Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

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Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

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A verbal contract isn’t worth the paper it’s written on.

Samuel Goldwynquoted in The Great

Goldwyn (Alva Johnson, 1937)

Writing

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Significance of a writing in contract law

The Statute of FraudsContracts covered by the Statute

of Frauds and the requirementsThe UCC & the Statute of FraudsThe Parole Evidence Rule

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In general, a writing is not required to create a legally enforceable contract

However, a writing is preferable to an oral contract for a number of reasons: more definite, signature provides authentication, and use as evidence

Sometimes, a writing is required…

Basics

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In 17th Century England, the Statute of Frauds was enacted to prevent fraud by requiring written evidence before enforcing certain types of contracts

American states adopted similar statutes

The Statute of Frauds

16 - 6House of Lords, England

If a covered contract does not satisfy the requirements of the statute of frauds, the contract is unenforceable

A person injured by the unenforceable contract may pursue an action based on quasi-contract or promissory estoppel

Consequences

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Collateral contracts Contracts for real estate Contracts for more than one year Contracts for sale of goods over $500 Executor’s promise Marriage as consideration See the list on page 413 of the text

Covered Contracts

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Collateral contracts in which a person (guarantor) promises to perform an obligation of another person (principal debtor) to a third person (obligee)

Covered Contracts: Collateral Contracts

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Example: Jason is a personal guarantor on a loan from City Bank to Jason’s sister, Mary

The Collateral Contract

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Under the main purpose or leading object rule, no writing is required where the guarantor makes a collateral promise for the main purpose of obtaining personal economic advantage

See Wintersport Ltd. v. Millionaire.com, Inc.

Exception to Collateral Contract Rule

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Wintersport Ltd. v. Millionaire.com Inc.

Facts & Procedural History: Wintersport Ltd. printed one issue of magazine

for Millionaire.com They negotiated to print another issue, but

order and price cut due to magazine’s financial trouble

Concerned over creditworthiness, Leiter (Wintersport) told Strong (Millionaire.com) that Wintersport would only extend credit to Millionaire.com if the firm paid a $10,000 down payment and a stockholder (White) gave a personal guaranty on the balance due

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Facts & Procedural History: White (Millionaire.com) gave Leiter personal

guaranty via the phone and sent a $10,000 check

Millionaire.com failed to pay balance and Wintersport sued Millionaire.com

Trial court entered judgment for Wintersport against Millionaire.com and White, but White appealed, arguing that the action should have been dismissed because the statute of frauds prevented the enforcement of his oral guaranty16 - 13

Wintersport Ltd. v. Millionaire.com Inc.

Issue and Legal Reasoning: Does the statute of frauds prevent

enforcement of White’s oral guaranty? An original promise – outside statute of

frauds – occurs when the promisor receives a direct benefit from the promise

Wintersport did not show that White’s benefit was anything more than an indirect incident of share ownership

Reversed and dismissed in favor of White

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Wintersport Ltd. v. Millionaire.com Inc.

Contracts for the transfer or sale of an interest in real estate Some states require a writing for leases

and certain easements on real property Exception: if vendor fully performed on

the contract or vendee reasonably relied on the contract to his/her detriment Then statute of frauds does not apply

Covered Contracts: Real Estate

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Bilateral contracts that cannot be performed within a year from the date of their formation (one year rule) Is performance possible within year?

Probability of performance irrelevant Example: Jack signs contract to

consult with Company X for 13 months – this must be in writing

Covered Contracts: One Year Rule

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Schaadt v. St. Jude Medical S.C., Inc.

Facts & Reasoning: Schaadt fired by St. Jude before end of

alleged one-year employment contract and filed suit

Question is whether parties can fully perform their obligations under contract within one year if those obligations are not excused Schaadt’s obligations begin after St. Jude’s

employment of Schaadt for one year

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Schaadt v. St. Jude Medical S.C., Inc.

Reasoning and Holding: Since obligations cannot

be fulfilled within one year, Statute of Frauds requires a writing

St. Jude (party charged with breach) did not sign the contract, thus the contract is unenforceable at St. Jude’s option

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UCC 2-201: contracts for the sale of goods for a price of $500 or more

Includes agreements to modify existing sales contracts if contract as modified is for a price of $500 or more [UCC section 2–209(3)]

Example: Pam buys a refrigerator for $501, thus a writing is required to be enforceable No writing required for <$500 refrigerator

Covered Contracts: $500+ in Goods

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Though uncommon, the statute of frauds requires a writing to evidence (a) contracts in which an executor or administrator promises to be personally liable for debt of an estate, or (b) contracts in which marriage is the consideration

Other Covered Contracts

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Most states require only a signed memorandum of the parties’ agreement stating the essential terms: (a) identity of parties, (b) subject matter

identified with reasonable certainty, and (c) signed by the party to be charged

Memorandum need not be made at the same time the contract comes into being

Satisfying the Statute of Frauds

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UCC 2–201: writing must be sufficient to indicate a contract for sale has been made between the parties, but must indicate the quantity of goods to be sold A sales receipt may satisfy the requirement

Sufficient writing includes: (a) confirmatory memorandum between merchants, (b) part payment or part delivery, (c) admission in pleadings or court, and (d) specially manufactured goods

Satisfying the Statute of Frauds

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Jones v. The Baran Company

Facts: Jones ordered a specially manufactured

automobile from dealership (Baran) with $50,000 down-payment and signed form Parties did not agree to actual price Jones argued dealership agreed to “MSRP”

18+ months later, vehicle delivered and Baran demanded market value and Jones refused

Baran returned deposit, then sold vehicle16 - 23

Jones v. The Baran Company

Reasoning on Appeal: Baran argued oral agreement violated

Statute of Frauds, but uncontroverted evidence showed oral contract had been formed, with the price term being MSRP

Baran admitted a contract was made for one specially manufactured good, thus the oral agreement was enforceable under the UCC § 2–201(3)(b) exception to the Statute of Frauds

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Cyberlaw

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Electronic Signatures in Global and National Commerce Act (E-Sign) of 2000 provides that in interstate commerce transactions, an electronic signature has the same legal effect as a handwritten signature, and an electronic contract has the same legal effect as a traditionally-printed contract

The Convention on the International Sale of Goods does not require that a contract be in writing to be enforceable A contract need not

take any particular form, and can be proven by any means

The CISG & a Writing

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The parol evidence rule provides that, when parties enter a written contract that they intend as a complete integration (final statement of agreement), a court will not permit the use of evidence of prior or contemporaneous statements to add to, alter, or contradict the terms of the written contract

The Parol Evidence Rule

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More on Parol Evidence

UCC 2-202 includes parol evidence rule Admissible parol evidence:

Additional terms in partially integrated contracts

Explaining ambiguities Circumstances invalidating contract Existence of condition Subsequent agreements

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Carrow v. Arnold

Facts & Procedural History: Arnold and Mitchell negotiated to purchase

a farm owned by Carrow, orally representing that Carrow could continue to live on the farm

After executing the contract, Arnold and Mitchell began plans for development

Carrow discovered the plans and told Arnold he wanted out of the deal, but Arnold refused

Carrow filed suit to rescind the contract and Arnold counterclaimed for enforcement

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Carrow v. Arnold

Issue: Is the agreement enforceable or

unenforceable due to fraud and misrepresentation?

Law Applied to Facts : When a written contract is the final statement

of the parties’ agreement (a complete integration), the parol evidence rule prohibits the parties from introducing extrinsic evidence of the agreement

Here, agreement is a final, integrated contract

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Carrow v. Arnold

Law Applied to Facts and Holding: Parol evidence rule bars admission of oral

promises and representations that are inconsistent with its written terms, unless an exception to the rule applies in this case Carrow knew that provisions in proposed

Agreement seemed inconsistent with alleged oral promises

Contract neither ambiguous nor fraudulent, thus the parties have entered a binding contract

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Parol Evidence Chart

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Test Your Knowledge

True=A, False = B All contracts must be in writing to be

enforceable. A contract for the sale of a carpet for

$499 must be in writing to be enforceable.

Jill orally promised the President of First Bank to pay Jack’s debt to First Bank if Jack defaulted on the note. Jack defaulted and Jill must pay Jack’s debt.

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Test Your Knowledge

True=A, False = B Joey owes Chandler money, so Joey

contracts with LoanCo for a short-term loan. Chandler orally gave his personal guaranty to LoanCo that Joey would repay the loan. Joey defaulted and Chandler must repay the loan for Joey.

If a state law conflicts with the federal E-Sign, the provisions of E-Sign prevail.

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Test Your Knowledge

Multiple Choice Parol evidence refers to:

(a) The evidence required to prove a case(b) Written or spoken statements not

contained in the written contract(c) The lack of evidence

E-Sign states that: (a) An electronic signature has the same

legal effect as a handwritten signature.(b) A contract in electronic form is not

enforceable unless proven with a hard copy 16 - 35

Test Your Knowledge

Multiple Choice Mamie agreed to sell Susan her Picasso

painting. She wrote the name of the painting and $600 on a napkin. Both Mamie & Susan signed the napkin. Susan paid Mamie the money and Mamie:(a) May refuse to hand over the painting

since contract was on a napkin and is unenforceable

(b) Must give Susan the painting since the contract satisfies the statute of frauds

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Thought Question

Do the Statute of Frauds and parol evidence rule – legal principles from the 1600s – still make sense in today’s commercial world?

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