16-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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3•Introduction to Contracts•The Agreement: Offer

•The Agreement: Acceptance•Consideration

•Reality of Consent

Contracts

PART

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3•Capacity to Contract

•Illegality•Writing

•Rights of Third Parties•Performance and Remedies

Contracts

PART

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Writing

PA ET RHC 16

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

Samuel Goldwynquoted in The Great Goldwyn by Alva Johnson, 1937

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Learning Objectives

• List contracts that must be written to satisfy the Statute of Frauds

• Identify exceptions to the Statute of Frauds

• Compare UCC with the Statute of Frauds under common law

• Describe the 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 several reasons: more definite, use as evidence, and signature provides authentication

• 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

House of Lords, England

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• 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 435 of the text

Covered Contracts

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

Covered Contracts: Collateral Contracts

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

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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

Exception to Collateral Contract Rule

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• 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, so the contract must be in writing

Covered Contracts: One Year Rule

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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

– The 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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• 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 evidence of contemporaneous or prior statements to contradict, add to, or alter the terms of the written contract

• Example: Hinkel v. Sataria Distribution & Packaging

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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Parol Evidence Chart

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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?