Understanding Contracts means knowing something about how courts handle contract disputes. It is contractual disputes which have caused the courts to define the Necessary Elements and Material Terms of contracts. Many contract disputes involve Contract Formation. That means understanding Offer, Acceptance and the misunderstood subject of Acknowledgement. Contract formation also involves Termination of Offers. All these issues are covered in this subject
A big part of any contract for the sale of real property is the earnest money pledged by the buyer. Understanding and handling earnest money is covered in the Earnest Money section. Also covered is the complex and, at times, confusing subject of dealing with Multiple Offers.
Necessary Elements of Contracts
Contracts are about promises. In fact, one legal definition of a contract is: "a promise or set of promises for breach of which the law gives remedy." A more abstract definition is that a contract is simply an "enforceable agreement." Whatever the definition used, when people talk about the necessary or required "elements" of a contract, what they are really talking about is what it takes to make a promise or agreement "valid" so that it can be enforced in a court of law.
Actually, it is misleading in some ways to talk about the elements of a "valid" contract because that suggests some specific magical terms are needed to form a contract. That is not true. Instead, there are certain things courts routinely look for before they will enforce a contract. These things, elements if you will, are "necessary" in the sense that doubt about them creates doubt about the enforceability of the contract. Whether there is a contract in the first place is a matter of contract formation, whether what was formed is valid or enforceable or not. Click HERE for a discussion of contract formation.
It is often said that every contract must have: 1) capacity; 2) consent; 3) a lawful object and 4) consideration. That is true, as far as it goes, but what is being tested is the social utility of a particular agreement. Capacity, consent and the rest are just things one would expect to find in a bargain that benefits society by helping individuals order their economic life. When one or more are missing, society may decline to enforce the exchange.
Capacity to Contract
State law protects "minors" (unmarried persons under the age of eighteen) and "incompetents" (those declared by a court to be incapable of handling their own affairs) because they do not have the "capacity" to enter into contracts. Contracts with minors are said to be "voidable" by the minor at any time prior to reaching majority or within a reasonable time thereafter unless the contract is for a "necessity." No Oregon court has ever ruled on whether real estate is a "necessity" for a minor. Much would depend on the circumstances of the purchase and the nature of the property (e.g., an emancipated minor renting an apartment near the college where they are enrolled).
Contracts with persons already declared incompetent are said to be "void." Void is just another way of saying courts will not enforce contracts made by incompetents. Where a person is declared incompetent after formation of a contract, the contract, like that with a minor, is said to be voidable. Avoiding a contract altogether on capacity grounds requires proof of incompetence at the time of contract. Incompetence at the time of contract can be seen as another way to attack consent - and that's where capacity can get messy.
Other than in cases dealing with minors or declared incompetents, capacity is about the ability to understand the nature and consequences of one's actions. Take, for instance, a person who is falling down drunk or over medicated or suffering memory problems or delirious or just having trouble distinguishing reality. In any of these cases, capacity may become an issue because doubt is cast on the person's ability to understand what they are doing. Without that understanding, it is hard to say there was "mutual assent" sufficient to form a contract.
Other than in the case of minors or incompetents, capacity is more a formation problem rather than some kind of required element. Thinking of capacity in this way will help you avoid problems. If anything (age, speech, mannerisms, memory, etc.) makes you question a party's mental capacity, think about whether the contract could later be challenged. If there is doubt, it is time to seek help. At a minimum, close questioning of the person's understanding of the nature and consequences of what they are doing is in order as is careful documentation of your discussion.
"Consent" as a necessary element is, in some ways, the same as having the "mutual assent" necessary to form a contract. Consent means to agree willingly. There is a free-will component to consent. Consent to a contract must be free of force, intimidation or trick. Old melodramas where sweet Nell is tricked or forced by the evil villain into signing the deed to the ranch miss the issue of consent. Contracts induced by force, intimidation or trickery are not enforceable, or if you like, they are void.
Another component of consent often overlooked is the idea of mistake. A mistake as to what is being purchased can destroy consent. If I consent to A, but unbeknownst to either party what is really offered is B, can I be said to have consented to B? This issue of mistake is a powerful one and is discussed in detail in the section on Contract Formation.
You will likely work your whole real estate career and never have any cause to consider the Lawful Object of a contract. The common example of a contract with an illegal object is a contract to have someone murdered. Such contracts are void. Needless to say, this is not a big issue in real estate.
Lawful Object is rarely used as a defense to a real estate contract. Take, for instance, the contract to sell an illegally subdivided lot. It is not illegal to buy or sell an illegally created lot. An attempt to sell a piece of a farm zoned EFU results in a tenancy in common, not an illegal contract. Where the buyer does not know of the illegality, the issue will be mistake or misrepresentation rather than illegality.
Consideration is one of those wonderful legal concepts that everyone has heard of but few understand. Consideration is not a physical thing like money. It's not a metaphysical thing like "love and affection." Strictly speaking, it's not even a separate "necessary" element of a contract. Consideration is an abstraction developed by courts as a means of determining what kinds of promises the law will enforce.
Consideration is really just a way to demand social utility by limiting the judicial enforcement of promises to those that involve an exchange for value. An exchange for value is another way of saying a real bargain. Asking whether there is consideration for a contract is the same as asking whether there was an actual bargain in which each party promised to give up or receive something of value to them. The legal definition of consideration is, of course, a lot denser.
Courts often claim consideration has multiple (usually three) elements. Accordingly, a promise is said to be "supported by consideration" if: 1) The promisee suffers legal detriment; 2) the detriment induces the promise; and 3) the promise induces the detriment. Just think bargain. My promise to sell you my house (parting with my house is a "legal detriment") induces you to promise to give me money (parting with money is a "legal detriment") and that is what induced me to sell you the house. It is simple, really: something for something.
Consideration is so simple a concept that it almost never has anything to do with modern real estate practices. Unfortunately, that hasn't prevented the development of real estate myths about consideration. The most virulent of these myths is the one that real estate contracts are void unless earnest money is in hand at the time of offer because without earnest money there is no consideration.
Though often repeated, and even taught in some real estate classes, it just isn't true that you need earnest money to have an enforceable contract for the sale of real property. My promise to sell my house induces your promise to give me money which induces me to sell you my house. The consideration is the promises themselves. Earnest money has nothing to do with consideration, though it is, of course, still a very good idea. Click HERE for a detailed discussion of earnest money.
One place consideration does sometimes play a role in real estate is in settlements or contract modifications. For instance, parties will often use termination agreements when deals fail. Often, these agreements contain promises not to sue. Often these promises are extended to the agents, not just the parties to the termination agreement.
Courts have ruled that such promises are not enforceable because they are not backed by consideration. They are not backed by consideration, courts reason, because the agents gain benefit without legal detriment. That is the case because the agents have nothing to bargain with for the parties agreeing not to sue them. It would be different if the agents were parties to the termination agreement and, for instance, gave up claim to a commission or right to sue the principals for damages.
Another place you sometimes see lack of consideration play a role in real estate is in contract modifications. If a party, who is already bound to perform under a contract, extracts a modification of some kind from the other party by threatening not to perform, the modification may be found unenforceable for want of consideration. That is the case because the party seeking the modification suffers no legal detriment by performing the contract because they were already legally obligated to do so. Anytime you see a one-sided exchange, think about consideration. Other than that, it is rarely an issue in real estate.
Material Terms of a Contract
Closely related to the concept of necessary elements is the idea of "material terms." Material terms of a contract are often called "essential terms." They are terms that go to the essence of the bargain. Without them, a court cannot enforce the bargain because it cannot be certain what the bargain actually is.
Because the material terms of a bargain are considered essential, they are often thought of as required. You will hear people say that a contract for the sale of real property MUST have this particular term or that particular term or it is "illegal" or "void" or some other unfortunate-sounding term. The truth, of course, is more complicated.
Courts distinguish between the material and subordinate terms of a contract. According to Oregon courts, "[a] term is 'material' to an enforceable agreement when it goes to the substance of the contract and, if breached, defeats the object of the parties in entering into the agreement." All the other terms of a contract are considered "subordinate" and, therefore, not essential to the enforcement of the contract. Such terms are often called "subordinate details of performance."
Oregon courts have identified six material or essential terms when it comes to the sale or purchase of real property. The terms are: 1) designation of the parties; 2) identification of the property; 3) the promise to sell and buy; 4) the purchase price; 5) how the purchase price will be paid; and 6) a fixed time and place for the delivery of the deed or closing. Courts are quick to point out, however, that depending on the circumstances there may be more material terms. Ultimately, what is or isn't material to a particular contract depends on the parties' intent as found in their agreement.
The idea of material or essential terms is relevant only in a dispute about enforcement of a contract. When it comes to real estate, such disputes usually involve specific performance of a promise to sell. Sellers sometimes defend against specific performance by claiming that one or more of the material terms were omitted or insufficient. They almost never win such arguments but real estate agents should know enough about material terms to avoid creating the potential for such arguments.
Although each of the six material terms cited by Oregon courts has been the basis of a defense against specific performance at one time or another, by far the most popular is identification of the property. This is the case because standard real estate forms make it hard (not impossible) to miss the other material terms. Identification of the property, even though still the most common "material term" defect, is not the problem it once was.
Identification of the property was once a bigger problem because of the use of tax lot numbers and street addresses to describe property. Lawyers trying to defeat specific performance claims would use the lack of legal description to argue the identification of the property was too indefinite to support specific performance. Mostly, they lost but lawyers still started including legal descriptions in sale contracts. From there, it was a short step to the real estate myth that a contract was somehow "void" if it didn't contain the legal description of the property.
Modern real estate forms avoid the whole legal description issue by using lot numbers and addresses but also adding a line that says the parties agree to provide the legal description for the purpose of title and identification. That simple agreement defeats any claim of faulty identity. Agents should be aware, however, that not all forms contain such "saving" provisions to handle identification of the property.
In addition to identification issues, you will sometimes see lack of promise to buy or sell arguments. Such arguments result when real estate transactions are proposed by letter or other non-standard writing. That makes the problem easy to control for real estate licensees who use standard forms. Party identification, purchase price and means of payment are similarly easy to control by using standard real estate forms. That leaves only the time and place of closing to cause trouble.
Real estate deals, especially those involving real estate licensees, close in escrow. That makes the "place" of closing pretty simple. Time, you would think, would be similarly simple but is not. You sometimes hear, for instance, that a contract must have a specific closing date to be valid. Like most easily stated rules, this one is inaccurate. It is a huge leap from requiring a time and place of closing to demanding a specific date.
The time of closing can be implied from the other terms of a contract. It can be stated by reference to performance of another term in the contract. What courts mean when they say the time and place of closing is material is that they have to be able to figure out when performance was due. A date certain helps but that doesn't mean a contract without one is automatically void. Click HERE for a recent Oregon Court of Appeals decision discussing the closing date issue.
Contract Formation is the most important step in a real estate transaction. Notwithstanding its importance, or maybe because of it, the formation of real estate contracts is fraught with uncertainty, myth and superstition. Some of that uncertainty, myth and superstition is the result of the legal complexities of contract law. More, however, is the result of human nature.
Contract formation requires "mutual assent" - a deceptively simple legal concept that means a mutual manifestation of assent to the same terms. Mutual assent is usually established by offer and acceptance. One party proposes the terms of an agreement (the offer) and the other party assents to those terms (the acceptance). Real estate transactions almost always start with the buyer making a written offer to the seller.
Offers tend not to cause many legal problems. That is not the case with acceptance. There are often misunderstandings over communicating acceptance. A recurring problem in real estate is acceptance varying from the offer. This happens when little changes are made to an offer by interlineations prior to "acceptance." All these issues are covered in this topic.
Offers are a kind of promise or, if you like lawyer talk, a manifestation of willingness to enter into a bargain. The offer must be made in a way that would justify the other party believing that assent to the bargain is invited and will conclude the bargain. An offer, it is said, empowers the offeree to create a contract by acceptance. An unambiguous offer, therefore, commits the offeror to the bargain they propose subject only to the offeree's acceptance.
There are, of course, a million ways to make ambiguous offers and, therefore, call into question contract formation. If a doctor says to a patient, "don't worry, I can fix that," can the patient sue the doctor for breach of contract if it turns out the doctor couldn't fix it after all? The answer depends on not just the words used by the doctor, but the context in which they were used. Would the patient be justified in believing their assent to a bargain was invited and that their assent would conclude the bargain? In the context of an interaction between a doctor and a patient, few would believe a bargain was being proposed. If there was no offer, there was no contract and, therefore, no subsequent breach.
In real estate we rarely worry about manifesting willingness to enter into a bargain. That's all handled by our forms. If you look again at the sale agreement or "earnest money" form you use, you will see express offer and acceptance language. The use of such forms removes doubt about whether an offer is being made. Unfortunately, the parties to a real estate transaction sometimes talk directly with each other and can sometimes make statements that could be taken as an offer.
Suppose a man says to his neighbor, "I'd sell my house if I thought I could get $300,000," and the neighbor says, "Ok, I'll have the $300,000 in the morning, you've got a deal." Does the man have to sell his house to his neighbor? What if the owner received a letter from the neighbor saying, "Will you sell me your house for $250,000?" The owner writes back saying, "I wouldn't even consider selling my house for less than $300,000" and the neighbor writes back: "I accept?" Can the neighbor now force the sale?
In these kinds of cases, courts usually find no offer was made because these are statements of future intentions, hopes or estimates, not promises. But, when parties start communicating, especially in writing, about what price or what terms might be acceptable, watch out. What a court might later make of these communications is not always predictable. Click HERE for a copy of an Oregon Supreme Court case discussing the legal requirements for an offer to purchase or sell real property.
Because of the unintended offer potential, any written communication discussing the terms or conditions of a sale, that is not intended as an offer, should say right in the document that it is not an offer. The same applies to verbal discussions of price and terms but in a verbal exchange there is the added protection of the Statute of Frauds. It is, however, very unwise to rely solely on the Statute of Frauds. Click HERE for a detailed discussion of the Oregon Statute of Frauds.
One place where being clear about what is and isn't an offer can be critical is in multiple offer situations. A seller with multiple offers to consider may want to make counter offers to more than one buyer. Because a true counter offer, like any unambiguous offer, will create the power of acceptance in the offeree, extreme care must be used to avoid creating more than one contract. Various strategies and forms have been developed to deal with multiple offers. Be certain you understand these strategies and forms before countering more than one buyer. Click HERE a detailed discussion of multiple offers, including sample language.
Another place where clarity is required in offers is where preliminary negotiations are followed by the execution of a separate formal document of agreement. The preliminary negotiation problem plagued real estate for years after the invention of the fax machine. In the early days of fax transactions, there was concern that copies of offers faxed back and forth might not be formal enough to indicate the parties' intent to enter into a contract because no single written memorial of the agreement existed. To compensate for this concern, brokers for years sent around the "original" offer to get "original" signatures after everyone had agreed to the deal by fax.
This manner of doing business created uncertainty in the formation of real estate contracts because either party could argue that no contract was intended until the "original" was signed. Otherwise, what purpose was served by sending around the original?
To solve the problem, a "multiple counterparts" clause was added to real estate contracts saying the documents could be signed in multiple counter parts with the same effects as signing one document. Such clauses are now obsolete because of state and federal electronic transaction legislation but you will still see them in real estate contracts today.
An offer, however signed, can offer a unilateral contract or a bilateral contract. Both types are used in the practice of real estate. The cooperation agreement between brokers formed through a multiple listing service is formed on the basis of a unilateral offer of compensation. The listing broker promises to pay a coop commission to any broker who procures a buyer for the broker's listing. The offer is unilateral because only the listing broker makes a promise.
A cooperating broker cannot accept the unilateral offer by promising to procure a buyer, they must actually procure one. Unilateral offers are accepted by performance, not promise. That means the cooperating brokers are under no obligation to procure a buyer and the listing broker, though bound by their promise, can withdraw their offer at any time prior to the other broker's actual performance. Click HERE for a detailed discussion of offers of compensation. This manner of contracting is very different from the way buyers and seller deal with each other.
Bilateral contracts, like a sale agreement between a buyer and a seller, involve the exchange of promises. An exchange of promises is sufficient consideration for a bilateral contract and no other consideration in the form of money or property is necessary. Click HERE for a detailed discussion of the role of earnest money in real estate contracts. Because bilateral contracts are binding without additional consideration, an offer of a bilateral contract creates in the offeree the power to bind the offeror by giving nothing more than a promise. This places special emphasis on the acceptance, revocation and performance of bilateral contracts. Acceptance is the next subject in this topic.
"Acceptance," according to a well respected legal journal, is "a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer and thereby creates a set of legal relationships called a contract." In plain English, that means acceptance transforms an offer into a contract. Acceptance also terminates the offeror's power to revoke the offer. Taken together, these two aspects of acceptance (cutting off revocation and creating a contract) make acceptance a matter of supreme importance.
The law favors the voluntary apportionment of economic interests. The law, therefore, strives to make certain that individuals cannot avoid voluntary contracts nor be forced into involuntary ones. Generally, contract rules, and those regarding acceptance are no exception, are designed to enforce individual intent. Did the offeror intend to create the power of acceptance? Did the offeree intend to accept it? These are the kinds of intent questions upon which contract formation often turns.
Intent is, of course, notoriously hard to prove. To compensate, the law of contracts adopts what is called the "objective theory of contracts." Under the objective theory, it is not what a person actually intends that matters, it is what a reasonable person in the same circumstances would reasonably believe they intended that matters. Applied to acceptance, the objective theory says that if the offeree makes the promissory acceptance requested they will be held to their acceptance whether they intended to accept or not unless the offeror knows or should know they did not intend to accept.
The enforcement balance between being bound to voluntary contracts but not to involuntary ones underlies most of the rule of acceptance. For instance, if the offeror makes an offer to two people (e.g., husband and wife), only those two people can accept. Acceptance cannot be transferred, even if performance later can. One person cannot "accept" for another unless the person accepting has the express authority to bind that person to the kind of contract being offered and expressly accepts on that person's behalf.
Offers to husbands and wives signed by only the husband or only the wife are not uncommon in real estate. Mostly, the lack of acceptance by one of two joint offerees doesn't become an issue because the offeree who did not accept intends to and does perform the contract. When, however, the lack of acceptance by one of two or more joint offerees becomes an issue, you can have a real mess. Generally, when the husband and wife are buyers, the seller can enforce the contract against the signing spouse. Neither spouse however, will be able to enforce the contract against the seller unless the seller ignores the lack of acceptance by the joint offerees and goes forward with the contract.
When the husband and wife are the sellers, you have bigger issues because spouses often hold title as tenants by the entirety. A buyer who does not obtain the signatures of both husband and wife may be unable to enforce the contract against the non-signing spouse (unless the spouse who didn't sign authorized the other spouse to sign for them or ratified the contract by his or her actions after formation). The buyer can, however, always sue the accepting spouse for breach of contract if they cannot deliver title as promised in the contract.
Probably the place "intent to accept" is most likely to arise is in communicating acceptance. It is common law that the acceptance of a bilateral contract must be "communicated" to the offeror or his agents to be effective. Communication brings up means and timing issues. What does it take to "communicate" acceptance and when is that acceptance effective? These are big questions because the offeror has the right to revoke an offer at any time prior to acceptance.
Most courts, including Oregon courts, hold that acceptance is effectively communicated when it is put out of the possession of the offeree. At common law, this concept was known as the mail box rule. In the famous 1818 English case of Adams v. Lindsell, a common law court ruled that acceptance mailed (placed in a public mailbox) prior to receipt of revocation was effective even if the revocation was received before the offeror received the acceptance.
Mailboxes, other than as an application of the rule, don't really have much to do with communicating acceptance anymore. The more general rule is that if an offer is accepted by a medium that is reasonable in the circumstances (mail, fax, telegraph, etc.), it is effective when it is put out of the possession of the offeree. This often comes as something of a shock to real estate licensees because real estate rules and form contracts focus on the date and time the acceptance is signed rather than when acceptance is communicated.
The focus on signing has lead to considerable grief in Oregon real estate. Two scenarios are common. In one, the seller gets a better offer from buyer #2 after countering buyer #1 and tries to revoke the counter, only to find out buyer #1 has already "signed." In the second popular scenario, the fact that the buyer or seller has "signed" or "accepted" is communicated by one agent talking to another agent on the phone. In both these situations contract formation is very much in doubt.
Communication of acceptance requires putting the acceptance out of the possession of the offeree. In the first scenario, the signed acceptance is still in the buyer's possession. Signing is not enough. The signed document must be "communicated" or "dispatched;" that is, placed out of the seller's possession and into the buyer's (assuming no counter offers). How is that done? Typically, nowadays, an accepted written offer is placed out of the seller's possession into the buyer's when it is faxed to the buyer's agent. The date and time on the fax will be an excellent record of when acceptance took place.
It is easy to see why the law requires communication of acceptance if you think about the seller revocation/buyer acceptance scenario. The seller's agent calls up the buyer's agent and says "the seller revokes." The buyer's agent calls the buyer and says "hey, you better have signed that counter offer because the seller is trying to revoke." The buyer, being no dummy, says "no sweat, I signed it an hour ago." Allowing this kind of process would seriously undermine the goal of supporting voluntary contracts. Hence the rule that acceptance is not effective until communicated.
The second scenario where one agent tells the other agent on the phone that their client has "signed" or "accepted" raises questions about how acceptance can be communicated. The general rule is that acceptance can be communicated by "any means reasonable in the circumstances." What is reasonable in the circumstances usually depends on things like how these parties have communicated previously, how communications are usually handled in the business or industry involved, the time given for acceptance and so on.
In the case of real estate contracts, the means of communication is often set by the offer itself. In Oregon, most real estate contracts contain a term stating the offer (or counter offer) can be accepted "only in writing." It is black-letter common law that when the place, time or medium of acceptance is prescribed by the offer, no contract is formed unless the terms of the offer are followed. It follows that when the offer states that acceptance can be accomplished "only in writing," a verbal exchange between agents isn't going to meet the terms of the offer.
Once you understand "acceptance," you can see that there is no occasion for an agent to ever say to someone that an offer has been "accepted." Until communicated in writing, there is no acceptance. Once the acceptance in writing is communicated, there is no need to tell someone it is accepted - they already know. It would be very wise for agents to remove "my client has accepted" from their vocabulary. It would be even wiser for agents to explain to clients that if they want their acceptance to be effective, they need to have a way to communicate it to the seller as soon as they sign it.
All this is not to say a court will never enforce a verbal acceptance in a real estate transaction. Formation of a contract is ultimately a matter of intent, not bright-line legal rules. Limitations on the means of acceptance can be waived by conduct. The Statute of Frauds can be avoided in special cases based on past performance or detrimental reliance. Click HERE for a discussion of Statute of Frauds issues. In short, communicating acceptance verbally is always risky and never predictable.
Acceptance Varying from Offer
You wouldn't think that contract formation problems resulting from an acceptance that varies from the offer would be a problem in real estate. You would be wrong. It is still a common, if completely misguided, practice for agents to allow (or even suggest) clients make (and initial) changes to an offer or counter-offer prior to "accepting." These agents evidently believe that minor changes made in this way are "easier" than making a counter offer. That is not the case and this manner of conducting business is extremely dangerous. Here's why.
It is the most basic of common law contract rules that an acceptance which adds qualifications or conditions to an offer operates as a counter offer and, therefore, a rejection of the offer. Any attempt by the offeree to add or subtract anything from the offer will result in uncertainty in the formation of the contract if for no other reason than that there is no place on standard forms for the offeror to accept a counter offer made in this way. All this leaves formation of the contract very much up in the air when additions or deletions are made to an offer before it is "accepted."
Just how much up in the air changing the terms of an offer can leave formation is illustrated by the famous Oregon case of Painter v. Huke. Huke listed his property with a broker who obtained an offer from the Painters. Huke countered for more money down. The Painters were OK with the increased down but wanted more time to close. So the agent had the Painters change the closing date, initial the change and "accept" Huke's counter offer. She then sent a copy of the signed counter offer to Huke and started working to close the deal.
About a month later when the closing in Huke's counter offer came due, Huke asked the broker why the Painters weren't closing. That's when he learned of the changed closing date. Not happy with any of this, he sold the property to another buyer. That's when the Painters sued him and won at trial. On appeal, the Oregon Court of Appeals ruled against the Painters, holding they had no contract with Huke because their initialed change to Huke's counter offer added to the terms of the offer and, therefore, was a rejection and counter offer by the Painters. The Court could find no evidence that Huke accepted the Painters' counter offer and, therefore, found there was no contract. Click HERE for a copy of the Painter v. Huke case.
For years, preprinted real estate contracts have contained a warning to sellers and their agents to not make any modification to the offer. The next time you see that warning, think of Painter v. Huke. Making alterations to an offer, whether those alterations are initialed or not, destroys the power of acceptance. Returning the altered form to the offeror is a counter offer. Click HERE for a discussion of counter offers. Acceptance varying from the offer always creates the potential that a court will later rule no contract was ever formed.
There is no such thing as "acknowledgment" of a contract from a legal point of view. Contracts are formed by offer and acceptance alone. That form contracts in Oregon contain an "acknowledgment" clause is a misunderstood accident of history - not a legal requirement. Only in Oregon has "acknowledgment" become intertwined with offer and acceptance.
Years ago, the Real Estate Agency, in a effort to force better recordkeeping, adopted a number of administrative rules dealing with offers. These rules, now codified in OAR 863-015-0135, demanded, among other things, that licensees give buyers copies of their offers as well as copies of the seller's response to the offer even if the response is rejection. Click HERE for a copy of OAR 863-015-0135. Soon thereafter, real estate sale forms in Oregon began to include "acknowledgment" clauses.
The original idea of an acknowledgment clause was to create proof that real estate agents had provided the buyer with a copy of the seller's response to the buyer's offer as required by administrative rule. Acknowledgment was a matter of agent recordkeeping and had nothing whatever to do with formation of the contract. The acknowledgment clause was placed below the signatures of parties so as not to be confused with a term of the contract itself. That approach evidently was too simple because confusion is exactly what resulted.
Two major contract formation myths have grown up around the acknowledgment clause. The first, that there is no contract until the buyer signs the acknowledgment, is pure myth. The exact origin of the acknowledgement myth is lost in time but the most likely origin is a court case where a lawyer used the buyer acknowledgment signature not to prove a contract existed but to satisfy the more narrow requirements of the Statute of Frauds. Click HERE for a detailed discussion of the Statute of Frauds. Whatever the origin of the myth, there is no such thing as "acknowledgment" of acceptance in contract law.
The other major contract formation myth that has grown up around acknowledgment involves using acknowledgment as acceptance when a seller makes changes to an offer or "accepts" the offer after it has expired. Unlike the pure myth that acknowledgment is required to form a contract, the myth that acknowledgment can be used in place of acceptance has at least some legal traction. As we know from the discussion of acceptance, intent plays a large role in acceptance. It follows that an acknowledgment clause signed with the proper intent could be evidence of acceptance.
The problem with using an acknowledgment clause as evidence of acceptance is that such clauses typically contain no words of promise. Because of its recordkeeping origin, the Oregon acknowledgment clause, in its original form, simply said "Buyer acknowledges receipt of a copy of Seller's written response to this Agreement." Acknowledging receipt of a copy of response says nothing about the buyer agreeing to the contents of the response - just that they got a copy of the response, whatever it was. The acknowledgment clause, therefore, was as originally written poor evidence of acceptance of changes to an offer or late acceptance.
Notwithstanding the contract formation problems inherent in using acknowledgment to prove acceptance, the practice proved too convenient to forego. It became standard practice for agents to consider the buyer's acknowledgment as evidence of their acceptance of alterations to the buyers' offer or the seller's late acceptance. By the time it was called into question by attorneys, the practice of using acknowledgment for the buyer's acceptance when the seller "accepts" the offer after it has expired was so widespread that the acknowledgment clause was changed to accommodate the practice.
An unintended consequence of changing the acknowledgment clause to accommodate late acceptance by the seller has been to perpetuate confusion. The pure myth that acknowledgment is "required" before there is a real estate contract continues in the industry notwithstanding a complete absence of legal support. Now that the acknowledgement clause actually is used for acceptance in the case of expired offers, you can expect acknowledgment myths to survive well into the future.
Termination of Offers
Because an offer creates the power of acceptance in the offeree, termination of offers is an important subject. Offers can be terminated by the passage of time, death of the offeror or by rejection. Unless specifically made irrevocable, offers are revocable by the offeror any time prior to acceptance. Each of these means of termination of offers raises its own set of legal issues.
Lapse of Time
The general rule is that an offer is deemed open for the time specified in the offer or, if no time is specified, for a reasonable time in the circumstance. Given the rule, lapse disputes take two forms. If a time is specified, lapse arguments typically revolve around how the specified time is to be counted. If no time is specified, the argument will be about what is a reasonable time for the offer to be open in these circumstances.
What is reasonable in the circumstances depends on a number of factors. Market dynamics are a big factor. How long a reasonable buyer will allow an offer to last is not the same as how long a reasonable seller will allow a counter offer to last. What is reasonable depends on the specific buyer or seller in the specific market seeking the specific property at the specific time. Basically, what a court wants to know is how long do these kinds of offers in this market typically last.
If an offer expires on a certain date, the question is whether the offer expires at a minute after midnight of the day before the date or at midnight on that date. If an offer allows a certain number of days for the seller to accept, the question is when the days allowed start to run. Is it the date the offer is made or date it is received? Once that is settled, disputes can arise over whether the offer ends at midnight on the last day or at the same time of day the offer was made or received. These same counting issues arise when the expiration is expressed in hours.
Because counting issues can cause so much confusion, most real estate forms express the offer deadline as a date and time of day. This manner of expressing the offer deadline eliminates counting disputes. An offer which expires on January 1, at 5 p.m. must be accepted (signed AND communicated) no later than 5 p.m. on that date. There are no "if ands or buts." Holidays don't matter. There are no excuses or conditions, period. Acceptance communicated at 5:01 p.m. on January 1 would be too late.
Because offers expire automatically if not timely accepted, late acceptance communicated to the offeror acts as a counter offer. For a contract to form, the original offeror must accept the "counter offer" and communicate that acceptance to the offeree. Typically, there is no place on form contracts for the offeror to accept the offeree's late acceptance. For that reason, it has been the practice of Oregon real estate licensees to use the "acknowledgment" clause as "acceptance." Eventually, standard forms were changed to accommodate the use. Click HERE for a detailed discussion of the acknowledgment issue.
Death or Lack of Capacity
The power of acceptance is terminated if the offeror dies before the offeree can accept. This is the case whether the offeree knows of the offeror's death or not. Do not confuse this rule with the performance of contracts. If one party to a contract already formed dies, the contract is typically binding on their heirs. But that is not the case if the offeror dies before the contract is formed. If the offeree dies before accepting an offer, the deceased's heirs or representatives cannot accept the offer on the deceased's behalf nor for their estate.
Incapacity, like death, can affect contract formation. As with death, the incapacity must arise after the offer is made but before it is accepted. For that to happen, there must basically be a legal judgment of insanity. That is a rare case. In cases where the issue of capacity is in doubt, most courts will hold in favor of formation of a contract unless the offeree knows of the offeror's incapacity. As with death, the representatives of a person who lacks the capacity to contract cannot accept on that person's behalf unless they have the specific written authority to do so, i.e., a power of attorney.
Revocation is the manifestation of the intent not to enter into the contract proposed by an offer. A "manifestation" of intent can be oral or written or, as discussed shortly, even indirectly. Unless an offer is specifically made irrevocable, it can be revoked at anytime prior to acceptance.
Revocation is effective when received. This, of course, leads to endless argument about what it means to have "received" something. Legal texts dealing with the law of contracts define "received" as "when a writing comes into the possession of the person addressed, or of some person authorized by him to receive it for him, or when it is deposited in some place which he has authorized as the place for this or similar communications to be deposited for him."
As you can see from the definition, "receipt" does not require that the writing come into the possession of the person to whom the revocation is addressed. Possession by the addressee is but one of three ways to have receipt. Typically, buyers and sellers deal through agents. So the question is whether agents are "authorized" to accept revocations. The answer is very simple: If they are authorized to receive offers and acceptances, they are authorized to receive revocations unless the principal specifically limits their authority.
If agents are authorized to receive revocations, revocations are effective when agents receive them. This is true whatever the means by which the revocation is communicated. Agents should, however, keep in mind that things done verbally can end up being worth about as much as the paper they are [not] written on. These two factors suggest that the best way to handle a revocation for a client is to call the other agent and tell them your client revokes and to check their fax machine because your clients' written confirmation of the revocation should be printing out as we speak.
When you can't reach the other agent, the third part of the definition of "receipt" ("when it is deposited in some place which he has authorized as the place for this or similar communications to be deposited for him") comes into play. Notice that the third part of the definition of "receipt" includes deposit where "similar communications" are deposited. What is similar to a revocation? How about communications (offer, counter offer, acceptance, etc.) regarding formation of the contract? Basically, a revocation can be "deposited" any place the recipient has authorized the deposit of other communications regarding the formation of the contract. Typically, that is their real estate agent's office.
How does one "deposit" something at a real estate office? Handing it to a person and getting a receipt is a best case scenario (easy to prove and very certain). Sending it to a person during business hours by a means of communication commonly used for that purpose is another way but can raise "I never got it" issues. Sending it to a fax machine after hours raises even more issues. Slipping something under the front door after hours is at the far end of the "deposit" spectrum (hard to prove and very uncertain).
A good way to think revocation is to analogize it to the deposit of money in a bank. When you go to the bank during banking hours and hand the money to a teller and get a receipt, you are very sure the money has been "deposited." If you drop it in an ATM and get a receipt, that's pretty good. Dropping it in a night deposit box designated for that purpose works but you won't have a receipt. Shoving money under the front door after hours might work if it is discovered by an honest person but you wouldn't want to bet on it. In short, revoking is pretty easy but you need to think about proof.
The ease (assuming adequate proof) with which an offer can be revoked is probably made most clear by the common law doctrine of indirect revocation. The doctrine originated in the 1876 English common law case of Dickerson v. Dodds. Dodds made an offer to sell his property to Dickerson. Before Dickerson could accept, Dodds made an offer to sell the property to Allan. Allan accepted. When Dickerson learned Allan had accepted, he quickly "accepted" the offer he had and sued Dodds. The court held the offer to Dickerson was indirectly revoked when Dickerson received reliable information that Allan had accepted.
The result in Dickerson v. Dodds upsets real estate agents and lawyers alike. How, they wonder, could the court find that the offer to Dickerson was revoked? If you think about it, however, you will see that the holding is a logical consequence of the idea that contracts are voluntary private agreements. Dickerson knew when he attempted to accept that the property was already sold to Allan. He, therefore, knew that Dodds did not want to sell to him. That is, he knew prior to his acceptance that Dodds had revoked his offer to sell by selling to someone else.
The result in Dodds should not give agents comfort. Creating multiple offers for the same property at the same time is so dangerous it calls into serious question the agent's diligence. That a court might later, depending on the circumstances (remember Dickerson v. Dodds only worked for Dodds because Dickerson knew of Allan's acceptance before he tried to accept), rule for one or the other of the offerees is irrelevant. A diligent real estate agent representing a seller will not depend on the vagaries of common law to protect their client.
Had Dodds been represented by a competent real estate licensee, two things would have happened. First, the agent would have made every effort to revoke using the best means available under the circumstances and understanding that revocation is valid only upon "receipt." Click HERE for a detailed discussion of revocation. Second, the agent would have made the second offer contingent on revocation of the first. Revocation, as you can see from the discussion thus far, is simply too fact specific to take a chance with. If you do your best to revoke and then make the second offer contingent on the revocation of the first offer, you will never be responsible for your seller ending up with two deals.
Rejection of an offer terminates the offer. You cannot reject an offer and then later accept it. The very same rule applies to counter offers. A counter offer revokes the original offer. Thus, a seller cannot counter the buyer's offer seeking more money and, when the buyer rejects the counter, then turns around and accept the original offer. Similarly, a buyer may not counter a seller's counter offer and, when their counter is rejected, try to go back to the seller's counter offer. Notwithstanding these most basic rules of offer and acceptances, both buyers and sellers will sometimes try to counter and, when that goes nowhere, try to accept the original offer.
Counter offers can sometimes be confused for "grumbling assent" or "counter inquiry." Grumbling assent is acceptance with some comment like: "I accept but still think the price is too high." A counter inquiry is acceptance with a proposal for new terms. For instance: "I accept but would you consider less money?" A grumbling assent or counter inquiry is not a counter offer, it is acceptance. The key here is clear acceptance and a request or comment, not a demand or other statement that would call into question the willingness to proceed with the terms proposed in the offer.
This same issue of request versus demand is central to understanding the real estate myth that a contract, once formed, can be terminated if one party requests changes to the contract that are "rejected" by the other. Basically, there is no such thing as a counter-offer to a contract that has already formed. Once the contract has formed, subsequent requests for modifications that do not threaten non-performance are just that: requests. If rejected, nothing happens. Click HERE for a detailed discussion of the difference between modification requests and threats of non-performance.