|
January 2010 Edition
|
Homepage
l
Contact
Fundamentals of Contract
Law
By: Luigi Frascati
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:
Offer.
Acceptance.
Consideration
Legal Intent.
Capacity.
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 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.
ACCEPTANCE
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).
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 '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.
LEGAL INTENTION
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.
CAPACITY
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.
LEGAL OBJECT
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.
GENUINE CONSENT
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.
About the Author:
Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia.
He is the author of the Real Estate Chronicle, his weblog published online.
Luigi holds a Bachelor Degree in Economics and has been practicing real
estate for the past eighteen ye
|
|
|
|
|
