The Statute of Frauds

Terms:

Statute of Frauds:
Basis of most modern laws requiring that certain promises must be in writing in order to be enforceable; it was passed by the English Parliament in 1677. In the United States, although state laws vary, most require written agreements in five types of contracts which are covered in this lesson.

Contracts of Suretyship:
Contracts to assume the obligation of another person.

Contracts in Consideration of Marriage:
A contract under which one party promises something of value to the other party on the condition that they become married.

“Main Purpose” Rule:
The rule stating that where a person guarantees the debt of another person in order to satisfy his own personal interests, that guarantee is enforceable even if it is not in writing.

Usually, oral contracts are enforceable. However, the statute of frauds requires that five kinds of contracts be put in writing in order to be enforceable. If a contract falls into one of these five categories, the contract is “within the statute” and must be in writing. If the contract does not fall into one of these five categories, the contract is “outside the statute” and does not need to be in writing.

The five categories of contracts that must be written down in order to satisfy the statute of frauds are:

1) contracts for the sale of an interest in land,
2) contracts for the sale of goods for $500 or more (under the U.C.C.),
3) contracts in consideration of marriage,
4) contracts that cannot be performed within one year of the contract being made and,
5) contracts of suretyship.

Contracts for the Sale of an Interest in Land

Under the statute of frauds, contracts for the sale of an interest in land must be written down.

The exception here is where an oral contract for the sale of land has been partially performed. If a seller performs his side of the contract by conveying good title to the buyer, the seller can recover the purchase price from the buyer even though the contract is oral. For example:

Robert and Jimmy enter into a contract in which Robert agrees to sell Jimmy his house for $1 million. The contract is oral. Robert conveys good title to the house to Jimmy. Jimmy tries to get out of the deal, arguing that the contract was oral and therefore, unenforceable under the statute of frauds. In this case, Jimmy will lose and will have to pay Robert the purchase price of the house. Although the contract was oral and unenforceable under the statute of frauds, Robert’s part performance, the conveyance of the title, made the contract enforceable.

As far as the buyer’s part performance goes, if the buyer either makes a valuable improvement on the land or takes possession of the property and pays part of the purchase price, the contract will be enforceable. For example:

Robert and Jimmy enter an oral contract in which Robert agrees to sell Jimmy his house for $1 million. After they agree, and in anticipation of moving in, Jimmy has the house painted and has an addition built onto the house which he turns into a recording studio. Robert tries to get out of the deal by arguing that the contract was oral and, thus, invalid. In this case, Robert will have to convey title to Jimmy. Jimmy’s valuable improvement that he made on the land makes this otherwise unenforceable contract enforceable.

Contracts for the Sale of Goods

According to U.C.C. section 2-201, any contract for the sale of goods for the price of $500 or more must be in writing.

There are, however, certain exceptions to this rule in which an oral contract for the sale of goods of $500 or more will be enforced.

(1) If the buyer receives and accepts the goods, the contract will become enforceable. If the buyer receives and accepts part of the goods, the contract will become enforceable as to the goods that were accepted and received. For example:

SqueezeMe Juice Company and Sunshine Orange Groves form an oral contract in which Sunshine will sell SqueezeMe two hundred bushels of oranges at $5 per bushel for a total value of $1000. Sunshine sends SqueezeMe the first shipment of twenty five bushels for $250. SqueezeMe receives the shipment and accepts them. After they accept the oranges, SqueezeMe tries to get out of the contract, arguing that it was an oral contract for goods valued at over $500 and is therefore unenforceable. In this case, the contract will be enforced as to the goods that were received and accepted. In other words, the contract will be enforced for the $250 worth of oranges that SqueezeMe has accepted so that SqueezeMe will have to pay Sunshine the $250. However, SqueezeMe is under no obligation to accept and pay for the remaining $750 worth or oranges that they contracted to buy.

(2) If the buyer makes a partial payment for the goods contracted for, the contract is enforceable as to the goods for which payment has been made. For example:

Sunshine and SqueezeMe enter an oral contract whereby Sunshine will sell SqueezeMe two hundred bushels of oranges for $5 per bushel for a value of $1,000. SqueezeMe sends Sunshine a partial payment of $250. Sunshine then tries to get out of the contract, arguing that it is unenforceable under the statute of frauds. In this case, the contract will be enforced as to the goods already paid for. Therefore, Sunshine is legally obligated to send SqueezeMe $250 worth of oranges but they will not be legally required to accept payment for, and send, the $750 worth of oranges remaining on the contract.

(3) If the contract requires the seller to specially manufacture goods for the buyer that are not suitable for sale to others and the seller makes a substantial beginning in the manufacturing process, the contract will be enforceable. For example:

Pistols and Flowers is a heavy metal rock and roll band that is about to go on a world tour. The five members of the band decide that they would like custom made leather jackets with the band’s emblem on them for the tour. The band makes an oral contract with LeatherCo to provide five specially made jackets with the band’s emblem embossed into the leather and each band member’s name imprinted on the jacket. LeatherCo begins the job by tanning the leather and creating a metal template of the band’s emblem. The band members then try to
pull out of the deal, saying that the contract was unenforceable under the statute of frauds. In this case, the agreement is enforceable because the contract called for the manufacture of special goods which were not suitable to others and LeatherCo made a substantial beginning in the manufacturing of the jackets.

If a contract involves the sale of goods and services together, the statute of frauds will govern if the contract is primarily for the sale of goods and will not govern if the contract is primarily for the sale of services. For example:

(1) Michael and Scottie enter an oral agreement in which Scottie agrees to pay Michael $600 and Michael agrees to give Scottie six basketball lessons and an official NBA basketball. This contract is not governed by the statute of frauds. Although Scottie is buying a basketball along with the lessons, the contract is primarily for the lessons (which are services).

(2) Michael and Scottie enter an oral agreement in which Scottie agrees to pay Michael and Michael agrees to give Scottie a basketball, four tickets to a Wizards game, a free jersey and a basketball lesson. This contract will be governed by the statute of frauds because, although there is a service involved in the contract, the contract is essentially for the sale of goods.

Contracts in Consideration of Marriage

Contracts made in consideration of marriage must be in writing. Please note that this is not a contract to marry. This is a contract in consideration of marriage. For example:

(1) Evan orally promises to marry Zora and Zora promises to marry Evan. This is not a contract in consideration of marriage. This is simply a contract to marry.

(2) Evan and Zora make an oral contract in which Evan promises to buy Zora a mansion in France if Zora marries Evan. This promise is not enforceable because it violates the statute of frauds. Evan is promising the mansion in consideration of Zora marrying him. Therefore, this contract must be in writing.

Contracts that Cannot be Performed Within One Year

Under this provision of the statute of frauds, contracts that cannot be performed within one year of the contract being made must be in writing.

The one year time period is measured from the date that the contract is made. For example:

On January 1, 2003 the Metro Opera House and Andy Boccello make an oral contract in which Metro will pay Andy $25,000 and Andy will perform on New Years Day, 2006. This contract is unenforceable because it is not in writing. 2006 is three years away and there is no possible way that the contract can be performed within a year of its making. Thus, it must be in writing.

Please note that if there is any theoretical possibility that the contract can be performed within a year, the contract is outside the statute and does not need to be in writing no matter how remote the chance is that the contract will be performed within a year. For example:

(1) The city planners of Boston make an oral contract with Beantown Construction Co. under which the city will pay Beantown $1 million and Beantown will build a one hundred ten story skyscraper in downtown Boston. This contract is enforceable because, even though it is highly unlikely that Beantown will finish the skyscraper within a year, it is theoretically possible that they will and, as long as it is theoretically possible for the contract to be performed within a year, the contract is outside the statute and does not have to be in writing.

(2) Roy is a thirty five year old paraplegic. Other than the fact that he cannot walk, Roy is in perfect health. Roy makes an oral contract with Jackie in which Roy will pay Jackie $10,000 per year and Jackie will take care of Roy until he dies. This contract is also enforceable because it is theoretically possible that the contract can be fully performed within a year. If Roy dies within a year of making the contract, Jackie has fulfilled the contract within a year. That being the case, this agreement falls outside the statute and does not have to be written down.

The exception to this rule is where a contract has been fully performed. If an oral contract that cannot be fulfilled within one year has been fully performed, the contract is fully enforceable (regardless of how long performance actually took). For example:

The Boston Red Sox and Ramon Garcia enter an oral contract in which the Red Sox will pay Garcia $500,000 per year for two years and Garcia will play for the Red Sox for those two years. Garcia plays for the Red Sox for the two seasons. At this point, the Red Sox are obligated to pay Garcia his salary. Although the contract was oral and it was impossible to perform within a year, the contract became enforceable by virtue of the fact that Garcia performed on the contract. Thus, the Red Sox are obligated to pay him.

Contracts of Suretyship

According to this provision of the statute of frauds, a promise made by a third person to a creditor that the third person will be responsible for the debt that the debtor owes the creditor must be in writing. For example:

Larry has just moved from Indiana to Boston and would like to buy a house in the area. Larry goes to Fleet Bank and applies for a $1 million loan. Kevin, Larry’s friend from Minnesota who also lives in Boston, orally promises the bank that he will be responsible for paying back the loan if Larry does not. This promise is unenforceable because, according to the statute of frauds, it must be in writing.

There are three exceptions to this rule.

(1) If the third person makes the promise to the debtor instead of to the creditor, the promise does not have to be in writing. For example:

Larry has just moved from Indiana to Boston and would like to buy a house in the area. Larry goes to Fleet Bank and applies for a $1 million loan. Kevin, Larry’s friend, orally promises Larry that he will be responsible for paying back the loan if Larry does not. This promise is outside the statute and does not need to be in writing because Kevin made the promise to Larry, the debtor, and not to the creditor bank.

(2) If the third person promises to be primarily responsible for the debt, the promise is outside the statute. For example:

Larry has just moved from Indiana to Boston and would like to buy a house in the area. Larry goes to Fleet Bank and applies for a $1 million loan. Kevin, Larry’s friend, orally promises the bank that he will be responsible for paying back the loan. Here, Kevin has promised to be primarily responsible for the debt. Therefore, this promise is outside the statute and does not need to be in writing.

(3) Even if the third person makes the promise to the creditor and promises only to be responsible for the debt if the debtor defaults, an oral promise will be enforceable if the third person’s main purpose for making the promise is for his own benefit. This is called the “Main Purpose” rule. For example:

Larry has just moved from Indiana to Boston and is looking for a place to live. Kevin, Larry’s friend, owns some property and agrees to lease two acres of land to Larry. Larry asks Kevin if he can build a house on the land and Kevin readily agrees, knowing that a house will drastically increase the value of his property. Larry goes to Fleet Bank and applies for a $1 million loan to build the house. Kevin orally promises the bank that he will be responsible for paying back the loan if Larry does not. In this case, even though Kevin’s promise is oral, it will be enforceable because Kevin’s main purpose in making the promise to the bank is his interest in seeing the house build on his land.

Any kind of writing will be adequate to satisfy the statute of frauds. However, the writing must contain the essential terms of the contract, including who the contracting parties are, the subject matter of the contract and the terms and conditions of the agreement. Also, the writing must be signed by the party to be charged (i.e. the contract must be signed in order to hold a party liable to it). If any party to the contract does not sign it, that party cannot be held liable under the contract. For example:

Larry has just moved from Indiana to Boston and would like to buy a house in the area. Larry goes to Fleet Bank and applies for a $1 million loan. Kevin, Larry’s friend from Minnesota who also lives in Boston, makes a written contract with the bank that he will be responsible for paying back the loan if Larry does not. However, Kevin does not sign the contract. Larry defaults on his loan but Kevin refuses to pay the bank. In this case, although Kevin’s promise satisfies the writing requirement of the statute of frauds and is enforceable, the contract will not be enforceable against Kevin because he did not sign it.

In the event that an oral contract violates the statute of frauds, the contract will be voidable. Remember the difference between a contract which is void and a contract which is merely voidable. A void contract is meaningless to begin with while a voidable contract is a valid contract except that it can be affirmed or rejected at the option of one of the parties.

That being the case, if the contract is subsequently put into written form, it will still be a valid contract (as opposed to if the contract were void, putting it in writing would not make the contract valid unless there was new consideration).

 

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