Creating Contracts Unless It’s in Writing
One of the basic requirements of a legally binding contract is that the terms and conditions are agreed to by both parties involved in the contract. While some contracts are legally enforceable without a written form, it’s best practice to create a written contract for any type of agreement you make with another person or company. Contracts eliminate any confusion surrounding the expected completion of your agreement, as the terms can be defined and explained thoroughly. It is unclear what would happen if you and another person had an oral contract , and one of you did not hold up your end of the bargain. Regardless of the situation, it would be difficult to prove your claim when only your word stands as evidence.
Some statutes exist that require that certain contracts be in writing and signed by the involved parties to be legally enforceable. For example, when purchasing goods that are valued at over $500, the UCC requires a written and signed contract. Different states have different required statutes regarding contracts needing to be in writing.
The Statute of Frauds
The Statute of Frauds dates back to 1677, making it one of the oldest pieces of legislation still in effect today. According to Cornell Law School, "The Statute of Frauds is an English statute of 1677 that set conditions under which contracts for the sale of goods, transfers of property, and some other subjects would be enforceable; and that, save these conditions and a few others, the oral contracts would be unenforceable for want of writing." In short, the Statute of Frauds set rules for what types of contracts had to be in writing.
In 1677, the Statute of Frauds was enacted primarily to prevent someone from charging someone else with fraud simply because the other person said that an exchange took place or transaction occurred. The Statute of Frauds set in place, "A few general rules controlling the enforceability of contracts not performed; (2) rules on the bargaining process; and (3) rules on contracts in certain specialized areas, including provisions for some contracts worth a minimum amount to be in writing," according to Wikipedia. A few years after the Statute of Frauds was enacted, there was a case that dealt with a breach of contract. The contract was formed orally, and then breached. The court was asked to enforce the contract. The judge, Sir John Powell, decided that, "What was by law required to be in writing and signed, may not be proved by parol, except in the case of part performance." Over the next 150 years, the Statute of Frauds was added to with specific performance requirements. The requirements were changed throughout the remainder of the 1800s, through the 1900s. In the early 20th century, particularly 1930, statutes of frauds were enacted to include contracts for the sale of land, leases, executor contracts, and the sale of goods. There are two types of the Statute of Frauds. The first is the 1640 Act (Statute of Westminster 1940), which "was an attempt to remedy defects and abuses in the application of the law of frauds and perjuries". The second, the 1677 Act (Statute of Frauds 1677), "which was enacted in the 29th year of the reign of King Charles II (29 Cha. II. c .3), was introduced into the House of Commons by Sir Henry Barrow as a private member’s bill in 1674. It was based upon a report presented to the House of Commons in 1673 by a select committee which had been appointed to inquire into the existing rules of law regarding the enforceability of promises to create contracts. The Committee considered that a small number of the existing cases of non-enforcement of promises to create contracts were justified, but that the great majority of such cases were "grievous inconveniences", wasteful of time and money, and adverse to the credit of the nation. The Committee therefore recommended the introduction of fresh legislation by which a number of classes of promise or agreement should be rendered unenforceable for the future unless, if evidently made orally in the past, they were either reduced promptly to writing or evidenced in some permanent manner. Exception was made to this requirement both for those cases of special urgency and special difficulty, where a delay in obtaining the necessary document would work a serious hardship or injustice, or where the difficulty of proof as to the agreement or the duty arising thereunder was of an unusual kind."
Types of Contracts Necessitating Written Agreements
Contracts for the sale of land (Real Estate). These types of contracts are probably the most common example of contracts that must be in writing. A conveyance or sale of land without a written contract is void.
Contracts that cannot be performed within one year. Whether or not a contract must be in writing generally depends on when it is possible for performance to occur. If performance can happen in one year or less from the time it is made, there is no need for the contract to be in writing. If a contract cannot be performed within one year from the time it is made, the contract must be in writing to be enforceable. A "Day of Performance" clause can help parties avoid this rule.
Contracts for the sale of Goods. The Uniform Commercial Code (UCC) governs the sale of goods and provides that contracts for the sale of goods over $500 must be in writing. However, recent cases, such as the U.S. Supreme Court’s decision in New York v. Electronic Merchants Association, have narrowed the application of the "Goods" exception to apply to transactions involving physical goods only. Most contracts regarding services now fall under the common law principles regarding service contracts.
Real Estate Contracts
Agreements to sell/lease real estate for longer than one year must be in writing. This is because the statute of frauds requires that any agreement based on consideration of 1 year or more be evidenced in writing. The lease exception is due to the fact that the agreement is for consideration of rent in 12 separate installments over a 12 month period. Thus, the "consideration of 1 year or more" technical requirement is met.
The most common elements of real estate sales contracts are:
- Identification of seller and buyer;
- Identification of parcel of property;
- Legal description of the property;
- Price;
- Terms of payment;
- Description of improvements on land;
- Assurance that land is free and clear of defects, liens and encumbrances;
- Allocation of costs for improvements, repairs, title insurance, closing costs, etc.
Contracts for More than One Year
Contracts That Can’t by Their Terms Be Performed Within One Year
Some types of contracts have to be in writing. This is known as the Statute of Frauds, and it applies to: Contracts for the sale of real property; Contracts that can’t be performed within one year of their making; Agreements to pay the debt of another or made in consideration of the marriage of another; Contracts for the sale of goods priced at more than $500; and Lease agreements for more than one year.
Most contracts that you will deal with as a business owner will be contracts falling under either the Statute of Frauds for Sale of Goods, or the Statute of Frauds for More Than One Year. The Statute of Frauds for More Than One Year broadly states that any contract exceeding one year must be in writing in order to be enforceable. The Statute also states that an oral contract that by its terms cannot by any possibility be performed within one year is necessarily void.
As an example, suppose you hire someone to write a report. You and the writer have not agreed on a schedule, so you do not know when the report will be finished. Assume, however, that you both expect it to take over one year. If you both agree in writing that the report is to be done in a year, then you have a valid contract that is legally enforceable (in case of breach). But if you both agree that the report will take, say, 18 months, with no other details of performance, then you will have a contract that cannot be performed within one year. It is therefore void.
Statute of Frauds for Sale of Goods
Like most rules, there are exceptions. If a seller has given a purchaser something that can’t be resold, like custom-made t-shirts, then the Statute of Frauds will allow an otherwise verbal contract to be enforceable.
Statute of Frauds for Sale of Goods – Exceptions
The exceptions to the Statute of Frauds for goods are: A written offer, signed by the party, is sufficient to bind the offeror to deliver goods. Goods accepted and received in part performance of the contract are also sufficient to bind the offeror. An offer, acceptance, and deposit and acceptance of a checks serves as an exception, too. However, these exceptions only apply if goods are received and then paid for.
Goods and UCC
The Uniform Commercial Code ("UCC") governs numerous legal agreements, including many contracts for the sale of goods. It requires written contracts for certain sales of goods. While the UCC applies only in the United States and its territories and only to goods, its legal requirements are an important basis for contract-must-be-in-writing requirements in most states. The UCC applies to the sale of goods over $500. If a party seeks to enforce a contract that does indeed fall within the UCC’s definition of a "sale of goods , " but if the contract does not satisfy the UCC’s requirements for contracts to be in writing, the contract is unenforceable.
The offical UCC rules require that contracts for sale of goods over $500 be in writing. It also has Special Rules for Sales of Goods Under $500.
Contract of Marriage and Prenuptial Agreements
As mentioned above, marriage contracts or agreements that are made prior to marriage, commonly known as prenuptial agreements, must be in writing. A written prenuptial agreement typically covers property rights, the disposition of personal property upon separation and divorce, support and alimony, and custody. Prenuptial agreements may also address future issues and obligations but can only do so when the parties have fair and reasonable disclosures of property and financial obligations and have either waived such disclosures in writing or have acknowledged that full disclosures are not necessary. Written documentation of prenuptial agreements is critical because those agreements may be enforced even when one party fails to perform his or her obligations by the terms of the agreement. Without the written contract, a party is left without any remedy when the other party fails to meet the obligations in an agreement. When a prenuptial agreement is in writing and signed, both parties understand that they are now bound by the terms of the agreement pursuant to the statute of frauds. In addition, the written agreement may not be contradicted by any statement made by the parties in the past. Generally, oral evidence cannot be used to explain or otherwise vary the written agreement.
Guarantees and Suretyships
A guarantee, also referred to as a suretyship, is an agreement in which one or more parties (i.e., the guarantor(s)) agree to be responsible for the repayment of a debt or the performance of an obligation if the party responsible defaults. While guarantees may be made orally or in writing, a contract that makes it clear that one party is responsible for the debt or obligation of another must be in writing. See California Civil Code section 1622 ("There is no particular form of contract, but it may be oral, written, by some outside or acting agent, or by operation of law.") (See also California Civil Code section 2856(f); Wetherbee v Gary (1910) 158 C 275 ["An agreement on the part of a banker to answer for his customer" is an agreement to answer for the debt of another and must be in writing. As these cases demonstrate, a person who is a "party to a guarantee" or "suretyship" must be "expressly undertak[ing] the debt" in question, and not simply refer to it.]) An agreement to pay off someone’s loan is a guarantee or surety because it is a promise or undertaking to repay a debt due to another party.
Exceptions to the Written Contract Requirement
There are "exceptions" to contracts that need to be in writing.
Examples of exceptions:
Part performance
We already know that some contracts must be in writing in order to be enforceable. We also know that most contracts for the sale of land must be in writing in order to be enforceable. But what happens when a contract for the sale of a house is made "in some informal way"?
Who owns the house – the person who has an informal and unwritten agreement, or the person who has the written agreement? The law says that if you really do own the house – if you have "partly performed" your contract by beginning to do the things it says you are required to do (like finding the money for the purchase) – then you have enforceable rights against the other person.
In Sellers v. Johnston, 121 Wn. App. 552, 91 P.3d 904 (2004), the plaintiff and defendant orally agreed to sell the defendant a house. Later, the defendant stopped paying rent and ended up selling the house to someone else. The court ruled that the defendant had not fully paid for the house, that he should have had reasons to believe the contract was not enforceable, and that the original seller was clearly the owner of the house.
If you begin making improvements to or occupying the property, you may be able to enforce your contract even if it wasn’t in writing.
Judicial admission
If the defendant in a case admits that an oral contract exists, then he can’t later say, "Oops! No oral contract exists." The plaintiff doesn’t have to prove the contract existed because the defendant already admitted it. This is called a "judicial admission."
A judicial admission means that the court can take that fact as established for the purposes of trial, without further proof that the trial. The judicial admission only establishes the facts as between the particular parties who made the admission, so another party might still be able to object.
For example, in American Nat’l Fire Ins. v. B & L Trucking, 134 Wn.2d 413, 950 P.2d 464 (1998), an insurance company had a fire claim from a trucking company. The trucking company filed a counterclaim against the insurance company, and all its defenses against the counterclaims. The insurance company moved to strike the counterclaim because they were outside the statute of limitations. In response, the trucking company said that the insurance company had agreed to overlook the issue, that the statute of limitations had been tolled (meaning the time didn’t count off) while they worked out their issues.
The judge concluded that the defendant perjured himself when he made this statement, so the defendant could not bring up the statute of limitations.
But if the plaintiff admits the existence of an oral contract, the other side can’t object to the contract later just because it wasn’t in writing. In Whalen v. Oliver, 106 Wn. App. 782, 26 P.3d 925 (2001), at least some members of the court felt that the defendant had judicially admitted the existence of the oral contract. The court said that the defendant should not be allowed to disavow the oral contract just because it wasn’t reduced to writing.
So a judicial admission of an oral contract may be enough to get around the writing requirement.
Promissory Estoppel
A promise does not have to be supported by an agreement. An agreement is an exchange where two people consider something valuable, such as money or personal property, to each other.
If the person who promised you something doesn’t come through, any money you spent is gone, and like the old saying goes, you’re out of luck. However, there is an exception to this rule under certain circumstances, created by the Courts over the years. If you were taken advantage of by the other person’s promise, to the point where you’ve relied upon it, it can be enforced. The law calls this promissory estoppel even when there wasn’t a written contract.
Exceptions are limited to four requirements:
- Even though the promise was not supported by a written contract, it created reasonable reliance on your part. You must have taken steps to follow through on that promise.
- The promise must be supported by the understanding that you will receive benefits from the use of your property. In other words, both of you were supposed to gain from the bargain.
- Your reliance on the promise must be reasonable.
- The person who promised something did not keep his or her promise.
Conclusion
In conclusion, understanding why some contracts must be in writing is essential for both consumers and other businesses. It is not only important in determining whether or not the agreement is enforceable, but also because of what must be included in that agreement . The inclusion of very specific information isn’t merely a technicality but is a sign of a well-crafted contract that can be relied upon as part of a legally-enforceable business relationship. Contracts that must be in writing are an opportunity for individuals and businesses to ensure that everyone is in agreement before those parties have to answer to a legal judgment.