Unit 4 Contracts: The Basics - Video Notes (Vocabulary Flashcards)

Classification of Contracts

• A contract is a legally enforceable agreement made by competent parties to perform or not perform a certain act.
• Classifications include:
  • Express or Implied
  • Bilateral or Unilateral
  • Executory or Executed
  • Void, Voidable, Unenforceable, or Valid
• Express vs Implied
  • Express contract: terms declared in words (oral or written). Example: a lease or rental agreement where the landlord allows the tenant to occupy and the tenant pays rent.
  • Implied contract: agreement inferred from conduct rather than words (e.g., going to a restaurant and ordering food implies you’ll pay).
• Bilateral vs Unilateral
  • Bilateral contract: both parties promise to perform in exchange for the other party’s promise to perform.
  • Example: a would-be pilot promises 2,500 for flying lessons and the instructor promises to teach.
  • Unilateral contract: one party promises to perform without expectation of performance by the other party; the second party is not bound unless they perform.
  • Example: a radio station offers 1{,}000 to the 100th caller; payment occurs upon performance. An option can also be unilateral.
• Executory vs Executed
  • Executory contract: some performance remains to be done by one or both parties (e.g., escrow not yet closed; unsigned contracts).
  • Executed contract: all parties have performed; execution can mean sign or complete.
• Void, Voidable, Unenforceable, or Valid
  • Void: no contract or legal effect (e.g., lack of capacity or illegal subject matter).
  • Voidable: valid and enforceable on its face but may be rejected by one or more parties (e.g., induced by fraud, menace, or duress).
  • Unenforceable: valid in principle but cannot be proved or enforced due to a legal obstacle (e.g., oral agreement that should be in writing under the statute of frauds).
  • Valid: binding and enforceable with all basic elements present.

Basic Elements of Valid Contracts

• Four requirements for a legally binding contract: 1) legally competent parties, 2) mutual consent, 3) lawful objective, 4) sufficient consideration.
• Legally Competent Parties
  • Generally, anyone can contract except certain limits.
  • Age: must be at least 18 years of age unless married, in the military, or emancipated by the court.
  • Minors cannot appoint an agent or enter into an agency agreement with a broker to buy or sell; contract with a minor is voidable by the minor.
  • If a person is judicially declared not legally competent, the contract is terminated; if obvious incompetence is evident, no contract exists.
  • Minors and those not legally competent can acquire real property by gift or inheritance, but transfers require court approval.
  • Intoxication or drug influence can lead to cancellation when sober or ratification (approval after the fact) depending on the parties.
  • Power of attorney (POA): authorizes another to act on behalf of the principal; the holder is the attorney-in-fact. For real property, a POA must be recorded to be valid and lasts as long as the principal remains competent. It can be revoked by recording a revocation.
• Mutual Consent (Mutual Assent)
  • Often described as a "meeting of the minds".
  • Offer: communicates contractual intent to enter into a contract; must be communicated to the offeree; unconditional acceptance is needed for binding effect; terms must be definite and certain; agreement must be genuine or contract may be voidable.
  • Termination of an Offer:
  • Lapse of time: offer revokes if not accepted within the prescribed period.
  • Revocation: offeror can revoke before acceptance by the offeree.
  • Failure to meet a condition of acceptance.
  • Qualified acceptance (counteroffer) by the offeree.
  • Rejection by the offeree.
  • Death or insanity of either party.
  • Unlawful object of the proposed contract.
  • Acceptance:
  • Requires unqualified agreement to all terms; if terms change, it becomes a counteroffer (new offer by the offeree).
  • Acceptance must be communicated to the offeror in the specified manner and timing before a contract becomes binding.
  • Silence is not acceptance; the seller may rescind an offer before acceptance.
• Genuine Assent
  • Must be genuine and freely made by all parties; issues that vitiate genuine assent include:
  • Fraud: deceit to gain something of value; can include misrepresentation or failure to disclose material information; may make contract voidable.
  • Innocent Misrepresentation: wrong information provided unknowingly; may allow rescission.
  • Mistake: misunderstanding of facts; ambiguity may void a contract.
  • Duress or Menace: use of force to obtain agreement.
  • Undue Influence: unfair advantage used to obtain consent.
  • Hold Harmless Clause: protects broker from incorrect information.
• Practical examples and notes
  • Earnest money given with an offer is not the consideration for the sale; it indicates intent to perform and may be used for damages if the buyer backs out.

Interpretation of Contracts

• Statute of Frauds (California)
  • Many contracts must be in writing to prevent fraud in land transactions (and related interests).
  • Written requirements include: offers, acceptances, loan assumptions, land contracts, deeds, escrows, options to purchase; trust deeds, promissory notes, and leases longer than one year must be in writing to be enforceable.
  • Principal statutes are found in Civil Code 1624.
  • Contracts that must be in writing:
  • An agreement for the sale of real property.
  • An agreement that cannot be performed within 1 year from its making (including leases longer than 1 year).
  • An agreement to employ an agent, broker, or other person to purchase, sell, or lease real estate for longer than 1 year, for compensation or a commission.
  • An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust, unless the purchaser’s assumption of the indebtedness is provided for in the conveyance of the property.
  • Personal property: personal property valued at more than 500 must be accompanied by a written bill of sale.
• Parol Evidence Rule
  • When two parties make oral promises and later sign a contract promising something different, the written contract is the valid one.
  • Parol means oral; the rule prohibits outside evidence to vary or add to the terms of fully executed writings.
  • If a contract is intended to be the complete and final agreement, no outside promises (oral or written) are allowed.
  • Ambiguity or vagueness may allow prior agreements to clarify an existing disputed contract.
  • A licensee’s duty: ensure contract language conveys the parties’ wishes; oral agreements can cause confusion in real estate.
  • Leases for less than one year should be in writing, though the statute of frauds does not require it; a lease for more than one year must be in writing.
• Determining Conflicts in a Contract
  • If handwritten changes are made and initialed, those controls the document.
  • Order of resolving contradictory statements in contracts:
    1) Handwritten content
    2) Typewritten content
    3) Attached addenda
    4) Preprinted material
  • Precedence rules: handwritten clauses take precedence over typewritten, attached addenda, and preprinted material; typed clauses take precedence over attached addenda and preprinted material; attached addenda take precedence over preprinted material.

Discharge of Contracts

• Discharge means cancellation or termination of a contract.
• Methods of discharge:
  • Performance: complete performance by all parties ends the contract. A tender of performance is an offer to perform; often occurs at escrow closing. Objections must be raised at the time of tender or they are waived (waiver).
  • Release: one party releases the other from performing.
  • Mutual Rescission: all parties agree to cancel the contract.
  • Assignment: transfer of all rights and remedies to an assignee; the assignor remains partially liable unless a novation occurs.
  • Novation: substitution of a new obligation for an existing one, extinguishing the original contract (e.g., buyer assumes seller’s loan and lender releases the seller).
• Breach: failure to perform the terms of the contract.
  • Remedies for breach:
  • Unilateral rescission: available to a party who entered a contract without genuine assent (fraud, mistake, duress, menace, undue influence, or faulty consideration); must be done promptly and restore value exchanged.
  • Lawsuit for money damages: recover monetary losses (e.g., price paid, the difference between contract price and market value, title and recording expenses, consequential damages, interest).
  • Lawsuit for specific performance: force the breaching party to perform as agreed when money damages are insufficient to restore the injured party; common in real estate due to uniqueness of property.

Statute of Limitations

• California law sets time limits for filing civil actions; once the period expires, rights cannot be enforced.
• Time limits for various actions (in years or days):
  • 90 Days: personal property left behind (e.g., suitcases, clothing, jewelry) must be claimed within 90 days after departure.
  • 6 Months: action against an officer to recover property seized in an official capacity.
  • 1 Year: libel or slander; injury or death caused by wrongful act; loss to a depositor against a bank for payment of a forged check.
  • 2 Years: action on a contract not in writing; action based on a title insurance policy.
  • 3 Years: action on a liability created by statute; trespass or injury to real property (e.g., encroachment); action for relief on fraud or mistake; attachment.
  • 4 Years: action on any written contract (most real estate contracts fall here).
  • 10 Years: action on a judgment or decree of any court in the United States.

Summary and Practical Takeaways

• A contract is enforceable when it is: (1) between legally competent parties, (2) based on mutual consent, (3) for a lawful objective, and (4) supported by sufficient consideration.
• Mutual consent requires a clear offer and unqualified acceptance; a counteroffer terminates the original offer.
• Genuine assent can be corrupted by fraud, misrepresentation, mistake, duress, menace, or undue influence.
• The Statute of Frauds requires certain real estate-related agreements to be in writing, with Civil Code 1624 guiding the types.
• The Parol Evidence Rule protects the written contract from outside evidence; handwritten, typed, addenda, and preprinted terms have precedence rules to resolve inconsistencies.
• Discharge can occur via performance, release, mutual rescission, assignment, or novation; breach introduces remedies like unilateral rescission, damages, or specific performance.
• Time limits for enforcing contracts are strict; many real estate-related actions fall under 4-year written contracts, while other actions have shorter or longer limits.
• For real estate practice, key nuances include:
  • Earnest money is not the consideration for the sale; it demonstrates intent and may be used for damages if the buyer breaches.
  • A power of attorney must be properly documented and, for real estate, recorded to be valid and last while the principal remains competent.
  • A minor’s contracts are voidable; adults should proceed cautiously and seek counsel when minors are involved.
  • A licensee must ensure contract language accurately reflects the parties’ wishes to reduce confusion and disputes.

Quick Reference (Key Terms)

• Express contract: terms stated in words (oral or written).
• Implied contract: agreement inferred from conduct.
• Bilateral contract: promises by both sides.
• Unilateral contract: promise by one side only.
• Executory contract: some performance remains.
• Executed contract: performance completed by all parties.
• Voidable contract: valid but may be rejected.
• Unenforceable contract: cannot be enforced (e.g., due to writing requirements).
• Void contract: lacks legal effect.
• Offer, Acceptance, Counteroffer, Revocation, Lapse of Time, Rejection, Acceptance Communication
• Statute of Frauds: in-writing requirement for certain contracts (real property, leases >1 year, etc.).
• Parol Evidence Rule: written contract governs; outside evidence limited.
• Discharge of Contracts: performance, release, mutual rescission, assignment, novation, breach.
• Remedies for Breach: unilateral rescission, money damages, specific performance.
• Statute of Limitations: varies by action; most written real estate contracts are 4 years.