Buisness Law Today Chapter 13

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CHAPIER OUTI. I l {E lEARI{I I {G OBIECIIVES.THE REQUIREMENT OF A WRITINC.THE SUFFICIENCY

OF THE WRITINC.THE PAROL EVIDENCE RULE

AFTER READINC THIS CHAPTER, YOU SHOULD BE ABLETO ANSWER THE FOLLOWING QUESTIONS:

What contracts must be in writine to beenforceable?

If it is possible for a contract to be performedwithin one year, must it be in writing?

When will an oral promise to pay anotherpersor-r's debt be enforced?

If a written contract is required, what terms areconsidered essential and must be contained inthe written docr-rment?

What is parol evidence? When is parol evidenceadmissible to clarifi, the terms of a writtencontract?

contract that is otherwise valid may still be unenforceable if it is not in the properform. As the iudge observes in the chapter-openir-rg quotation, most people truit a

written document more than an individual's memory of the terms of an agreement intowhich they entered. For this reason, the law requires certain types of contracts to be inwriting. If a contract is required by law to be in writing and there is no written evidenceof the contract, it may not be enforceable.

In this chapter, we examine the kinds of contracts that require a writing r,rnder what iscalled the Statute of Frauds and what must be contained in the writins. The chapter con-cludes with a discrrssion o[ the parol evidence rule, under which courts delerrrrirre theadmissibility at trial of evidence extraneous (external) to written contracts.

Today, every state has a statute that stipulates what types of contracts must be in writingor be evidenced by a record. In this text, we refer to such a statute as the Statute ofFrauds. The primary purpose of the statute is to ensure that, for certain types of contracts,there is reliable evidence of the contracts and their terms. These tvpes of contracts arethose historically deemed to be especially important or complex. Alihougll the statutesvary slightly from state to state, the following types of contracts are norn-rally required tobe in writing or evidenced by a written memorandum:

651would soonerhust thesmallest slip ofpaper for huth,than thestrongest andmost retentivememory everbestowed onmortal man,r,

Joseph Henry Lunrpkir,1799-1867

'

(Anerican jurist)

STATUTE OF FRAUDSA state statute under which certaintypes of contracts must be in writingto be enforceable.

527 EilEMETHE STATUTE OF FRAUDS

528 I[SfiUilCONTRACTS

nGIfiIIIIftfAlir Although only certaintypes of contracts must be inwriting to be enforceable, it is goodpractice to put other contracts inwriting as well to prevent disputesover contract terms.

For an interestingdiscussion of the historyand current applicability of theStatute of Frauds, both internationallyand in the United States, go to

en.wikipedla.org,/wiki/Statute-of-f rauds.

I Contracts involving interests in land.

2 Contracts that cannot by their terms be performed within one year from the date of

formation.

5 Collateral contracts, such as promises to answer for the debt or duty of another.

4 Promises made in consideration of marriage.

5 Contracts for the sale of goods priced at $500 or more (under the Uniform Commercial

Code, or UCC-see Chapter 1B).

Agreements or promises that fit into one or more of these categories are said to "fall

under" or "fall within" the Statute of Frauds. (Certain exceptions are made to the Statute

of Frauds, howevet, as you will read later in this section.)The actual name of the Statute of Frauds is misleading because it does not apply to

fraud. Rather, the statute denies enforceability to certain contracts that do not comply

with its requirements. The name derives from an English act passed in 1677 , which is pre-

sented as this chapter's Landmark in the Law feature.

(ontracts Involv ing Intetests in [andLand is a form of real properly, or real estate, which includes not only land but all physical

objects that are permanentiy attached to the soil, such as buildings, plants, trees, and the soil

itself. Under the Statute of Frauds, a contract involving an interest in land must be evidenced

by a writing to be enforceable.l ItExAMPtTl5.ll If Carol contracts orally to sell Seaside

Shelter to Arel but later decides not to sell, Arel cannot enforce the contract. Similarly, ifAxel

refuses to close the deal, Carol cannot force Axel to pay for the land by bringing a lawsr-rit.

The Stahrte of Frauds is a defense to the enforcement of this tlpe of oral contract. ElA contract for the sale of land ordinarily involves the entire interest in the real prop-

erty, including buildings, growing crops, vegetation, minerals, timber, and anyihing else

affixed to the land. Therefore, a fixture (personal property so affixed or so used as to

become a part of the realty-see Chapter 44) is treated as reai property.

The Statute of Frauds requires written contracts not just for the sale of land but also

for the transfer of other interests in 1and, such as mortgages and leases. We describe these

other interests in Chapter 44.

The 0ne-Year RuleContracts that cannot, by their own tetms, be performed within one year from the day after

the contract is formed must be in writing to be enforceable. Because disputes over such

contracts are r,rnlikely to occur until some time after the contracts are made, resolution of

these disputes is difficult unless tl-re contract terms have been put in writing. The one-year

period begins to rr:n the day after the contract is made.

trEiFMFiE rarl Superior University forms a coniract with Kimi San stating iha{ San wil l

teach three courses in history during the coming academic year (September l5 through iune15). If the contract is formed in March, it must be in writing to be enforceable-because it

cannot be performed within one year. If the contract is not formed until July, however, it will

not have to be ir-r rvriting to be enforceable-because it can be performed within one year.

E P"hibit l3-i on page 7)0 graphically illustrates the one-year rule.

The test for determining whether an orai contract is enforceable under the one-year

rule of the Statute of Frauds is whether performance is possible within one year from the

day after the date of contract formation-not whether the agreement is /ikely to be

l. In some states, the contract will be enforced if each party admits to the existence of the oral contract in court or

during discovery before trial (see Chapter 3).

l.

529rTtlrfi'f;mTHE STATUTE OF FRAUDS

On April 12, 1677, the English Parliament passed ?nAct for the Prevention of Frauds and Perjuries." Four

days later, the act was signed by King Charles l l andbecame the law of the land. The act contained

trruenty-five sections and stipulated that certain types of contracts would henceforth have

to be in writ ing or evidenced by a written memorandum if they were to be enforceable

by the courts.a

EnforCement Of Oral PrOmiseS The English act was enacted specifically to Pre-vent the many frauds that were being perpetrated through the perjured testimony of wit-

nesses in cases involving breached oral agreements, for which no written evidence

existed. During the early history of the common law in England, the courts generally did

not enforce oral contracts, but in the fourteenth century they began to be enforced in

certain ossumpsit actions.b These actions, to which the origins of modern contract law

are traced, allowed a party to sue and obtain relief when a promise or contract had

been breached. During the next hruo centuries, the king's courts commonly enforced oral

promises in actions in assumpsit.

Problems with Oral COntractS Because the courts enforced oral contracts on the

strength of oral testimony by witnesses, it was not too difficult to evade justice by alleg-

ing that a contract had been breached and then procuring "convincing" witnesses to

support the claim. The possibil i ty of fraud in such actions was enhanced by the fact that

seventeenth-century English courts did not allow oral testimony to be given by the par-

ties to a lawsuit-or by any parties with an interest in the l it igation, such as husbands or

wives. Defenses against actions for breach of contract were thus limited to written evi-

dence and the testimony given by third parties. The Statute of Frauds was enacted to

minimize the possibil i ty of fraud in oral contracts relating to certain types of transactions.

Essentially, the Stotute of Frouds offers a

defense ogainst controcts that fall under the stotute. lndeed, some hove criticized the statute

becouse, although it wos created to protect the innocent it con also be used os o technicol

defense by o porty who hos breached a genuine, mutually ogreed-on orol controct-if the

controct folls within the Stotute of Frouds. For this reason, some legal scholors believe the

oct has coused more fraud thon it hos prevented. Nonetheless, IJ.S. courts continue to opply

the Stotute of Frouds to disputes involving oral controcts. The definitions of such terms os

writing cnd signature, however, have changed to occommodote electronic documents-os

you will read in Chapter IZ which covers e-contrqcts.

To locate information on the Web concerning the Stotute

of Frouds, go to this text's Web sife of www.cengage.com/blaw/blt , select "Chapter t 3,"

ond click on "lJRLs for Landmarks!'

a. These contracts are discussed in the text of this chapter.

b. Assumpsit is Latin for "he or she undertook" or "he or she promised." The emergence of remedies for

breached promises and duties dates to these actions. One of the earliest cases occurred in I370, when

the court allowed an individual to sue a person who, in trying to cure the plaintiff's horse, had acted so

negligently that the horse died. Another such action was permitted in 1375, when a plaintiff obtained

relief for having been maimed by a surgeon hired to cure him.

I5O INiIUEICONTRACTS

COttATERAt PROMISEA secondary promise that is ancillary(subsidiary) to a principal transactionor primary contractual relationship,such as a promise made by oneperson to pay the debts of another ifthe latter fails to perform. A collateralpromise normally must be in writingto be enforceable.

Under the Statute of Frauds, contracts that by their terms are impossible to perform within one yearfrom the day after the date of contract formation must be in writing to be enforceable. Put anotherway, if it is at all possible to perform an oral contract within one year from the day after the contractis made, the contract will fall outside the Statute of Frauds and be enforceable.

performed within one year. When performance of a contract is objectively impossibleduring the one-year period, tl-re oral contract will be unenforceable.

lEExAlttPG tr.rl Bankers Life orally contracts to lend $40,000 to Janet Lawrence "aslong as Lawrence and Associates operates its financial consulting firm in Omaha,Nebraska." The contract does not fall within the Statute of Frauds-no writing isrequired-because Lawrence and Associates could go out of business in one year or less.In this event, the contract would be fully performed within o.te year.z Similarly, an oralcontract for lifetirne employment does not fall within the Statute of Frauds. Because anemployee who is hired "forlife" could die within ayear, the courts reason thatthe con-tract can be performed within one year.l @]

Col lateral PromisesA collateral promise, or secondary promise, is one that is ancillary (subsidiary) to a prin-cipal transaction or primary contractual relationship. In other words, a collateral promiseis one made by a third party to assume the debts or obligations of a primary party to acontract if that party does not perform. Any collateral promise of tl-ris nature falls underthe Statute of Frauds and therefore rnust be in writing to be enforceable. To understandthis concept, it is important to distinguish behreen primary and secondary promises andobligations.

Primary versus Secondary Obligations A contract in which a party assLrrles a primaryobligation normally does not r-reed to be in writing to be enforceable. FEXAMpLE r5.llKenneth orally contracts witl-r Joanne's Floral Boutique to send his mother a dozen rosesfor Mother's Day. Kenneth promises to pay the boutique when he receives the bill for theflowers. Kenneth is a direct party to this contract and has incurred a primary obligation

2. See Wamer y. Texas & Pacific Railroad Co., 164 U.S. 418, 17 S.Ct. 147,41 L.Ed. 495 (1896).5. See, for exanple, Cattengno v. TUI Construction Corp.,67 Mas.App.Ct. I 102, 851 N.E.zd I l3 j (2006).

551mrirrfilmTHE STATUTE OF FRAUDS

under the contract. Because he is a party to the contract and has a primary obligation to

Joanne's Floral Boutique, this contract does not fall under the Statute of Frauds and does

not have to be in writing to be enforceable. If Kenneth fails to pay the florist and the florist

sues him for payment, Kenneth cannot raise the Statute of Frauds as a defense. He can-

not clairn that the contract is unenforceable because it was not in writing. EIn contrast, a conhact in which a party assumes a secondary obligation does have to be

in writing to be enforceable. lEEFArtapLErr.il Suppose that Kenneth's mother borrows

$10,000 from the Medford Trust Company on a promissory note payable six months later.

Kenneth promises the bank officer handling the loan that he will pay the $10,000 lf his

mother does not pay the loan on time. Kennelh, in this situation, becomes what is known as

a guarantor on the loan. He is gr-raranteeing to the bank (the creditor) that he will pay the

loan if his mother fails to do so. This kind of collateral promise, in which the guarantor states

that he or she will become responsible only if the primary party does not perform, must be

in writing to be enforceable. E Exhibit l3-2 illushates the concept of a collateral promise.

We return to the concept of guaranty and the distinction between primary and secondary

obligations in Chapter 26, in the context of creditors' rights.

An Exception-The "Main Purpose" Rule An oral promise to answer for the debt of

another is covered by the Statute of Frauds unless the guarantor's purpose in accepting

secondary liability is to secure a personal benefit. Under the "main PurPose" rule, this

type of contract need not be in writing.a The assumption is that a court can infer from the

circumstances of a case whether a "leading objective" of the promisor was to secure a per-

sonal benefit.l*ExAMptE ttel Carrie Oswald contracts with Machine Manufacturing Company to

have some machines custom made for her factory. To ensr-rre that Machine Manufacturing

will have the supplies it needs to make the machines, Oswald promises Allrite Materials

Supply Company, Machine Manufacturing's sr-rpplier, that if Nlrite continues io deliver

materials to Machine Manufacturing, she will guarantee payment. This promise need r-rot

be in writing, even though the effect may be to pay the debt of another, because Oswald's

main purpose is to secure a benefit for herself. EAnother typical application of the so-called main purpose doctrine occurs when one

creditor guarantees the debtor's debt to another creditor to forestall litigation. This allows

4. Restatement (Second) of Contracts, Section I 16

A collateral (secondary) promise is one made by athird party (C, in this exhibit) to a creditor (8, in this exhibit) to paythe

debt of another (4 in this exhibit), who is primarily obligated to pay the debt. Under the Statute of Frauds, collateralpromises must be in writing to be enforceable.

"r-^ to Be Entorce

@'lil;.,torNs

552 llNiIIUCONTRACTS

PRENUPTIAT AGREEMENTAn agreement made beforemarriage that defines eachpartner's ownership rights inthe other partne/s property.Prenuptial agreements must bein writing to be enforceable.

the debtor to remain in business long enough to generate profits sufficientto pay bothcreditors. In this situation, the guaranty does not need to be in writing to be enforceable.

Promises Made in Considerat ion of Marr iageA unilateral promise to make a monetary payment or to give property in consideration of mar-riage must be in writing. If Mr. Baumann promises to pay Joe Villard $10,000 if Villard mar-ries Baumann's daughter, the promise must be in writing to be enforceable. The same ruleapplies to prenuptial agreements-agreements made before marriage (also called antenup-tial agreemenfs) that define each partner's ownership rights in the other partner's properly. Aprospective wife or husband may wish to limit the amount the prospective spouse can obtainif the marriage ends in divorce. Prenuptial agreements made in consideration of marriagemust be in writing to be enforceable.

Cenerally, courts tend to give more credence to prenuptial agreements that are accom-panied by consideration. EEXAMpI.E Iril Maureen, who is not wealthy, marries Kaiser,who has a net worth of $300 million. Kaiser has several children, and he wants them toreceive most of his wealth on his death. Prior to their marriage, Maureen and Kaiser draftand sign a prenuptial agreement in which Kaiser promises to give Maureen $100,000 peryear for the rest of her life if they divorce. As consideration for consenting to this amount,Kaiser offers Maureen $1 million. If Maureen consents to the agreementand accepts the

$1 million, very likely a court would hold that this prenuptial agreement is valid, shouldit ever be contested. E

What happens to the prenuptial agreement when on engogement is broken? Sometimes,parties include in their prenuptial agreements terms that have to do with premarital activit ies.For example, in one case a couple agreed that the bride-to-be (Virginia DeFina) would pay forall expenses relating to the wedding. In return, the groom-to-be (Stephen Scott) promised totransfer a one-half interest in the real property that was to be the marital abode. Then thecouple broke their engagement, and the wedding was canceled. By this time, DeFina hadalready incurred 916,000 in wedding expenses. Given that the wedding was canceled, didDeFina have any claim on Scott's property? Scott claimed that she did not because theiragreement assumed that they would marry. Furthermore, Scott maintained that traditionallythe bride and/or her family pay the wedding expenses anyway.

When this question came before a New York court, the court first noted that women areusually the economic losers in broken engagements. Not only have they traditionally had tobear the wedding expenses, but under the laws of some states, they are also required toreturn the engagement ring. The court, referring to this "regime" as "both unequal and unjus-tified," decided that contract principles should apply. The court pointed out that Scott andDeFina were "well-established professional adults" who formed clear plans regarding theirengagement and their eventual marriage. Indeed, Scott was an attorney who had been mar-ried twice before. Thus, the court concluded that DeFina had a l ien (a claim-see Chapter 26)on Scott's property in the amount of $16,000.s

trContracts for the Sale of GoodsThe Uniform Commercial Code (UCC) includes Statute of Frauds provisions that requirewritten evidence of a contract. Section 2-201 contains the major provision, which generallyrequires a writing or memorandum for the sale of goods priced at $500 or more (this low

5. DeFina y. Scott, 195 Misc.2d 75, 755 N.YS.2d 587 (N.Y.Sup. 2003)

5t5rinrurl]raTHE STATUTE OF FRAUDS

Statute of Frauds includes links todefinitions of certain terms used inthe section. To access this text, go to

of Frauds and International Sales Contracts

As you wil l read in Chapter ' l 8, the Convention onContracts for the International Sale of Goods (CISG)

provides rules that govern international sales contractsbetween cit izens of countries that have ratif ied theconvention (agreement). Article I I of the CISG does

not incorporate any Statute of Frauds provisions. Rather, it states that a "contract for saleneed not be concluded in or evidenced by writ ing and is not subject to any otherrequirements as to form."

Article I I accords with the legal customs of most nations, which no longer require

contracts to meet certain formal or writ ing requirements to be enforceable. lronically,

even England, the nation that enacted the original Statute of Frauds in l67J has

repealed all of it except the provisions relating to collateral promises and to transfers of

interests in land. Many other countries that once had such statutes have also repealed

all or parts of them. Civil law countries, such as France, have never required certaintypes of contracts to be in writing.

F0 R C R lTl C At AN A tYS I S ff there was no Statute of Frauds ond o disputeorose concerning on oral agreement" how would the porties substantiate their

respedive positions?

threshold amount may be increased in the future-see Chapter 1B). A writing that will sat-

isf, the UCC requirement need only state the quantity term; other terms agreed on need not

be stated "accurately" in the writing, as long as they adequately reflect both parties' intentions.

The contract will not be enforceable, however, for any quantity greater than that set forth in

the writing. In addition, the writing must be signed by the person against whom enforcement

is sought. Beyond these hvo requirements, the writing need not designate the buyer or the

seller, the terms of payment, or the price. (See this chapter's Beyond Our Borders feature to

learn whether other countries have requirements similar to those in the Siatute of Frauds.)

Except ions to the Statute of FraudsExceptions to the applicability of the Statute of Frauds are made in certain situations. We

describe those situations here.

Partial Performance In cases involving oral contracts for the transfer of interests in land,

if the purchaser has paid part of the price, taken possession, and made vah-rable improve-

ments to the property, and if the parties cannot be returned to their positions prior to the con-

tract, a court may grant specific performance (performance of the contract according to its

precise terms). Whether a court will enforce an oral conhact for an interest in land when par-

tial performance has taken place is usually detenr-iined by the degree of in jury that wouid be

suffered if the court chose nol to enforce the oral contract. In some states, mere reliance on

certain types oforal conhacts is enough to retnove them from the Statute ofFrauds.

Under the UCC, an oral contract for goods pricecl at $500 or more is enforceable to

the extent that a seller accepts payment or a buyer accepts delivery of the goods.o

The online version of UCCSection 2-201 on the

6. UCC 2-201(3)(c) . See Chaptcr l8

ril lwili[EtCONTRACTS

-.".'Hffi=:-F Applied Resources, lnc. (ARl),makes computer hardware for point-of-sale systems-kiosksconsisting of computers encased in chassis on which cardreaders or other payment devices are mounted. School-LinkTechnologiel Inc. (SLT), sells food-service technology toschools. In August 2005, the New York City Department ofEducation (NYCDOE) asked SLT to propose a cafeteriapayment system that included kiosks. SLT asked ARI toparticipate in a pilot project, orally promising ARt that it wouldbe the exclusive supplier of as many as l,5OO kiosks if theNYCDOE awarded the contract to SLT. ARI agreed. SLT intendedto cut ARI out of the deal, however, and told the NYCDOE that

The existence and extent of a contract to supply computer kiosks for use in school cafe-terias were in dispute in the following case.

BACKGROUND AND FACTS SLT would be making its own kiosks. Meanwhile, SLT paid ARIin advance for a certain number of goods but insisted ononerous terms for a written contract to which ARI would notagree. ARI suspended production of the prepaid items andrefused to refund more than $55,000 that SLT had paid. SLTfiled a suit in a federal district court against ARl. ARIresponded with, among other things, a counterclaim forbreach of contract, asserting that SLT failed to use ARI as anexclusive supplier as promised. ARI sought the expenses itincurred for the pilot project and the amount of profit that itwould have realized on the entire deal. SLT filed a motion forsummary judgment on this claim.

lN THE WORDS 0t THE COURT , . . JaHN w LUNasrRItM, United states DistrictJudge.

SLT raises several arguments as to why it is entitled to summary judgment on ARI'sbreach of * * * contract claim. SLT relies, first, on the statute of frauds. Contracts for thesale of goods over $500 generally must be in writing and must be signed by the partyagainst whom enforcement is sought. Because the NYCDOE contract undisputedlyinvolved the sale of goods in excess of $500, the parties'oral contract thatARI would bethe exclusive supplier of kiosks for the project is not enforceable in the absence of anapplicable exception to this general rule.

ARI contends that the statute of frauds does not apply with respect to goods which havebeen received and accepted * * * . [Under] one ofthe exceptions to the statute offrauds* * * d contract which would otherwise be unenforceable for lack of a witing but which isvalid in other respects is enforceable * * * with respect to goods for which payment has beenmade and accepted or which have been receitted and accepted. This exception allows par-tial performance to serve as a substitute for the required writing, but only for goods whichhave been received and accepted or for which payment has been made and accepted.Here, the goods which arguably fall within that definition are those supplied by ARI forthe pilot proiect with the NYCDOE because those goods were received and accepted bySLT. Consequently, SLT's motion for summary judgment based on the statute of fraudsis denied with respect to those goods. [Emphasis added.]

SLT's motion based on the statute of frauds is granted, however, with respect to ARI'sclaim that it was to be the exclusive supplier for 1,500 kiosks for the NYCDOE project.* * 'r' The non-pilot program kiosks do not fall within the ambit frealm] of [the partialperformance exception to the Statute of Frauds] because those goods were not receivedand accepted, nor was payment made and accepted for them. ARI has not directed thecourt's attention to any other evidence which demonstrates a genuine issue of materialfact with respect to any other statute of frauds exception. Accordingly, the court's analysisof ARI's breach of oral contract claim is narrowed to the goods ARI supplied for SLI's

United States District Court, District of Kansas, 47t F.Supp.2d I lOl (2007).

CASE l l . l -Cont inued

pilot project with the NYCDOE, as the remaining aspect of that claim is barred by the

statute offrauds.

I IsWTHE STATUTE OF FRAUDS

enforceable to the extent that the seller delivers the goods andthe buyer accepts them.

F0R CRITICAL ANAIYSIS-LegalCo nsideratio n coutd ARt hove successfully

osserted o claim ogoinst SLT bosed on froudulentm isrepresentotio n? Exploi n.

DECISI0N AND REMEDY rne court denied sLTs motionfor summary judgment on ARI's counterclaim for breach ofcontract "with respect to goods which SLT already receivedand accepted, [that is,] the goods for the pilot program with

the NYCDOEj' Under the partial performance exception to the

Statute of Frauds, an oral contract for a sale of goods that

would otherwise be unenforceable for the lack of a writing is

@

Admissions In some states, if a party against whom enforcement of an oral contract is

sought admits in pleadings, testimony, or otherwise in court proceedings that a contract for

sale was made, the conhact will be enforceable.T A contract subject to the UCC will be

enforceable, but only to the extent of the quantity admitted.s lffiMFiE!5.g]The president

of Ashley Corporation admits under oath that an oral agreement was made with Com Best

to buy certain business equipment for $10,000. In this situation, the agreement will be

enforceable, but only to the extent it is admitted. H

Promissory Estoppel In some states, an oral contract that would otherwise be unen-

forceable under the Statute of Frauds may be enforced under the doctrine of promissory

estoppel, or detrimental reliance. Recall from Chapter l0 that if a promisor makes a

promise on which the promisee iustifiably relies to her or his detriment, a court may estop(prevent) the promisor from denying that a contract exists. Section 139 of the Restatement

(Second) of Contracts provides that in these circumstances, an oral promise can be

enforceable, notwithstanding the Statute of Frauds, if the reliance was foreseeable to

the person making the promise and if injustice can be avoided only by enforcing the

prornise.

Special Exceptions under the UCC Special exceptions to the applicability of the

Statute of Frauds exist for sales contracts. Oral contracts for customized goods may be

enforced in certain circumstances. Another exception has to do with oral contracts

between merchants that have been confirmed in writing. We will examine these excep-

tions in Chapter 18. Exhibit l3-3 on the following page graphically surnmarizes the types

of contracts that fall under the Statute of Frauds and the various exceptions that apply.

A written contract will satis$' the writiag requirement of the Statute of Frauds. Awritten

memorandum (written evidence of the oral contract) signed by the party against whom

enforcement is sought will also satisfy the writing requirement. The signature need not be

placed at the end of the document but can be anywhere in the writing; it can even be ini-

tials rather than the full name. (See the Application feahrre at the end of this chapter for

suggestions on how to prevent problems with oral contracts.)

7. Restatement (Second) of Contracts, Seciion I J3

8. UCC 2-201(3)(b). See Chapter 18.

including the Resfofement (Second)of Controc8, go to the American Lawlnstitute's Web site at

www.ali.orq.

For information on theResfofernenb of the Low,

556 lmrfitmCONTRACTS

EXCEPTIONS. Customized goods. Admission (quantity). Partial performance. Merchants confirmed in writing

EXCEPTIONS. Part ial performance. Admissiona. Promissory estoppela

EXCEPTIONS. Admissiona. Promissory estoppela

EXCEPTIONS. Main purpose rule. Admissiona. Promissory estoppela

a. Some states follow Secton 133 (on admissions) and Section .139 (on promissory estoppel) aIlhe Restatement(Second) of Contracts.

A significant issue in todav's business world has to do with how "signatures" can be cre-ated and verified on electronic contracts and other documelits. We will examine elec-tronic signatures in Chapter 17.

What Const i tutes a Wri t ing?A writ ing can corrsist of any confirmation, invoice, sales slip, check, fax, or e-mail-or suchitems in combination. The written contract need not consist of a sinele document to con-stitute an enforceable contract. One document may incorporate ai-rother document byexpressly referring to it. Several documents rnay form a single contract if they are physicaliyattached, such as b,v staple, paper c1ip, or glue. Several documents may forrn a single con-tract even if tl-rey are merely placed in the same envelope.

fruExAMPtE t55l Sam orai l l agrees to sel l some land nert Lo a shopping rrral l to Terry.Sarn gives Terry an unsignecl memo that contains a legal description of the property, andTerry gives Sam an unsigned first draft of their contract. Sam sends Terry a signed letterthat refers to the memo and to the first and final drafts of the contract. Terry sends Saman unsigned copy of the final draft of the contract with a signed check stapled to it.Together, the docurne nts can constitute a writing sr.rfficient to satisfy the Statute of Fraudsand bind botl-r parties to the terms of the contract as evidenced by the writings. @

What Must Be Contained in the Wri t ing?A memorandum evidencing tl-re oral contract need only cor-itain the essential terms of thecontract. Under most provisions of the Statute of Frauds, the writing must name the par-ties and identify the subject matter, cor-isideration, and quantity. With respect to contractsfor the sale of land, some states require that the memorandum also set forth the essentialte rms of the contract, such as location and price, with sufficient clarity to allow the termsto be determined from the memo itself, without reference to any outside sources. Underthe UCC, in regard to the sale of goods, the writing neecl only state the quantity and besigned by the party against whom enforcement is sought.

Because only the partv against whorn enforcernent is sought must have signed thewriting, a contract mav be enforceable by one of its parties but not by the other.l*ExAMptFt3ro'l Rock orally agrees to buy Betty Devlin's lake house and lot for $150,000.Devlin writes Rock a letter confirir-ring the sale by identifying the parties and the essen-tial terms of the sales contract-price, method of payment, and legal address-and signs

the letter. Devlin has made a written memorandum of the oral land contract. Because

she signed the letter, she normally can be held to the oral contract by Rock. Rock,

however, because he has not signed or entered into a written contract or memorandum,

can plead the Statute of Frauds as a defense, and Devlin cannot enforce the contract

against him. E

Sometimes, a written contract does not include-or contradicts-an oral understanding

reached by the parties before or at the time of contracting. Suppose that a lease agreement

says no pets are allowed but a person signs it anyway because the landlord orally repre-

sents at the time of the signing that tenants are allowed to have cats. Can the tenant have

a cat despite what the lease agreement says? In determining tl-re outcome of such disputes,

the courts look to a common law rule governing the admissibility in court of oral evi-

dence, or parol evidence.Under the parol evidence rule, if a court finds that a written contract represents the

complete and final statement of the parties' agreement, then it will not allow either party

to present parol evidence (testimony or other evidence of communications behveen the

parties that are not contained in the contract itself ). In other words, a party cannot intro-

duce in court evidence of the parties' prior negotiations, prior agreements, or contempo-

raneous oral agreements if that evidence contradicts or varies the terms of the parties'

written contract.Does a football team's agreement with its fans to sell "stadiun'r builder licenses" (SBLs)

for seats represent the parties' entire contract, or can an SBL brochure explain or vary the

agreement? That was the question in the following case.

5I7 EIAEEilETHE STATUTE OF FRAUDS

PAROL EVIDE'{CE RULEA substantive rule of contracts, aswell as a procedural rule of evidence,under which a court will not receiveinto evidence the parties'priornegotiations, prior agreements, orcontemporaneous oral agreements ifthat evidence contradicts or variesthe terms of the parties' writtencontract,

the games. Prices varied depending on the seats' locations,which were indicated by small diagrams. Yocca applied for an

SBL, listing his seating preferences. The Steelers sent him aletter notifying him of the section in which his seat was

located. A diagram included with the letter detailed theparameters of the section, but it differed from the brochure'sdiagrams. The Steelers also sent Yocca documents setting outthe terms of the SBL and requiring his signature. Thesedocuments included a clause that read, "This Agreement

contains the entire agreement of the parties." Yocca signed the

documents, and the Steelers told him the specific location of

his seat. When he arrived at the stadium, however, the seatwas not where he expected it to be. Yocca and other SBLbuyers filed a suit in a Pennsylvania state court against the

Steelers, alleging, among other things, breach of contract. The

court ordered the dismissal of the complaint. The plaintiffs

appealed to a state intermediate appellate court, which

reversed this order. The defendants appealed to the state

supreme court.

@s : COMPANY PR0FltE- ' :^ . .. ' Pittsburgh Steelers Sports, lnc.,

is the operating company for the National Football League's(NFlJs) Pittsburgh Steelers (rruww.steelers.com). Art Rooneyfounded the company, which his family still owns. The teambegan in 1935 as the Pittsburgh Pirates, named after thebaseball team. One of the star players in the early years was

Byron "Whizzer/'White, who led the NFL in rushing in 1958.

White became a justice of the United States Supreme Court in

1962. Renamed in a contest sponsored by the Pittsburgh Post-

Gozette in t 940, the Steelers had winning seasons only eighttimes in the team's first forty years. ln the 1970s and 1980, the

Steelers won the Super Bowl four times, adding a fifth title in

2006. Groundbreaking for a new stadium took place in 1999.

BACKGR0UtiID AND FACTS In october 1ee8, PittsburghSteelers Sports, Inc., and others (collectively, the Steelers) sent

Ronald Yocca a brochure that advertised a new stadium to be

built for the Pittsburgh Steelers football team. The brochurepublicized the opportunity to buy stadium builder licenses(SBLs), which grant the right to buy annual season tickets to CASE 15.2-Cont inues next Page

558 llEiluuCONTRACTS

CASE 13.2-Cont inued

I I { I } IE WORDS Of THECOURT . , . Just ice NI?RA.

{<**t<

* * * Where the parties, without any fraud or mistake, have deliberately put theirengagements in writing, tl-ie law declares the writing to be not only the best, but the only,evidence of their agreement. All preliminary negotiations, conversations and verbal agree-ments are merged in and superseded by the subsequent written contract * x x and itsterms and agreements cannot be added to nor subtracted from by parol evidence.Therefore, for the parol evidence rule to apply, there must be a writing that represents theentire contract between the parties. To determine whether or not a writing is the parties'entire contract, the writing must be looked at and if it appears to be a contract completewithin itself, couched fexpressed] in such terms as import a complete legal obligationwithout any uncertainty as to the ob ject or extent of the parties' er-rgagement, it is conclu-sively presumed that the writing represents the whoie engagement of the parties* * * An integrationa clause [a provision stating that all of the terms of the parties'agreement are included in the written contract] *( * x is also a clear sign that the writingis meant to be jr-rst that and thereby expresses all of the parties' negotiations, conversation{and agreements made prior to its execution. fEmphasis added.]

-

()nce a writing is determined to be the parties' entire contract, the parol eyid.ence ruleapplies and evidence of any previous oral or written negcttiations o, agrnn*ents inttohting thesame subiect matter as the contract is almost always inadmissible to explain o, vary theterms of the contract. One exception to this general rule is that paroi evidence may beintroduced to vary a writing meant to be the parties' entire contract where a party avers[asserts] thata term was omitted from the contractbecause of frar,rd, accident, o,

-irtrk".In addition, where a term in the parties' contract is ambigr,rous, parol evidence is admis-sible to explain or clarif, or resolve the ambiguity, irrespective oi whether the ambiguityis created by the language of the instrument or by extrinsic or collateral circumstancei.IEmphasis added.]

In the instant case fthe case before the court], we cannot agree with the lappellatecourt] that the SBL Brochure represented the terms of the parties' contract concerning thesale of SBLs. Contrary to the lappellate court's] understanding, the SBL Brochure diJ notrepresent a promise by tl-re Steelers to sell SBLs to Appellees. Rather, the Brochure wasmerely an offer by the Steelers to sell Appellees the right to be assigned an unspecified seatin an unspecified section ofthe new stadium and the right to receive a contract to buy ansBL for that later-assigned seat. Moreover, by sending in their applications * * *

,Appellees simply secr,rred their right to be considered for assigned seati and the opportu-nity to receive a subsequent offer to purchase SBLs for those seats. In this respect, the SBLBrochure was similar to an option contract in that it merely gave Appellees the option topossibly accept an offer for SBLs at some later date.

On the otl-rer har-rd, the SBL Agreement clearly represented the parties' contract con-cerning the sale of SBLs. Unlike the SBL Brochure, the SBL Agreement reflected a prom-ise by the Steelers to actually sell Appellees a specific number of SBL seats in a specifiedsection. F urthermore, the SBL Agreement detailed all of the terms and conditioni of thatsale, fthat is,] the precise number of seats to be sold to the named Licensee, the exact sec-tion in which those seats were located (inciuding a visuai depiction of that location), thetotal amounts due for each SBL, the dates those amounts were due, and all of the rightsand duties associated with owning an SBL, including the Licensee's right to transferlhe

a. lntegrcted confrocfs will be discussed later in this chapter.

CASE 15.2-Cont inued

SBL. Most importantly, the SBL Agreement explicitly stated that it represented the par-ties' entire contract regarding the sale of SBLs. Accordingly, we find that the SBLAgreement represented the parties' entire contract with respect to the sale of SBLs and

that the parol evidence rule bars ihe admission of any evidence of previous oral or writ-

ten negotiations or agreements entered into behveen the parties concerning the sale of the

SBLs, sucl-r as the SBL Brochure, to explain or vary those terms expressed in the SBLAgreement.

5598@THE STATUTE OF FRAUDS

WHAT IF THE FACTS WERE DIFFERENT?Suppose that the Sfee/ers hod not sent Yocco o

diogrom with the letter notifying him of his seat's sectionqnd that the SBL documents hod not included on integrationclause. Would the result have been different?

DECISI0N AND REMEDY rtre Pennsylvania supremeCourt reversed the lower court's judgment. The state supremecourt held that the SBL documents constituted the parties'

entire contract and under the parol evidence rule could not besupplemented by previous negotiations or agreements.Because the plaintiffs based their complaint on the claim thatthe defendants violated the terms of the brochure, and thecourt held that the brochure was not part of the contract, thecomplaint was properly dismissed.

tr

Exceptions to the Parol Evidence RuleBecause of the rigidityof the parol evidence rule, courts make several exceptions. Theseexceptions include the following:

I Evidence of a subsequentmodification of a written contract can be introduced in court.Keep in mind that the oral modifications may not be enforceable if they come underthe Statr-rte of Frauds-for example, if they increase the price of the goods for sale to

$500 or more or increase the term for performance to more than one year. Also, oralmodifications will not be enforceable if the original contract provides that anymodification must be in writ ing.q

2 Oral evidence can be introduced in all cases to show that the contract was voidabie orvoid (for example, induced by mistake, fraud, or misrepresentation). In ihis situation,if deception led one of the pariies to agree to the terms of a written contract, oral evi-dence indicating fraud should not be excluded. Courts frown on bad faith and arequick to allow the introduction at trial of parol evidence when it establishes fraud.

5 When the terms of a written contract are ambiguous, evidence is admissible to showthe meaning of ihe terms.

i[ Evidence is admissible when the written conhact is incomplete in that it lacks one ormore of the essential terms. The courts allow evidence to "fill in the gaps" in the contracl

5 Under the UCC, evidence can be introduced to explain or supplement a written con-tract by showing a prior dealing, course of performance, or usage of trade.l0 We discussthese terms in further detail in Chapter 18, in the context of sales contracts. Here, it is

sufficient to say that when buyers and sellers deal with each other over extended peri-

ods of time, certain customary practices develop. These practices are often overlookedin the writing of the contract, so courts allow the introduction of evidence to show how

L UCCz-209(Z), (3). See Chapter 18.10. UCC I-205,2-202. See Chapter l8

r{0 llEili@CONTRACTS

EEIE The parol evidence rule andits exceptions relate to the rulesconcerning the interpretotion otcontracts.

INTEGRATED CONTRACTA written contract that constitutesthe final expression of the parties'agreement. lf a contract is integtated,evidence extraneous to the contractthat contradicts or alters themeaning of the contract in any wayis inadmissible.

the parties have acted in the past. Usage of trade-practices and customs generally fol-

lowed in a particular industry-can also shed light on the meaning of certain contractprovisions, and thus evidence of trade usage may be admissible.

The parol evidence rule does not apply if the existence of the entire written contractis subject to an orally agreed-on condition. Proof of the condition does not alter ormodify the written terms but affects the enforceability of the written contract.

IEEXAMilE t5"m ]elek orally agrees to purchase fumand's car for $8,000. but only if

]elek's mechanic, Frank, inspects the car and approves of the purchase. Frank cannot

do an inspection for another week, and Armand is leaving town for the weekend. jelek

wants to use the car right away, so he drafts a contract of sale that does not include the

agreed-on condition of a mechanical inspection. Both parties sign the contract. The

following week Frank, the mechanic, inspects the car but does not recommend its pur-

chase. When felek does not buy the car, Armand sues him for breach of contract. In

this case, )elek's oral agreement did not alter or modify the terms of the written agree-

ment but concerned whether the contract existed at all. Therefore, the parol evidence

rule does not apply. E

When an obvious or gross clerical (or typographic) error exists that clearly would not

represent the agreement of the parties, parol evidence is admissible to correct the error.

lrExAMptFtsJZ Sempter agrees to lease 1,000 square feet of office space from Stone

Enterprises at the current monthly rate of $3 per square foot. The signed written lease

provides for a monthly lease payment of $300 rather than the $1,000 agreed to by the

parties. Because the error is obvious, Stone Enterprises would be allowed to admit

parol evidence to correct the mistake. E

Integrated ConttactsThe determination of whether evidence will be allowed basically depends on whether the

written contract is intended to be a complete and final statement of the terms of the agree-

ment. If it is so intended, it is referred to as an integrated contract, and extraneous evi-

dence (evidence from outside the contract) is excluded.An integrated contract can be either completely or partially integrated. If it contains

all of the terms of the parties' agreement, then it is completely integrated. If it contains

only some of the terms that the parties agreed on and not others, it is partially inte-

grated. If the contract is only partially integrated, evidenc_e of consistent additional

ierms is admissible to supplement the written agreement.ll Note that for both com-

pletely and partially integrated contracts, courts exclude any evidence that contradicts

the writing and allow parol evidence only to add to the terms of a partially integrated

contract. Exhibit I J-4 illustrates the relationship between integrated contracts and the

parol evidence rule.

One common way for parties to avoid disputes over whether a contract is

partially or fully integrated is to include an integrotion clduse in the contract.

An integration clause declares that the contract is the parties'complete and final

agreement and explicitly states that there ate no other terms or conditions of

performance. A contract that includes such a clause is conclusively deemed to

be an integrated contract, and all extrinsic and parol evidence will be excluded.

E

Ii

ld

11. Restdtement (Second) of Contracts, Section 216.

ill r!7irtrrfiIflTHE STATUTE OF FRAUDS

FULLY INTEGRATEDlntended to be a complete and final

embodiment of the terms of the parties'agreement.

PAROL EVIDENCE INADMISSIBLEFor example, evidence of a prior negotia-tion that contradicts a term of the wriften

contract would not be admitted.

PAROL EVIDENCE ADMISSIBLEFor example, if the contract is incomplete

and lacks one or more of the essentialterms, parol evidence may be admifted.

NOT FULLY INTECRATEDOmits an agreed-on term that is consis-

tent with the parties' agreement.

of Frauds

Charter Golf, Inc.,manufactures and sellsgolf apparel andsupplies. Ken Odin hadworked as a Charter

sales representative for six months when he was offered aposition with a competing firm. Charter's presiden!, Jerry Montieth,offered Odin a 10 percent commission "for the rest of his life" ifKen would turn down the offer and stay on with Charter. He alsopromised that Odin would not be fired unless he was dishonestOdin turned down the competito/s offer and stayed with Charter.Three years later, Charter fired Odin for no reason. Odin sued,alleging breach of contract. Using the information presented in thechapter, anwver the following questions.

I Would a court likely decide that Montieth's employmentcontract falls within the Statute of Frauds? Why or why not?

Assume that the court does find that the contract falls withinthe Statute of Frauds and that the state in which the court sitsrecognizes every exception to the Statute of Frauds discussedin the chapter. What exception provides Odin with the bestchance of enforcing the oral contract in this situation?

Now suppose that Montieth had taken out a pencil, written"lO percent for life" on the back of a register receipt andhanded it to Odin. Would this satisfy the Statute of Frauds?Why or why not?

Assume that Odin had signed a written employment contractat the time he was hired to work for Charter, but it was notcompletely integrated. Would a court allow Odin to presentparol evidence of Montieth's subsequent promises?

s a general rule, mostbusiness contracts

should be in writing evenwhen they fall outsidethe Statute of Frauds.Businesspersons frequently

make oral conhacts over the telephone, however, particularlywhen the parties have done business with each other in the past.

Confirm the Agreement in WritingAny time an oral contract is made, it is advisable for one ofthe oarties to send either a written memorandum or a confir-

* This Application is not meant to substitute for the services of an attorney who is licensed to practice law in your state.

(Continued)

542 llNilsilCONTRACTS

mation of the oral agree ment by lax or e-mail to the other

party. This accomplishes two purposes: (1) it demonstrates the

party's clear intention to form a contract, and 12; it provides

the terms of the contract as that party understood them. If the

party receiving the memorandum or confirn-ration then dis-

agrees with the terrns as described, the issue can be addressed

before performance begins.

Special Rules for Contracts between MerchantsWhat about the sale of goods behveen merchants? Under the

UCC, wriiten confirir-ration received by one merchant removes

the Statute of Frauds requirenent of a writir-rg unless the mer-

chant receiving the confirmation objects in writing within ten

days of its receipt. This law (discussed in Chapter 18) clearly

points out the need for the mercl-rant receiving the confirma-

tion to review it carefuily to ascertain that the confirmation

confonns io the oral contract. If the writing does not so

conform, the merchant can obiect in writing (the Statute of

Frauds still applies), and the parties can resolve misunderstand-

ings withoui legal liability. If the n-ierchant fails to object, the

written confirmation can be used as evidence to prove the

terms of the oral contract. Note, however, that this ten-day rule

does not apply to contracts for interests in realty or for services,

to which the UCC does not apply.

CHECKTIST FOR THE BUSINESSPERSON1 When feasible, use written contracts.2 lf you enter into an oral contract over the telephone,

fax or e-mail a written confirmation outl ining yourunderstanding of the oral contract.

5 lf you receive the other Party's written or faxed confir-mation, read it carefully to make sure that it statesthe terms already agreed to in the oral contract, asyou understand them.

4 lf you have any objections, notify the other party ofthese objections, in writing, within ten days'

collateral promise 350integrated contract 540

parol evidence rule 557prenuptial aSreement 552

Statute of Frauds 527

a. Contracts involving interests in land-The statute applies to any contract for an interest in

realty, such as a sale, a lease, or a mortgage.

b. Contracts that cannot by their terms be performed within one year-The statute applies only

to contracts that are objectively impossible to perform fully within one year from (the day

after) the contract's formation.

c. Collateral promises-The statute applies only to express contracts made betrrueen theguarantor and the creditor that make the guarantor secondarily liable. Exception: the mainpurpose rule.

d. Promises made in consideration of marriage-The statute applies to promises to make a

monetary payment or give property in consideration of a promise to marry and toprenuptial agreements made in consideration of marriage.

e. Contracts for the sale of goods priced at $5OO or more-See the Statute of Frauds provision

in Section 2-2Q1 of the Uniform CommercialCode (UCC).

2. Exceptio ns-Partia I performance, ad m issions, and promissory estoppel.

Appticobitity-The following types of contracts {all under the Statute of Frauds and must be in

writing to be enforceable:

545 mllE rHIHE STATUTE OF FRAUDS

The Sufficiencvof the Writing'(See pages 335-337.)

The ParolEvidence Rule(See pages 337-341,)

To constitute an enforceable contract under the Statute of Frauds, a writing must be signed by theparty against whom enforcement is sought, name the parties, identify the subject matter, andstate with reasonable certainty the essential teims of the contract. In a sale of land, the price anda description of the property may need to be stated with sufficient clarity to allow them to bedetermined without reference to outside sources. Under the UCC, a contract for a sale of goods isnot enforceable beyond the quantity of goods shown in the contract.

The parol evidence rule prohibits the introduction at trial of evidence of the parties' priornegotiations, prior agreements, or contemporaneous oral agreements that contradicts or variesthe terms of the parties'written contract. The written contract is assumed to be the completeembodiment of the parties' agreement. Exceptions are made in the following circumstances:

L To show that the contract was subsequently modified.

2. To show that the contract was voidable or void.

5. To clarify the meaning of ambiguous terms.

4. To clarify the terms of the contract when the written contract lacks one or more of itsessential terms.

5. Under the UCC, to explain the meaning of contract terms in light of a prior dealing, courseof performance, or usage of trade.

6. To show that the entire contract is subject to an orally agreed-on condition.

7. When an obvious clerical or typographic error was made.

,1 .

Answers for the even-numbered questions in this tar Review section can be found on this text's occompanying Web site atwww.cengage.com/blaw/blt. Select "Chopter 15" ond click on "For Review."

I What contracts must be in writing to be enforceable?

2 If it is possibie for a contract to be perfomed rvithin one year, must it be in writing?

5 Wl-ren will an oral promise to pay another person's debt be enforced?

4 If a written contract is required, what terms are considered esser-itial and n-rust be contained in the written document?

5 What is parol evidence? When is parol evidence adn'iissible to clarif, the terms of a written contract?

tr'r ::

E The contract calls for Benson to subrnit a lr'ritten rese:rrchreport, with a deadline of two years for subnission.

T3"? Hypothetical Question with Sample Answer. Gemma pron.risesa local hardrvare store that she will pay for a larvn nower thather brother is purchasing on credit if the brother fails to pay '

the debt. Must this promise be in r,vriting to be enforceable?Why or u,hy not?

For a sample answer to Question t5.2, go to Appendix E at theend of this text.

# HypoTHETrcAr. scENARr0s AND cAsE pRoBr.EMs

23"4 The One-Year Rule. On May 1, by telepl'rone, YLr offers to hireBenson to perforr-n personal services. On May 5, Bensonreturns Yu's call and accepts the offer. Discuss fulll' whetherthis contract falls under the Statute of Fraucls in the follow-i r ro nirorrrnqlrnnec'

? The contract calls for Benson to be employed for one year,

with the right to begin performance irr.rnediately.

2 'l'he contract calls for Benson to be employed for ninemonths, rvith perforrnance of services to begin onSeptember 1.