CONTRACT LAW OVERVIEW
The major purpose of contract law is to assure that a contract is properly formed and is binding on and enforceable by the parties. Contracts constitute "binding arrangements for the future," and may be either written or oral. The existence of a contract imposes obligations on the parties, and as a result, creates certain rights and/or limitations for those parties.
Real estate brokers and associates live and operate in a world of contracts, an integral part of their normal course of business. During the workday life of the licensee, contracts come early, often, and with great rapidity in even a simple sale of real estate. First, of course, is the listing agreement. When an offer is made, the intricacies of the contract of sale must be dealt with. At the same time, various contracts with abstractors, attorneys, consulting inspectors, and other support services enter the picture. Finally, closing brings more contracts to consider.
Contract law is often complicated for even the most competent specialist and situations arise where the legal aspects of a contract are not clear. It is imperative that each element of every contract be understood by all parties. If there is any question, the advice of an attorney should be sought. Real estate licensees should never risk loss by giving legal advice beyond their competence.
Defining a Contract.
A contract may be defined as an agreement between two or more competent persons, having for its purpose a legal objective wherein the parties agree to act in a certain manner. A contract may also be defined as a voluntary agreement supported by legal consideration between legally competent parties to do or refrain from doing some legal act. In essence, a contract is a set of promises that courts can enforce.
In real estate practice there are many different types of contracts, each of which must meet certain minimum requirements for enforcement. The most commonly encountered contracts used in professional real estate brokerages are listing contracts and contracts for sale.
RECOGNIZED CLASSIFICATIONS Of CONTRACTS
In the discussion and study of contract law, reference is often made to different kinds of contracts and their various characteristics. These classifications are not all inclusive nor all exclusive. Any given contract may be classified in more than one category at the same time.
A formal contract depends upon a particular form or mode of expression for its legal status based on statutory requirements. With certain exceptions, such as contracts under seal, negotiable instruments, and recognizance, formal contracts no longer are used.
An informal contract is one for which the law does not require a particular set of formalities. Virtually all contracts used in real estate transactions are considered informal or ordinary agreements which may use any style of language as long as they meet the basic common law requirements for a valid contract. Although they may in fact be very complicated, real estate contracts are usually considered "simple" contracts.
A unilateral contract is one in which only one party makes a promise which may be accepted upon the act of another. It is generally considered to be a promise in exchange for performance. A unilateral contract is "one-sided" because only the offeror, who makes this promise, will be legally bound.
In a bilateral contract, both parties make promises. It is a two-sided agreement wherein each party is both a promisor and a promisee and is under duty to render a performance and enjoys the right to receive a performance. This is the more common type of contract in real estate. A sales contract whereby the owner agrees to transfer title in exchange for the buyer's agreement to pay cash is a clear example of a bilateral contract, the exchange of a promise for a promise.
Executory and Executed.
A contract which is in the process of being carried out is an executory contract. When both parties have rendered their promised performance, the contract may be considered fully executed (performed). A contract may be wholly performed on one side, but unperformed on the other, or unperformed on both sides in whole or in part (partially executed). A real estate sales contract is executory until closed.
A contract for sale of real estate does not transfer legal title, but during the time a real estate contract is executory, signed by both parties, the purchaser has equitable title. If the seller refuses to sell, the purchaser after tendering performance can sue for specific performance and has the right to demand that legal title be transferred upon payment of the full purchase price.
Contractual liability may be developed in several different ways. Where language is used to indicate an agreement in words (as in a written contract for sale of real estate) or where words are not used but actions manifest an assent to contract, the contract is referred to as an express contract.
Implied contracts are distinguishable from express contracts only in that the offer and/or acceptance are found from conduct rather than expressed words. The law will imply a contract where neither words nor actions expressed an agreement but where a person accepts and retains the beneficial results of another's services which were rendered at their own request and which they had no reason to suppose were gratuitous. Implied contracts for the sale of real estate cannot be enforced.
LEGAL EFFECT OF CONTRACTS
The legal effect of express and implied contracts is the same. The only difference is the manner in which assent is manifested. Both are consensual in that there is a voluntary acceptance of benefits by one or both parties resulting in the creation of a contractual obligation. Real estate brokers are well advised, however, to assure that all contracts are expressed in writing in order to ensure enforceability.
A valid contract contains all the essential elements of a contract and is legally binding on all parties.
A void contract is one that has no legal effect. It is no contract at all. It is actually inaccurate to call such an agreement a contract since a contract by definition is a legally enforceable agreement. A void contract usually comes about as a result of the absence of one or more essential elements of a contract. A contract entered, into to burn down a building, for example, is a void contract as the objective is illegal.
Avoidable contract is one that is valid and enforceable on its face but may be properly rejected by one of the parties. The aggrieved party, however, must take action to have the contract voided.
An unenforceable contract may satisfy all the basic requirements for a valid contract, but cannot be enforced in the courts because of some statutory requirement or some rule of law.
Some contracts are "implied in law," not to be confused with "implied contracts" discussed above. Quasi contracts are non-consensual obligations imposed by law to prevent unjust enrichment of one person at the expense of another. A quasi contract is not a contract as such, as it is not based on expressed or implied promises.
Quasi contracts are obligations created by law (in the absence of any agreement between the parties) as a method of giving a remedy in the nature of contract relief. A quasi contract might be imposed in a circumstance in which one has received and retains money or goods which in fairness and justice belongs to another. They are used to fill the void where no consensual contract liability exists.
FOR EXAMPLE: A broker ordered ten lock boxes for securing homes listed for sale. The vendor, through an honest mistake, shipped 100 units which the broker used. Although no contract existed for the excess items, the broker would be expected to pay for them if they are kept.
The law reasonably protects against improper suits resulting from quasi contracts. These may be applied in a wide variety of situations, but in general, the following hold.
No "one absolute correct form" is required for a valid contract. Any form used, however, should specify all the terms and conditions of the agreement between the parties and must be signed by those to be legally bound by the document.
Seven essential elements are necessary in a real estate sales contract, the absence of any one of which will make a contract void, voidable, or unenforceable.
In examining an agreement to determine whether or not a valid contract has in fact been created, contract attorneys scrutinize each element. The failure of any one results in a decision of "no contract."
In addition to the above, other provisions are usually included in a contract. Among these are:
The first element of any contract is an offer, that is, a promise by one party, the offeror, to act or perform in a specified manner provided the other party acts or performs in a manner requested. An offer confers upon the offeree a legal power to accept. Upon acceptance, a contract is created.
The agreement process begins when the offeror makes an offer to another, the offeree. The offer may be accepted as presented or a counter proposal may be made. Often there is negotiating back and forth over the terms of the proposed contract before a firm agreement is concluded, particularly in the sale of real estate.
If an offeree creates any variance from the terms proposed in the offer in accepting it, the initial offer has been turned down and a counteroffer is being made. With each subsequent counteroffer, the offeree switches legal position to offeror while the offeror becomes the offeree. If a seller does not want to risk the loss of a sale, acceptance of an offer to purchase must be unequivocal.
Requirements of an Offer.
For an offer to be considered legally sufficient it must meet three requirements:
The offeror must intend that an offer become a contract. Acts, words, and behavior should lead a reasonable person familiar with the business being transacted into believing that a bona fide offer has been seriously and voluntarily proffered. Statements made in jest, under great stress, or through bluffing, are not tenders of offers.
Reasonably Definite and Complete Terms.
When an offer is incomplete or vague and the terms are unclear and uncertain, it cannot serve as the basis for a contract. In law, the words did not rise to the status of an offer. The requirements are not absolute certainty, however, but only a reasonable definiteness and sometimes the terms are only implied. If the offer includes the usual essential terms which are a the names of the parties, the subject matter involved, the price, and the time and place for performance, It will usually be considered as having met the requirement. The requirement of definiteness dictates the use of a legal description in a contract for sale of real estate.
Communicating the Offer.
An offer is not legally effective until the party to whom it is directed has received it. If an offeree has no knowledge of an offer, it has not been properly communicated and is therefore not in effect. The requirement of communication of offers goes further in that it must be communicated by the offeror personally or by an authorized representative. A buyer who has learned that a property owner "will sell his house for $75,000" cannot create a contract by saying to the owner, "I'll take it."
Estimation of Seller's Net and Buyer's Cost.
When an offer is presented, real estate brokers are required by Rule 605:10-17-4 (8) to inform the buyer and seller as to the anticipated costs at closing. They must prepare a good faith estimate of the seller's net proceeds and the buyer's net costs based on the offered price and terms. Sample forms appear on following pages. If an offer is less than the listing price, the seller's net figure will have changed from that as given at the time of the listing.
A counteroffer is a response to an offer which relates to the same subject matter as the original offer but differs from it in one or more particulars. A counteroffer operates as a rejection of the offer. In effect, it amounts to a conditional acceptance which the original offeror, now the offeree, must agree to for a contract to be formed.
Any attempt on the part of an offeree to change the terms proposed by the offeror creates a counteroffer. It has the effect of a new offer, rejecting the original. The original offer cannot be accepted thereafter by the offeree unless the offeror revives it by repeating it.
TERMINATION OF OFFERS
Although there are exceptions, as a general rule, offers may be withdrawn at any time and for any reason prior to acceptance. This is so even if the offeror says the offer will be dept open for a specified period of time. The power to accept continues until the offer is terminated by some legally recognized method.
Lapse of Time.
An offer may contain wording indicating the time limit for remaining open. The offer is revoked if the offeree fails to accept it within the prescribed time. In the absence of specifically stated time, a reasonable period of time will be adjudged. After the time has expired, any attempt on the part of the offeree to accept the offer simply constitutes a new offer.
Revocation by the Offeror.
An offeror may withdraw a simple offer for any reason (or without stating or having a reason) at any time prior to acceptance by the offeree. Even if an offeror agrees to hold an offer open to acceptance for a certain time, the offeror is generally not bound to do so.
If an offeree wants to be certain that an offer will be h held open for a certain period, the offeree must contract with the offeror. In other words, the offeree must "buy" the time needed by entering into an option contract. Options are often simply part of another agreement, such as options negotiated by lessees to buy leased premises. In these cases, the options are part of the basic contract, and are supported by the consideration of the basic contract. No additional or express consideration is necessary for them to be binding.
Rejection by the Offeree.
The offer is terminated when the offeree expressly states that the offer will not be accepted or if the offeree fails to fulfill a condition prescribed by the offeror. Most frequently, however, rejection comes in the form of a counteroffer which is a conditional acceptance based on certain changes made in the terms. The original offer is rejected in either case and is no longer operative. The original offer is dead and cannot be accepted later unless revived by the offeror repeating it.
Death or Insanity of Either Party.
Although neither death nor insanity of either party will terminate an executed contract, an offer will end upon the occurrence of death or upon declaration of insanity of either party, regardless of notice thereof.
Destruction of Subject Matter.
Should the property subject to the offer be destroyed or lost at no known fault of either party, the offer is terminated.
The offer is void if legislation is enacted subsequent to the offer making it illegal. This is true even if the offer has been accepted and a contract has come into effect. The executory portion of such a contract cannot be enforced.
For a contract to be binding, it must have a genuine acceptance as well as a bona fide offer. Acceptance of an offer is essential to the creation of contract. The offeree must meet exactly all the terms and conditions set forth by the offeror. No mutual consent is present if negotiations are merely conditional.
When a valid offer has been properly accepted, there is a "meeting of the minds." No contract exists unless there is mutual consent or assent. Acceptance is both a matter of intention and an over act of manifestation. An acceptance must be both positive and unequivocal. It may not change any of the terms of the offer, add to, remove from, nor modify in any way the provisions of the offer.
In the case of a bilateral contract, acceptance is some overt act by the offeree indicating an acceptance of the terms of the offer, such as written or spoken words, or other action communicated to the offeror.
Where an offer contemplates the formation of a bilateral contract, the offeree must communicate an acceptance to the offeror or at least place the acceptance in the ordinary channel of communication in order to form a contract.
Where the offer consists of a promise in exchange for an act, the formation and existence of the contract does not depend upon notice being given to the offeror of the acceptance. Compliance by performance of the requested act is sufficient. Performing the requested act (or forbearance) with the intention of accepting the offer is acceptance for a unilateral contract.
Once an acceptance has been communicated, the contract is completely formed and subsequent communications do not affect it except for a mutual agreement to rescind or modify.
REALITY OF CONSENT
The consent of the parties to the contract must be real before there is a contract. The terms of the contract must reflect the true intention of the parties, i.e., what the parties have reasonably indicated outwardly - not their secret intent. In order to be recognized as a valid contract, the assent of the parties must be genuine and free from mistake, misrepresentation, fraud, duress, menace or undue influence.
Depending upon the nature of the mistake, the effect of a mistake on the validity of a contract varies. Innocent mistakes serve to cancel agreements. Mistakes based on ignorance or poor judgment or the fact that the contract had not been read before signing cannot be claimed as material mistakes sufficient to terminate a contract. If a mistake is made in the preparation of the offer, it is probably curable and will not affect the contract. If the identity of one of the parties to the contract or the identity of the subject matter is incorrect, the contract may not be void, but may be voidable. A court may reform the contract. If, however, there is ambiguous language which does not express the meaning or intentions of the parties, there is no contract.
Should the contract be in violation of law, it is void. However, if it is in the interpretation of the law and the contract is based on an erroneous conclusion, the contract cannot be disavowed. It h as been generally assumed that everyone knows the law and failure to understand the legal consequence of signing a contract will not bring relief. In more recent times, however, the presumption that everyone knows the law is being given less weight.
When both parties contract in the belief that certain conditions exist when in fact they do not, the contract is voidable.
An unknowing or innocent misstatement of a material fact, without intention of deceit, can make a contract voidable at the option of the party to whom the misrepresentation was made.
Any attempt to gain some unfair or dishonest advantage over another will defeat the reality of consent and cause the contract to be voidable, if not void. A defrauded party has the right to collect damages or have contract rescinded.
Contracts based on substantial misrepresentation, the knowing and deliberate misrepresentation of material facts, and done with the intent to deceive and possibly cause harm and injury, are usually voidable at the option of the injured party. Failure to disclose known defects ("remaining silent") can be considered fraud. If altered after acceptance, the contract is voidable by the purchaser.
Misstatements based on opinion cannot be construed as fraudulent acts. Exaggerated or superlative comments not made as representations of fact, such as "this is a real good buy," are not fraudulent. One test of "harmless trade puffery" is whether a reasonable person would have relied on the statement.
Since the bargain theory of contracts is fundamental to the free enterprise system, the law will not permit one party to coerce another into an assent to an agreement. Duress is the use of force or restraint to cause others to do something they would not do otherwise. Under these conditions, there can be no genuine meeting of minds and such a contract is not enforceable against the forced party.
Although menace is a mild form of duress, by Oklahoma Statute (Title 15, Sec. 53), it is one of the bases for avoiding an agreement on grounds of defective assent. Menace is compelling a person by wrongful threat of force to do or agree to do an act. It includes the use of fear or threat of unlawful or violent injury to any person, or threat of injury to the character of any such person.
Overcoming freedom of will through unfair persuasion is undue influence. It usually involves transactions resulting in unnatural enrichment of someone because of their domination of another person. Such unfair persuasion is usually an exploitation of such weakness as mental infirmity, ignorance, lack of experience, old age, poor health, physical handicap, emotional strain, or financial distress.
Undue influence most often results from a relationship of trust and confidence between two persons wherein one is justified in assuming that the other will be looking after the formers best interest when the latter is actually violating the fiduciary relationship.
A contract may meet all other requirements to make it valid and yet fail because of lack of the technical requirement of sufficient legal consideration. The concept of consideration is not only difficult to define, it is also one of the most difficult concepts to justify. Its roots go back to the beginning era of development of modern contract law.
Consideration is something of value which is committed by each of the parties to an agreement and without which the parties cannot be held to their promise. Unless a bargain is reached in exchanging something for something, a contract cannot be legally enforced. For a contract to be formed, something must be given in an exchange. Our legal system will not enforce a contract based on purely gratuitous promises.
Valuable consideration may be a mutual exchange of promises by which the parties obligate themselves to do something they were not legally required to do before. Consideration must have value. There must be a reciprocal relationship between the offeror's promise and the offeree's performance or return promise. Valuable consideration may be property, time, service, the payment of money, other things of value measurable in dollars, or simply a legal right.
Consideration may also be defined as a legal detriment to the promisee bargained for by the promisor. Legal detriment means that the promisee gives up or promises to give up a legal right, or assumes or promises to assume a legal burden. In the normal course of business, both parties suffer legal detriments and both enjoy legal benefits from entering into a contract. In bilateral contracts, both parties incur legal detriment.
The general trend in contract law is to place more emphasis on the intent of the parties. Intent will determine whether a detriment or benefit has resulted from the bargain, and whether consideration is created, binding the parties to keep their promises. The determination of intent is through the same objective standard applied to making and accepting an offer.
Most contracts are supported by valuable consideration, distinguishing them from gifts. Good consideration (love and affection, with no pecuniary measure of value) is sufficient to support a gift deed, but is insufficient for most other contracts.
Love and affection may be compelling motives for making a promise, but they are not words of bargaining. Because such a contract is not supported by present consideration, courts may not specifically enforce such a promise should the grantor have a change of mind before performing. A completed gift is irrevocable while a gratuitous promise is generally unenforceable. The grantee cannot enforce any covenants supported only by good consideration against the grantor.
If the transfer was done to avoid creditors, a contract supported only by good consideration can be set aside because no money actually changed hands.
Nominal consideration is consideration in name only bearing no relation to market value. It may be used to disguise the true value of the exchange, or may be as stated. A recital of obvious nominal consideration would be: "$10.00 and other valuable consideration."
Adequacy of Consideration.
The law does not require adequacy of consideration to find a contract enforceable. The value given to constitute legally adequate consideration has no relationship to actual value. Once consideration is found in a contract, courts seldom will inquire into it adequacy or sufficiency. The law usually is not concerned whether the value of one of the promises is equal in value to the other.
As a general rule, the recital of a promise for a promise is sufficient consideration to create a binding mutual obligation. Because the value of the exchange is involved, the fact that some duty was exchanged for a relatively small amount or that one party got the better of a bargain does not usually concern the courts. As long as the parties to the contract appear to have equal bargaining capabilities, the value of mutual consideration is not important. The law requires only that consideration exchanged meet the definition.
A written agreement that states consideration has been given is not conclusive proof that consideration has been bargained and paid. Consideration must have some value and must actually be given. Earnest money deposits are not intended to make a purchase contract binding; they serve only as a source of payment for damages in the event the prospective purchasers do not keep their promises and breach the contract.
A nominal sum written into a contract will not always suffice as legal consideration. The amount is not the issue but whether or not actual consideration was given. In some states, "One dollar in hand paid in consideration of X's promises to. . ." will not make the promise enforceable. In Oklahoma, however, the recital of any payment may be interpreted as a promise to pay and a binding contract is thereby crated. Proof of legal consideration in addition to that recited, such as forbearance of a right to bring a justifiable law suit, would be sufficient even though the Statutes, Title 15, Section 114, states that a written instrument expressing consideration is presumptive of consideration. Section 115 places the burden of proof of lack consideration on the party seeking to invalidate or void the contract (instrument).
Past Consideration No Consideration.
Because consideration is something given in exchange for a promise and to induce it, there must be present consideration to support a contract. Past consideration is an attempt to support present promises with a previously conferred benefit. A past event given as consideration makes a contract unenforceable because the object of the contract was not something bargained for. Anything that has occurred prior to the promise cannot be consideration.
Illusory Promise Not Consideration.
The content of the promise may determine whether a bargained for promise constitutes adequate consideration. A promise may be so worded that it is left up to the promisor to decide whether or not to perform. It may be worded so that the promisor has an unrestricted right to cancel the contract. Because such words in the promise do not obligate the promisor, it is an illusory promise. There being no legal detriment to the promise, such consideration is legally insufficient. For example: "I will sell you a corner lot when I plat my next subdivision" is, without more, an illusory promise.
A promise which requires the commission of a crime or which violates basic public policy is obviously illegal and will void a contract. It is not always clear what does or does not violate statutes designed to protect the public health and morals. A court decision may be necessary to determine whether consideration given is legal.
Options and Consideration.
An option is a right given for a consideration to purchase or lease a property upon specified terms within a specific time, without obligating the party who received the right to exercise the right. It must be supported by consideration and, to be enforceable, must have all the elements of a contract. A promise to pay a mere recital of consideration alone is not sufficient consideration to exercise an option.
CONTRACTUAL CAPACITY OF PARTIES
All persons are presumed to have the legal capacity to enter into contracts. Some, however, do not have the full understanding of their rights nor the capacity to understand the nature, purpose, and effect of a contract. These are considered in law not to have full contractual capacity and are afforded some degree of special protection under the law. Among them are minors, mental defectives and intoxicated persons.
Oklahoma Statutes define a minor as a person under the age of eighteen (Title 15, Sec. 13). The courts recognize that persons of immature years lack capacity to compete on an equal basis with other persons, so they have given minors the right to protect themselves against their own lack of experience, judgment and ability. Although some minors have the intelligence to comprehend the most complex of transactions, they need to be protected from their immaturity, inexperience and tendency to buy impulsively.
The general rule of law is that any time prior to attaining the age of majority and within a reasonable period thereafter, nearly all contracts entered into by the minor may be avoided with no liability. After reaching legal age, minors may ratify or approve their previous contracts and will then be bound by them. A "reasonable time" for affirming or disavowing a contract depends on conditions surrounding the situation. In Oklahoma, for most situations, the time period is one year beyond achieving majority.
Adults are in the perilous legal position of being liable for contracts which can be disaffirmed or canceled by a party who is a minor. Since a contract with a minor binds both the minor and the adult unless the minor elects to disaffirm it, a contract with a minor is not void on its face, but is voidable. The burden is upon adults to ascertain that the persons with whom they deal are of legal age.
Ratification is a manifestation of an intention to be bound by a contract entered into during the period of minority. Minors cannot ratify a real estate contract until they come of age, at which time there are several ways to manifest ratification.
If the minor does nothing to disaffirm the contract within a reasonable period of time after attaining majority, the contract will be considered affirmed. Reasonableness of time will depend on the situation. If the contract is executory, more time may be allowed than if the contract is completed.
Upon reaching the age of majority, persons may expressly declare their intention in words to be bound by a contract entered into as a minor. The means of expression is not important. It can be written or it may be made orally and no particular form of expression is required. It must be more than a mere acknowledgement of the existence of the agreement. It must be an indication of an intent to be bound by the contract.
Implied Ratification. ,
The conduct of a person may imply an intention to continue the responsibility attendant to the contract. For example, if a minor purchases a home three months before reaching majority and continues to meet monthly payments and reside therein after reaching majority, the action would constitute ratification.
The major objective of the law in giving a minor the right to avoid contracts was to protect the minor's estate from dissipation during minority and did not include the requirement that the minor return to the adult the consideration received. In more recent times, the tendency of courts has been to have the minor place the adult in status quo, that is, restored to the legal position prior to the contract. Upon rescission of a voidable contract, the parties must return any consideration that was exchanged. The minor owes the duty to return to the other party of the contract any payment received and which he still has at the time of disaffirmance. The minor is also entitled to recover all the payments made as well as the return of any property still in the possession of the other contracting party.
There are several exceptions to the general rule that minors may avoid their contracts. One is that contracts made by minors to obtain necessaries are not voidable by minors and will be enforced against them. Necessaries are those things personal to the minor, such as food, clothing, shelter, medical care, elemental education, training for a trade, and the tools of a trade, suitable for the minor's station in life.
In matters related to housing, minors who are married have rights different from those of unmarried minors. Anyone who is legally married and otherwise qualified may dispose of and make contracts relating to real estate, regardless of age.
A minor cannot be held liable for damages for loss of rent caused by the breach of a lease, but can be held liable for the reasonable rental value of the premises during the time occupied, provided it would be classed as a necessary and suitable to the minor's station in life.
Period of Minority.
The age at which the period of minority ends is calculated from the first minute of the day on which a person is born to the same minute of the corresponding day completing the period of minority (Title 15, Sec. 13, O.S.). In other words, majority begins on a person's eighteenth birthday.
Legal procedures have been established to provide "judicial emancipation" of minors. Upon petition by or on behalf of a minor and a court hearing, a judge may find that removal of the disabilities of minority is in the best interest of the minor and may declare the minor capable of tending to affairs of business and competent to enter into contracts.
Mentally incapacitated persons are given the same protection as that given to minors. Many incompetent persons have never been adjudged as such and continue to function in business, freely entering into contracts. Contracts of incompetents are voidable, not void. Should the person be determined to have been incompetent at the time the contract was entered into, affirmative action on the part of the incompetent will be necessary to set it aside later. Since it is difficult to recognize the affliction of incompetence, there is no effective way to avoid the problem except through the exercise of good judgment.
The contracts of persons judicially declared insane are void and can never have any effect. Because the proceedings by which guardians and conservators are appointed are a matter of public record, all those dealing with an insane person or an adjudged incompetent are presumed to know of that person's inability to enter into contracts.
The rules regarding the contracts of persons under the influence of alcohol or other drugs are similar to those of other persons lacking the capacity to understand the nature of a transaction. The contract of an intoxicated person is usually binding, except where that person is so intoxicated as to be incapable of understanding the consequences of the transaction. In that case, the intoxicated person, upon regaining sobriety, may ratify the contract or may disaffirm the contract and recover the consideration given. In the case of disaffirmance, the other party must also be returned to the same legal position as before the contract.
CORPORATIONS AND OTHER FORMS OF ORGANIZATIONS
Legal counsel should always be sought when entering into contracts involving any type or organization.
The contractual ability of a corporation is usually determined by its charter and by-laws. Its capacity to contract may be related only to specific matters or it may be related to broad areas of business transactions. It is usually necessary to obtain copies of minutes of corporate meetings showing that the transaction is authorized and indicating who is empowered to sign for matters involving real property on behalf of the corporate contractor.
A partnership cannot contract except through a general partner. Each general partner has the authority to bind the firm. Third parties dealing with a partner are entitled to rely on the partner's representations of having authority even when a partner is exceeding authority.
Unincorporated associations cannot contract in the name of the association as they do not have a clearly recognized legal status. They must be treated as a group of individuals with each member of the association (or syndicate, or other designation) having the legal capacity to contract. A contract entered into in the name of an unincorporated association will bind the members who authorized the contract or ratified it after it was negotiated.
Governmental units have no capacity to conduct business of any kind unless they are specifically authorized by statute to do so. They are strictly controlled by statutes and ordinances, so it is important in dealing with any governmental unit to verify its authority to contract.
Illiterate persons are considered competent to contract. A contract signed by an illiterate is presumed valid unless fraud or undue influence can be proved.
Legal rights of persons convicted of felonies are suspended upon a sentence of imprisonment in a state penitentiary for any term less than life. If sentenced to life imprisonment or death, rights are completely taken away and they cannot enter into valid contracts, except for the sale of their interest in real property. Parole restores a limited series of civil rights, including the right to contract. All rights may be regained when a full pardon is granted.
Send mail to with questions or comments about this web site.