Fundamentals of Contract Law

No matter where you live in North America, you must have seen some humorous vignettes depicting a not-so-trustworthy real estate agent trying to sell a house to an innocent-looking couple. My favorite vignette, which still makes me laugh, goes back a few years when I was working in real estate at United Realty. She engaged a Pompeii Realty realtor, briefcase in hand, in the process of selling a house to an ancient Roman couple, sometimes around 100 B.C. The house has views of Mount Vesuvius. There’s a menacing, ominous plume of black smoke rising from the top of the volcano, and the Roman couple look a bit surprised when the real estate agent, with a big grin on his face, says the punchline: “Also, with a view like this is what could go wrong”!

What exactly do you do when you sign a ‘contract’? The term “contract” means a promise or set of promises made by one person to another, which the courts will enforce. A contract may contain a series of promises or ‘terms’ that must be fulfilled by either party. The person who makes the promise is called the ‘promisor’ and the person who can enforce that promise is called the ‘promise’. If the contract contains several mutual promises, each party will be both promisor and promisor. Land purchase and sale contracts and land interests often have many mutual promises. Contracts are a crucial part of every business transaction, but not as much as in Real Estate. For example, some contracts are made verbally, while others are made simply by exchanging letters or even emails. This is not the case in Real Estate, where contracts are required by law to be written in generally lengthy legal forms to avoid uncertainty, ambiguity and to be binding.

A contract has seven essential elements:

Offer.

Acceptance.

Consideration

Legal Intent.

Ability.

Legal Object.

Genuine consent.

Each of these elements must be present for a contract to be binding and enforceable. Let’s examine them individually.

OFFER

An offer is a promise made by one party to another. Except in Real Estate where the offer must be in writing, an offer may be made in any form. In all circumstances, however, an offer must be made in clear and unequivocal terms. If more than one interpretation can be given to an offer, the Courts will not follow any interpretation. There are ‘one-sided’ and ‘bilateral’ offers. Real estate purchase offers are bilateral, that is, they contain the exchange of mutual promises.

An offer is not made forever. Deals can be finalized when all mutual promises are fulfilled. Or they may expire, if they are not accepted in a timely manner. Or they can be released, if one of the parties does not, or cannot, keep the promise. Offers may also be revoked after acceptance, unless a term of the offer provides that revocation is not permitted, as is now the case in British Columbia for offers involving land. A ‘counter offer’ is simply an offer from the recipient to the offeror. The legal effect of a counter offer is to terminate the original offer and replace the recipient’s offer. What this means in practice is that if the counteroffer is not accepted, the offeree cannot attempt to accept the first offer unless the offeror submits it again. This is a point often neglected in Real Estate, which has caused several tears to be shed.

ACCEPTANCE

The acceptance, like the offer, must be given in clear terms. It must be a positive act. For example, an offer cannot say “If I don’t hear from you, I’ll assume you’ve accepted.” Doing nothing will never be considered legal acceptance. The rule of law is that when the law requires an offer to be in writing, then the acceptance must also be in writing for the offer to become a binding contract for both parties. Such is the case of Real Estate. The acceptance does not take effect until it is communicated to the offeror. Communication can be by ‘instant means’ such as communications by telephone, teletype or facsimile, or email or hand delivery and by ‘non-instant means’ such as post. The Law attributes the responsibility to the offeror to specify how he wants the offer to be accepted. If the offeror chooses a method such as slow mail, then he bears the risks involved in that type of service (such as incorrect delivery).

CONSIDERATION

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 ‘any right, benefit or increase in profit to the promisor or any leniency, detriment, loss or other liability suffered by the promisor’. What this means is that the party trying to enforce the contract must have “paid” something for the other party’s promise. The consideration must be of real value, but it does not have to be money. For example, a mutual exchange of promises is a consideration per se.

LEGAL INTENT

For a person to be bound by a contract, they must have the serious intent to create legal obligations. For example, inviting a guest to dinner would not normally be considered a contract intended to create legal obligations. The Law presumes that there is lawful intent in a contract involving complete strangers. On the other hand, if the contract is between family members, the Law presumes that there is no intention to bind (non arm-length). However, this presumption can be revoked if there is evidence to the contrary.

ABILITY

Even when all the above essential elements are present, a contract can still be null, voidable or illegal. A null contract is one that is considered in the Law to have never existed. A voidable contract is slightly different: it exists until repudiated by one of the parties. An illegal contract is one that is made for an illegal purpose and is therefore always void. Examples of voidable contracts are those entered into when one of the parties is an infant, that is, a minor or an adult. In this case the contract can be canceled by the infant. Likewise, when one of the parties is legally incapacitated, 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 first be answered before the contract can be enforced: 1) whether the corporation actually exists 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.

LEGAL PURPOSE

Aside from blatantly illegal contracts, such as contracts to commit a crime or something wrong, until recently here in British Columbia, certain other types of contracts were considered illegal. For example, until the mid-1980s, land sales contracts made on a Sunday were considered a contravention of Article 4 of the Lord’s Day Law (now repealed) and therefore illegal and void. The Supreme Court of Canada has since ruled that the application of section 4, indeed the entire Lord’s Day Act, is unconstitutional because it infringes on the freedom of conscience and religion guaranteed by the Canadian Charter of Rights and Freedom.

GENUINE CONSENT

If one of the parties makes a misrepresentation or if the contract contains an inherent error, the contract still may not be binding. A false statement is, by definition, a statement that is false and 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 injured party due to the nature of the misrepresentation. If the representation is innocent, the party can demand the rescission of the contract. In the case of negligent or fraudulent misrepresentation, the affected party may also sue for damages. Although misrepresentation requires that a statement be made, in Real Estate silence can also result in some form of misrepresentation. Disclosure of hidden defects is one such example: Seller’s failure to disclose hidden defects will not, of itself, affect the consent of the parties, but will have similar consequences as misrepresentation.

In case of inherent error, there is no true consent of the parties. The logic behind this notion is that the parties were negotiating for a different issue than the one stipulated in the contract. A specific type of error is sometimes referred to as ‘non est factum’, which is Latin for ‘this is not my act’. This occurs when a person executes a document form thinking that the document is something else. Both duress and undue influence affect the genuine consent element of a contract. Coercion occurs when a person is forced to enter into a contract against their will. As a result, the Courts will find the contract voidable at his choice. Undue influence, on the other hand, is more subtle. It results in one party losing their free will to subcontract. However, it most often occurs when one person is in a superior or dominant position relative to another and uses this position of influence 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.

Louis Frascati

[email protected]

http://www.luigifrascati.com
Real Estate Chronicle

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