Types of Contracts and Enforceability

Contract Formation: Express, Implied, Bilateral, and Unilateral Agreements

A contract is a legally binding agreement between two or more competent parties to perform or refrain from performing a specific act. Contracts can be established either through direct statements or through actions. An express contract is one in which the parties state their terms and intentions either orally or in writing. In typical real estate practice, listing agreements and purchase agreements are express contracts because the parties explicitly set down their commitments. Conversely, an implied contract is formed by the actions, conduct, or circumstances of the parties rather than by explicit spoken or written words. For example, a licensee's conduct can inadvertently create an implied agency relationship in some jurisdictions. However, rules governing agency formation, disclosure requirements, and written-agreement mandates vary by state, and a real estate salesperson must always work under a supervising broker.

Contracts are also categorized by the number of parties making enforceable promises. A bilateral contract is formed when both parties exchange mutual promises, binding each party to perform. A standard real estate purchase contract is a classic bilateral contract because the buyer promises to buy and the seller promises to sell. Similarly, an exclusive right-to-sell listing agreement is a bilateral contract established between the broker and the seller, obligating both parties to their mutual commitments.

In contrast, a unilateral contract involves only one promising party. In a unilateral contract, one party promises something in exchange for the other party's performance rather than a return promise. The performing party is under no legal obligation to act; however, if they do perform, the promising party is legally required to fulfill their promise. An open listing is generally treated as unilateral: the seller promises to pay a commission to a broker who earns it under the terms of the listing, typically by being the procuring cause of a sale. Another common example is an option contract to purchase real estate prior to the option being exercised. In an option contract, the optionor (the seller) is legally bound to sell, while the optionee (the buyer) is not obligated to buy. When the optionee chooses to exercise the option according to its terms, the unilateral option contract converts into a binding bilateral purchase contract.