Wednesday, March 31, 2010
10 - Contracts – Formation (Defenses - Statute of Frauds - Part 1)
10 - Contracts – Formation (Defenses – Statute of Frauds – Part One)
PLEASE NOTE THAT THE FOLLOWING IS TAKEN FROM SOME OF MY CLASS NOTES, SOME OF WHICH IS MY OWN PERSONAL WORK AND SOME OF WHICH BELONGS TO CONCORD LAW SCHOOL. IT IS POSTED TO HELP MY IL STUDENTS IN PARTICULAR. IT CANNOT BE DISSEMINATED WITHOUT EXPRESS, WRITTEN PERMISSION.
Last time in contracts, we looked at the defense of undue influence. Now we move on to the Statute of Frauds (SoF).
The issue here is what contracts must be in writing to be enforceable. Note that not all contracts must be in writing, only some of them. Mark Twain once said that “an oral contract isn’t worth the paper it is written on.” Obviously, this is a funny statement, but it also emphasizes something about contracts. Some contracts must be in writing and some do not need to be in writing.
The reason we need a rule like this is that people can and do lie about their intentions when entering into agreements. The Statute of Frauds (SOF) dates back a long way, to English law, when their courts came up with it to simply prevent people from claiming they had agreements that they couldn't really prove. So, one of its purposes was to prevent fraud by simply disallowing certain kinds of contracts that weren't well documented. Even unintended fraud -- memories fade, people remember what they wanted to hear; people present themselves in their best light. In addition, a related purpose was to specify what evidence of contract was required. A final purpose, rarely recognized by the parties, is that the exercise of writing the contract helps them clarify their understanding.
The SoF sets out 5 (or 6, depending on who is doing the writing) kinds of contracts that must be in writing. They are:
(1) Contracts that cannot, by their terms, be fully performed within one year. This is sometimes called the “One Year” rule.
(2) Contracts for the sale of goods valued at $500 or more. The “Sale of Goods” rule.
(3) Contracts to guarantee a debt owed by another. The “Suretyship” rule.
(4) Contracts for the transfer of an interest in land (including leases for more than one year).
(5) Contracts in consideration of marriage, other than a mutual promise to marry.
(6) Contracts by executors to pay an estate debt out of their own funds.
Let’s make some quick points about each one:
A) Year -- contracts which cannot, by their terms, be fully performed within one year. Note that this regards a contract that cannot be fully performed within a year – by its terms. The terms must limit the time where performance is acceptable. So, if owner contracts with builder to construct 100 homes on owner’s land, and builder agrees, but tells owner that there is no way he can have it done within two years, so the contract states the homes do not have to be done for two years, this contract does NOT have to be in writing under the one-year rule, because the terms do not state that builder cannot finish within one year. In fact, builder could hire extra crew and work twenty-four days and could conceivable finish within one year.
B) Goods -- contracts for sales of goods valued at $500 or more. Note that is not ANY contract for $500 or more. It involves the sale of goods.
C) Suretyship -- contracts to guarantee a debt owed by another. More on this later, but remember it has to be for another’s debt, not one where the surety is getting the substantial benefit of the contract.
D) Land -- contracts for the transfer of any interest in land (including leases for more than one year). An interest in land would not include easements. Generally we are talking about a sale of an interest, but that is not always the case.
E) Marriage -- contracts in consideration of marriage, other than a mutual promise to marry. That is, these are contracts where marriage is the consideration in the agreement for something else: money, property, dowry, etc.
Assuming we have one of these types of contracts, the next thing to consider is what evidence of the contract is required. The general requirements to satisfy the SoF is (1) a writing, (2) signed by the party to be charged (i.e., the party against whom enforcement is sought), (3) containing all "essential" terms. By essential terms, we mean basically price, quantity, time for performance, etc. All the terms we need in the formation of every contract. If it is not in the writing, it probably cannot be enforced against the other party.
Here is one of the places where it is really important to have already determined which law must be applied, the common law or the UCC. Under the UCC version of the SoF, the writing must be signed by the party to be charged and contain at least the one essential term that the UCC will not "fill in". The UCC has "gap fillers" for every term except for the quantity. We can use a market price, a reasonable time for delivery, merchantable quality, etc., but if we don’t know how many, we cannot enforce the agreement.
The writing does not have to be very formal. Even a signed check can be sufficient evidence of the contract, as it satisfies the quantity term (based on a reasonable market price for that amount of money, at that time). A napkin can be sufficient.
There is one other UCC rule that is important here. The Merchant's Confirming Memo exception -- UCC 2-201(2). In a transaction between merchants (that means both parties are merchants), only the sending merchant must sign, if (1) the document is sent within a reasonable time after the oral agreement is made; (2) actually received by the party to be charged, or he has reason to know of its contents, and (3) does not object within ten days. In addition, (4) the document itself must be sufficient to bind the sender, meaning that it must have a quantity term. This exception means that the party to be charged will be held to the terms of the confirming memo, even though she didn’t sign it. This is an important rule. Know this one -- it comes up a lot.
Next time in contracts, we will continue with the SoF.
Professor Doug Holden
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