CONTRACTS IN GENERAL

CONTRACTS IN GENERAL

Probably no other area of the law is as important to real estate brokers, salespersons, and parties transferring
real estate than that of contracts. Nearly every consequential transaction includes one or more contracts. It is
important, therefore, to understand their nature and to be well acquainted with some of the broad rules
governing contract creation, operation and enforcement.

In this chapter we consider contracts in general. Chapter 7 focuses on contracts used most frequently in the real
estate business.

Contract Defined

Any term as broad in its application as “contract” is difficult to define with precision. California’s Civil Code
states the following: “A contract is an agreement to do or not to do a certain thing.” The American Law Institute
offers this definition: “A contract is a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.” Still another authority on the
subject, Corbin, submits a definition which combines the foregoing two versions: “A contract is an agreement
between two or more persons consisting of a promise or mutual promises which the law will enforce, or the
performance of which the law in some way will recognize as a duty.” The latter will serve as our working
definition, and its meaning will be clarified later when we analyze the essential elements of a contract.

Classification. It will be helpful to review certain terms which are commonly used to classify contracts. With
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reference to manner of creation, a contract may be express or implied.

In an express contract, the parties declare the terms and put their intentions in words, either oral or written. In an
implied contract, however, the agreement is shown by acts and conduct rather than words. (In a hurry, you enter
the corner drugstore, where you have an account, pick up a pack of gum, wave it at the clerk; the clerk nods and
you leave. There is an implied contract that you will pay for the gum later.)

With reference to content of the agreement, a contract may be bilateral or unilateral. A bilateral contract is one
in which the promise of one party is given in exchange for the promise of the other party. (e.g., A tells B, “I’ll
give you $300 if you will promise to paint my house” and B so promises.) In a unilateral contract, on the other
hand, a promise is given by one party to induce some actual performance by the other party. The second party is
not bound to act but if the second party acts, the former is obligated to keep the promise. (e.g., A offers a reward
of $100 to anyone who will find and return A’s lost dog. B does not make any promise but just happens to find
and return the dog. A must pay B $100.)

With reference to extent of performance, a contract may be executory or executed. In an executory contract,
something remains to be done by one or both parties. In an executed contract, both parties have completely
performed.

Finally, with reference to legal effect, contracts may be classified as void, voidable, unenforceable, or valid. A
void agreement is not a contract at all. It lacks legal effect (e.g., an agreement to commit a crime; or, in
California, an attempt by a minor under 18 to make a contract relating to real property). A voidable contract is
one which is valid and enforceable on its face, but one which one or more of the parties may reject (e.g., certain
contracts of minors are voidable at the option of the minor; a contract induced by fraud may be voided by the
victim). An unenforceable contract is valid, but for some reason cannot be proved or sued upon by one or both
of the parties (e.g., a contract that cannot be enforced because of the passage of time under the statute of
limitations). A valid contract is one that is binding and enforceable. It has all the essential elements required by
law.

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Contract implied in fact should be distinguished from contract implied in law. A contract implied in law evidences
obligations created by law for reasons of justice. A contract implied in fact would be the foundation of an employee’s claim
against a deceased employer’s estate for overtime wages.