Contracts may be formed either orally or written. The statute of frauds is a body of rules that state which types of contracts must be formed in writing or they are not valid.
The body of law that governs the statute of frauds is called the Uniform Commercial Code or the “UCC”. If a contract falls under the statute of frauds it will not be valid or enforceable in a court of law. The purpose of the statute of frauds is to prevent fraudulent acts.
The statute of frauds laws may vary from state to state, but most resemble the UCC standards. There are various types of contracts that fall within the statute and require a writing. Generally, any other contract that falls outside the scope of the statute are enforceable without a written contract. The following are the most common types of contracts that requires a written agreement for:
- Any contract involving the sale or transfer of land;
- Any contract involving the sale of goods that exceeds $500;
- Any contract where one person promises to pay the debt obligations of another;
- Any contracts where performance cannot be completed within one year of the contract formation;
- Any contract involving the consideration of marriage;
- Any contract where an executor of an estate agrees to personally pay off the debts of the estate.
These types of contracts must be properly formed and completed in order for the agreement to be lawfully enforceable.
Again, the laws will vary from state to state. Typically, however, the writing should have the following information included:
- The identification of both parties entering into the contract;
- The subject matter of the contract must be reasonably identifiable;
- The fundamental terms and conditions of the agreement must be clearly stated; and
- The signature of both parties.
It is important to note that if both parties do not sign the agreement then the non-signing party is not liable for their performance of the contract.
However, if the contract is for the sale of goods, the only signature required in that the writing is from the party accepting the goods, in addition to a term regarding quantity of the goods. This applies of the person selling the goods did not put an area for them to sign or made it clear that they do not need to sign the contract.
There are two exceptions to the statute of frauds because there are some situations where applying the statute may create an unjust situation. In these situations, a party to a contract that would typically be unenforceable under the statute of frauds may be able to enforce it on the basis of partial performance or promissory estoppel.
- Partial Performance: can be used to prevent a party who has accepted partial performance by another party under the contract from using the Statute of Frauds to avoid meeting their own contractual obligations.
- Promissory Estoppel: is a rule that prevents a party to a contract from being relieved of their performance when their actions were relied upon and acted on by the opposite party of the same contract. It is essentially a rule that ensures unfairness doesn’t occur.
Although these exceptions exists, a contract will remain enforceable despite the statute of frauds if all parties have agreed to the contract. If the parties agree to the contract, but only later argues about the statute of frauds in order to get out of it, then it is possible for a court to find it in your favor.
However, the court rarely accepts oral contracts for things like selling a home or transitions with a large amount of money. If the transaction involves a large sum, far above the requirement of $500, then it is likely the court will order the parties to form a contract in writing.
A statute of frauds does not of itself render a contract completely void. The statute does makes certain contract voidable by one of the parties. Note the differences below:
- A contract that is void cannot be enforced by any means; and
- A contract that is voidable remains valid and enforceable unless one of the parties chooses to void the contract.
You should note that even when a written contract is not required, it is a good idea to have one anyway. It may be difficult to prove that an oral agreement existed, and there may remain questions regarding the terms of the agreement.
A contract does not need to be drafted by an attorney in order to be valid or enforceable. However, a local business attorney will be able to make sure the contract you draft or enter into is legally binding and in the manner of your understanding.
A business attorney with extensive experience with contracts will also help explain the consequences and responsibilities of entering into the contract. In any case, it is always helpful to have an attorney review a contract before entering into any major agreements.