The ability to enter into a binding agreement is a cherished right of most people and perhaps the most central part of business life. The basic elements of what is required to achieve a binding agreement are described in our article Binding Contracts. This article shall discuss in more detail one aspect of creating enforceable agreements, namely complying with the Statute of Frauds.
Despite its misleading name, the Statute of Frauds is the requirement that certain types of contract have to be in writing to be enforceable. The underlying purpose of the doctrine is to avoid the likely turmoil and conflict that can arise when parties fight over what was said and what was promised when creating the contract. Put simply, if the agreement is of major significance or is to last a long time, the Courts require it to be in writing, as described in more detail below.
Basic Doctrine of Statute of Frauds:
The “Statute of Frauds” requires that certain types of contracts be written and signed by all parties in order to be considered binding and enforceable. The following types of contracts have been deemed most important and most susceptible to fraud, and thus the Statute of Frauds is applicable to these cases: marriage, any agreement that takes more than a year to complete, real estate, sale of goods worth at least $500, and repaying the debts of others.
The Statute of Frauds was created in an attempt to reduce the likelihood of fraudulent conduct. Since many agreements are made on oral terms without a written contract, it can often be hard to provide sufficient proof of what the exact terms agreed to by both parties were in the event that a claim is made against one of the parties.
Written agreements, as made necessary by the statute, include signatures of both parties as well as details about the exact terms of agreement to which both parties may be held in a dispute. It is not necessary for the contract itself to be in writing, but there must be some note in writing signed by the party to be charged, in order for the agreement to be valid. The terms must not be made too ambiguous by that method, as described in some detail in our companion article on Binding Contracts.
According to California law [Cal. Civ. Code. 1624], the following types of contracts are considered invalid unless the contract itself, or a “note or memorandum thereof,” is in written form and signed by the party to be charged.
- Any agreement such that its terms may not be completed within a year.
- A promise to pay the debt of another.
- An agreement for the lease of a property for a period exceeding one year in length, or for the sale of real property. The party to be charged must sign the written agreement.
- An agreement establishing that an agent or broker has the authority to purchase, sell, or lease real estate for a period exceeding one year.
- An agreement that will not be performed during the lifetime of the promisor.
- An agreement by a purchaser of real property to establish indebtedness by paying a mortgage.
- An agreement to loan money worth more than $100,000 made by a person whose business is to lend.
CA Commercial Code Sec. 2202 makes it clear that the terms delineated in the final written expression of an agreement may not be contradicted by any prior agreement (written or oral).
CA Commercial Code 1206 states the following laws regarding sale of personal property:
- A contract for the sale of personal property is not enforceable beyond $5000 in value of remedy unless there exists some form of writing which indicates that a contract for sale has been made. The writing must clearly define the price of sale, the subject matter, and must be signed by the party to be charged.
- (1) does not apply to the sale of goods, securities, or security agreements.
Commercial Transactions and the Statute of Frauds:
The Courts utilize far more relaxed requirements when dealing with commercial contracts between merchants, realizing that in the constant day to day transactions between professionals in the world of business, there is less need for such protections. See our article on Commercial Transactions.
Sale of Goods
“A contract for the sale of goods for the price of five hundred dollars ($500) or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought” [CA Commercial Code Sec. 2201 (1)]. Between merchants, if a written confirmation of the contract is received by the party to be charged within a reasonable amount of time, and no written notice of objection is given within 10 days thereafter, the contract is enforceable [CA Commercial Code Sec. 2201 (2)].
In order for an agreement to be considered valid and enforceable under the Statute of Frauds, the agreement must:
- be in written form
- plainly identify the subject matter of the contract
- provide essential terms of the agreement; In contracts involving sale of goods, the contract must specify the quantity and price of goods to be sold
- be signed by both parties; the Uniform Commercial Code states that for the sale of goods, only the signature of the party against whom a claim is made is necessary
Exceptions to the Statute of Frauds
The following special circumstances serve as exceptions to the Statute of Frauds and are considered enforceable agreements that would otherwise be considered invalid under the rules of the statute.
- If custom goods were manufactured for a specific order, the agreement would be enforceable even if the order was made on oral terms.
- When there exists a written confirmation of agreement between two merchants, i.e. an invoice identifying the goods, quantity, and price of an order
- If the party being charged admits there was a valid oral agreement, the agreement can still be enforceable.
- Partial Performance—If one party has already carried out a significant portion of their duties as outlined by an oral agreement before the other party challenges the validity of the oral agreement, they can still be entitled to the amount they are due for that portion of the goods.
- Promissory Estoppel—If an oral agreement is made between two parties and one party begins to incur costs necessary to fulfill their part of the agreement, the other party cannot claim that this agreement is unenforceable under the Statute of Frauds because they were clearly aware of the agreement and allowed the other party to incur costs. Promissory Estoppel requires that a clear offer was made, there was an expectation of reliance on the offer, the party receiving the offer could reasonably rely on the offer, and there was a reliance on the offer that led to a significant loss for the receiving party.
Miscellaneous Contracts That Always Require a Writing:
“A mortgage can be created, renewed, or extended, only by writing, executed with the formalities required in the case of a grant of real property” [CA Civil Code 2922].
“A premarital agreement shall be in writing and signed by both parties. It is enforceable without consideration” [CA Family Code 1611].