BASICS of CONTRACTS and PROMISSORY NOTES
Contract Ingredients.
Contracts and promissory notes come in many forms. Sometimes they amount to no more than a single page or a verbal agreement between two parties and others require reams of paper and government approval of every clause. Regardless, at their very core, every contract requires three ingredients: offer, acceptance, and consideration.
- Offer – A promise contingent on a particular act.
- Acceptance – An express act agreeing to the terms of the offer.
- Consideration – Something of value exchanged by the parties.
Statute Requires Written Contracts in Many Cases.
The “statute of frauds” requires a written contract in cases such as these:
- Marriage
- Conditions that cannot be performed within one year
- Transfers of land
- Contracts by the executor of an Estate to pay a debt of the estate with his own money
- Contracts for sale of goods over $500.00
- Providing surety such as a guarantor
Parties may agree to most other contracts verbally, but enforceability becomes more difficult in event of a breach of contract.
General Contract Terms.
All contracts for sales should contain certain critical terms such as:
- A description of the goods
- Time of delivery
- Method of payment
- Identification of the parties
Many other important provisions to consider including:
- Tax obligation
- Inspection
- Risk of loss
- Compliance with laws
- Waiver
- Warranties
- Laws governing the contract
- Attorney fee provision
- Assignment
- Authority of agents
- Indemnification
- Remedies
- Jurisdiction
- Validity of provisions
- Notice
- Non-exclusive engagement
- Default
- Severability
- Modification
- Integration
Real Estate Contract Terms.
In addition to many of the above terms, all real estate contracts should also include:
- Property description
- Identification of the parties
- Total purchase amount
- Closing date
Additional suggested provisions for real estate contracts include:
- Earnest money
- Items included or excluded
- Closing costs assignment
- Pro rata items and amounts
- Taxes and assessments
- Insurance
- Home protection plans
- Special stipulations
- Loan and/or appraisal contingencies
- Inspection contingencies
- Risk of loss
- Quality of title
- Default
- Real estate commission
- Addendums
- Method of execution and delivery
- Condition of property
Breach of Contract Considerations.
- Statute of Limitations
In Washington, land contracts allow for recovery of land involved in contract for up to ten years in the case of breach. The majority of other written contracts remain enforceable for a period of six years. A party may attempt to remedy any breach for a verbal contract within three years.
Limitations for recovery in the event of breach:
- Land Contracts – 10 Years
- Most Other Written Contracts – 6 Years
- Most Verbal Contracts – 3 Years
- Excuse for Non-Performance
A breach of contract means non-performance by one party on the contract. Typical excuses for non-performance on a contract include:
- Mistake
- Misrepresentation
- Frustration of purpose (an unforeseen event undermines a party’s purpose for entering into a contract)
- Impossibility
- Ilegality
- Unclean hands (when the other party acted unethically or in bad faith)
- Unconscionability (terms extremely unjust or overwhelmingly one-sided)
- Accord and satisfaction (indicates the party already performed)
- Remedies for Non-Performance
The performing party may seek a remedy for a breach of contact. Typically, a party would sue for the loss due to the breach of contract and seek compensatory damages. Compensatory damages mean damages for loss, injury, or harm suffered as a result of the breach.
In addition to the remedy of compensatory damages, other remedies include:
- Specific performance – requires the breaching party to complete the task anyway
- Liquidated damages – refers to damages included in the original contract in case of breach
- Rescission – creates a legal fiction where the contract never occurred and both parties return to their position prior to the contract.
Conclusion.
Although contracts seem simple enough on the surface, you should contact an attorney and leave to him the task of making sure your contract omits no critical clauses or includes no unnecessary items that may harm you. Litigation over a contract dispute for any reason usually proves very expensive and investing a small amount up front may save you money in the long term and also spare you a great deal of stress.