A Note from the Legal Helpdesk: A Primer on Alabama Contract Law
Part II: Other Important Concepts in Contract Law
May 13, 2019
As we discussed in Part I of this series, a contract is an agreement between parties that is enforceable by a court. The elements of a legally enforceable contract are:
1) an offer and an acceptance,
2) consideration, and
3) mutual assent to terms essential to the formation of a contract.[i]
We discussed the ins and outs of the first element, “offer” and “acceptance,” in part I of this series. We now move on to the other elements, as well as additional concepts to keep in mind when dealing with contracts.
Consideration simply means a person who has been promised something by another agrees in return to take an action or future action, or agrees to refrain from doing something he or she is entitled to do.[ii] Usually consideration involves paying money for something or exchanging a thing of value.
The amount of consideration does not have to meet a certain monetary value to make a contract valid.[iii] Courts will interfere with a contract if an additional irregularity happens, like if there is unfairness or a party is legally incapable of entering into the contract.[iv]
In Alabama, a written contract for the sale of real property must express consideration in order to bind the parties.[v] However, even where property is exchanged for nominal consideration, such “gratuitous conveyances” (meaning for free) are typically valid.[vi] This situation often occurs when property is bestowed among family members, where the conveyance is performed for $1 and the property is signed over in a quitclaim deed.
Real estate agents are unlikely to run into a consideration issue since real estate agreements almost always entail payment for the property, and agency agreements entail future payment for services. Consideration issues may arise in so-called fraudulent conveyances, where owners transfer the property for little actual money to attempt to avoid losing the property (bankruptcy), having the property’s equity impact the owner’s benefits (Medicaid), or the property owner is attempting to avoid losing the property due to a judicial order (for example, a divorce judgment).
Mutual assent means that all parties agreed to the same terms –this concept is often called a “meeting of the minds.” The most obvious way to prove mutual assent is to show the signatures of buyer and seller on a written contract. In a contract for the sale of real property, signatures are essential, as discussed in the first part of this series.[vii] So, the signatures not only validate the offer and acceptance but show mutual assent as well.
Breach of Contract and Remedies
When a party to a contract violates the terms, the party is said to have “breached” the contract. What the aggrieved party seeks in response to the breach is called a remedy, and the remedy can vary depending on the type of contract at issue.
For real estate purchase agreements, the remedies for a breach include monetary damages, specific performance (enforcement of the contract), incidental damages, and voiding the contract. Alabama law allows buyers and sellers to seek specific performance of the contract because courts recognize that monetary damages may not satisfy the offended party.[viii] For a real estate agreement, specific performance means that a buyer or seller could be forced to buy or sell the property, respectively. Some purchase agreements specifically provide for monetary (often called “liquidated”) damages in the event of a breach. But, even if a contract has a monetary damages clause, the general rule is that a party cannot be awarded both enforcement of the contract and monetary damages for breach of the same contract.[ix] So, the aggrieved party would have to choose.
In addition to ordering specific performance, a court may award incidental damages.[x] For real estate agreements this may include reasonable expenses incurred by the non-breaching party as a result of the breach, such as the cost of the inspection for the buyer.
Finally, where a seller cannot furnish “good and marketable title” (i.e., the title is free of liens, judgments, or other types of encumbrances) and the purchase agreement stated that the seller could do so, a court may allow the purchaser to rescind the contract.[xi] Rescinding a contract simply means that the purchaser can get his or her earnest money back and the seller keeps the property, as if they had never entered into the contract.[xii]
Tips for Breach:
Frequently, the cause of a suspected breach is a lack or failure of communication. Communication issues in real estate arise at various times but especially when items agreed upon are not written down. Memorializing conversations with clients and other agents in an email after phone calls or meetings can save a lot of time and frustration later.
Breaches happen. If your client believes the other party has violated the terms of a purchase agreement, it is highly recommended that you consult an attorney before discussing next steps with your client.
Earnest money disputes are probably the most common issue after a contract falls apart. For additional information on earnest money, see a previous Legal Helpdesk article here. REALTORS® may need to utilize interpleader if the earnest money dispute cannot be resolved. See an article about interpleader here.
Other Points to Remember
Common Provisions: Some provisions that are often in a real estate sales contract include the following clauses.
- Personal property to be included or excluded from the sale
- Payment for required repairs or retrofits
- The seller’s disclosure obligations, if any
- The seller’s obligation to maintain the property, if any
- Any warranties
- The buyer’s inspection rights
- Remedies for breach of the contract
- Whether or not the buyer can terminate the contract depending on certain contingencies.[xiii]
Arbitration Provisions: Many standard contract forms contain provisions requiring parties to arbitrate disputes that may arise out of the transaction. In Alabama, the law generally favors arbitration, with a caveat: Alabama law voids any pre-dispute arbitration agreement unless it was entered into voluntarily and involves interstate commerce.[xiv] Courts have held that real estate transactions involve interstate commerce, so the issue becomes whether the parties entered into the purchase agreement voluntarily.[xv]
For additional information on arbitration, see a prior Legal Helpdesk article here.
Written Authority Required for Agent to Act on Client’s Behalf: Alabama law requires that if a REALTOR® will be signing documents on a client’s behalf, the REALTOR® must have separate written authorization to do so from the client for the signature to be effective.[xvi]
Caveat Emptor in the Sale of Used Residential Real Estate: Regarding the sale of used residential property, Alabama is a caveat emptor (“buyer beware”) state. Thus, a seller ordinarily does not have a duty to disclose defects in the property to the purchaser.[xvii]
There are several exceptions to this rule. First, under Alabama law, the seller has a duty to disclose defects to a buyer if the seller has knowledge of a material defect that affects health and safety and the defect is not known or readily observable by the buyer.[xviii] Second, there is a duty to disclose if a fiduciary relationship exists between the parties.[xix] Finally, a duty to disclose arises if the buyer specifically asks about a material condition concerning the property that the seller knows about.[xx]
The presence of an “as-is” clause in the purchase agreement generally precludes a claim for breach of the duty to disclose, even in cases of misrepresentation or fraud.[xxi] However, where a fiduciary relationship exists[xxii] or a health and safety condition exists,[xxiii] the duty to disclose still applies. The Legal Helpdesk wrote several articles that develop the issue of caveat emptor in detail, which can be viewed here and here.
The basics of contract law that affect Alabama real estate agents are relatively simple.
- When it comes to verbal negotiations, a listing agent can be held liable for failure to communicate a verbal offer to his or her client.
- To be legally enforceable, the contract for the sale of real estate must be in writing and signed by both the buyer and seller. So, only negotiations included in the written agreement are enforceable.
Finally, please remember that specific questions regarding contract law should always be discussed with an attorney. The concepts developed in this series of articles are solely for education and background information.
[i] See Strength v. Alabama Dep't of Fin., 622 So. 2d 1283, 1289 (Ala. 1993).
[ii] See Roberts v. Lindsey, 242 Ala. 522, 525 (Ala. 1942).
[iii] “Mere inadequacy” by itself does not invalidate an otherwise valid contract, and courts “are not disposed to enter upon nice calculations to strike a balance on the one side or the other.” Marcrum v. Embry, 291 Ala. 400, 406 (Ala. 1973).
[iv] See Williamson v. Matthews, 379 So. 2d 1245, 1247 (Ala. 1980).
[v] Rains v. Patton, 191 Ala. 349, 351(Ala. 1914); Ala. Code § 8-9-2.
[vi] Sintz v. Stone, 562 So. 2d 228, 229 (Ala. 1990).
[vii] See also Bowen v. Sec. Pest Control, Inc., 879 So. 2d 1139, 1142 (Ala. 2003) (Noting that where a contract is subject to the statute of frauds, the signature of the party against whom enforcement of the contract is sought is required).
[viii] Ala. Code § 8-1-47.
[ix] See Conner v. Auburn Ptnrs, L.L.C., 852 So. 2d 755, 760 (Ala. 2002); Gulf Oil Corp. v. Spriggs Enterprises, Inc., 388 So. 2d 518, 520 (Ala. 1980).
[x] See Anderson v. Wooten, 549 So. 2d 40, 44 (Ala. 1989).
[xi] Blaxton v. J. L. Todd Auction Co., 281 Ala. 621, 622 (Ala. 1968).
[xii] See Clark v. Wilson, 380 So. 2d 810, 812, (Ala. 1980).
[xiv] See Old Republic Ins. v. Lanier, 644 So. 2d 1258 (Ala. 1994); Ala. Code § 8-1-41(3).
[xv] Sometimes an aggrieved party may try to circumvent arbitration provisions by arguing they are unconscionable. Unconscionability is determined by examining “(1) whether there was an absence of meaningful choice on one party's part, (2) whether the contractual terms are unreasonably favorable to one party, (3) whether there was unequal bargaining power among the parties, and (4) whether there were oppressive, one-sided, or patently unfair terms in the contract. Layne v. Garner, 612 So. 2d 404, 408 (Ala. 1992). In Alabama, arbitration clauses in contracts are not presumed to be unfair or oppressive. See Green Tree Fin. Corp. v. Wampler, 749 So. 2d 409, 416-417 (Ala. 1999).
[xvi] Hight, at 388 (Ala. 1990); Ala. Code § 8-9-2.
[xvii] See Blaylock v. Cary, 709 So. 2d 1128, 1130 (Ala.1997).
[xviii] See Moore v. Prudential Residential Services Ltd. Partnership, 849 So. 2d 914 (Ala. 2002).
[xix] Commercial Credit Corp. v. Lisenby, 579 So. 2d 1291, 1294 (Ala. 1991).
[xxi] Teer v. Johnston, 60 So. 3d 253, 261 (Ala. 2010).
[xxii] See Potter v. First Real Estate Co., 844 So. 2d 540, 551 (Ala. 2002) (citing Ala. Code § 6-5-102).
[xxiii] See Benton v. Clegg Land Co., 99 So. 3d 872, 881(Ala. Civ. App. 2012) (citing Moore, at 923).
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