The Meaning of Implied Contract
An implied contract is a type of contract that is formed in any words, oral or in writing, which creates an agreement between two or more parties. Statutory law governs contracts. Implied contracts consist of both express and implied terms. The difference between an expressed contract and an implied contract can be broken down into two parts including: An expressed contract is written or spoken language between two or more parties during the time of making a contract. An implied contract can be through the actions of two or more parties , such as: The key difference between expressed and implied is that in an expressed contract, the language used defines the terms whereas in an implied contract, the act is the terms. An implied contract occurs when one or more parties have provided a service to another party that contemplates to performing that contract even though there are no express words or terms stated. In real estate, an implied contract is created in the event a buyer or seller performs an exclusive task for an agent to list their property. The moment the agent begins advertising your property, you have created an implied contract.
The Legal Basis of Implied Contracts for Real Estate
Section 2-204 of the Restatement (Second) of Contracts states: A contract may be made in any manner sufficient to show agreement, including conduct by both parties which is reasonably interpreted as an offer or an acceptance. An agreement sufficient to constitute a contract may be found even if the moment of its making is undetermined.
In Restatement (Second) of Contracts, Section 6, it is stated: Unless displaced by the particular provisions of the chapter on contracts for the sale of goods, the effect of the definition of "agreement," and the corresponding provisions of Sections 50-53, 56, 59 and 130, are not dependent on the intention of the parties and may be fulfilled by conduct sufficient to show agreement, including conduct by both parties which is reasonably relied upon by the other.
This suggests that the fact-finder must consider the evidence that indicates the conduct of the parties as being sufficiently clear to indicate a working agreement.
In the leading case of Portsmouth Harbor Land & Hotel Co. v. Russell Co., 104 N.H. 575, 574-75 (1962), the New Hampshire Supreme Court held that "[w]here an agreement bars enforcement of a promise within the Statute of Frauds, the performance of the promise within the bar by the other party may operate to remove the bar and so far as necessary to prevent injustice may be allowed recovery in quantum meruit."
The court also held that recovery for services rendered in reliance upon an oral promise is not precluded by the bar "if such services were of benefit to the promisor and would work an injustice on the promisee if compensation were denied."
The mode of remedy here is quantum meruit for the services rendered.
In dissenting in Young v. Marquette Sav. & Loan Assoc., 582 N.W.2d 784 (Wis. Ct. App. 1998), Judge Cane stated that:
In every instance, the doctrine of unjust enrichment has been applied only after the court found facts to imply the existence of a contract on the basis of a series of acts and transactions that were deemed controlling between the parties. Thus, the action in quantum meruit is not a remedy for unjust enrichment; rather, it is a remedy for the appropriation of benefit. If the defendant had been unjustly enriched, the court was careful to note that it had already found a quasi-contract that encompassed the enrichment.
The Wisconsin Supreme Court stated in Ethyl Corp. v. State, 134 Wis. 2d 304, 328-348, 397 N.W.2d 762 (1986):
The doctrine of unjust enrichment is based on "[t]he principle that a person shall not be unjustly enriched at the expense of another." It is an equitable principle that provides a remedy in a situation where the breach of an implied or an express contract has not been breached (restitution) . . . . Although the action for unjust enrichment is quasi in nature and is governed by equitable principles, the relief available under an equitable doctrine belonging to the province of the court’s equity side is not precluded when the action is tried in law. The injured party is entitled to a remedy commensurate with the unjust enrichment, which may be monetary.
Common Real Estate Scenarios that can Create Implied Contracts
Implied contracts can manifest across various real estate contexts beyond the sale of property. These circumstances often challenge parties to discern their obligations and rights, especially when no written agreement exists.
Tenancy Arrangements: Implied contracts frequently arise between landlords and tenants. A tenant pays rent, and a landlord provides housing or other use of real property through leasing the property to the tenant. This relationship, however, does not require a lease agreement to exist. In some jurisdictions, where a tenant pays rent and a landlord accepts, an implied contract is formed even without a written residential lease. Even oral agreements for residential leases exist in the form of month-to-month tenancy or tenancy-in-common.
Property Management: Real estate companies hire management firms to operate their properties on their behalf. Unless otherwise provided, a practice known as "property management," in addition to acting as real estate agents, can create an implied contract. This is also true for contractors or sub-contractors doing work on a property without a contract. The obvious exception is for minor projects such as mowing the grass or watering.
Buy-Seller Negotiations: Implied contracts also exist when negotiating a sale of goods. Under the Uniform Commercial Code (UCC), the following conduct can establish a sales contract, in this order: (a) the requisite agreement (offer and acceptance); (b) conduct that recognizes the existence of a contract; (c) or a failure/omission to object or to exclude certain terms.
Given the wide-spread use of implied contracts in the real estate context, you should exercise caution—taking care not to overlook legal obligations with which you may be charged.
Implications for Buyers and Sellers
The implications of implied contracts reach beyond the transfer of legal title to property. Legal title is not real property, but rather a bundle of rights and interests in the property which does not commence until closing of the sale of the property. The buyer and seller each owe fiduciary duties to each other in the transaction, and those duties extend to the parties acting on their behalf, including agents, attorneys, lenders, brokers and others. Those fiduciary duties, in other words, extend to the whole web of relationships that affect the transaction.
A breach of any of those fiduciary contractual rights and duties raises a claim (which may be based in tort or contract law) by the injured party.
Implied contracts can also present risks in a real estate transaction. For example, a buyer thinking he is purchasing a home with a clear title may find, sometimes years later, that the home is subject to an easement or right of way.
There are four essential elements of an implied contract applicable to real estate purchases:
- Offer: A proposed contract must be made.
- Acceptance: The offer must be accepted without negotiation.
- Consideration: A contract must be in exchange for value.
- Consummation: The parties must act out the terms of the contract.
Implied contracts in real estate purchases manifest in several circumstances, most frequently through an offer and acceptance to purchase real estate. An example would be the execution of a purchase and sale contract. Upon execution of the contract, the buyer’s offer is accepted and therefrom the deal is consummated with the exchange of earnest money.
However, implied contracts also take place after a buyer has taken possession of real estate, and even after an offer is rejected, rendering the doctrine of implied contracts rather broad by design. One example of an implied contract where no one intended that a contract be formed until it was formally written down, so that only an acceptance was made by taking possession of the property (which caused the buyer to become a tenant at will), would be the scenario where the buyer of a home finds that home occupied by another party. Of course, the result in that case would often be a breach of fiduciary duty under the implied contract.
Again, the key takeaway here is that an implied contract is an agreement with the basic requisite essentials of a legally binding contract, and may include a letter of intent and purchase order, purchase and sale agreement, earnest money deposit, and transfer of possession. Whether a contract is express or implied, all real estate transactions are fraught with risks for buyers and sellers, and attorneys familiar with such issues are invaluable in properly advising their clients about all the elements involved in such transactions.
How to Protect Yourself when it comes to Implied Contracts
Section 2: Protecting Your Rights in Implied Contracts
To safeguard your interests when dealing with an implied contract in a real estate transaction, it’s essential to adopt a detailed and cautious approach.
First and foremost, you should pursue clear communication with any other parties involved in the prospective contract, extending beyond verbal commitments. It’s entirely possible for a simple, seemingly casual request to later be the basis for an implied contract. By documenting all contracts and communications with sellers, buyers, brokers and lenders, you can more effectively protect yourself should a dispute inevitably arise .
Proving the existence of an implied contract can be difficult without essential documentation of the entire process leading up to the execution of a written agreement.
If you suspect another party may be relying on an implied contract to base a claim against you, you should seek legal counsel as soon as possible. An attorney experienced with these types of agreements will be able to provide guidance and help you navigate the complexities of the situation.
Don’t attempt to dismiss an implied contract out of hand if a dispute arises. With no warning, you could find yourself facing expensive litigation in which you have to prove why the court should not enforce their version of the contract.
Examples of Implied Contracts from Precedent
To really appreciate the concept of implied contracts you need to turn to a case in which the court has stated the principal and nature of an implied contract. In the case of Kenyon v. Illinois Central Railroad Co. the Mississippi Supreme Court described an implied contract as follows: The principle of a contract implied arises by law from `the peculiar circumstances under which the parties are placed, or where the acts of the parties are plainly referable to some compromise or other contract mutually executed.’ To constitute all the elements of a contract implied in fact, the agreement does not have to be proved by direct, explicit, and positive testimony, but may be inferred from all the facts and circumstances of the case, together with the conduct of the parties; and from these may be deduced the existence of the contract and its terms-that is, that both parties understood it in the same way and agreed upon its terms, and were bound by those terms in their subsequent dealings-, if a third party to the communication would so read the declaration, and the actions of the parties would lead him to deduce such a relationship in fact existing between them, the parties themselves being in possession of all the facts and the communications between them, with no mistake about those facts on either side, and the construction adopted by the court being unquestionably the result a result which must be drawn, as stated above, from the dealings of the parties with reference to the contract. A contract will be implied only when some equitable consideration demands it, as in cases of mistake of one party in accepting the proposal of the other, in ignorance of his true intention, when the mistake is known to the other or ‘when the circumstances are such that to enforce the agreement literally would be to create a new contract and not to enforce the old one.’" (citations omitted)
Conclusion – How to Tackle Implied Contracts
Not every handshake or social gathering will result in an enforceable implied contract. If the parties to an implied contract did not expect or set out to create a binding agreement, it is unlikely a judge or arbitrator will find in favor of plaintiff.
On the other hand, if someone made a promise to do or provide something and the reasonable expectation was that it would be forthcoming, there is a basis for a finding of an implied contract.
As with every other legal concept, there are exceptions and outliers. But for landlords and tenants alike, "be careful what you wish for" applies to implied contracts as much as to anything else.
Very often it is an attorney that will advise a landlord or tenant that some act or course of action, or a delay in taking action , will not result in a loss of rights. Unfortunately, the advice given may be accurate in a strict legal sense, but a total misunderstanding of the situation. In such circumstances, the client may opt to rely on this inaccurate information only to find out later that an implied contract was created. Remedies for breach of an implied contract can be significant.
If your tenant or landlord takes action or fails to take action, and a reasonable person should know that this action or inaction would result in a legal right or obligation, your implied contract may have been created. And there is no way to undo an implied contract if you later find yourself in a bad position.
As the old saying goes, ‘forewarned is forearmed.’ Be careful with what you say, and what you don’t say. Consider all possibilities.