of the agreement cannot be received other than in writing. Spoken words (parol evidence) cannot be used in court to change, modify or contradict the terms of a written agreement that appears complete.

material fact

an important fact which significantly affects a person's decision to enter into the contract

Coercion or duress

forcing a person to do something against his will, including using threats to force a person to do something.

Menace

a show of an intention to inflict harm.

Undue influence

involves taking unfair advantage of a position of confidence or authority or of a person's distress or weakness of mind (such as when a person is intoxicated, ill, or enfeebled).

consideration

something of value given by one party in exchange for something of value from the other party to the contract.

unilateral

one-sided contract in that only one party has an obligation to perform under the contract. One party makes a promise in order to induce an act by the second party.

bilateral

when each party makes a promise. In such a contract, a promise is exchanged for a promise, and both parties are equally obligated to perform. Failure of either party to perform is a breach of the contract.

executory contract

a contract that is to be performed

executed contract

When both parties to the contract have fully performed the terms

time is of the essence

If the contract does not specify a time for performance, it is implied that performance is required within a reasonable time.

waiver

unilateral act with legal consequences

Novation

substitution of a new obligation for an existing one with the intent to cancel the existing one.

Full performance

all parties have performed all of their duties under the contract.

Partial performance

exists when one party performs part of the obligations and the other party relieves him of the obligation to perform the rest.

Substantial performance

when one party has substantially performed but failed to perform exactly as the contract requires

mutual release

cancellation of the contract rather than rescission

unilateral rescission

when an injured party goes to court to void a voidable contract. Upon finding that the contract had been voidable and should be declared void, the court would rescind the contract and attempt to restore each party to its condition in terms of money and property prior to the contract.

impossibility of performance

This occurs when the subject matter of the contract is destroyed (e.g., in a fire), or when changes in law make performance illegal.

operation of law

when a contract is unenforceable due to bankruptcy or expiration of the time set in the Statute of Limitations.

Liquidated damages

amount determined in advance to be paid in the event of a breach

Compensatory damages

an amount determined by a court or arbitrator to cover the actual amount of the loss suffered as a result of the breach

Specific performance

a legal procedure or action (court action or lawsuit) brought by either party to a contract to enforce the terms of the contract and force the defaulting party to perform the contract.

mediation

a third party tries to get the parties to the contract to agree to a resolution of their conflict, but neither party would have to agree to mediation or be bound by the mediation process.

arbitration

a third-party arbitrator serves as a judge, hearing both parties and making a decision which is binding on the parties.

assignment

transfer all interests and rights to others

rescission

terminate all obligations under the contract