Fundamentals of Contract Law
No matter where you live in North America, you must have seen some humoristic vignettes depicting a not-so-trustworthy Realtor intent at selling a house to some innocent-looking couple. My favorite vignette, which still makes me chuckle today, goes back to a few years ago when I was practicing real estate at United Realty. It involved a Real Estate Agent of Pompeii Realty, briefcase in hand, in the process of selling a house to an ancient Roman couple sometimes around 100 BC . The house is overlooking Mt. Vesuvius. There is a black, threatening, ominous plume of smoke coming out of the top of the volcano, and the Roman couple looks somewhat startled when the Real Estate Agent – big smile on his face – delivers the punchline: ” Plus, with a view like this what could possibly go wrong” !
What is it exactly that you do when you sign a ‘contract’ . The term ‘contract’ means a promise or a set of promises made by one person to another, which the Courts will enforce. A contract can contain a number of promises or ‘terms’ to be performed by either party. The person who makes the promise is called the ‘promissor’ and the person who can enforce that promise is called the ‘promissee’ . If the contract contains several mutual promises, each party will be both a promissor and a promissee. Contracts of Purchase and Sale of land and interests in land usually have lots of mutual promises. Contracts are a crucial part of every business transaction, but not nearly as much as in Real Estate. For instance, some contracts are made verbally while others are made by simply exchanging letters or even e-mails. This is not the case in Real Estate, where it is a requirement at Law that contracts be written down in usually lengthy legal forms to avoid uncertainty, ambiguity and to be binding .
A contract has seven essential elements:
Each of these elements must be present for a contract to be binding and enforceable. Let’s examine them individually.
An offer is the promise made by one party to another. Save and except in Real Estate where the offer must be in writing, an offer can be made in any form. In all circumstances, however, an offer must be made in clear an unambigous terms. If more than one interpretation can be given to an offer, neither interpretation will be followed by the Courts. There are ‘unilateral’ and ‘bilateral’ offers. Offers to purchase real property are bilateral, i.e. containing the exchange of mutual promises.
An offer is not made forever. Offers can either be finalized, when all mutual promises are fulfilled. Or they can expire, if not timely accepted. Or they can be released, if one of the parties does not – or cannot – deliver on the promise. Offers can also be revoked after acceptance, unless a term of the offer stipulates that revocation is not allowed.- as it is now the case in British Columbia for offers involving land. A ‘counter-offer’ is simply an offer from the offeree back to the offeror. The legal effect of a counter-offer is to terminate the original offer and substitute the offer of the offeree. What this means in practicality is that if the counter-offer is not accepted, the offeree cannot try to accept the first offer unless it is tendered again by the offeror. This is a point often times neglected in Real Estate, which has caused several tears to be spilled.
The acceptance, like the offer, must be given in clear terms. It must be a positive act. For instance, an offer cannot state “If I don’t hear from you, I will assume you have accepted”. Doing nothing will never be considered legal acceptance. The rule at Law is that where an offer is required by statute to be in writing, then also the acceptance must be in writing in order for the offer to become a contract binding on both parties. Such is the case in Real Estate. An acceptance has no effect until it is communicated to the offeror. Communication can be made by ‘instantaneous means’ as in the case of telephone or teletype or fax communications, or e-mail or hand-delivery and by ‘non-instantaneous means’ such as postal mail. The Law gives the responsibility to the offeror to specify how he wants the offer to be accepted. If the offeror chooses a method like slow mail, then he assumes the risks involved in that type of service (such as misdelivery).
For an offer and acceptance to form a contract there must be consideration or the contract must be signed under seal. Consideration is defined as ‘some right, benefit or profit accruing to the promissor or some forebearance, detriment, loss or otherwise responsibility suffered by the promissee’ . What this means is that the party trying to enforce the contract must have ‘paid’ something in exchange for the promise of the other party. Consideration must be of real value, but it does not have to be money. For example, a mutual exchange of promises is consideration per se.
For a person to be bound to a contract, he must seriously intend to create legal obligations. For example, inviting a guest for dinner would normally not be considered a contract intended to create legal obligations. The Law presumes that there is legal intention in a contract involving total strangers. On the other hand, if the contract is between family members the Law presumes that there is no intention to be so bound (non arm-length transaction). However, this presumption can be reversed if there is evidence to show otherwise.
Even when all the foregoing essential elements exist, a contract can still be void, voidable or illegal. A void contract is one which is deemed at Law never to have existed. A voidable contract is slightly different: it exists until it is repudiated by one of the parties. An illegal contract is one which is made for an illegal purpose, and which is therefore always void. Examples of voidable contracts are the ones made when one of the parties is an infant, i.e. a minor or under the majority age. In this case the contract can be voided by the infant. Likewise, when one of the parties is legally insane, the contract is voidable. A special case is a contract stipulated when one of the parties is a limited company or corporation. Three questions must be first answered before the contract can be enforceable: 1) whether the corporation does in fact exist and 2) whether it has the capacity to enter into the contract and 3) whether the person signing on behalf of the corporation is, in fact, the authorized signatory.
Quite aside from blatantly illegal contracts such as, for examples, contracts to commit a crime or tort until recently here in British Columbia certain other types of contracts where considered illegal. For example, until the mid-80’s contracts involving the sale of land made on a Sunday were deemed to be a contravention of s.4 of the Lord’s Day Act(now repealed) and, thus, illegal and void. Since then, the Supreme Court of Canada has ruled that the application of s.4 – in fact the entire Lord’s Day Act – is unconstitutional in that it infringes on the freedom of conscience and religion guaranteed by the Canadian Charter of Rights and Freedom.
If one of the parties makes a misrepresentation or if the contract contains an inherent mistake, the contract may still not be binding. A misrepresentation is, by definition, a statement which is false and which must have induced one of the parties to enter into the contract. A misrepresentation can be innocent, negligent or fraudulent and different remedies are available to the party suffering damages because of the nature of the misrepresentation. If the representation is innocent, the party can sue for rescission of the contract. In the case of negligent or fraudulent misrepresentation, the affected party can sue for damages as well. Although misrepresentation requires a statement to be made, in Real Estate silence too can result in some form of misrepresentation. Disclosure of latent defects is one such example: failure to disclose latent defects on the part of the Seller will not, by itself, affect the consent of the parties but will have similar consequences as misrepresentation.
In the case of inherent mistake, true consent of the parties does not exist. The logic behind this notion is that the parties were negotiating for a subject matter other than the one stipulated in the contract. A specific type of mistake is sometimes referred to as ‘non est factum’ , Latin for ‘this is not my deed’ . This occurs when a person executes one form of document thinking the document is something else. Duress and undue influence both affect the genuine consent element of a contract. Duress occurs when a person is forced to enter into the contract against his will. As a result, the Courts will find the contract voidable at his option. Undue influence, on the other hand, is more subtle. Like duress it results in one party losing his free will to contract out. However it occurs more frequently when a person is in a superior or dominant position in relation to another and uses this influential position to induce the other to enter into the contract. Again, if undue influence is found, the contract is voidable at the option of the innocent party.
Real Estate Chronicle