Introduction
Contracts are the foundation for business,
the very essence of every business transaction.
Most
contract disputes involve a disagreement between the parties about what the
contract actually requires. A
contract can be considered a rule book, outlining the agreed to duties and
obligations of the parties, and there’s no better way to do this than in
writing.
Does a contract have to be
in writing to be valid? Let’s say we make
an oral agreement for me to sell you my pen for $5. Is this a valid agreement? Yes.
But, there are some promises
that, by their nature, have to be in writing to be enforced.
Statute of Frauds:
The Statute of Frauds does not mean that oral
agreements cannot be made and performed or that they are illegal. It merely means that enforcement may be
unavailable, if one of the parties refuses to fulfill its obligations. There are basically only six promises that
must be in writing to be enforceable, and you can remember these by the
pneumonic MYLEGS, or M-Y-L-E-G-S:
M – Marriage - promises
in consideration of marriage
-- Mutual promises to marry can be oral: “if you will
marry me, I will marry you.”
-- However, “If you will marry me, I will give you the Trump
Tower.” “If you will marry me,
I’ll give you $10,000.” That is a promise in consideration of marriage and requires a writing.
Y – Year - A
promise that, by its terms, cannot be performed within a year require a
writing.
L – Land
-- Can you enter into an oral enforceable lease for 3
months? Yes. Because
leases are not considered land for the purposes of the Statute of Frauds. Can you have an oral enforceable lease more
than 12 months? No, because that cannot be performed within a
year.
E – Executors
-- If you promise to pay an estate’s debts out of the
estate’s funds, this can be oral.
-- However, if you promise to pay estate’s debts with
your own funds, this has to be
written.
G – Goods – Goods of
$500 or more, “As Modified”
-- Can you have an orally enforceable contract in the
amount of $700, modified down to
$400? Yes.
-- Could you have an orally enforceable contract in the
amount of $400, modified to
$700? No.
-- So we use the last agreement to determine if we need a
writing.
S – Suretyship
– meaning the debt of another
-- Promise to pay the debt of another must be in writing.
Now, what if you and I
made an oral deal for 500 computers at $1000 a computer? Unenforceable. Then I sent you a memo saying “cancel that 500
computer deal,” signed Angie Kloote.
That’s a sufficient writing to satisfy the Statute of Frauds. It’s exactly the opposite of what I
wanted. I wanted out, but now I’m
in. Because I created a writing, there’s
a signature there, and it has a quantity.
So that’s a sufficient writing to show there was a deal, even though I’m
saying cancel.
Exceptions to the Statute of Frauds
One thing I’ve learned
working with Contracts is, there’s always an exception. There are four exceptions to the Statute of Frauds, and they can be remembered by the
pneumonic SWAP or S-W-A-P. There are four things you can “SWAP” for the
writing. You don’t need a writing if you
have SWAP, four exceptions to the Statute of Frauds:
S - Specially manufactured goods
-- Let’s say Bob has an oral agreement with Bill
Heard Chevrolet for 10 Avalanches. But, instead of driving the ones off the lot,
he wants them customized by painting “Bob’s Delivery Service” on the side. The dealer starts to make the first letter and
Bob says “cancel the deal.” The
Avalanches cost more than $500, and it’s not in writing. Is there a deal? Yes.
The entire contract is taken out of the Statute of Frauds. Why?
Because they are specially manufactured goods.
W - Written Merchants Confirmation
-- If
you have two merchants, and one sends a confirmation to the other – this is a sufficient writing to satisfy
the statute of frauds, even if the other merchant
never discussed such a deal.
-- You
have an enforceable contract unless the confirmation is contested in 10 days. So, unless you answer back
saying there was no deal, there is one.
A - Admissions
-- Admissions
in court make an oral contract enforceable
P - Performance
-- To
the extent that one party has performed, it is removed from the Statute of Frauds.
-- Lets say you and I have an oral agreement for me
to deliver to you 500 computers, and I delivered 75. Do we have an enforceable oral
agreement? Yes, but for only the 75 computers
I have delivered.
Conclusion
In conclusion, although a verbal contract is perfectly
legal and enforceable, many disputes involve a disagreement between the parties
about what the contract requires. Even without respect to the Statute of Frauds, it is good
practice to reduce the essential terms of any contract to a signed, written
agreement. Even when Statute of Frauds does not apply to an oral contract, it
may be very difficult to prove and enforce the contract in the absence of a
written agreement. A writing will both reduce the
chance of future litigation, and also give the parties the opportunity to take
a second look at the terms and conditions of their agreement before it becomes
final.