Welcome to my Law blog specifically intended as an aid to law students. I will post comments and white papers, from time to time, and I am happy to carry on conversations with students who are in need of help in law school.

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I am a Professor of Law at Concord Law School, an Internet Law School located in Los Angeles, though I live, teach and otherwise work out of Lakewood, Colorado, resting up against the foothills just west of Denver.





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Tuesday, April 20, 2010

11 - Contracts – Formation (Defenses – Statute of Frauds – Part Two)

11 - Contracts – Formation (Defenses – Statute of Frauds – Part Two)


Last time in contracts, we looked at the first part of the defense of the statute of frauds. Now we continue that discussion.

Let’s look at the four most important defenses in greater detail:

One-year Provision

Under this provision, we are concerned with a Contract which by its terms is not capable of full performance within one year. How do we measure the duration? It is measured from the date of formation through the date of completion. How do we know if the one year time frame actually applies? If the contract does not rule out the possibility of full performance within one year, the one-year rule does not apply. This provision of the Statute is only applicable when the contract, by its terms, is not capable of full performance within one year.

The SoF has certain escape hatches – where the contract is required to be in writing, but where something else has happened to take the contract out of the SoF. How could a contract that has a duration of longer than one year be taken out of the Statute of Frauds? The answer is, by the full performance of one side to the contract. Obviously, if one side has completely performed, the probability that there was, in fact, a contract is pretty high.

One more thing here: Let’s say I agree to fix your car six times over the next three years and then, you fail or refuse to pay me for the work I have done. Detrimental reliance is an exception to the SoF one-year rule. Don’t confuse this with part performance. Part performance is NOT an exception to the one-year rule. FULL performance IS, but PART performance is NOT. What we have here is a special rule on reliance. It is a promissory estoppel rule called “Detrimental Reliance.” Here is how it is stated:

Estoppel Arguments: Detrimental reliance. Even though the contract is unenforceable under the SoF, courts will sometimes allow the contract if the party reasonably relies to his detriment. You will generally see this principle as an exception to the one year rule.

Sale of Real Property Provision

Here we are concerned about the sale of an interest in land and the escape hatch – how to take the contract out of the SoF is part performance. What is “part performance”? It is taking possession of the property and doing something more (like payment, improvements, etc.). If there is sufficient part performance, then the probability that there was, in fact, a contract is high.

Sale of Goods

Here we are concerned with a sale of goods valued (the contract price) at $500 or more. Remember that if the contract is one for the sale of goods, the UCC will apply. Then, if the price is $500 or more (note “more than $500”), you will need to look at the UCC SoF provision.

Let’s try a hypothetical. Suppose that I orally promise to sell you 1,000 pieces of a particular product for $1,000 and you orally promise to pay me the $1,000. You then give me $100 cash. What happens if I then fail or refuse to deliver the goods to you? Can you enforce the oral contract? You can, but only to the extent of the $100 paid, or the goods actually accepted. Part performance provides another important exception to the SOF. Here, you can prove that I accepted the $100 for something, so you can require return performance of that amount (here, $100 worth of product).

Let’s suppose we have an oral agreement that you will pay me $1,000 for my computer. If you give me $100 down, but I change my mind and refuse to sell the computer to you, can you enforce the contract? Here, jurisdictions are split. The answer is technically, no, since no computer can be divided into pieces, so you can't get a $100 piece of the computer. But some courts have permitted enforcement of the entire contract for goods, where the goods are indivisible, and part performance has occurred. Now, if the goods are, in fact divisible, then the courts could allow the payment to cover the appropriate number of machines. For instance, if each machine is worth $100, under the divisible contract rule, the court could enforce a contract for one machine.

[Make sure you review UCC 2-201. Specifically, note the (1) quantity term, (2) merchant exception, and (3) ways to take the contract out of the Statute.]

Guarantee (Suretyship) Provision

The guarantee, or surety, provision covers a promise to answer for the debt of another (secondary promise). Keep in mind here, the situation is where person A enters into an agreement with person B, where B gives something of value, whether goods, services or other non-goods property, like real property, and A is supposed to pay a certain consideration to B. Person A can’t pay person B, so A goes to person C and asks C to agree with B to pay this debt agreement. C is acting as the surety/guarantor for A’s promise to pay B.

If the guarantor or surety is contracting for his own benefit/purpose, or at least, substantially for his own benefit/purpose, then it would not be a secondary promise as far as the surety is concerned. If the surety is contracting for the primary benefit/purpose of someone else, that’s what makes the agreement a secondary agreement. The purpose of the suretyship is not primary to the surety, but rather it is primary to the other person. All of this is called the “primary purpose” rule or the “leading object” rule. So ask the question “Is the “leading object” of the promise to benefit the surety or the other person?”

Why is this important? Two reasons: First, if it is a secondary promise, the agreement must be in writing. If it is a primary promise (as far as the surety is concerned), then it does not need to be in writing. Second, if it is a secondary promise, the agreement must be supported by consideration. If it is a primary promise, the Suretyship agreement does not need to be supported by consideration. The policy behind all of this is that an ordinary suretyship is not a separate contract – it is appended to the debt agreement and the consideration of the debt agreement is sufficient. If the suretyship promise is for the primary purpose of the surety, then it IS a separate agreement that must, under basic “formation of contracts” principles, be supported by a separate consideration.

So, how do we remember all of the possibilities – the six parts to the SoF? Here’s how I learned it from one of my colleagues at Concord Law School: Keep in mind that I am teaching online. So, I tell my students to get their faces very close to their monitor and then look way down until they see my legs. That’s all there is to it. The acronym, MYLEGS.

1. Know the basic types of contracts covered by the statute:
     M - Marriage
     Y - Year
     L - Land
     E - Executors
     G - Goods
     S - Suretyship

2. Know what constitutes a sufficient writing:
      Common Law: Signed by defendant; all essential terms
     UCC: Signed (except between merchants, it can be signed by the sender); quantity term

3. Know the main exceptions:
     - Goods: Merchant's confirming memo exception
     - Land: Part performance (money plus improvements or money plus possession)
     - Year: Full performance and detrimental reliance exception
     - Suretyship: Main purpose/leading object rule

TEST TIPS: If the contract is within the SOF, it is unenforceable unless it is in writing. So, if a fact situation states that there IS a written contract, the SOF does not apply, unless something within that fact situation leads you to believe that the writing is insufficient or there is a subsequent oral modification that falls within the SOF.

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.

Next time in contracts, we will continue with the Parol Evidence Rule. (And yes, I spelled it right – “parol,” not “parole.”

Professor Doug Holden
© 2010. Douglas S. Holden. All Rights Reserved.

1 comment:

  1. Could you please try to clarify the primary vs. secondary promise. I was unable to follow your explanation.
    What I gather:
    C acting as surety for A.
    a) If C acts substantially for their own benefit = Primary Promise. No need to be in writing, no need for consideration. Separate agreement, K formation rules apply including need for consideration?
    b) If C acts primarily for A = Secondary Promise. Must be in writing, needs consideration. Attaches to existing debt agreement and doesn't need consideration??
    Seems like I'm crossing up the two options somewhere. Any help would be appreciated.