Up to this point, we've focused on the elements of a contract and if any defenses exist that would make the contract void or voidable. Assuming that the contract remains enforceable, we now turn to determining whether the contract has the correct form and discuss how to interpret the meaning of the agreement.
The Statute of Frauds
As you know, a contract does not generally have to be in writing to be enforceable. However, society has determined that some agreements should require some additional proof, usually a writing, to be enforced. These agreements tend to be complex and important, hence why we agree that the party trying to enforce the agreement should have some proof that an agreement exists in the first place. Because the statute of frauds can be used to escape the obligations of a contract, courts have created a number of exceptions, which we will discuss later on.
The following are the types of contracts that require a writing under the statute of frauds:
- Contracts for the sale of land. Almost all contracts involving an interest in real estate are subject to the statute of frauds. An "interest in land" is a broad description involving the sale, mortgaging, or leasing of real property. However, short-term leases for a year or less do not require a writing to be enforceable.
- Contracts that cannot be performed within one year. Any agreement that cannot be completed within one year from the time the contract was formed must be in writing to be enforceable. The reason behind this rule is fairly straight forward - if you're going to have an agreement meant to last for a long time, you should get it in writing. Notice that the time period is from when the contract was entered, not from the time when performance starts. Another complication here is the use of the word "cannot." This means that we require a writing if there is no possible way that the contract can be completed within one year. A practical application of this rule could involve an employment agreement. If you sign a contract to work for a company for exactly one year, this agreement cannot be fully performed within the year, meaning that a writing (i.e., an employment contract) is required. However, if the agreement is to complete a task for a business, the question you must ask is whether or not that task could possibly be completed within a year. If it could, no writing is required. Even if it seems completely improbable that the task could be completed within a year, as long as it's theoretically possible, the agreement falls outside the statute of frauds and a writing is not required.
- Marriage provisions. I thought about skipping this one, but it's too fun. The rule states that if any part of the marriage consists of a promise to exchange some consideration other than the actual marriage itself, the statute of frauds requires that part of the agreement to be evidenced by some form of writing. Therefore, a promise to marry someone does not require a writing, but if you promise to marry someone in return for the latest and greatest Aston Martin, you better get some evidence. Or in another example, assume that the mother of your sweetheart came and said secretly, "if you marry my child, I'll give you $500,000." Again, get it in writing for it to be enforceable. Many affluent individuals meet this requirement by creating a prenuptial agreement (or prenup), which will specify how their assets will be treated upon marriage and/or divorce or death.
- The UCC. The general rule here is that contracts for the sale of goods greater than $500 must be evidenced by some form of writing. However, I'll decline to elaborate on this now because we'll pick up the UCC next week.
The Writing Requirement
You'll be tempted to say that the examples above all require a signed contract. Don't. Rather, the statute of frauds requires that these types of agreements must be evidenced by some writing, signed by the party to be bound. Therefore, a signed contract is not required. Rather, we look to find some memo, note, text, napkin, etc., that gives evidence that an agreement was entered.
The writing does not have to be formal or contain every detail of the agreement. However, it must be detailed enough for us to figure out what the parties agreed to. This can usually be fulfilled by naming the parties to the agreement and identifying the subject matter. If I told my fiancé that I'll give her my estate in the French Alps should she agree to marry me, whereupon I write this all on a napkin, then we have met the requirements of the statute of frauds (unless I have multiple estates in the Alps, in which case my wife would probably get her pick).
The requirement that the agreement be signed by the party to be bound can get a little tricky. As you might imagine, physically signing the document is sufficient. But what if you send an email? In such a situation, the Electronic Signatures in Global and National Commerce Act comes to the rescue. It states that any symbol logically associated with an agreement can meet the signature requirement of the statute of frauds. Therefore, if I offer to sell you my land in Driggs, Idaho and you respond via email with "I accept. - Me." I can now enforce this contract against you just as I could if you had signed a physical piece of paper.
Exceptions to the Statute of Frauds
- Full performance. This one is probably so obvious that it doesn't warrant much of a discussion. If both parties fulfilled their obligations under the contract, trying to get out of it using the statute of frauds is silly. Remember, the purpose of the statute of frauds is to keep one party from saying there was an oral agreement when there was none. So if both parties perform, why on earth would one party try to say there was no deal after performing the duties associated with an agreement that doesn't exist?
- Partial performance. When a contract has been partially performed and the parties cannot be returned to their positions before the contract's formation, a court may enforce the agreement even without a writing. For example, if we enter an agreement whereby I sell you my land in Driggs, obviously we're going to need a writing to meet the requirements of the statute of frauds. But let's say it was an oral agreement, and you pay me the $400,000 agreed-upon price. Then when you try to move onto my land, I involve the courts to evict you, claiming that we had no deal, using the statute of frauds to help my case. Your response is simple - you ask the court, "if we didn't have a deal, why does Brother Hales have my $400,000." At that point, the judge looks at me...and I have some explaining to do.
- Admission. As with full performance, this exception is rather simple. If I use the statute of frauds to claim that no contract exists, but then I admit that there was a contract...well, of course the courts are going to enforce the agreement.
- Promissory Estoppel. As you saw with the Killian v. Ricchetti case from last week, if one party makes promises that the other party justifiably relies on to his or her detriment, the courts may choose to enforce the agreement even if it does not meet the requirements of the statute of frauds. So if I orally promise to sell you my land and you then begin paying money for a geographic survey, city permits, etc. (and I know what you're doing), even if you haven't paid me yet (which would evoke the partial performance requirement above), the court may still enforce our agreement on the theory of promissory estoppel.
The Parol Evidence Rule
Some contracts do not include, or contradict, an oral understanding of the parties before they signed a contract. For example, a timeshare salesperson may tell you that the timeshare will increase in value or that they'll take the timeshare back at any point if you don't want it anymore (both of which are common lies). Thereafter, the purchase documents that you sign inform you in small print that the timeshare will not increase in value and that they have no buy-back program. In determining how to resolve this conflict, the courts will utilize the parol evidence rule. Spoiler alert - the timeshare company is going to win.
This rule states that a court will not receive into evidence any prior or contemporaneous terms/agreements that contradict the terms of the parties' written contract. This makes sense. We don't want parties coming to the courts claiming that although they signed a contract saying one thing, they verbally agreed to something different before signing the contract. The court's response is simple - if that was true, you should have included it in the contract that you signed! This rule applies to all written contracts whether or not the statute of frauds requires the agreement to be evidenced with a writing.
However, as you know by now, there are going to be several exceptions to this rule:
- Contracts subsequently modified. Remember that the parol evidence rule only applies to disputes about the terms that allegedly took place before the contract was signed. Therefore, if the parties are arguing about a modification to a written contract that occurred after the contract was signed, the parol evidence rule does not apply. As a result, a court can hear evidence that a contract was modified after it was signed. But note that this is not the case if the contract states that all modifications must be in writing.
- Voidable or void contracts. If one party tries to introduce evidence that the contract is void or voidable, the courts will hear that evidence. Examples include illegality, fraud, duress, or mistake. The reason is simple: if deception led one of the parties to agree to the terms of a written contract, courts will want to review it.
- Contracts containing ambiguous terms. When the terms of a contract are ambiguous, meaning that they could be interpreted in different ways, evidence is admissible to show the meaning of the terms.
- Incomplete Contracts. If the parties never intended the contract to be their full understanding, then the rule does not apply. Evidence is therefore admissible when the written contract is incomplete or missing essential terms.
- Contracts with an obvious or gross error. The parol evidence rule does not prevent a showing that a fact stated in the contract is untrue. An example could be an accountant's contractual rate of $30 an hour when both parties knew that the true rate was $300. A court would allow the correction of such an error.
- Prior dealing, course of performance, and usage of trade. A prior dealing is defined as "a sequence of previous conduct between the parties to a particular transaction which is fair to be regarded as establishing a common basis of understanding for interpreting their expression and other conduct." Course of performance is the conduct of a party in response to a contract that calls for repeated action, such as an agreement to mow your neighbor's yard every week. Usage of trade is defined as a common practice that is regularly observed in a certain vocation or trade and therefore expected going forward.
In these situations, courts will allow the parties to admit into evidence discussions of what was said before the contract was signed in an effort to clarify what the parties meant when they signed the agreement.