Contracts that Must Be in Writing
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Do all contracts have to be in writing to be enforceable?
No. Only certain contracts must be in writing to be enforceable. These contracts are required to be in writing pursuant to a doctrine known as the statute of frauds. Note: As the name implies, the purpose behind requiring that certain types of contracts be in writing is to prevent fraud by or against parties to the contract. A writing provides the best evidence as to the terms and intentions of the parties to the agreement.
What does the statute of frauds require?
The statute of frauds requires that, in order to be enforceable, certain contracts must meet the following characteristics: Be memorialized in a writing or written record (or combination of writings), Note: The writing does not have to take the form of a formal contract; rather, it can be any type of physical writing that memorializes the relationship. Handwritten notes, emails, and even text messages could constitute a sufficient writing. The key is that the writings must contain all of the elements described below. Identify the parties to the contract, Note: Identifying the parties to the contract is a reasonableness standard. It does not necessarily require that the parties use their whole or even real names. It may be the case that the use of nicknames or aliases is sufficient to identify the parties to the agreement. Be signed by the party against whom it is being enforced (or her representative), and Note: The signature requirement simply means some form of mark or other designation made by the party against whom the contract is being enforced. Handwriting a part of the agreement or initialing any part of the agreement may be sufficient to constitute a signature. Further, using an email address that is password protected may be sufficient to constitute a signature. State the essential terms to be performed (specify the quantity of goods to be exchanged). Note: Generally, this means identifying the consideration that will be exchanged between the parties. The absence of any of these elements may cause a court adjudicating a dispute between parties to determine that no valid contract exists or to use default contract provisions to determine the relationship between the parties.
What kinds of contract must be in writing under the statute of frauds?
Several categories of contract uniformly fall under the statute of frauds, including: Contracts that, by their terms, cannot be performed within one year of the contract, Example: Rick enters into a contract with Lex to provide lawn maintenance for one year. Because it is impossible to complete this contract in less than one year, it is subject to the statute of frauds. This principle generally applies to leases or similar contracts with a stated time period of one year or more. Promises to pay or answer for someone elses debts, Example: Margaret wants to purchase a vehicle. She has a part-time job and can make the payments, but she does not have much of a credit history. Margarets mother agrees to guarantee payment of the loan in the event Margaret fails to make payment. This guarantee agreement is a promise to answer for the debts of someone else. As such, it must comply with the statute of frauds to be enforceable. Note: Most lenders require that entrepreneurs sign a personal guarantee agreement when their businesses borrow money. Promises in consideration of marriage, Note: This is a strange example that is a relic of history. It is made to cover situations where a third party promises to transfer something of value to a couple following marriage. Historically, think in terms of a father paying a dowry to the new husband of his daughter. The sale of an interest in land (including leases of real property for more than a year), Example: Amber wishes to purchase Jaylenes property to build a house. Amber drafts a purchase agreement that identifies the property, the purchase amount, and is then signed by Amber and Jaylene. This written instrument would satisfy the statute of frauds. Note: This includes any interest in landing, including the sale of the property, the granting of an easement in the property, selling mineral rights to the property, etc. Mortgages, Note: Mortgages are loans that are secured by an ownership interest in real estate. Contracts for the sale of goods of $500 or more, Note: As previously introduced, this is a requirement under section 2-201 of the UCC. Lease of goods for $1,000 or more, and Note: This provision is located in section 2A-201 of the UCC. Security interests in personal property not in the secured partys possession. Note: Security interests allow a party a claim to certain property in the event a debt is not paid. Lenders will generally require that a borrower grant the lender a security interest in any property owned by the borrower or to be purchased by the borrower with the borrowed funds. Note: As previously discussed, contract law is the subject of state law. States have the ability to require that any type of contract be in writing to be enforceable. For example, insurance contracts fall under state law and are required to be in writing. You should review your states statute of frauds for details when executing any contract.
What type of signature is required for contracts under the statute of frauds?
A writing must either be signed by the party to the contract or her representative. A signature can be any mark or symbol (such as initials or logos) used to identify a party. It may be written, printed, stamped, engraved, or, in some states, electronic. Check individual state rules to determine what types of contracts must be in writing. If the contract consists of multiple writings, only one document needs to be signed if the documents are obviously part of the same transaction. Example: Whitney enters into a contract to sell her land to Kurt. Her state recognizes an electronic signature as a valid signature. Whitney agrees to sell the land in an email. Later, she decides not to sell the land to Kurt. Kurt sues for breach of contract. Whitney likely will not be able to defend the action based upon the absence of an enforceable contract. Simply sending an email from your personal email address may be sufficient identification to constitute a signature. Further, the court may review multiple emails to piece together the terms of the agreement.
Are there any special signature requirements for merchants?
Yes. Under the UCC, merchants may create an enforceable contract by sending a signed document after the fact to memorialize the contract. The signed writing must be sent within a reasonable time; the receiving party must receive the writing and know it relates to the prior contract, and the receiving party must fail to object to the writing within 10 days of receipt. Example: Blue, Inc., sends a shipment of material supplies to White, LLC in excess of $500. Both parties are merchants of this type of goods. White did not order these exact supplies. Blue made a mistake in sending these items. After receipt, White realizes that the company can use the supplies. White sends a letter to Blue acknowledging receipt and the intention to retain the supplies. At this point, there is a valid contract arising through the combination of the actions of the parties and a written acknowledgement after the fact.
Can a contract be enforceable if it fails to satisfy the statute of frauds requirements?
Yes. There are numerous exceptions that allow for enforcement of contracts that do not satisfy the statute of frauds requirements. Each type of contract that falls under the statute of frauds has specific exceptions. Some of these exceptions are dealt with individually below.
What statute of frauds exceptions apply to contracts for the sale of goods of $500 or more?
There are several circumstances that allow for partial or full enforceability of these contracts. Complete Performance: This is when one or both parties have fully performed the contract (i.e., made payment that is accepted or has delivered goods that were accepted). There may be an enforceable contract for the goods that are delivered or payment made. Example: Jovani orders parts from Gloria over the phone for $1,000. Without producing any documents, Jovani ships the parts to Gloria, who accepts them and pays $500. Gloria later decides to return the parts. Jovani has a no-return policy and refuses to accept return of the parts. She sues Jovani for breach of contract, stating that there was no enforceable contract. A court may review the situation and hold the agreement to be enforceable, despite the absence of a written agreement. The actions of Gloria in accepting the subject goods provide sufficient information to reduce the likelihood of fraud in the situation. Specialty Goods: If a party enters into a contract for the manufacture and purchase of specialty goods, the contract is enforceable for any of the specialty goods already made by the party. Naturally, there must be some evidence that the specialty goods were intended for the other party. Example: Marshal, a musical performer, walks into a jewelry store and asks the owner, Tiffany, to create a custom necklace for him for $100,000. The necklace is made of platinum, has his initials in the center, and is surrounded by precious gems. He makes a down payment, but refuses to sign a contract. Tiffany takes the down payment and begins constructing the necklace. When the necklace is complete, Marshal returns to inspect it. Though the necklace is constructed exactly as Marshal ordered, he does not like the final look and refuses to pay for the item. Tiffany sues Marshal for breach of contract. Marshal attempts to defend against the suit on the grounds that there is no enforceable contract under the statute of frauds. The court may enforce the agreement, despite the absence of a written agreement, because of the special nature of the goods. There is sufficient information in the situation to avoid or reduce the risk of fraud in the transaction. Statement Under Oath: If a party admits while under oath in any court proceeding (deposition, pleading, etc.) that the contract existed, then the contract is enforceable to the extent of the admission. Example: Zora sues Tom for failure to fulfill his contract obligations. During a deposition, Tom admits that he met with Zora and agreed to sell her the subject products. At trial, he argues that that contract is not enforceable because it lacks a writing sufficient under the statute of frauds. The court can use his statements under oath to enforce the disputed agreement, despite the absence of a written agreement.
What exceptions to the statute of frauds apply to contracts for the sale of real estate?
In contracts for the sale of land, a special exemption exists from the statute of frauds. If a purchaser takes possession of the land and makes permanent improvements, this can be sufficient evidence to take the contract out of the statute of frauds and allow enforcement. Example: Elaine verbally agrees to sell Elijah a piece of real estate. Pursuant to this verbal agreement, Elijah makes a down payment and takes possession of the land. Elijah has the land surveyed and graded to build a house. Later, Elaine decides to back out of the deal on the grounds that there is not a contract enforceable under the statute of frauds. In this situation, a court may hold that an enforceable contract exists based upon this exception to the statute of frauds. Note: This situation can also give rise to a detrimental reliance claim to establish an implied-in-law contract or a claim for restitution for the value of work put into improving the property.
What exceptions to the statute of frauds apply to contracts with durations of more than 12 months?
In contracts with a duration of more than one year, substantial performance of the contract may be sufficient to allow for continued enforceability. Further, once the contract is fully performed, the statute of frauds does not prevent posthumous enforcement of any details. Example: Frank enters into a lawn service agreement with Elizabeth that will last for two years. After 10 months, Elizabeth seeks to get out of the agreement. When she fails to pay her monthly bill, Frank sues her. Elizabeth defends the action by arguing that there is not an enforceable contract under the statute of frauds. The court may side with Frank, as the agreement has been substantially performed for a significant period of time. The extent of services provided to Elizabeth over this period of time and the history of payments is likely sufficient to demonstrate that a contract indeed existed. This information greatly reduces the likelihood of fraud in the agreement. Of course, there will still need to be evidence indicating that the contract was for 2 years.
What is promissory estoppel?
This is yet another exception to the statute of frauds. All contracts are subject to equitable (fairness) principles. Most notably, the principle of promissory estoppel can make contracts enforceable that do not meet statute of frauds requirements. The promissory estoppel doctrine means that, based upon principles of fairness and equity, one party may be estopped (or stopped) from denying that a contract indeed exists. Under this equitable principle, the statute of frauds does not bar enforcement of a contract if: 1) The promisor states that a writing will be made and fails to produce the writing, Example: Winston agrees to sell horse feed at a given price to Rashad. Winston states that he will work up a contract for the sale. Despite Rashads insistence, Winston fails to produce the contract. OR 2) The promisor induces action (or inaction) by the party seeking enforcement, Example: Calvin tells John that he will sell John the supplies necessary to complete a work contract. He tells John to go ahead and plan on having the supplies necessary to complete the entire contract. John relies on Calvins representation by not securing the supplies from another supplier. AND 3) The party seeking enforcement relies on this representation to her detriment. Example: In either of the above situations, there could be a legal detriment suffered by the party seeking an exception to the statute of frauds if Winston or Calvin fail to perform. If Rashad is unable to secure feed or Calvin is unable to secure materials, they may suffer a detriment. Further, they could suffer a detriment if the cost of feed or supplies has risen since the time of entering into the original agreements. Note: The detriment suffered by one party must be a direct result of the other partys failure to perform her obligations under the agreement. The detriment does not, however, have to be the subject of the agreement. As in the above example, the detriment can be the result of an inability to perform a second and independent agreement. Generally, the court will use this exception when fairness dictates that enforcing the contract is the only reasonable means of avoiding injustice to the relying party. Note: Some courts have refused to apply promissory estoppel principles to contracts under the UCC, because the UCC includes enumerated exceptions to the statute of frauds.