Contracts The Statute of Frauds and Contract Law

What Is the Statute of Frauds?

The "Statute of Frauds" (commonly abbreviated as "SOF") is a rule of law requiring certain kinds of contracts to be written (not oral or "verbal") and be signed by all parties to an agreement in order to be binding. The types of contracts and rules that comprise of the Statute of Frauds can vary from state to state and within each jurisdiction. In the United States, there are some general principles which will be covered by this article.

The Purpose of the Statute of Frauds

This statute was created to aid society in preventing injury from fraudulent conduct. Oral agreements are vague and frequently don't provide sufficient proof of what terms were agreed by parties to a contract, leaving one party to make fraudulent or false claims and forcing the other party to prove the lie. But written agreements, which include signatures, create a firm "record" of the deal and provide greater assurances and evidence of the actual terms that were agreed to by the parties when the deal was struck. By requiring certain types of important agreements be contained in a signed writing, it further helps reduce the chances of litigation, creates clarity of the terms and intentions of agreements, and also provides people with the opportunity to review the terms and conditions of an important deal one last time before making the contract final.

What Types of contracts are Governed by a Statute of Frauds

Over the course of time and history, certain types of contracts were identified as being important, of significant value, and the most susceptible to fraud. While exact requirements vary between states and jurisdictions, there is a general uniformity of common areas where a Statute of Frauds frequently applies. Those areas are easily remembered by using the mnemonic MY LEGS:

• Marriage

  Promises made in the consideration of marriage. While these are unusual, most of us have heard claims such as "he promised to buy me a condo in Trump Tower if we married." Unless such an agreement is in writing, it's not enforceable as a matter of law.

• Year

  Any agreement that cannot be performed and completed within one year, per its terms, is subject to the Statute of Frauds. The best example is a five year contract to supply oranges - by its terms, a five year deal cannot be completed in one year. But be careful with this concept and don't confuse it with an agreement that isn't completed within one year but might be able to be completed in one year, for example, an agreement to build a tree house that could be completed within one year but takes 13 months.

• Land

  The transfer of real estate requires a writing - the buying, selling or transfer of land. Note that transfer does not include leasing, which is just a right or license to use land, which means that an oral lease for 3 months would not be subject to the writing requirement of the Statute of Frauds. However, a land lease for 2 years would require a writing, not because of this section but because of the other section that requires a contract, per its terms, must be able to be performed and completed within one year.

• Executors

  This deals with estate law - promises to pay the debt of an estate from an executor's private funds must be written. However, promises to pay the debt of an estate from the estate's funds can be oral and not subject to the Statute of Frauds.

• Goods

  The sale of goods worth $500 or more requires a signed writing. The Uniform Commercial Code is the body of law in the United States that typically covers the sales of goods. But this area is not so simple - what about contract modifications? A $600 contract that was modified down to $350 can be oral. However a $350 contract that is modified up to $600 is governed by the Statute of Frauds and requires a signed writing.

• Suretyship

  A "surety" is someone who promises to pay the debt of another person. Any promise or contract to be a surety is governed by the Statute of Frauds and must be contained in a signed writing.

The Formal Requirements of the Statute of Frauds

Typically the Statute of Frauds requires the following elements in order to be considered a valid and binding agreement. The agreement must:

• be in written form
• identify the subject matter of the contact so it is reasonably understood (e.g. the purchase of "bowling balls")
• provide the essential terms of the agreement (with sales of goods it is the quantity and price of the goods)
• have the signature of both parties or, per the UCC for sales of goods, the signature of "the party to be charged" (the party contesting the validity of a contract.)

The Uniform Commercial Code states that for sales of goods, only the party to be charged (the party against whom the contract is sought to be enforced) is required to sign. To make clear, let's use an example. John agrees to sell Bob 10 cases of imported beer for $600, which is written down on a notepad and signed by Bob. A few weeks later, Bob contests the validity of this contract and John sues Bob, presenting the notepad contract in court. Since John agrees that the writing and its terms are valid, his signature is not required on the contract. But since Bob is contesting the validity of the contract, the Statute of Frauds requires Bob's signature to appear in order for the agreement to be enforceable by John. In this case, Bob will be held to the terms of the deal unless he has some special explanation to the court why this notepad contract, which contains his signature and specific terms, is somehow not legitimate and accurate.

The Application and Effect of the Statute of Frauds

If the Statute of Frauds defense is raised successfully against an agreement, it makes the contract cancellable or "voidable" at the option of the party pleading the Statute of Frauds. Just because an agreement may not comply with the Statute of Frauds does not render it "void" or automatically terminated, for example, an illegal agreement to purchase cocaine. That agreement is considered not a valid agreement at all since it is illegal. If the parties had an oral agreement for the purchase of $800 of beer, both parties can agree in court that a valid contract exists which can be enforced.

Exceptions to the Statue of Frauds

There are exceptions to general rules above that would make an agreement enforceable that would normally be invalid under the MYLEGS rules of the Statute of Frauds. To remember these special circumstances, use the "SWAPP" mnemonic.

• Specially Manufactured Goods

  Custom made goods that were manufactured special for an order and which can be identifiable to the order would constitute an exception to the Statute of Frauds. For example, Don orally agrees to purchase for $1,200 the 5 motorcycles that Ted has on his lot and wants them custom detailed to say "Don's Delivery Service." Ted finishes 3 of them when Don tries to cancel the deal. In this instance, since the contract calls for specifically manufactured goods, it falls within the exceptions to the Statute of Frauds. It is clear by the nature of this job that there was an agreement between the parties.

• Written Merchants Confirmation

  When there exists a written confirmation of an agreement between two merchants (not consumers), this is sufficient proof to satisfy the Statute of Frauds. Merchants frequently invoice each other after making oral agreements and the law recognizes this customary manner of business. By way of example, an invoice identifying the goods, quantity and price pursuant to an oral order and stating that the agreement is firm unless canceled within 5 days.

• Admission in Court

  As stated above, a "party to be charged" or the person who is having the agreement enforced against them can admit that there was a valid oral agreement. The failure of this agreement to qualify under the Statute of Frauds does not render it automatically "void" or unenforceable.

• Partial Performance

  If one party has already partially performed on the agrement in some significant fashion, this can save an oral agreement from being invalidated under the Statute of Frauds. Once again, this exception provides more solid proof that the parties had intended for an oral or vague agreement to be enforceable and with agreed upon terms. For example, Bill orally agrees to sell Jack 500 iPods in exchange for $5,000. Bill delivers 200 of them after which Jack challenges the validity of the oral agreement. The court should find that there is an enforceable agreement for 200 iPods although not for the full 500, and Jack will owe Bill $2,000.

• Promissory Estoppel

  This is a legal doctrine designed to prevent fundamental "unfairness." This legal concept is occasionally used when a significant injustice would occur that would be harmful to society. For example, Jill promises Bill $700 to paint his house. Bill told Jill that he was going out to buy some paint and Jill gives Bill a ride to the store. Two weeks later after a good part of the house is painted, Jill claims no agreement with Bill existed since it was oral and unenforceable under the Statute of Frauds. In this instance, Jill cannot claim she was ignorant of the agreement as she induced Bill to spend $300 to purchase paint for the job. Jill could have easily prevented the significant expense to Bill from the time and cost of going out to buy paint. The concept of promissory estoppel or "fundamental fairness" kicks in to right an obvious wrong and will otherwise allow Bill to recover the cost of his efforts against Jill. To qualify as promissory estoppel, all of the following elements are typically required:

• • A clear and definite offer was made (there was an offer of $700 to paint the house)
  • There was a reasonable expectation of reliance on the offer (Jill reasonably expected Bill to rely upon the offer - it was clear Jill wasn't joking.)
  • There was a reasonable reliance on the offer by the party receiving the offer (in our example, Jill's promise to pay Bill $700 to paint the house
  • There was detrimental reliance on the offer (Bill's spending $300 to purchase paint for the job)

Conclusion and Suggestion

Even if the Statue of Frauds may not apply to a specific agreement, it is always excellent practice to try to reduce the essential terms of any contract to a written, signed document. Even if an oral contract is valid and cannot be invalidated by the Statute of Frauds, the terms are usually very difficult to prove in absence of a written agreement and there will frequently be disputes later as to the exact terms of the deal.