The Statute of Frauds
The Statute of Frauds originated in the courts of England. The Statute of Frauds is entirely based on the subject matter of the contract. If the subject matter of the contract falls within one of the categories of the Statute, the ability to collect monetary damages, enforce the contract, or to seek specific performance is conditioned on proof that a contract exists in the form of a “signed writing,” signed by the party to be charged. In general, four types of business contracts “fall within” the Statute of Frauds, and are thus required to be in writing:
- Contracts involving the sale of land (the real estate), an interest in land (such as an easement, a mortgage, or a life estate), or a lease which extends for more than a certain period of time (usually one year, but two years in New Jersey); or
- Contracts that by their terms cannot be performed within one year of their formation; or
- The promise to answer for the debt, miscarriage, or default of another (so called secondary or collateral promises); or
- Under the Uniform Commercial Code, contracts for the sale of goods for the cumulative purchase price of $500.00 or more.
At its essence, the Statute of Frauds requires that a writing must evidence the agreement of the parties. Unless a specific format is required (e.g., a deed to land containing the “legal description” of the property), the writing may be in any form. The writing may be a memorandum, a receipt, telegram, letter, an exchange of correspondence, the records of a business, an acknowledgment, or even a letter that purports to repudiate a contract.
The Part Performance Exception
The part performance doctrine is a major exception to the application of the Statute of Frauds involving agreements relating to the sale of land. The part performance exception is applicable when an oral contract for the sale of land has been partially performed. If the court finds sufficient part performance, the oral contract will be enforced and the court may grant specific performance of the oral contract. Courts are especially prone to find part performance where the parties cannot be returned to the status quo because of the substantial actions undertaken by a party in reliance that a contract or agreement existed.
The case of Louron Industries v. Holman exemplifies the part performance doctrine. Be careful to note the nature of proof required. If proof by conduct or certain acts is introduced to prove the existence of an oral contract, such proof must point clearly and unmistakably to the existence of the oral contract. The three examples of proof under the part performance doctrine are: (1) Where the buyer pays a part of the purchase price and has taken actual and exclusive possession of the property; (2) Where the buyer has made permanent, valuable, and substantial improvements to the property with the consent of the seller; and (3) Where the buyer has given consideration to the seller and the amount paid represents a greater amount than that usually paid by a lessee under the terms of a lease. Point number two is especially critical and will be found in most applications of the part performance doctrine.
Louron Industries, Inc. v. Holman
502 P.2d 1216 (Wash. App. 1972)
Plaintiffs sued defendants for specific performance of an oral contract to sell land. Plaintiffs had originally leased the land from defendants and had signed a written contract of purchase. Believing that defendants had also signed the agreement, plaintiffs made substantial improvements to the land beyond those permitted by the lease. Defendants asserted the statute of frauds as a defense, but the lower court found sufficient part performance and held for plaintiffs. Defendants appealed.
* * * Appellants * * * contend there was not a sufficient writing or part performance to take this case out of the statute of frauds * * * (W)e disagree.
In Miller v. McCamish, * * * the court stated:
(This Court has long held that an agreement to convey an estate in real property, though required … to be in writing with the formal requisites specified for a deed, may be proved without a writing, given sufficient part performance; and that specific performance will be granted where the acts allegedly constituting the part performance point unmistakably and exclusively to the existence of the claimed agreement.)
And in Richardson v. Taylor Land & Livestock Co., * * * the Supreme Court pointed out what are evidences of part performance, saying:
The principal elements or circumstances involved in determining whether there has been sufficient part performance by a purchaser of real estate under an oral contract otherwise within the statute of frauds, are (1) delivery and assumption of actual and exclusive possession of the land; (2) payment or tender of the consideration, whether in money, other property, or services; and (3) the making of permanent, substantial, and valuable improvements, referable to the contract.
In considering these factors of part performance in relation to the facts of this case, respondent’s possession of the real property in and of itself would not be sufficient to take the case out of the statute of frauds because possession had been gained under the terms of the lease rather than by the contract to purchase. That possession alone would not point unequivocally to the existence of a seller-buyer relationship but would be equally consistent with the relationship of landlord and tenant. However, the payment of the $1,000 earnest money to appellants’ agent, when the terms of the lease called for $65 per month rental, was consistent with the sale and pointed toward a vendor-vendee relationship and was inconsistent with continuation of the lease. Moreover, the evidence shows that respondent made very substantial permanent improvements to the real property. These were in excess of those allowed by the terms of the lease and so they, too, were consistent with a sale rather than a lease. These factors bring the case within the rule announced above and constitute sufficient evidence of part performance to take the case out of the statute of frauds. * * *
Performance Beyond One Year
The original Statute of Frauds enacted by the British Parliament in 1677 provided that a writing was required for “an agreement that is not to be performed within the space of one year from the making thereof.” This section is the least favored by courts, and has been subject to a variety of exceptions. In order for a particular contract to fall within the Statute of Frauds, the performance of the contract must be objectively impossible to perform within a year from the date of the formation of the contract. The issue is one of possibility, not probability, or even likelihood that the promise can be performed within a year.
A contract entered into for an indefinite period of time by definition, falls outside the Statute of Frauds. In the area of employment law, such a contractual relationship may be termed as one of “employment at will.
Promises To Answer For The Debt Of Another
A “promise to answer for the debt, miscarriage, or default of another,” termed a secondary or collateral promise, is required to be in writing under the Statute of Frauds. An example is promise of guaranty, also called suretyship. A secondary or collateral promise may also be called a “triggered promise,” since its performance only comes into existence or is “triggered” by the failure of the primary party to pay or perform. The Statute of Frauds generally applies to a secondary or collateral promise and not to a primary promise, unless the primary promise falls within another provision of the Statute of Frauds.
The main purpose doctrine exception applies to certain types of secondary or collateral promises. The main purpose doctrine exception provides that while the promise to answer for the debt of another generally must be in writing under the Statute of Frauds, where the secondary promisor has “some purpose of his own” (generally to secure some personal monetary or pecuniary gain or some personal benefit), the Statute of Frauds does not apply and no writing will be required. Oral proof may be introduced to prove the existence of the contract.
Contracts for the Sale of Goods U.C.C. §2201
The Statute of Frauds generally applies to a contract for the sale of goods for the price of $500.00 or more. This is a cumulative requirement, that is, the “sale” is a total purchase concept. Even though no one item may meet the $500.00 requirement, if the total or cumulative purchase meets or exceeds $500.00, the entire transaction will fall within the Statute of Frauds and will be required to be in writing.
Having met these threshold requirements, UCC § 2-201 then requires:
- Some writing sufficient to show an agreement (i.e., “that a contract for sale has been made between the parties”);
- Signed by the party against whom enforcement is sought (“the party to be charged”) or by his authored agent or broker.
Under the UCC, a writing is not insufficient because it omits or incorrectly states a term agreed upon, but the contract is not enforceable beyond the quantity of goods shown in such writing. Thus, the UCC is much more lenient on the question of the sufficiency of the writing than was the common law, which required all of the “important terms” of a contract to be contained in the writing (i.e., price, quantity, parties, time for performance, etc.). Under the UCC, there are only three “definite and invariable” requirements as to the writing:
- The writing must evidence an intention to enter into a contract;
- The writing must be “signed,” which includes any authentication that identifies the party to be charged; and
- The writing must specify a quantity.
The emphasis under the UCC is clearly on the existence of “some writing”—that is, a confirmation, sales slip, check, note, order slip, telegram, letter, etc. The signature is not required to be at the end of a document and can be placed anywhere on the writing so long as it can be authenticated. A signature can consist of a stamped name, a symbol, or a party’s initials, so long as it represents the intention of a party to acknowledge their assent.
The UCC requires that a quantity be stated, and even the quantity need not be stated “accurately,” as long as the writing reflects the intention of the parties. However, the contract is not enforceable beyond the quantity stated in the contract.
Exceptions To The U.C.C.
There are three main exceptions to the UCC Statute of Frauds provision. An oral contract will be enforceable to the extent that a seller accepts payment or to the extent that a buyer accepts delivery of the goods contracted (“goods paid for/accepted”), also called the “partial performance” doctrine.
Where goods are to be specially manufactured or custom made for a buyer and are of the type not “ordinarily sold in the regular course of the seller’s business,” so long as the seller has either begun their manufacture or incurred obligations for their manufacture, no writing is required.
Finally, if there is no writing, but the defendant in his pleadings, testimony or otherwise has admitted that a contract for sale was made, the Statute of Frauds will not apply.
The Memorandum Substitute
The UCC also provides for an effective substitute for the writing requirements of the Statute of Frauds, which is referred to as the “confirmatory memorandum substitute.” When a merchant has concluded an oral contract with another merchant, it is common for one party to send to the other a letter of confirmation, a purchase order, or perhaps a printed form of the contract for their review and perhaps “counter-signature.”
Between merchants, however (that is, if both parties are merchants), an oral contract for the sale of goods is enforceable if one of the parties within a reasonable time of the making of the oral agreement sends a written confirmation containing the essential terms of an oral contract to the other party, and the party receiving the written confirmation has reason to know its contents and does not provide written notice of objection to the memorandum within 10 days.
Note that the memorandum substitute is the proper method to provide protection to a merchant whenever an oral contract or order is made for goods over $500.00. It would also be wise to send the memorandum by registered or certified mail in order to later prove that the other party “had reason to know its contents.” Why does the memorandum substitute require that both parties are merchants?
Interpretation of Contracts
Professor Thayer insightfully commented that there is no “Lawyer’s Paradise where all words have a fixed, precisely ascertained meaning.” (Thayer, A Preliminary Treatise on Evidence at Common Law 390 (1898)). Section 226 of the Restatement notes:
“Interpretations of words and of other manifestations of intention forming an agreement is the ascertainment of the meaning to be given to such words and manifestations.”
Whenever parties to a contract cannot agree on the terms of their contract and go to court to litigate the issue, the court will apply certain basic principles of construction and interpretation of the agreement.
The purpose of interpreting contracts is to determine and then give the proper effect to the intention of the parties. Generally speaking, courts will give a reasonable meaning to the words used in a contract. In applying this principle, courts will utilize the “plain meaning rule”; that is, if a writing appears to be plain and unambiguous on its face, its meaning must be determined from the “four corners” of the instrument itself without resort to extrinsic evidence of any nature. In pursuit of “plain meeting,” courts will use an objective standard, the expressed intention of the parties, rather than any secret or hidden intention in interpreting a contract. In doing so, courts will read and interpret a contract in its entirety so as to give effect to all of its parts. This is yet another application of the objective test of Lucy v. Zehmer.
Certain problems may arise which may result in intervention and interpretation by the courts:
- When a contract is partly written and partly printed, the written part will prevail if there should be a conflict. If an amount is expressed in conflicting words and figures, the words will prevail. Example: “three thousand dollars” written as $300 the correct sum will be three thousand dollars.
- Usage of trade and customs of a community can be used to explain the meaning of unclear or ambiguous language found in a contract—this is especially true under the UCC.
- Actions of parties occurring after executing a contract but prior to a controversy may be used by a court to demonstrate the real intention of the parties to an agreement.
- Language in a contract that is either unclear or ambiguous will be interpreted most strongly against the party who prepared the contract or the party who caused the confusion. An example exists in a provision of an insurance contract, which may be capable of more than one interpretation. Such a contract provision will be construed against the insurance company that, of course, prepared the contract. For example, “exception clauses” are strictly construed in insurance contracts. If an insurance company wishes to exclude any coverage, the exclusion must be clearly and unambiguously stated. This rule also applies to so-called “boiler plate” contracts, often offered to the buyer on a “take it or leave it” basis.
The Parol (Oral) Evidence Rule
When a contract is reduced to a writing, it is logical to assume that the written contract contains all the terms agreed to by the parties. Professor Corbin states “When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence whether parol or otherwise, of antecedent [prior] understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing.” The parol evidence rule states that oral testimony is generally not admissible to vary the terms of a written contract when such oral testimony relates to statements made prior to the signing of the contract or to statements made at the same time [contemporaneous] the contract was made, if the parties intended as the final expression of their agreement.
Fred signs a written contract in which he agrees to close on the purchase of a farm “on or about December 15, 2016.” However, it was clearly understood that Fred would only be required to complete the purchase if he could arrange a suitable mortgage. The ability to arrange for a mortgage is an example of a “condition precedent.” Oral or parol evidence would be permitted to prove the existence and failure of this condition. (A conditional clause, however, should be clearly stated in the contract.)
There are several important exceptions to the parol evidence rule:
- Where the words used in a contract are ambiguous, that is, where words are capable of more than one meaning, oral or parol evidence may be offered to explain the ambiguity in the contract.
- When a written contract is obviously incomplete (as where a detail is omitted or a blank is not filled in), oral or parol testimony is admissible to supply the missing term. Example: A promise (or covenant) not to compete contained a provision describing the area of non-competition as being “within a ten-mile radius of the city of _____________,” and the name of the city was not filled in. The court permitted oral testimony to fill in or supplement the missing name of the city.
- The failure of a condition precedent. If parties to a written contract orally agree that a contract will not to be effective unless or until a certain event or condition takes place, the court will permit oral testimony to show that the condition precedent was not fulfilled. In this case, the party offering the oral proof is not trying to vary the terms of the written agreement; rather, the introduction of the oral proof is essential to show that the agreement never came into existence.
Changes, modifications, or additions to a contract are not covered by the parol evidence rule, since the parol evidence rule only applies to oral proof of provisions made before or at the time of the signing of the written agreement. (Note, however, that other provisions, such as the Statute of Frauds or the rules concerning consideration might apply to keep oral proof from being introduced.)
It is also settled that the parol evidence rule does not prevent a party from using contemporaneous or prior negotiations or expressions to indicate that the writing was never intended to be a final expression of their agreement.
Billy Kettle, the son of Ma and Pa Kettle, orally promises that his parents will be able to live on their property, a farm in Wall, New Jersey, “for their lifetimes.” In reliance on this promise, Ma and Pa execute a quit claim deed to their son but fail to include this provision. Later, Billy receives an offer to purchase the property by Hovdranian Builders but Ma and Pa decide they simply don’t want to move. When Billy moves to evict his parents, they attempt to introduce oral prof of Billy’s promise. Should the chancery court permit the introduction of this oral proof if it rises to the “clear and convincing” level? What if Billy admits in a sworn deposition that he had indeed made this promise to his parents? Should that change the result?
UCC And The Sales Of Goods
The Statute of Frauds under the UCC (2-201) deals with contracts for the sale of goods for the price of $500 or more. In light of more “modern times,” should this amount be raised? If so, to what amount?
Louron Industries v. Holman
- What was the basis for plaintiff’s suit? Why?
- Had the defendants signed the contract? Why did the plaintiff’s expect a court to enforce the contract even though there was no writing?
- What must proof point toward in cases of the application of the “part performance” doctrine
- What are the circumstances that will bring the case under the “part performance” doctrine?
- What particular facts here were most important for the plaintiff’s case?
- What is “earnest money”?
Access The Following Supplemental Cases From Lexis-Nexis
Hardin v. Brummett
- What is “earnest money”? What is an “employment at will” contract?
- What is an “indefinite period” contract?
- What is the rule employed in these types of contracts?
Howard, Weil, Labouisse v. Abercrombie
- Who was suing at the trial level? Why?
- Why had the broker charged Abercrombie’s account?
- What type of promise had Abercrombie made?
- Had the defendant wished to protect itself, and assure that Abercrombie’s promise would be enforced, what should it have done?
- What case was used as a precedent here?
Wilson Floors Co. v. Sciota Park, Ltd.
- What is the “main purpose” doctrine?
- Why did the bank make its promise to Wilson?
- What is the alternate name for this doctrine?