Washington Real Estate Fundamentals
Lesson 6:
Contract Law
© 2011 Rockwell Publishing
Introduction
Contract: Agreement between two or
more competent persons to do, or not do,
certain things in exchange for consideration.
Valid contract: Agreement that meets
minimum requirements so that it is legally
binding.
 Will be enforced by a court if one party
fails to fulfill terms of agreement.
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Contract Classifications
Contracts may be classified according to
certain basic characteristics.
Every contract is:
 express or implied
 unilateral or bilateral
 executory or executed
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Contract Classifications
Express vs. implied
Express contract: Agreement that has been
put into words, whether spoken or written.
Implied contract: Created by actions of the
parties, not by express agreement.

Most contracts are express, not implied.
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Contract Classifications
Unilateral vs. bilateral
Unilateral contract: Only one party promises
to do something and is legally obligated to
perform as promised.
Bilateral contract: Both parties promise, both
are legally obligated.

Most contracts are bilateral.
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Contract Classifications
Executory vs. executed
Executory: Contract is in the process of
being performed.
Executed: Contract has been fully performed;
both parties have fulfilled their promises.

Note: “executed” may also refer to a
contract that has been signed, whether
or not any performance has taken place.
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Summary
Contract Classifications
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Contract
Express or implied
Unilateral or bilateral
Executory or executed
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Elements of a Valid Contract
To be valid, a contract must have:
 parties with legal capacity
 mutual consent
 lawful objective
 consideration
In addition, certain types of contracts must be
in writing and signed.
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Elements of a Valid Contract
Contractual capacity
Contract not legally binding unless all parties
have legal capacity.
Two requirements for legal capacity:
 age of majority
 mental competence
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Contractual Capacity
Age of majority
In Washington, a person must be at least 18
to enter into a contract.
 Someone under 18 is a minor.
Parent or legal guardian may enter into
binding contract on minor’s behalf.
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Contractual Capacity
Age of majority
Contract in which one party is a minor is
voidable by the minor.

Minor or guardian can choose whether to
terminate or proceed with contract.

Other party can’t enforce contract.
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Contractual Capacity
Mental competence
Mentally competent: Of sound mind.

If one party declared incompetent,
contract void – no legal effect.

Guardian can enter into contracts on
behalf of incompetent person.
Contract entered into while temporarily
incompetent may be voidable.
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Summary
Contractual Capacity
• Capacity
• Age of majority
• Minor
• Mental competence
• Guardian
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Elements of a Valid Contract
Mutual consent
Mutual consent: Contract legally binding only
if both parties consent to its terms.
A court presumes consent if someone signs a
contract.
 Party who can’t read or doesn’t know
language should ask someone she trusts
to read or translate contract.
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Mutual Consent
Offer and acceptance
Mutual consent arrived at through process of
offer and acceptance:
 Offeror makes offer to offeree.
 If offeree accepts offer, contract formed.
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Mutual Consent
Offer
Offer must:
 express intention to enter into contract
 be definite and certain
If offer fails to specify all basic terms, it’s
merely an offer to negotiate.
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Offer
Termination
An offer may terminate due to:
 revocation by offeror
 lapse of time
 death or incompetency of the offeror
 rejection of the offer
 a counteroffer
If offer terminates before acceptance, no
contract formed.
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Termination of an Offer
Revocation
Offeror can revoke offer any time before
acceptance.

Offeror must notify offeree of revocation
before offeree accepts.
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Termination of an Offer
Lapse of time
Offer with deadline for acceptance expires
automatically when date or time arrives.
Offer without deadline expires after reasonable
amount of time.
 “Reasonable” depends on circumstances.
 Issue sometimes decided by court.
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Termination of an Offer
Death or incompetency
Offer terminated and no contract formed if:
 offeror dies before offer is accepted
 court declares offeror mentally
incompetent
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Termination of an Offer
Rejection by offeree
Rejection terminates offer.
 After rejecting offer, offeree can’t change
mind and accept it.
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Termination of an Offer
Counteroffer
Counteroffer: Offeree accepts some terms,
but changes one or more other terms.

Counteroffer terminates original offer and
replaces it with new offer.
 Roles of offeror and offeree reversed.

Sometimes called qualified acceptance,
but has same legal effect as rejection.
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Mutual Consent
Acceptance
To create contract, offeree must
communicate acceptance to offeror before
offer terminates.

Offer may specify how acceptance must
be communicated.

If no time or manner of acceptance
stated, reasonable time and manner
implied.
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Acceptance
Negative influences
Acceptance must be voluntary, free of
negative influences.
Contract voidable by victimized party if
consent resulted from:
 fraud
 undue influence
 duress
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Negative Influences
Fraud
Fraud: Misrepresenting a material fact to
someone who relies on the misinformation.
 Material fact: Important information that
may affect decision to enter into contract.
Fraud may involve:
 misleading statements
 concealment of information
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Fraud
Actual vs. constructive fraud
Actual fraud: Person making statement knows
or should know that it’s false.
 Includes intentional deceit or concealment.
 Includes statements made without
knowing whether they’re true or false.
Constructive fraud: Person in position of trust
or with superior knowledge unintentionally
misleads another person.
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Negative Influences
Undue influence
Undue influence: Persuading someone to
sign contract by taking advantage of trust,
weakness of mind, or distress.

Persuasion strong enough to overpower
will, so that consent isn’t truly voluntary.

May involve abuse of special legal
relationship based on trust: attorneyclient, agent-principal, etc.
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Negative Influences
Duress
Duress: Using force, constraint, or threats to
compel someone to do something against
his will.
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Elements of a Valid Contract
Lawful objective
Both purpose of contract and consideration
must be lawful.

Can’t involve:
 violation of law
 violation of public policy

Contract with unlawful objective is void.
 Court won’t enforce it for either party.
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Elements of a Valid Contract
Consideration
Consideration: Something of value exchanged
by contracting parties.

Each must give the other something of value:
 money, property, services, or a promise
to give something of value in the future

In typical real estate sale:
 seller’s promise to convey title
 buyer’s promise to pay agreed price
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Elements of a Valid Contract
Statute of frauds
Statute of frauds: State law that requires
certain types of contracts to be in writing and
signed.

Contracts not covered by statute
generally enforceable even though
unwritten.
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Statute of Frauds
Which contracts must be in writing
Washington’s statute of frauds applies to an
agreement:
 to convey an interest in real property

to assume the debts of another

to employ an agent to sell, buy, lease, or
exchange real property, if agent will be
compensated

that won’t be performed within one year
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Statute of Frauds
Adequate written contract
To comply with statute of frauds, any “writing”
is adequate as long as it:
 identifies contract subject matter
 indicates agreement between parties
 is signed by party to be bound
May be printed, handwritten, or a combination.
 Handwritten part takes precedence if it
conflicts with printed part.
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Statute of Frauds
Contracts that fail to comply
Contract subject to statute of frauds
unenforceable if not in writing and signed.

But once contract fully performed, neither
party can undo transaction based on
statute of frauds.
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Summary
Consent and Other Requirements
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Mutual consent
Offer and acceptance
Counteroffer
Fraud (actual or constructive)
Undue influence
Duress
Lawful objective
Consideration
Statute of frauds
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Legal Status of Contracts
Four terms used to describe a contract’s legal
status:
 void
 voidable
 unenforceable
 valid
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Legal Status of Contracts
Void
Void: No contract; attempted agreement failed
and can be disregarded.
 Neither party has to withdraw.
 Usually happens because essential
element missing, such as:
 no consideration exchanged, or
 no consent (for instance, party mentally
incompetent).
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Legal Status of Contracts
Voidable
Voidable: One party can choose whether to
withdraw or go through with the contract.
 Contract unenforceable by other party.
 Examples:
 contract entered into by minor
(voidable by minor or guardian)
 contract entered into as a result of
fraud, undue influence, or duress
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Legal Status of Contracts
Voidable
Voidable contract is binding unless party asks
court to rescind contract.
 Withdrawing party must take legal action
within reasonable time.
 Otherwise, court may rule that contract
has been ratified.
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Legal Status of Contracts
Unenforceable
Unenforceable: Contract that can’t be
enforced in court.
 Examples:
 terms can’t be proved
 voidable by other party
 statute of limitations expired
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Unenforceable Contracts
Terms can’t be proved
Court can’t enforce contract if terms of
agreement can’t be proved.
 Most often a problem with oral contracts.
 Parties probably agreed on all essential
terms, but that can’t be proved now.
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Unenforceable Contracts
Voidable by other party
If one party has a right to void a contract (for
example, a minor), other party can’t enforce
the agreement.
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Unenforceable Contracts
Statute of limitations expired
Statute of limitations: Law that sets time limit
for filing a lawsuit.
 Party who misses deadline loses right to sue.
 Contract unenforceable.
Washington statute of limitations for contracts:
 breach of written contract: 6 years
 breach of oral contract: 3 years
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Legal Status of Contracts
Valid
Valid contract:
 all essential elements
 terms can be proved in court
 not voidable (for example, no negative
influences)
 statute of limitations hasn’t run out
If one party fails to perform as promised, other
can sue to have contract enforced.
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Summary
Legal Status of Contracts
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Void
Voidable
Unenforceable
Valid
Statute of limitations
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Discharging a Contract
Valid contract may be discharged by:
 full performance
 agreement between parties
Most contracts are discharged by full
performance.
 Each party performs as promised.
 Contractual relationship ends.
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Discharging a Contract
Agreement between parties
Contract may be discharged without full
performance, if parties agree to:
 rescission
 cancellation
 assignment
 novation
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Discharging a Contract
Rescission
Rescission: Parties agree to terminate
contract and undo steps already taken.
 Consideration is returned.
 Puts parties as nearly as possible back in
positions they were in before contract.
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Discharging a Contract
Cancellation
Cancellation: Parties agree to terminate
contract without undoing steps already
taken.
 Money paid prior to cancellation not
returned.
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Discharging a Contract
Assignment
Assignment: One party (assignor) withdraws
from contract and assigns interest to new
party (assignee).
 Contract not really discharged.
 If assignee defaults, other party can still
sue assignor (secondary liability).
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Discharging a Contract
Assignment
General rule:
 Contract can be assigned without other
party’s consent, unless clause expressly
forbids that.
Exception:
 Personal services contract can’t be
assigned without consent.
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Discharging a Contract
Novation
Novation: Original party withdraws and is
replaced by new party, and also is released
from liability.
 No secondary liability (as in assignment).
 Always requires consent of other original
party.
Novation can also refer to substitution of new
agreement for old one between same parties.
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Summary
Discharging a Contract
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Discharge
Full performance
Rescission
Cancellation
Assignment
Secondary liability
Novation
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Remedies for Breach of Contract
Breach of contract: When one party fails to
fulfill a promise in the agreement, without
legal excuse.

If breach is material breach (important to
contract), other party has right to sue.

“Time is of the essence” clause makes
failure to meet deadline material breach.
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Remedies for Breach of Contract
Four legal remedies for breach of contract:
 rescission
 compensatory damages
 liquidated damages
 specific performance
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Remedies for Breach of Contract
Rescission
As explained earlier, rescission is termination
of contract that returns parties to original
(pre-contract) positions.
May occur by:
 agreement of parties
 court order
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Remedies for Breach of Contract
Compensatory damages
Compensatory damages: Money that court
orders breaching party to pay other party, to
compensate for losses resulting from breach.
 Most common remedy for breach of
contract.
 Intended to put nonbreaching party in
position she would have been in if
contract performed.
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Remedies for Breach of Contract
Liquidated damages
Liquidated damages: Parties agree in advance
to amount that will serve as compensation in
event of breach.
 Nonbreaching party can’t sue for more.
 Helps parties avoid costly litigation.
In residential purchase agreement, earnest
money usually treated as liquidated damages if
buyer defaults.
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Remedies for Breach of Contract
Specific performance
Specific performance: Court orders breaching
party to perform contract as agreed.
 Generally ordered only if money
damages would be inadequate remedy.
 Subject of contract is unique, so
damages would not make it possible
to purchase substitute.
 Court may be willing to grant specific
performance to real estate buyer.
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Breach of Contract
Tender
Tender: Unconditional offer by one party to
perform his part of the agreement.

Usually made when it appears other
party is going to default.

To be entitled to sue for breach,
nonbreaching party must show he was
ready to fulfill contract.
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Breach of Contract
Anticipatory repudiation
Anticipatory repudiation: Express statement
by breaching party indicating that she is not
going to perform as agreed.
 If anticipatory repudiation occurs, other
party can sue for breach of contract
without making a tender.
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Types of Real Estate Contracts
Listing agreement
 Buyer representation agreement
 Purchase and sale agreement
 Land contract
 Lease
 Escrow instructions
 Option agreement

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Types of Real Estate Contracts
Listing agreement
Contract between real estate seller and
brokerage firm.

In Washington, firm can’t sue for
commission without written agreement.

What firm must do to earn commission
depends on type of listing.
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Types of Real Estate Contracts
Buyer representation agreement
Contract between real estate buyer and
brokerage firm.

Buyer hires firm to help find suitable
property and/or negotiate purchase.

Again, firm can’t sue for compensation
without written agreement.
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Types of Real Estate Contracts
Purchase and sale agreement
Contract between real estate seller and
buyer.
 States all terms of sale, such as:
 price
 closing date
 contingencies
Form first serves as buyer’s offer, becomes
binding contract if accepted by seller.
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Types of Real Estate Contracts
Land contract
Contract used when buyer purchases
seller’s property on installment basis.

Vendor (seller) retains legal title until full
purchase price is paid.

Vendee (buyer) has equitable title and
possession of property while paying off
price.
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Types of Real Estate Contracts
Lease
Contract transferring right of possession and
use from landlord (owner) to tenant.
 Sets terms of occupancy, such as:
 rent
 responsibilities of each party
 duration of tenancy
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Types of Real Estate Contracts
Escrow instructions
Contract authorizing escrow agent to close a
transaction.

States obligations and conditions that
must be fulfilled for sale to close.

Buyer and seller generally sign joint
instructions.
 Separate instructions used in some
commercial transactions.
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Types of Real Estate Contracts
Option agreement
Contract creating right to buy, sell, or lease
property for certain price within a certain
period of time.

Must be in writing and supported by
consideration.

In option to purchase:
 optionor is seller
 optionee is buyer
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Types of Real Estate Contracts
Option agreement

Gives optionee a contract right, but not a
property interest.

May be assigned unless otherwise agreed.

May be recorded.

Different from right of first refusal.
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Summary
Remedies and Types of Contracts
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Rescission
Compensatory damages
Liquidated damages
Specific performance
Tender
Anticipatory repudiation
Option agreement
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