MGMT 298D – Week 3 – Spring 2010
I.
FINISH WEEK 2 MATERIALS
II.
INTRODUCTION – CONTRACTS
A. What is it? An enforceable promise…
B. Types of Contracts:
1. EXPRESS (words) vs. IMPLIED (conduct)
2. Bilateral (promise for promise) or Unilateral (find dog).
3. VOID () vs. VOIDABLE (everything else)
C. Elements of Contract: All of the following must be
established:
1. Agreement: Consists of Offer and Acceptance
2. Consideration - Value to both sides
3. No Defenses
D. Defenses: That can help a party avoid an otherwise
enforceable contract. We will cover these later on:
1. Invalid Consent: You agreed under wrong assumption
(e.g. Fraud, Misrepresentation, Mistake, Undue
Influence, Duress)
2. Not Written: Violates the Statute of Frauds
3. No Capacity: No kids, crazies or drunks
4. Illegal: Crime, unlicensed or
E. Sometimes courts will enforce a promise even though there
is no contract…
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1. Quasi Contract: Unjust enrichment
2. Promissory Estoppel: Detrimental reliance
III.
ELEMENTS OF A CONTRACT
A. Offer:
1. Explain Offeror vs. Offeree
2. Elements:
a. Must be certain: Normally must include
 ID of parties
 Price
 Subject (inc. time & what is contracted for)
b. Made with intent – Measure objectively
c. Communicated
3. Termination of Offers:
a. Revocation: Offeror, took the offer back (can be
by selling it to someone else, if offeree knows)
b. Rejection/Counter-offer: (distinguish “Inquiry”)
c. Time
d. Operation of Law (an event):
(1) Death or insanity
(2) Destruction of S. M.
(3) Illegality
4. Offers are usually REVOCABLE….unless an Option
Contract
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B. Acceptance:
1. Elements:
a. Meet Offeror’s Demand (mirror image rule)
b. By Proper Means (specified or same/faster)
c. With Intent…
d. Offer Still Exists (timely)
2. Meet Offeror’s Demand….Any changes violates the
Mirror Image Rule and is considered a Counter offer.
3. By Proper Means…specified in the offer or by
reasonable means.
4. Offer Still Available? When are these communications
effective?
a. General Rule: When received (offers,
counteroffers,rejections, revocations)
b. Exception: Mail Box Rule – Acceptances are
valid when dispatched
c. Exceptions to Mail Box Rule:
(1) Specified in offer (e.g. upon receipt)
(2) Rejection first (then acceptance)
d. Let’s look at Gibbs case (p. 38)
C. CONSIDERATION:
1. Requires something of value and bargained for
exchange.
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2. But watch out...
a. Can be a benefit for both sides, or a
burden/benefit for one side. (Hamer case)
b. Doesn't have to be fair - no such thing as
inadequate consideration
c. Can't use past consideration as basis for
consideration
d. Can't use pre-existing obligation as basis for
consideration.
e. Presents a special issue regarding
MODIFICATIONS: Modifications require
separate consideration.
3. MODIFICATION: In California (§ 1568 Civil Code)
written contracts can be amended by…
a. Written contract
b. Executed oral agreement (parties acted in
conformity with oral modification – e.g.
Landlord accepted lower rent, then later
objected).
D. LEGAL PURPOSE: An illegal contract is VOID - not valid
from the beginning and never can be enforced by either party.
1. If agreement is itself a crime (e.g. a “hit” contract)
2. Practicing without a license (professionals – e.g. real
estate broker)
E. CAPACITY: Minors, Crazies & Drunks
(1) Can ratify or reaffirm the contract when capacity
returns (majority, or you sober up)
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III. DEFENSES
A. REALITY OF CONSENT:
1. Contrast void vs. voidable
2. Primary Issues:
a. Misrepresentation: Must be material and cause
reliance
b. Can be INNOCENT, NEGLIGENT,
INTENTIONAL
(1) If made with scienter (intent to deceive)
then = FRAUD
(2) Misrep. can be "non-fraudulent" (with no
intent to deceive)
c. Duress: If extreme contract VOID (only one of
these defenses that involves void). If not
extreme, or merely economic, then VOIDABLE.
d. Undue Influence: Trust taken advantage of
through unfair persuasion. Elements…
 A susceptible party
 Perpetrator exercises “unfair persuasion”
 Unnatural result (party commits to an
unfair deal).
e. Mistake: Must be…
(1) Material
(2) Of Fact
(3) Mutual, unless the other party knew of
mistake or it involves a computational error.
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B. STATUTE OF FRAUDS:
1. Contract must be in writing if it’s got legs, specifically
MY REDS…
M - Marriage
Y - Year of more (only if Impossible to perform in
< 1 year)
R - Real Estate (unless either party performs)
E - Executor personally guarantees an estate debt
D - Debt of Another (only the Secondary Obligor)
S - Sale of Goods of $500+ **
2. Writing: Must be signed by the defendant.
3. Can be contained in more than 1 writing.\
4. REAL ESTATE WRITINGS:
a. Writing also required:
(1) Deposit Receipts
(2) Listing Agreements
(3) Options
b. EXCEPTIONS TO STATUTE OF FRAUDS
(for Real Estate agreements):
(1) Full performance by Seller (delivers a deed
to Buyer & Buyer accepts).
(2) Part performance Doctrine (by buyer).
Generally has 2 requirements:
FIRST: Buyer has reasonably relied on the
contract & other party’s agreement.
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SECOND: Buyer has changed his position
to such an extent that enforcement is
necessary to prevent an injustice.
(3) Let’s look at Sullivan case.
C. Minor Defenses: These will sometimes come up…
1. Statute of Limitations (2 yrs: oral; 4 yrs: written)
2. Impossibility of Performance (destruction, disasters)
3. Novation (replacement substitute contract)
4. Failure of conditions – Precedent, concurrent,
subsequent
III. REMEDIES
A.
Breach – Can be actual (sue now) or anticipatory (sue
now or wait for actual breach, then sue). Two types of
remedies…
Legal – Money
B.
Equitable - Other
Legal Damages….
1. Compensatory (normal damages) – ALWAYS
a. SELLER: Decline in contract price to market
price.
b. If prices increase – no damages and cannot
sue.
2. Consequential (foreseeable) – SOMETIMES
3. Punitive – NEVER
4. Incidental Damages – allowed in most breaches.
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a. RE Law in California allows selling expenses
of 2nd sale.
b. RE Law in California also allows expenses
incurred between the 2 sales (e.g. insurance,
property taxes, etc.).
5. SOME LIMITATIONS/SPECIAL ISSUES:
a. Liquidated Damages Clause: Pre-set damages
are valid IF note excessive (a penalty)
b. Attorneys Fees – Recoverable ONLY if a
clause is in the written contract.
c. Mitigation of Damages – Damaged party must
minimize their damages (e.g. the landlord must
try and find a new tenant)
6. LIQUIDATED DAMAGES IN R.E. CONTRACTS:
a.
b.
c.
d.
e.
C.
Favored now by California law.
Must be reasonable (MAX: 3% of price)
No > than deposit paid by Buyer.
Separately initialed by all parties.
SEE PAGE 46 for sample
Equitable: Where LEGAL DAMAGES ARE INADEQUATE
and IRREPERABLE HARM would result.
1. Specific Performance…
a. Land – ALWAYS
b. Goods – SOMETIMES (when unique)
c. Services – NEVER (slavery)
2. Rescission (cancel the contract): Usually based on
Fraud, duress, etc. or other party’s Breach.
3. Reformation: Redraft the contract.
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4. Constructive Trust/Equitable Lien: Defendant buys
property with Plaintiff’s money – Plaintiff can ask for
the property entirely (Constructive Trust) or a portion
(E.L.).
5. Declaratory Relief – Ask for an explanation.
6. DEFENSES:
a. Laches: Unreasonable delay
b. Unclean Hands: Plaintiff acted wrongfully also.
D.
IV.
Let’s look at Royer Case on P. 48.
DEPOSIT RECEIPTS
A. First Document used in the negotiation and purchase
process in RE transaction.
B. Constitutes the following (contractually speaking):
1. Offer.
2. Becomes contract if accepted by Seller.
3. If no listing agreement – can also include the
commission agreement with broker.
C. No statutory form required.
D. Real Estate Commissioner requirements include.
1. Blank spaces must be filled in.
2. Additions/alterations must be initialed.
E. REVIEW FORM ON P. 55 & Comments on pp. 63 - 86
F. SOME AREAS OF CONCERN:
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1. Deposit (2A) – Held until Acceptance, then deposited
in Escrow (Buyer has right of refund anytime prior to
Acceptance).
2. Financing Terms –
a. Contingency (2) – discuss the law of “conditions
precedent”
b. 7-Day Letter (G) – does not remove the
contingency. “feel good” letter.
c. Contingency Removal (2I) – removed after 17
days or not until loan funds.
d. Appraisal contingency (2J)
e. Occupancy (3) – May be important to Seller that
Buyer is not an investor.
3. Costs of Inspections (4) – Termite, soil, etc. – who will
pay for it?
a. Escrow costs – depends on the county custom.
b. Title Insurance costs
c. Retrofitting, smoke alarms and other
requirements.
4. Statutory Disclosures (5) – Many requirements – e.g.
Mello-Roos taxes, hazardous substances, etc.
5. Conditions Affecting the Property (7):
a. As is Clause (fairly new to the form).
b. As is protects from latent defects but not those
known to the seller (who must disclose them to
buyer).
c. Statutory disclosures and cancellation rights:
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(1) Acceptance of the Buyer of condition of the
property is a contingency.
(2) Does not give Buyer right to cancel – Seller has
right to remedy.
(3) Better practice for Buyer – used trained
professionals.
6. TITLE & VESTING (12): Another contingency (if
defects of title arise)
7. Sale of Buyer’s Property (13) Can be a contingency
(negotiated as a condition precedent)
8. Removal/Continuation of Contingency (14)
a. Gives Buyer a reasonable period to accept or
decline property based on reports/condition.
b. Once removed or waived – condition precedent
lapses & buyer is bound.
9. Dispute Resolution (17) – Arbitration and Mediation.
10.
Attorneys Fees (22) – Winner gets attorneys fees.
11. Agency Conflicts (27) – Important for Broker to
avoid getting sued for breach of duty of loyalty.
12. Broker commission (29) – Protects broker; gets paid
from escrow.
V.
STATUTORY DISCLOSURES:
A. Affects both Seller and Broker.
B. Any material defects or facts must be disclosed.
C. Includes the following:
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1.
2.
3.
4.
5.
6.
VI.
Hazardous materials.
Known structural defects
Lead based paint
Mello-Roos Tax
Death on premises.
Mold
LISTING AGREEMENT
A. Both a Contract and an Agency.
B. AGENCY PRINCIPLES apply.
C. Types:
1. Open – Commission to first broker who comes with
buyer.
2. Exclusive Agency (owner can sell w/o commission)
3. Exclusive Right to Sell (broker gets commission even if
owner sells).
D. Special Listings:
1. Net Listing – Commission based on sales price in
excess of price specified in agreement.
2. Option Listing – Grants broker option to buy.
3. Multiple Listing – Boards where brokers pool their
listings (by law anyone can join).
4. Let’s look at Buckaloo case on p. 102.
E. Compensation of Broker:
1.
2.
3.
4.
Determined by agreement (5% is national average)
Broker must be licensed (otherwise illegality problem)
Writing required
Procuring cause – Broker must show he/she introduced
buyer to seller (can even get commission after listing
expires).
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5. Depending on clause – Broker may be entitled to
commission even if property not sold (if presented an
“ready, willing and able buyer).
F. Review of SAMPLE LISTING AGREEMENT – p. 104
AGENCY LAW (if time)
VII.
AGENCY: Minor topic
A. CREATION
1. Parties: Principal hires Agent
2. Capacity: Only the Principal
3. Manner: No formalities or contract/consideration required
a. Verbally or by conduct
b. Writing – Only if real estate or multi-year
B. Duties of Parties
1. Duties of A  P:
a. Loyalty – basically three things:
1. No conflicts
2. No kickbacks
3. Confidentiality forever
b. Care – within standards
c. Obey – reasonable instructions
2. Duties of P  A:
a. Compensation (unless Gratuitous)
b. Reimbursement
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C. TERMINATION: At will by either party (but may breach
contract if fixed term involved)
1. Voluntary: Either side terminates (P. revokes or A.
renounces)
2. Operation of Law: Death, Insanity, Destruction, Illegality.
3. Agency Coupled With An Interest: The Car Loan thing…
a. Borrower (P) authorizes Lender (A) to repossess
b. P. cannot revoke
D. Third Party Liability: Let’s look at a CHART (next page)
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Agent's Action
liable?
Is P. liable?
Is A. personally
YES - Principal is liable if NO – Agent is not liable for
authorized contract, UNLESS
the contract is
AUTHORIZED or
(1) P. is undisclosed
RATIFIED.
(2) A. agrees
Agent signs a
CONTRACT
Depends if Tort is....
Agent commits a
TORT
INTENTIONAL: NO - P. is
not liable unless...
(1) P. instructs A.
(2) Act is a foreseeable
part of the job
or (3) P. is directly liable
for negligent hiring.
YES - Agent is always
liable for his or her
own torts.
NEGLIGENCE: YES - P. is
liable for the negligent acts
of A. if committed in the
course & scope of agency.
(Respondeat Superior)
Agent commits a
CRIME
NO - P. is not liable
unless...
(1) P. instructs A. -or(2) P. is directly liable for
negligent hiring.
YES - Agent is always
liable for his or her
own torts.
1. Authority:
a. Actual Express: P. tells A. “yes you can”.
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b. Actual Implied: P. doesn’t tell A. anything, but it is a
normal part of the job (by custom or reasonably
necessary)
c. Apparent:
(1) No actual authority (“no you can’t” or P. fires A.)
(2) P. creates the appearance
(3) 3rd party reasonably relies
(4) Usual scenarios: Created by Job Title or Firing
without notice
2. Ratification:
a. No actual authority (“no you can’t”)
b. A. acts for P.’s benefit
c. P. approves or accepts the benefits, with full
knowledge
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