Interpretation of Contracts

A contract that is clear, concise, and unambiguous will require no interpretation by a court. When a contract is ambiguous or confusing, the court has certain rules for interpretation. The court will not use the rules of contract construction and interpretation to make or amend a contract for the parties. If the parties do not have all of the essential elements of a contract, the court will hold that no con­ tract exists. The court will only interpret and enforce a contract that does exist. If a  contract exists,  the court will enforce the contract in accordance with what is typical and customary, giving it a practical interpretation, if possible, and considering the circumstances leading to the contract. The court will look to the intent of the parties making the contract. The court will look to the entire con­ tract as a whole but will stay within the “four corners” of the document. The court cannot add terms to the contract. If a printed contract form, such as a listing or a buy and sell agreement, is used, with blanks filled in by the parties, the handwritten words supersede the printed words if a conflict exists. The same is true of typewritten words in a pre­ printed contract. Any ambiguity in a contract is construed against the party preparing the con­ tract. This has been established as good public policy so that the one providing the confusing contract cannot benefit from the ambiguity. As a consequence, real estate licensees must use extra care in preparing contracts.

Contract Remedies

In some cases, a party to a contract fails to complete the contract or fails to per­ form for no legal cause. This is breach of contract. Breach of contract is also called default. The effect of breach of contract by a party is to terminate that party’s contract rights. The breach, however, does not terminate the contract obligations of the breaching party. The nondefaulting party has the following legal remedies against the defaulting party, which are obtained by filing suit in a court of law:

  • specific performance
  • rescission
  • compensatory damages
  • liquidated damages

Specific Performance

Every piece of real estate is unique. No piece can be substituted for another and have an exact match. As a result, a party contracting to buy a parcel of real estate does not have to accept a similar, or even almost identical, parcel. Because of the unique nature of real estate, the remedy of specific performance is available to non-defaulting parties. An order from the court requiring specific performance means that the contract will be completed as originally agreed. For example, Buyer B has contracted to buy 123 Hickory Lane from Seller H. Seller H attempts to convey 456 Hickory Lane, which is an exact mirror image of 123 Hickory Lane. Buyer B does not have to accept the substitute and files suit for specific performance. The court orders Seller H to deed 123 Hickory Lane to Buyer B.

Rescission

This remedy is the opposite of specific performance. Rescission means to take back, remove, annul, or abrogate. A marriage of short duration is rescinded or annulled. This contract remedy is applied when a contract has not been per­formed by either party and when it has been breached by a party. Upon suit for rescission, the court orders the parties placed back in their original positions as if the contract had never existed. For example, Vendor Smith enters into a contract for deed (land contract) with Vendee Black, date of possession to be immediate. Within two months, Vendee Black loses his job, tells Vendor Smith that he will not move out or pay the agreed payments, and refuses to sign a release of contract. Vendor Smith files suit for rescission of the contract. The court order places Vendor Smith in posses­sion and control and shows that Vendee Black has no interest in the real estate, just as before the contract. If Vendee Black had paid a down payment, the down payment would be ordered returned to Vendee Black, minus a fair amount for rental during the period Vendee Black had possession of the premises.

Compensatory Damages

When a contract is breached, one party usually suffers monetary loss as a result of the contract breach. The amount of money actually lost is the amount of compen­satory damages the court will award. The amount of compensatory damages should be an amount sufficient to put the nondefaulting party in the same economic position that he or she would be in if the contract had not been breached. The amount ordered paid should total what the injured party lost from the contract breach. The amount must be able to be calculated with some certainty. For example, Landlord T must evict Tenant G for failure to pay rent in the amount of $800. Upon inspection of the prem­ises, damage to windows, walls, and appliances has been done in the amount of $1,150. In addition, Landlord T must move and store Tenant G’s belongings at a cost of $500. The compensatory damage award should be a total of $800, $1,150, and $500, plus any court costs to file suit. The items usually included are lost rent, unpaid taxes, cost of repair to the premises, title search fees, lost interest, commissions, and lost profits. Tradition­ ally, attorney fees incurred to litigate the contract breach are not included in cal­culating compensatory damages. Punitive damages or exemplary damages are not typically allowed in breach of contract cases. Punitive or exemplary damages are awarded for extremely bad behavior by a party. They are to punish and send a message to society that the bad behavior will not be tolerated. An award of punitive damages is most often made in cases in which one party has taken fraudulent advantage of another.

Liquidated Damages

Instead of or in addition to compensatory damages, the parties to the con­ tract can stipulate in the contract an amount of money to be paid upon cer­tain breaches of the contract. Damages agreed to be paid in the contract are called liquidated damages. Liquidated damages usually consist of forfeiture of some money or late fees held by one party in the event of breach. Courts do not favor forfeiture. Thus, for liquidated damages to be collectible and enforced b)’ the court, the amount must be reasonable as compared to the damage caused by the breach. To be enforceable, the amount must not appear to be a penalty. Examples of liquidated damage clauses exist in many real estate contracts. The most typical one is the forfeiture of earnest money by the buyer to the seller in the event that the contract is not completed for legal cause. Another example is the late fee agreed to be paid in leases and mortgages in the event of late payments.