When neither party can sue the other to force performance the real estate contract is said to be?

If you are involved in a business agreement, one of the first things to determine is whether the promise or agreement at issue will be considered an enforceable contract under the law. While contracts usually involve promises to do something (or refrain from doing something), not all promises are contracts. How does the law determine which promises are enforceable contracts and which are not?

Is the Agreement a Contract?

In a dispute, the court must initially determine whether the agreement constitutes a contract or not. In order for an agreement to be considered a valid contract, one party must make an offer and the other party must accept it. There must be a bargained for exchange of promises, meaning that something of value must be given in return for a promise (called "consideration"). In addition, the terms of a contract must be sufficiently defined for a court to enforce them.  

Enforcement and Contract Defenses

If a court determines that a contract exists, it must decide whether that contract should be enforced. There are a number of reasons why a court might not enforce a contract, called defenses to the contract, which are designed to protect people from unfairness in the bargaining process, or in the substance of the contract itself.

If there is a valid defense to a contract, it may be voidable, meaning the party to the contract who was the victim of the unfairness may be able to cancel or revoke the contract. In some instances, the unfairness is so extreme that the contract is considered void, in other words, a court will declare that no contract was ever formed. What are some of the reasons a court might refuse to enforce a contract? 

In order to be bound by a contract, a person must have the legal ability to form a contract in the first place, called capacity to contract. A person who is unable, due to age or mental impairment, to understand what she is doing when she signs a contract may lack capacity to contract. For example, a person under legal guardianship due to a mental defect completely lacks the capacity to contract. Any contract signed by that person is void.  

A minor generally cannot form an enforceable contract. A contract entered into by a minor may be canceled by the minor or their guardian. After reaching the age of majority (18 in most states), a person still has a reasonable period of time to cancel a contract entered into as a minor. If the contract is not canceled within a reasonable period of time (determined by state law), it will be considered ratified, making it binding and enforceable. 

Courts are usually not very sympathetic to people who claim they were intoxicated when they signed a contract. Generally a court will only allow the contract to be voided if the other party to the contract knew about the intoxication and took advantage of the person, or if the person was somehow involuntarily drugged.

2. Undue Influence, Duress, Misrepresentation

Coercion, threats, false statements, or improper persuasion by one party to a contract can void the contract. The defenses of duress, misrepresentation, and undue influence address these situations:

• Duress: A party must show that assent or agreement to the contract was induced by a serious threat of unlawful or wrongful action, and that she had no reasonable alternative but to agree to the contract.
  
• Undue Influence: Undue influence is often defined as unfair persuasion by a person who, because of his or her relation to the victim, is justifiably assumed by the victim to be one who will not act in a manner that is inconsistent with the victim's welfare.
• Misrepresentation: A misrepresentation may be a false statement of fact; the deliberate withholding of information which a party has a duty to disclose; or an action that conceals a fact (for example, painting over water damage when selling a house).

3. Unconscionability

The unconscionability defense is concerned with the fairness of both the process of contract formation and the substantive terms of the contract. When the terms of a contract are oppressive or when the bargaining process or resulting terms shock the conscience of the court, the court may strike down the contract as unconscionable. 

A court will look at a number of factors in determining if a contract is unconscionable. If there is a gross inequality of bargaining power, so the weaker party to the contract has no meaningful choice as to the terms, and the resulting contract is unreasonably favorable to the stronger party, there may be a valid claim of unconscionability. A court will also look at whether one party is uneducated or illiterate, whether that party had the opportunity to ask questions or consult an attorney, and whether the price of the goods or services under the contract is excessive. 

4. Public Policy and Illegality

Rather than protecting the parties to a contract as other contract defenses do, the defenses of illegality and violation of public policy seek to protect the public welfare and the integrity of the courts by refusing to enforce certain types of contracts.  Contracts to engage in illegal or immoral conduct would not be enforced by the courts. 

5. Mistake

In order to cancel a contract for mistake, both parties must have made a mistake as to a basic assumption on which the contract was based, the mistake must have a material effect upon the agreed exchange, and must relate to facts existing at the time the contract is made. In addition, the party seeking to avoid the contract must not have contractually assumed the risk of mistake.

Parties sometimes attempt to claim mistake as a defense to a contract when they have failed to read the contract and later become aware of terms they dislike. Failure to read the contract is not a defense. A person who signs a contract is presumed to know what it says, and is bound to the terms she would have known about, had she read the contract.

6.  Force Majeure

Many business contracts include a "force majeure" clause, which cancels the contract if certain circumstances beyond the parties' control occur and make performing the contractual duties impractical or impossible.

The circumstances that trigger a force majeure clause are negotiated by the parties, but they typically include natural disasters (like floods, hurricanes, tornadoes, and earthquakes), acts or threats of terrorism, war, civil disorder, disease outbreaks or pandemics, labor strikes or disruptions, or fires. Typically, courts interpret force majeure clauses narrowly, so only events that are included in the clause would trigger it.

Some contracts include a force majeure clause with boilerplate language that cancels the contract if circumstances have made enforcing the contract "impossible." This is a higher threshold to reach because often times a contract becomes impractical while still being possible. That's why many business law attorneys recommend spelling out exactly what circumstances should trigger the force majeure clause.

Contracts lacking a force majeure clause can still achieve canceling the agreed-upon duties by relying on the common law contract doctrines of "impracticability" and "frustration of purpose," though these doctrines are applied more narrowly.

Concerned that Your Contract May Not Be Enforceable? Talk to An Attorney

While a contract may appear valid on its face, there are times that it's not enforceable under the law. If you have concerns that your contract may not be enforceable under the law, or you need help drafting a contract for your business, it's a good idea to consult with a skilled business attorney to ensure that your contract is valid.

An implied contract is a legal obligation created by words, actions, or circumstances. Implied contracts are formed in small ways every day. When you order a meal in a restaurant, or reach across a table for a manicure, you don't sign a contract—you might not even exchange words--but you are agreeing to receive goods or services in exchange for payment all the same. Would it be right to enjoy the meal or receive the manicure and then refuse to pay because you didn't sign a contract? Of course not. To prevent someone from getting something for nothing, or, as it's called in legal terms, unjust enrichment, a judge would decide that there existed an "implied contract" between you and the restaurant or manicurist and order you to pay up.

Kinds of Implied Contracts

When the stakes are the price of a meal or a manicure, it's unlikely that the person who didn't get paid will go to court. But for larger transactions that have no written agreement between two parties, the person seeking compensation for goods or services is likely to sue. That person would ask the court to determine whether an implied contract exists, and if it does, to order the other side to pay for what it received.

The law defines two types of implied contracts: those implied-in-fact and those implied-in-law. They differ based on how the agreement came about. Basically, an implied-in-fact contract is one that can be proved by looking at the parties' behavior—if it looks like they were intentionally acting pursuant to a contract, it's a contract. By contrast, an implied-in-law contract involves an ethical determination by a judge that one party should not get something for nothing.

Implied-in-Fact Contracts

A contract that's implied in fact is formed when two parties conduct themselves as if an agreement were in place.

Let's say you own a dog walking service, and you run into a dog-owner in your neighborhood who tells you she's had difficulty walking her dog because she sprained her ankle. The next day you knock on her door and offer to walk her dog. When you return, the owner pays you $20. You return daily for the next five days, and each time you bring the dog back, the owner pays you $20. You continue walking the dog for two more weeks, but the owner doesn't pay you for those two weeks. When you ask for your money, the owner says she thought you were just being kind, and she never intended to pay you for each walk.

If you file a lawsuit in small claims court to recoup payment for your service, the court would likely determine that you were, indeed, entitled to be paid for the two weeks of dog walking services.

The court would reason that your and the owner's actions constituted an understanding to exchange dog walking services for compensation. You and the dog owner established an implied-in-fact contract because the fact is, you walked her dog and she paid you for those services for the first five days. The facts would show that the understanding was open-ended—no one specified that your services would stop after five days.

Implied-in-Law Contracts

Implied-in-law contracts, also called quasi-contracts, are the last resort for judges who are faced with a situation where one party is taking advantage of the other. Courts use this doctrine to compensate someone for services performed, not because one party offered and even if neither party intended to enter into a contract, but because the person who received goods or services would be unfairly enriched by not paying. In other words, as the late Chief Justice Warren once said, "You just can't do that."

Here's an example of how a judge might make things right by concluding that an implied-in-law contract existed. Suppose you're a roofer and have been hired by a homeowner to re-roof his house. The property also includes a barn, but the barn was not mentioned in the contract. You replace the roof on both the house and barn, and the owner silently watches as you work. But then the owner refuses to pay you for the barn, arguing that your written contract mentioned only the house.

If you go to court to ask a judge to order payment for the barn, you'd argue that the owner had every chance to correct your mistake, but remained silent. A judge would likely agree and conclude that fairness requires that the owner pay for what he got. The result might be different, however, if the owner had been absent the entire time the roofer was working, and returned home to see an unwanted new roof on his barn. A judge might not order the owner to pay, or might order less than the cost of the barn roof, on the theory that the owner shouldn't be forced to pay for something he didn't want and had no opportunity to avoid.

How Are Implied Contracts Enforced?

When you believe an implied contract has been breached –that is, one party failed to perform—you can seek to recover the payment you are owed by using the same methods you would use if you had a written contract. You can use a mediator, participate in binding arbitration, or file a lawsuit.

When you have a written contract, it spells out the responsibilities of each party to fulfill the agreement. With an implied-in-fact contract, you'll have to establish the terms that both parties apparently agreed to, as evidenced by their behavior. And with an implied-in-law contract, you'll need to show how one side stands to be unjustly enriched by the other's labors or delivery of goods.

In the dog walker example above, which involves an implied-in-fact contract, a mediator, arbitrator, or judge might consider these points:

• Did the actions of the dog walker and the dog owner (the walker offering to walk the dog, and the owner turning the dog over to the walker) constitute a contract?
• Did the dog walker uphold her part of the contract (did she walk the dog)?
• Was the owner's breach "material," affecting an important right of the walker (getting paid)?
• Did the dog owner have a legal defense for not paying the dog walker?
• Finally, if all of the above comes down in favor of the walker, how much money does the dog owner owe the dog walker?

Some Contracts Must Be Written

When you are providing goods or services in exchange for payment, it's always best to have a written contract that spells out the responsibilities of each party to the agreement, in case misunderstandings arise later. Some contracts, however, must always be put in writing if the parties expect to have a court uphold them. States use laws, known as statute of frauds, to define when contracts must be written, and these laws vary by state. In general, written contracts are required for:

• land or real estate sales
• promissory notes for debts over an amount established by the state
• agreements that take longer than one year to complete, such as a mortgage agreement or a car or real estate lease that's longer than one year, and
• some sales of goods above a specified amount determined by the state.