1. Washington Real Estate Fundamentals
Lesson 6:
Contract Law
© 2011 Rockwell Publishing

2. Introduction
Contract: Agreement between two or more competent persons to do, or not do, certain things in exchange for consideration.
Valid contract: Agreement that meets minimum requirements so that it is legally binding.
Will be enforced by a court if one party fails to fulfill terms of agreement.
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3. Contract Classifications
Contracts may be classified according to certain basic characteristics.
Every contract is:
express or implied
unilateral or bilateral
executory or executed
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4. Contract Classifications Express vs. implied
Express contract: Agreement that has been put into words, whether spoken or written.
Implied contract: Created by actions of the parties, not by express agreement.
Most contracts are express, not implied.
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5. Contract Classifications Unilateral vs. bilateral
Unilateral contract: Only one party promises to do something and is legally obligated to perform as promised.
Bilateral contract: Both parties promise, both are legally obligated.
Most contracts are bilateral.
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6. Contract Classifications Executory vs. executed
Executory: Contract is in the process of being performed.
Executed: Contract has been fully performed; both parties have fulfilled their promises.
Note: “executed” may also refer to a contract that has been signed, whether or not any performance has taken place.
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7. Summary Contract Classifications
Express or implied
Unilateral or bilateral
Executory or executed
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8. Elements of a Valid Contract
To be valid, a contract must have:
parties with legal capacity
mutual consent
lawful objective
consideration
In addition, certain types of contracts must be in writing and signed.
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9. Elements of a Valid Contract Contractual capacity
Contract not legally binding unless all parties have legal capacity.
Two requirements for legal capacity:
age of majority
mental competence
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10. Contractual Capacity Age of majority
In Washington, a person must be at least 18 to enter into a contract.
Someone under 18 is a minor.
Parent or legal guardian may enter into binding contract on minor’s behalf.
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11. Contractual Capacity Age of majority
Contract in which one party is a minor is voidable by the minor.
Minor or guardian can choose whether to terminate or proceed with contract.
Other party can’t enforce contract.
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12. Contractual Capacity Mental competence
Mentally competent: Of sound mind.
If one party declared incompetent, contract void – no legal effect.
Guardian can enter into contracts on behalf of incompetent person.
Contract entered into while temporarily incompetent may be voidable.
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13. Summary Contractual Capacity
Age of majority
Minor
Mental competence
Guardian
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14. Elements of a Valid Contract Mutual consent
Mutual consent: Contract legally binding only if both parties consent to its terms.
A court presumes consent if someone signs a contract.
Party who can’t read or doesn’t know language should ask someone she trusts to read or translate contract.
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15. Mutual Consent Offer and acceptance
Mutual consent arrived at through process of offer and acceptance:
Offeror makes offer to offeree.
If offeree accepts offer, contract formed.
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16. Mutual Consent Offer Offer must:
express intention to enter into contract
be definite and certain
If offer fails to specify all basic terms, it’s merely an offer to negotiate.
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17. Offer Termination An offer may terminate due to: revocation by offeror
lapse of time
death or incompetency of the offeror
rejection of the offer
a counteroffer
If offer terminates before acceptance, no contract formed.
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18. Termination of an Offer Revocation
Offeror can revoke offer any time before acceptance.
Offeror must notify offeree of revocation before offeree accepts.
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19. Termination of an Offer Lapse of time
Offer with deadline for acceptance expires automatically when date or time arrives.
Offer without deadline expires after reasonable amount of time.
“Reasonable” depends on circumstances.
Issue sometimes decided by court.
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20. Termination of an Offer Death or incompetency
Offer terminated and no contract formed if:
offeror dies before offer is accepted
court declares offeror mentally incompetent
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21. Termination of an Offer Rejection by offeree
Rejection terminates offer.
After rejecting offer, offeree can’t change mind and accept it.
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22. Termination of an Offer Counteroffer
Counteroffer: Offeree accepts some terms, but changes one or more other terms.
Counteroffer terminates original offer and replaces it with new offer.
Roles of offeror and offeree reversed.
Sometimes called qualified acceptance, but has same legal effect as rejection.
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23. Mutual Consent Acceptance
To create contract, offeree must communicate acceptance to offeror before offer terminates.
Offer may specify how acceptance must be communicated.
If no time or manner of acceptance stated, reasonable time and manner implied.
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24. Acceptance Negative influences
Acceptance must be voluntary, free of negative influences.
Contract voidable by victimized party if consent resulted from:
fraud
undue influence
duress
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25. Negative Influences Fraud
Fraud: Misrepresenting a material fact to someone who relies on the misinformation.
Material fact: Important information that may affect decision to enter into contract.
Fraud may involve:
misleading statements
concealment of information
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26. Fraud Actual vs. constructive fraud
Actual fraud: Person making statement knows or should know that it’s false.
Includes intentional deceit or concealment.
Includes statements made without knowing whether they’re true or false.
Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads another person.
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27. Negative Influences Undue influence
Undue influence: Persuading someone to sign contract by taking advantage of trust, weakness of mind, or distress.
Persuasion strong enough to overpower will, so that consent isn’t truly voluntary.
May involve abuse of special legal relationship based on trust: attorney-client, agent-principal, etc.
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28. Negative Influences Duress
Duress: Using force, constraint, or threats to compel someone to do something against his will.
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29. Elements of a Valid Contract Lawful objective
Both purpose of contract and consideration must be lawful.
Can’t involve:
violation of law
violation of public policy
Contract with unlawful objective is void.
Court won’t enforce it for either party.
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30. Elements of a Valid Contract Consideration
Consideration: Something of value exchanged by contracting parties.
Each must give the other something of value:
money, property, services, or a promise to give something of value in the future
In typical real estate sale:
seller’s promise to convey title
buyer’s promise to pay agreed price
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31. Elements of a Valid Contract Statute of frauds
Statute of frauds: State law that requires certain types of contracts to be in writing and signed.
Contracts not covered by statute generally enforceable even though unwritten.
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32. Statute of Frauds Which contracts must be in writing
Washington’s statute of frauds applies to an agreement:
to convey an interest in real property
to assume the debts of another
to employ an agent to sell, buy, lease, or exchange real property, if agent will be compensated
that won’t be performed within one year
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33. Statute of Frauds Adequate written contract
To comply with statute of frauds, any “writing” is adequate as long as it:
identifies contract subject matter
indicates agreement between parties
is signed by party to be bound
May be printed, handwritten, or a combination.
Handwritten part takes precedence if it conflicts with printed part.
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34. Statute of Frauds Contracts that fail to comply
Contract subject to statute of frauds unenforceable if not in writing and signed.
But once contract fully performed, neither party can undo transaction based on statute of frauds.
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35. Summary Consent and Other Requirements
Mutual consent
Offer and acceptance
Counteroffer
Fraud (actual or constructive)
Undue influence
Duress
Lawful objective
Consideration
Statute of frauds
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36. Legal Status of Contracts
Four terms used to describe a contract’s legal status:
void
voidable
unenforceable
valid
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37. Legal Status of Contracts Void
Void: No contract; attempted agreement failed and can be disregarded.
Neither party has to withdraw.
Usually happens because essential element missing, such as:
no consideration exchanged, or
no consent (for instance, party mentally incompetent).
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38. Legal Status of Contracts Voidable
Voidable: One party can choose whether to withdraw or go through with the contract.
Contract unenforceable by other party.
Examples:
contract entered into by minor (voidable by minor or guardian)
contract entered into as a result of fraud, undue influence, or duress
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39. Legal Status of Contracts Voidable
Voidable contract is binding unless party asks court to rescind contract.
Withdrawing party must take legal action within reasonable time.
Otherwise, court may rule that contract has been ratified.
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40. Legal Status of Contracts Unenforceable
Unenforceable: Contract that can’t be enforced in court.
Examples:
terms can’t be proved
voidable by other party
statute of limitations expired
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41. Unenforceable Contracts Terms can’t be proved
Court can’t enforce contract if terms of agreement can’t be proved.
Most often a problem with oral contracts.
Parties probably agreed on all essential terms, but that can’t be proved now.
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42. Unenforceable Contracts Voidable by other party
If one party has a right to void a contract (for example, a minor), other party can’t enforce the agreement.
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43. Unenforceable Contracts Statute of limitations expired
Statute of limitations: Law that sets time limit for filing a lawsuit.
Party who misses deadline loses right to sue.
Contract unenforceable.
Washington statute of limitations for contracts:
breach of written contract: 6 years
breach of oral contract: 3 years
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44. Legal Status of Contracts Valid
Valid contract:
all essential elements
terms can be proved in court
not voidable (for example, no negative influences)
statute of limitations hasn’t run out
If one party fails to perform as promised, other can sue to have contract enforced.
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45. Summary Legal Status of Contracts
Void
Voidable
Unenforceable
Valid
Statute of limitations
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46. Discharging a Contract
Valid contract may be discharged by:
full performance
agreement between parties
Most contracts are discharged by full performance.
Each party performs as promised.
Contractual relationship ends.
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47. Discharging a Contract Agreement between parties
Contract may be discharged without full performance, if parties agree to:
rescission
cancellation
assignment
novation
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48. Discharging a Contract Rescission
Rescission: Parties agree to terminate contract and undo steps already taken.
Consideration is returned.
Puts parties as nearly as possible back in positions they were in before contract.
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49. Discharging a Contract Cancellation
Cancellation: Parties agree to terminate contract without undoing steps already taken.
Money paid prior to cancellation not returned.
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50. Discharging a Contract Assignment
Assignment: One party (assignor) withdraws from contract and assigns interest to new party (assignee).
Contract not really discharged.
If assignee defaults, other party can still sue assignor (secondary liability).
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51. Discharging a Contract Assignment
General rule:
Contract can be assigned without other party’s consent, unless clause expressly forbids that.
Exception:
Personal services contract can’t be assigned without consent.
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52. Discharging a Contract Novation
Novation: Original party withdraws and is replaced by new party, and also is released from liability.
No secondary liability (as in assignment).
Always requires consent of other original party.
Novation can also refer to substitution of new agreement for old one between same parties.
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53. Summary Discharging a Contract
Discharge
Full performance
Rescission
Cancellation
Assignment
Secondary liability
Novation
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54. Remedies for Breach of Contract
Breach of contract: When one party fails to fulfill a promise in the agreement, without legal excuse.
If breach is material breach (important to contract), other party has right to sue.
“Time is of the essence” clause makes failure to meet deadline material breach.
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55. Remedies for Breach of Contract
Four legal remedies for breach of contract:
rescission
compensatory damages
liquidated damages
specific performance
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56. Remedies for Breach of Contract Rescission
As explained earlier, rescission is termination of contract that returns parties to original (pre-contract) positions.
May occur by:
agreement of parties
court order
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57. Remedies for Breach of Contract Compensatory damages
Compensatory damages: Money that court orders breaching party to pay other party, to compensate for losses resulting from breach.
Most common remedy for breach of contract.
Intended to put nonbreaching party in position she would have been in if contract performed.
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58. Remedies for Breach of Contract Liquidated damages
Liquidated damages: Parties agree in advance to amount that will serve as compensation in event of breach.
Nonbreaching party can’t sue for more.
Helps parties avoid costly litigation.
In residential purchase agreement, earnest money usually treated as liquidated damages if buyer defaults.
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59. Remedies for Breach of Contract Specific performance
Specific performance: Court orders breaching party to perform contract as agreed.
Generally ordered only if money damages would be inadequate remedy.
Subject of contract is unique, so damages would not make it possible to purchase substitute.
Court may be willing to grant specific performance to real estate buyer.
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60. Breach of Contract Tender
Tender: Unconditional offer by one party to perform his part of the agreement.
Usually made when it appears other party is going to default.
To be entitled to sue for breach, nonbreaching party must show he was ready to fulfill contract.
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61. Breach of Contract Anticipatory repudiation
Anticipatory repudiation: Express statement by breaching party indicating that she is not going to perform as agreed.
If anticipatory repudiation occurs, other party can sue for breach of contract without making a tender.
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62. Types of Real Estate Contracts
Listing agreement
Buyer representation agreement
Purchase and sale agreement
Land contract
Lease
Escrow instructions
Option agreement
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63. Types of Real Estate Contracts Listing agreement
Contract between real estate seller and brokerage firm.
In Washington, firm can’t sue for commission without written agreement.
What firm must do to earn commission depends on type of listing.
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64. Types of Real Estate Contracts Buyer representation agreement
Contract between real estate buyer and brokerage firm.
Buyer hires firm to help find suitable property and/or negotiate purchase.
Again, firm can’t sue for compensation without written agreement.
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65. Types of Real Estate Contracts Purchase and sale agreement
Contract between real estate seller and buyer.
States all terms of sale, such as:
price
closing date
contingencies
Form first serves as buyer’s offer, becomes binding contract if accepted by seller.
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66. Types of Real Estate Contracts Land contract
Contract used when buyer purchases seller’s property on installment basis.
Vendor (seller) retains legal title until full purchase price is paid.
Vendee (buyer) has equitable title and possession of property while paying off price.
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67. Types of Real Estate Contracts Lease
Contract transferring right of possession and use from landlord (owner) to tenant.
Sets terms of occupancy, such as:
rent
responsibilities of each party
duration of tenancy
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68. Types of Real Estate Contracts Escrow instructions
Contract authorizing escrow agent to close a transaction.
States obligations and conditions that must be fulfilled for sale to close.
Buyer and seller generally sign joint instructions.
Separate instructions used in some commercial transactions.
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69. Types of Real Estate Contracts Option agreement
Contract creating right to buy, sell, or lease property for certain price within a certain period of time.
Must be in writing and supported by consideration.
In option to purchase:
optionor is seller
optionee is buyer
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70. Types of Real Estate Contracts Option agreement
Gives optionee a contract right, but not a property interest.
May be assigned unless otherwise agreed.
May be recorded.
Different from right of first refusal.
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71. Summary Remedies and Types of Contracts
Rescission
Compensatory damages
Liquidated damages
Specific performance
Tender
Anticipatory repudiation
Option agreement
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