Contract law in plain words (valid, void, voidable, Statute of Frauds, options, remedies)

Bottom line: a contract is a promise the law will enforce. Almost everything a broker does sits on top of one. If you know the five building blocks and the five labels, you can read any deal.

The building blocks of a valid contract

A contract is an agreement between two or more people that a court will enforce. For it to be valid (fully good and enforceable), it needs these pieces:

• Competent parties. Each person must be old enough (18), of sound mind, and not under a court order that takes away the power to contract. A minor (a person under 18) can usually back out later. A person who was drunk or drugged enough not to understand what they signed may be able to back out too.
• Offer and acceptance. An offer is a clear promise made on set terms ("I will pay $500,000 for this house"). Acceptance is a clear yes to those exact terms. If the answer changes any term, it is not acceptance. It is a counteroffer, which kills the first offer and becomes a new one. This meeting of the minds is also called mutual assent.
• Consideration. Something of value that each side gives. Money, a promise, or giving up a right all count. In a sale, the buyer gives money and the seller gives the house. A pure gift promise has no consideration.
• Legal purpose. The deal cannot require anyone to break the law. A contract to sell a house only to buyers of one race, for example, is not enforceable.
• Writing (for land). Colorado says a contract for the sale of land, or a lease for longer than one year, is void unless it is in writing, states the consideration, and is signed by the party who is making the sale or the lease (C.R.S. 38-10-108). This rule is called the Statute of Frauds. A handshake deal to sell a house is not enforceable against the seller.

Valid, void, voidable, unenforceable

• Valid: has every piece and can be enforced.
• Void: no legal effect from the start, as if it never existed. Example: a contract to do something illegal.
• Voidable: good until one side chooses to cancel it. A deal signed by a minor, or one signed because of fraud or pressure, is voidable by the hurt party only. The other side cannot walk away.
• Unenforceable: it may be a real agreement, but a court will not make anyone follow it. A land deal missing the required writing is the classic case. A deal that is too old to sue on is another.

Ways contracts are described

• Express contract: terms are stated, in words spoken or written. The Contract to Buy and Sell is express.
• Implied contract: the agreement is shown by conduct, not words. You get a haircut and nobody names a price, but both sides understand you will pay.
• Bilateral contract: a promise swapped for a promise. Buyer promises to pay, seller promises to deliver the deed. Most real estate deals are bilateral.
• Unilateral contract: one promise, accepted by doing something. "I will pay $1,000 to whoever finds my lost dog" is a promise that is accepted by finding the dog.
• Executory contract: some or all of the promises are not done yet. A signed purchase contract before closing is executory.
• Executed contract: every promise has been done. After closing, the contract is executed. (The word also means "signed", so read the context.)

Options, rights of first refusal, assignment, novation

An option is a deal where the owner is paid to keep an offer open for a set time. The holder may buy at a set price, but does not have to. The owner is bound, the holder is free. A right of first refusal is weaker: if the owner gets an offer from someone else and wants to take it, the holder gets the chance to match that offer first. Nothing happens unless the owner decides to sell.

Assignment means a party hands their rights in a contract to someone else. The person who assigns is usually still on the hook if the new person does not perform. Novation means the old party is replaced by a new one, and everybody, including the other side, agrees to let the old party out. Assignment passes the benefit. Novation wipes out the old party's duty too. Whether a buyer may assign at all depends on what the contract says, so always read that part of the form.

Notice, delivery, and electronic signatures

Notice means telling the other side something the contract requires, such as "I am cancelling" or "I object to the title". Delivery is getting that notice to the person in the way the contract allows. Deadlines in a purchase contract often run from the time of delivery, so how you deliver matters as much as what you say. Colorado law (the Uniform Electronic Transactions Act) says a signature or record cannot be denied effect just because it is electronic, and an electronic record can satisfy a rule that something be in writing (C.R.S. 24-71.3-107). So a DocuSign signature on a purchase contract counts.

Remedies when someone breaks the deal

A breach is breaking a promise. The remedies (the fixes a court or the contract provides) are:

• Specific performance: the court orders the person to do what they promised, such as convey the house. Courts use this for land because every parcel is one of a kind.
• Damages: money to cover the loss. The usual measure is what puts the hurt party where they would have been if the deal had been kept.
• Liquidated damages: an amount agreed in advance as the damages for a breach. In the standard Colorado purchase contract, the buyer's earnest money can be the seller's limited remedy for a buyer default. Earnest money is the buyer's good-faith deposit held at closing.
• Rescission: the deal is cancelled and each side gets back what it gave, as if the contract never happened.

How contracts end

A contract ends by performance (everybody did what they promised), by agreement (both sign a release), by expiration of a deadline, by operation of law (for example, a bankruptcy or the death of a party in a contract that depends on that person's personal skill), or by breach, when the hurt party elects to end it. A broker also should know that a commission is not owed just for finding a buyer. Colorado says a broker earns it when the sale is completed, or is defeated by the owner's refusal or neglect (C.R.S. 12-10-301), and not when the buyer backs out over a title defect the owner never fixed (C.R.S. 12-10-302).

Example with real numbers

A Boulder County buyer signs a Contract to Buy and Sell to purchase a house for $500,000 and puts $10,000 of earnest money in escrow.

1. Is it valid? Two adults, offer at $500,000 accepted in writing, consideration (money for house), legal purpose, and signed by the seller. Yes. It is bilateral and, until closing, executory.
2. Seller walks away (market jumps to $520,000). The buyer can sue for specific performance to force the sale at $500,000. If the buyer would rather take money, damages are about the lost bargain: $520,000 minus $500,000 = $20,000, plus provable costs such as a $600 inspection.
3. Buyer walks away. If the contract makes earnest money the seller's remedy, the seller keeps the $10,000 and that is liquidated damages. The seller cannot also demand the $20,000 difference in price if the contract limits the remedy to the deposit.
4. Option twist. Suppose instead the buyer paid $5,000 for a 90-day option to buy at $500,000, and the house is worth $540,000 on day 80. Exercising gains $540,000 - $500,000 = $40,000, less the $5,000 option fee, for $35,000 net. If the house had dropped to $480,000, the buyer lets the option lapse and loses only the $5,000.

Broker tie-in: a Colorado broker fills in blanks on approved forms and does not write contract law (see the next lesson). But you must be able to say what each label means so you can tell clients "this is only an option, not a purchase" and send them to a lawyer for the legal advice.