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Business Law

Principles and Practices

Golclma:n, A., & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). South- Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

emorialize Contracts in riting Statute ol Frauds

~APTER PREVIEW

e Status of Oral and Written ntracts

ntracts Required to Be in Writing - Contract to Personally Pay the Debt of

Another Person - Contract to Personally Pay the Debt of a

Deceased Person - Contract Involving the Sale of an Interest

in Real Property - Contract Made in Consideration of

.Marriage - Contract That by its Terms Cannot Be

Performed Within One Year of the Date the Contract Was Formed

e Sufficiency of the Written Record

ectronic Signatures

rol Evidence Rule

201

> ~

CHAPTER ·HIGHLIGHTS

~ IN A BUSINESS SETTING

This chapter identifies the relatively few contracts that are required by the Ia·

of each state (called a statute of frauds) to be in writing to be enforceable in

court. The chapter also summarizes the essential information that the writing

must contain so as to satisfy the law. A brief opening discussion points out tr:

advantages that written contracts have over those that are made orally. This ::

followed by a discussion of parol evidence, a rule determining whether oral

testimony external to a written contract that changes the terms of this writter

contract may be introduced at a court trial. The concluding pages of the

chapter introduce the electronic signature as a way to sign records.

Adams, an attorney, represented Hall, who called himself an International Trader, in a deal with a company in India that was to result in Hall receiving $10 mi llion. Adams and Hall resided in the state of Maine. The attorney's fee of $1 mill ion for handling the case was to be paid when Hall received his money from the company. In order to receive this $10 million, however, Hall was required to pay an upfront fee of $100,000 to an agent of the company handling the deal in India. Hall had done business with this Indian company on prior occasions, but the agent was new to the company. Hall borrowed the fee from Garlock, a business associate, and signed a promissory note agreeing to pay back the $100,000 within five days. Adams made arrangements with a local bank to wire the money to the agent in India. Neither Hall nor Adams heard from the agent once the money was sent. Adams had orally guaranteed to repay Garlock if Hall did not himself repay the debt. When the due date of the note arrived, Garlock requested his $100,000, but Hall was unable to make payment. Garlock therefore brought a lawsuit against Hall for the money. He hired Adams as his attorney. The court awarded damages to Garlock requiring Hall to make payment. However, Hall had no assets from which to collect it. During the trial, Adams publicly reprimanded Hall during cross-examination for not paying his loan as scheduled.

Questions 1. Has Adams, as the attorney, acted unethically in this case? 2. Is Adams legally obligated to pay Garlock the $100,000 that Hall borrowed

from him?

The Status of Oral and Written Contracts

LEARNING OBJECTIVE ~ Indicate that oral contracts are

just as enforceable as written contracts if they contain all the required

legal elements.

In most circumstances, oral contracts are just as enforceable as written contracrs if they contain all the elements necessary to make a contract legally bindin"' (those discussed in Chapters 7 through 10) and if the terms of the oral contracts can be proved in a court of law. In fact, most contracts are not in writing. Nevertheless, many lawsuits based on breach of valid oral contracts have beer: dismissed by courts because the parties who brought them could not sufficiently establish their terms.

Written contracts have advantages over oral contracts. A written contrac needs no witnesses to establish its existence and its terms. The writing is taken a- proof of the parties' intent to actually contract and to include certain specifica- tions of terms within the scope of the contract. If there are no witnesses to an ora. contract, one of the parties might deny that the contract ever existed or migh-

disagree on the exact terms of the contract. Even if there are witnesses to an oral contract, they may disagree about the contract's exact terms. To avoid misunder- standings and disagreements and to reduce the possibility of perjury (lying under oath) by one party or the other, you should ensure that all important contracts are in writing. Keep in mind that putting a contract in writing does not guaran- tee that at the time of performance the contract terms will not be questioned or become a "battleground" for a major dispute based on an interpretation of terms by the parties. The courts still need to decide what the disputed terms mean.

Relatively few contracts are required by law to be in writing; those that are re - quired to be in writing will be discussed in the pages that follow. Re-creating the intentions of the parties can be difficult in the absence of a written agreement.

ontracts Required to Be in Writing

LEARNING OBJECTIVE ~ ist the contracts that must be in

writing to be legally enforceable under a state's

statute of frauds.

ute of frauds: law requiring that ain types of contracts be in writing

Every state has a law requiring that to be enforceable in court, certain kinds of contracts must be in writing. This law, called the statute of frauds (based on the English Statute of Frauds passed in 1677), does not pertain to all contracts but only to six specific types. These six contracts, said to be "within the statute," are believed to be historically important enough to put into written form. The stat- ute of frauds does not eliminate the other essential elements of a valid contract (offer and acceptance, consideration, capacity, and legality). It simply adds there- quirement of written evidence that a contract existed.

Virtually all statutes of fraud require the following types of contracts to be in writing to be enforceable:

1. A contract to personally pay the debt of another person 2. A contract to personally pay the debt of a deceased person 3. A contract involving the sale of an interest in real property 4. A contract made in consideration of marriage 5. A contract that by its terms cannot be performed within one year from the

date the agreement was formed 6. A contract for the sale of goods or merchandise for the price of $500 or

more (discussed in Chapter 15)

In addition to these contracts, some states require other types of contracts to be in writing. These contracts may include a contract appointing an agent to sell real estate, a promise to pay a debt discharged in bankruptcy, or a promise to be released from an ordinary debt, as well as various types of consumer transac- tions such as a loan of money. If a state statute does not require that a contract be in writing, an oral contract is enforceable.

The statute of frauds applies only to executory contracts, that is, contracts that have not been fully performed. If, however, two parties fully perform an oral contract that should have been in writing, the agreement would not be void, but be unenforceable. The contract is valid for all other purposes. If both parties elect to go through with their oral agreement, they may, and no third party may complain that the contract is oral. Only the original parties to the contract may raise this issue.

Randazzo sold Merkel 2 acres of land in the town of Wallworth for $100,000 to build a bed and breakfast. The contract had been made orally. Shortly thereafter, Randazzo changed his mind and backed out of the deal. He returned the purchase price to Merkel and asked for the return of the document of ownership for the land. Merkel refused. Randazzo then asked the court to void the contract because it was not in writing as required by the statute of frauds for a sale of land. The court refused, ruling that because the agreement had been fully performed, the statute of frauds did not apply.

A Contract to Personally Pay the Debt of Another Person A contract one person (the guarantor) makes with a creditor to pay a third per- son's debt (called a contractual or secondary promise) must be in writing to be enforceable. Under this type of agreement, called a guaranty, the guarantor"s promise to pay is secondary to the promise of the person who owes the mone~ (the debtor). That is, the debtor is still responsible for paying the debt; the guar- antor is responsible only if the debtor fails to pay. (This type of contract may be a bit unusua l because we generally assume that a person does not normally take on another person's debt. Therefore, the statute of frauds requires writte:::. evidence of this unusual arrangement.) If necessary, the creditor would first b~ required to sue the debtor and obtain a judgment. A judgment in this case is a court order directing the debtor to pay the debt owed to the creditor. If the debto~ refuses, the creditor could then proceed against the guarantor.

Julian, who recently graduated from college, was hired by a large firm as an account executive. Because he needed a car to get to work, he went to a car dealer in the large city where he lived and put in a bid on a new car. Because Julian did not have a credit history, the dealer was unwilling to sell him the car unless a responsible person with good credit would guarantee payment. His uncle, a well-known businessperson in the same city, agreed in writing to become responsible for any payments his nephew failed to make. Because the uncle's promise to pay was secondar; (agreed to pay only if the nephew did not), and since the guarantee to pa! was in writing, the uncle becomes responsible for any of the payments his nephew fails to make.

An agreement does not come within the statute of frauds if you make your- self primarily responsible for the payment of a debt. An oral agreement in this case would be enforceable.

Forman said to his friend, the owner of Miles Furniture Mart: "It is my daughter's birthday, and she wants the dining room set she saw at your store. Go ahead and sell it to her, but send me the bill."

In this example, Forman did not promise to pay if the daughter did not pay Instead, Forman assumed primary responsibility for the amount of the daugh- ter's purchase. Becailse the debt became Forman's alone, the owner of Miles Furniture Mart would look only to Forman for payment.

A Contract to Personally Pay the Debt of a Deceased Person An executor or administrator is one who handles the property (or estate) of deceased person. The executor or administrator gathers the assets of the deceased, pays all debts, and distributes the remaining property according r the terms of a will or state law. The executor is not personally responsible fo~ the debts of the deceased; the debts are paid out of the deceased person's estate. If, however, there is not enough money to pay all the debts, an executor or administrator may promise to pay the debts from her or his own personal fu nds (such promises are relatively unusual) . Such an agreement, which is actually a agreement to become responsible for the debts of another, must be in writing r be enforceable.

When he died, Morten had an estate worth $100,000 but owed creditors $120,000. Morten's daughter, the executor of the estate, wanted to clear her father's name. She made an oral agreement with the creditors to pay the additional $20,000 owed by her father out of her own pocket. This oral agreement by Morten's daughter was not legally enforceable by the creditors.

RYou t eac

A Contract Involving the Sale of an Interest in Real Property A contract for the sale of real property or any interest in real property must be in writing to be enforceable. Real property is land or anything permanently attached to the land such as a building. The contract of sale, sometimes called a purchase offer, consists of an offer by the buyer and an acceptance by the seller. The purchase offer must also contain the other essential elements of a contract.

Newman placed a sign on her front lawn advertising her house for sale. Julian saw the sign, stopped, inspected the house, and orally offered Newman the $140,000 asking price. Newman accepted. After Newman had taken down the sign and worked out the details of the sale, Julian refused to go through with the purchase of the property. Because the statute of frauds requires that all contracts for the sale of real property be in writing, Julian was not bound by the oral contract.

It is not uncommon for people to enter into oral contracts involving real property. If, in the example, Julian made a deposit on the house, the oral contract for the sale of the house would still not be enforceable. In the eyes of the law, the deposit could be returned without injury to Julian. On the other hand, Newman may have immediately transferred possession of the house to Julian, with the deed of ownership to be given later. In this case, if Julian made improvements to the house, such as painting and making certain repairs, the law most likely would not permit N ewman to cancel the sale and retake possession of the house be- cause the agreement was not in writing.

A contract for a temporary transfer of an interest in real property must also be in writing. An interest in this sense is a legal right to the use of or a claim on real property. Examples of interests include mortgages, easements, and leases. A lease is an agreement by which an owner of real property rents that property to another party. In most states, an oral lease for a term of one year or less is valid.

Clinton orally agreed to rent a house from Jeffers for one year. This oral agreement does not have to be in writing to be enforceable because it is only for one year.

Martson, a retired professional athlete, owned a self-standing sporting goods store in a small city of about 50,000 people. He decided to retire completely and offered to sell his business, including the building, to a group of investors headed by a person named Greeves for $1 million. Greeves, without the aid of an attorney, drew up a handwritten purchase and sales agreement, signed it, and sent the document to Martson. The document was lacking an important requirement under the statute of frauds dealing with real property, namely a complete description of the property. It contained only a street address. A short time after Martson received the document, Greeves informed Martson that he decided not to go through with the contract. Mart- son never did sign the document.

Questions 1. Is Greeves bound by this agreement? 2. Is the fact that Martson did not sign the agreement significant? 3. Would an attorney have been helpful to the parties in this case?

A Contract Made in Consideration of Marriage A person who agrees to marry another for a reason other than a mutual promise to marry, must place the agreement in writing. Mutual promises to marry are valid contract promises and are enforceable even if there is no written evidence. For example, if Gentile and Wright each orally promise and agree to marry each other, their agreement is binding. If, however, Gentile agrees to marry Wright only if Wright will turn over certain property to her, this agreement will not be

prenuptial agreement: agreement by a couple planning to marry regarding the rights and obligations of each person

enforceable in court unless it is in writing. This type of arrangement is uncor::.- mon for a first marriage, but is more common when both parties are entering ~ second marriage- especially when children and/or significant assets are i::- volved. In this case, the parties would sign a prenuptial agreement. A prenupri.1 agreement is a written contract signed before marriage that states what wmL.- happen to a couple's assets after a divorce or death. A prenup, as it is common called, does not take effect until the parties marry. Without this prenuptial agree- ment, either a divorce court or a probate court would divide up these asse: according to state law. Furthermore, once you agree to a prenup, both parri must disclose all their assets or risk having the entire contract voided. It is cri'·- cal to decide on a prenup long before the marriage is to take place. If the pa who wants the prenup were to present it to the other party days before r marriage and this other party signed, there is a chance that this other party cou.- invalidate the document after the marriage claiming there was not enough ti to properly consider the consequences.

Whitney and Banks decide to marry. It is a second marriage for both. They sign a prenuptial agreement whereby each promises to waive any inheritance rights to the other's money and/or property accumulated up to the point of their second marriage. Each wishes the children of his or her prior marriage to be the sole heirs (those entitled to inherit) of the money or property.

In this example, a court will hold the agreement enforceable as long as Wh.-- ney and Banks understood the legal consequences of what they agreed to do a:-- knew the full extent of each other's property. Courts are increasingly upholdi~ ­ prenuptial agreements, provided they are fair and reasonable and were enter into freely (i.e., made without threats).

A Contract That by Its Terms Cannot Be Performed Within One Year from the Date the Contract Was Formed A contract must be in writing if "by its terms" it cannot be carried out exacr within one year of the date of the contract. If it can be carried out in exactly o year, or even less time, an oral contract is valid. The one-year period starts to r~ the day after the contract is formed. This is referred to as the "one-year rule." F example, a nationally -and internationally known singer enters into a contract August 10, 2008, to perform in a large city in September 2010. This comr.:: must be in writing because it cannot be performed prior to September 2010. Tr was an easy case. It could get a little more complicated than that because the Y"" legally begins when the contract is made, not when performance is to start.

Sullivan, a wealthy cattle rancher, planned to take a year off and travel with his family. On March 13, he orally agreed to hire Elridge for that one year to take charge of his property and his business interests. Elridge was to work from May 1 of that year to April30 of the next year. Because the contract cannot be completed within one year of the date of the agreemetr (March 13 ), it must be in writing to be enforceable. The date of May 1 is significant in determining whether or not the contract has to be in writin=

The key for determining whether an oral contract is enforceable under :. one-year rule is the possibility of performance, not the actual performance. -:- statute of frauds does not apply if it is possible to carry out the terms of the c tract exactly within one year. For example, Redman orally promises "to work; Dykes as a personal security guard for Dykes's lifetime" in exchange for Dyk.~ promise to pay him a monthly salary of $10,000. Courts, however, interpret language to mean that because it is possible- although not probable-that Dy might die within a year, an oral contract is enforceable even though it may no- completed for several years.

:.:: c.:» ..... = c.:» 1.1.. ..... ..... rn ...-:: .... ....

Sometimes the court's interpretation of what is possible is a bit far -fetched, but nevertheless will still stick to the rule that if performance is possible exactly within one year, an oral contract is enforceable. Consider the following example:

A magazine subscription company promised the senior class of Redwood High School, with whom the magazine company has an oral contract, that any student who sells $10 million of magazine subscriptions during the coming senior class magazine drive (lasting one month) will earn an all- expense paid trip to Europe for his or her entire family.

In this example, the relevant question is: Can it happen? The answer, of course, is yes! It is possible that a student will sell that many dollars worth of magazines in one month simply because some rich relative will buy them. Is that likely to happen? Probably not. Because it is possible that the contract can be ful - filled, the oral contract would be binding.

Some courts will apply the equitable doctrine of promissory estoppel (dis- cussed in Chapter 8) to allow recovery by a person who could not otherwise en- force a contract in this situation because of the statute of frauds requirement.

Answer True (T) or False (F) . 1. In a contract of guaranty, the guarantors promise to pay

is secondary to the debtor's promise. T F 2. Except as provided by statute, oral contracts are just as

enforceable as written contracts. T F 3. The statute of frauds applies only to executory contracts. T F 4. An oral promise to pay your own debt is not enforceable. T F 5 . Martin agreed to work for Simmons for thirteen months.

This agreement would be enforceable if made over the phone. T F

e Sufficiency of the Written Record - -

...EARNING OBJECTIVE~ Summarize the essential

information a memorandum evidencing a written

contract must contain.

randum: informal written : ce of an agreement required by _ :atute of frauds

In most states, the written evidence of a prior oral agreement required by the statute of frauds is an informal memorandum (record). A formal written contract signed by both parties is not necessary but may be used if desired. It is not neces- sary that the writing be made at the time of the contract. An oral agreement is enforceable even if it is within the statute of frauds as long as there is some writ- ing that refers to the agreement and its terms. Some courts have held that a tape or video recording may even satisfy the writing requirement.

Generally, the memorandum should contain at least the following information:

• The names of the parties • The subject matter of the agreement (real property, a debt, employment,

etc.) • The consideration • All material terms with reasonable certainty • Only the signature of the party against whom enforcement is sought

While visiting Stein at her cottage on the lake, Wayne convinced Stein to sell the cottage to him. Wayne wrote out a memorandum of

:~ · s '.::! ·v ·1 ·8 ·1 ·c: ·1 ·~ the agreement, signed it, and sent it to Stein. Stein did not sign the suv H!HH:Jms L"LL memorandum. When Stein changed her mind about selling the cottage,

Wayne brought an action in court to force her to sell. Because Stein had not signed the memorandum, there was no valid evidence of an agreement. The court would not require her to sell the cottage to Wayne.

In regard to the sale of real property, a state's statute of frauds often requires that, in addition to the price, for easy identification the writing include an accu- rate and complete description of the piece of real estate to be sold. The stree: address alone would be insufficient. Other material terms that would help clea;- up any uncertainty includes a clause stating that a title search would be con- ducted to ensure the seller currently owns the property (that is, has clear title The lesson here is that a contract involving the sale of real property should in- volve an attorney who deals in real estate law. This attorney could add to the cer- tainty that the legal requirements of the state's statute of frauds is met.

The signature of the party being held responsible may be handwritten. printed, typed, stamped, or may even be in electronic form and may appear any- where in the memorandum. An example of an informal memorandum is show~ in Figure 11.1.

The memorandum may consist of a single document or multiple pieces of paper (letters, telegrams, sales slips, invoices, faxes, or e-mails). If the memo ran- dum consists of several documents physically attached, at least one of them mu contain the signature of the party who will be held responsible. The other unsigned documents in the series must show that their content is related to the signed document.

Phoenix, Arizona January 17, 2012

AYERS MANUFACTURING COMPANY AND DONOVAN JENKINS JR. hereby agree as follows:

AYERS MANUFACTURING COMPANY agrees to hire DONOVAN JENKINS JR. as sales manager at a guaranteed salary of $8,000.00 per month for the duration of the contract. The employment period to begin February 3, 2012, is to continue for five (5) years, until February 3, 2017.

FIGURE 11.1 Informal Memorandum

AYERS MANUFACTURING COMPANY

"OW!,~ ~~·

=

ctronic Signatures

LEARNING OBJECTIVE~ gnize that a person may now

sign documents electronically.

rol Evidence Rule

LEARNING OBJECTIVE~ rmine the importance of parol

evidence as it relates to contracts.

_ evidence rule: rule stating that -:: of a written contract cannot a'lged by prior oral or written

="T'Ients

The handwritten signature alone as a way to sign documents has not been neces- sary for some time. Typed or printed signatures are also allowed, especially in signing a negotiable instrument (see Chapter 19). Now comes the electronic sig- nature, or e-signature, "invented" to accommodate electronic commerce. The e-signature is a generic term that refers to all the methods by which one can sign an electronic record. A very common method by which a person can sign electronically is the digital signature. It is an electronic substitute for a manual signature that serves the same function as a manual signature. A digital signature created by a computer signifies an intent to sign. This new method of signing documents, especially contracts, has not been without problems, however. One problem is whether agreements made in a purely online environment using e-sig- natures are legally binding. After all, prior to e-signatures, a person used a pen and signed the contract in his or her own unique handwriting. The question of legality was not generally questioned because the contract was most likely signed in the presence of some official person. Another problem involves the states. Most states have laws governing e-signatures; however, these state laws are not uniform. Thanks to federal legislation signed into law on October 1, 2000, the legality issue has been resolved. The law, known as the Electronic Signatures in Global and International Commerce Act (E-SIGN Act), removes the uncertainty as to the legality of electronic contracts and different forms of electronic signa- tures that have been developed. Such contracts and signatures are now consid- ered just as legal and enforceable as traditional paper contracts that have been signed in ink. The law states, among other things, that no contract, record, or signature may be denied "legal effect" solely because it is in electronic form (UCC 2-211 substantiates this law). Documents not covered by theE-SIGN Act include prenuptial agreements, court papers, divorce decrees, wills, evictions, foreclosures, and health insurance terminations.

There is a downside to using an e-signature: It offers little security. Your sig- nature could be intercepted online by thieves and used for fraudulent purposes. You are actually placed in the same position as if your credit card were stolen. Consequently, you should consider carefully whether you wish to sign anything online. Despite these limitations, the E-SIGN Act provides increased opportuni- ties for contracting online. Online contracts eliminate time and costs associated with exchanging paper documents requiring signatures created off-line, as when opening a bank account or obtaining a loan or a mortgage. Keep in mind that contracting parties must both agree to use electronic signatures; otherwise, the electronic signature is not valid.

Once a contract has been put in writing as the final expression of agreement between the parties, it is protected by the parol evidence rule from a claim by either party that what is in the contract is not their real intention. The parol evidence rule states that the terms of a written contract that is final cannot be changed by any oral or written agreements made prior to the writing. In other words, neither party can say that he or she agreed to do something other than what was included in the written contract. A court will not allow parol evidence because the court presumes that the written contract contained all the terms and provisions intended by the parties. Any term not included is , by law, considered intentionally omitted by the parties. In short, "What you see is what you get."

Now and Then, a band, entered into a written contract with Tiffany Community College to play at the Spring Fling for $1,500. Shortly before the contract was signed, the band leader asked the student activities

director to reimburse the band $500 more for hiring four persons to help set up and tear down the band's equipment. The student activities director orally agreed to pay this expense. After the Spring Fling, the student activities director paid the band leader $1,500 but refused to pay the additional $500 for the extra workers. The band sued the college to recover the $500. Because the written contract did not contain a provision to pay for the setup people, a court will not permit the band leader to introduce evidence that the student activities director orally agreed to pay this additional sum. The band is bound by the terms of the signed, written contract.

Parol evidence may be introduced, however, when the evidence does no- change the terms of the written contract. For instance, parol evidence may be introduced to explain certain terms or words that are vague or confusing. Paro evidence may also be introduced to prove that the written contract lacked certaii! terms originally agreed upon but accidentally left out of or typed incorrectly in the written contract. Parol evidence may also be presented to show that the writ- ten contract was illegal, that one party was persuaded to make the contract b~­ the fraud (deceit) of the other party, or that one person was mentally incompetent.

Campo, on an application for a job as manager of a large store, lied wher. he said that he had never been arrested and convicted of a major crime. He had actually been arrested, convicted, and sentenced to prison for robbery. Campo was hired and signed a three-year contract. Six months later, the store owner discovered the lie and fired Campo, who sued for breach of contract. The owner could introduce parol evidence to show that, because he relied on Campo's statement of having no arrest record, he was persuaded through fraud to make the contract with Campo.

The parol evidence rule applies only to agreements made prior to or at the time of signing the written agreement. As a result, oral proof of any changes w the writing after the written contract was made can be presented in court. The party presenting the proof, however, must show that the later agreement con- tained consideration.

Carlson, a person knowledgeable in electronics, agreed in writing to repair your CD system for $200. After beginning work, she discovered that more things were wrong than she had previously thought. Carlsott informed you that she would not continue the work until you agreed to pay her an additional $100. You orally promised to pay, and Carlson agreed to continue. When the work was completed, you refused to pay the additional $100. Carlson sued in small claims court and offered as proof your oral agreement to pay her the $100. This oral agreement could legally be introduced in court, but Carlson would still lose the case. Carlson, already legally obligated to complete the repairs for $200, furnished no consideration for your promise to pay the additional $100.

The key in determining whether parol evidence will be allowed is whethe- the contract put in writing is intended to be the final and complete agreemea: between the parties. If it is so intended, then it is considered as an integrated con- tract, and any outside evidence will be excluded.

A written contract may be changed by a subsequent oral agreement if the written contract was not required to be in writing under the statute of frauds. ~ the contract being modified must be in writing, the modification must also be ;_ writing.

~ .----------------------------------c.:» Fill in the blanks to complete each statement. ..... = c.:» 1. The signature was invented to accommodate electronic commerce. ..... ..... ..... 2. A subsequent oral agreement modifying a written contract must be in writing if the written contract originally had to be ____ _ 3. For a writing to satisfy the statute of frauds, it need only be signed by the rn party against whom it is to be ____ _ N

4. Oral changes to a written agreement made subsequent to the writing are

• generally unless the written agreement was required to be in P91BJ69!U! ·g p9ll!WJ9d '17 :pa:lJOjU8 '8 fiU!l!JM U! '(': :o!UOJl:J9i9 '~

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.... writing under the statute of frauds . .... 5. A contract put in writing and intended to be the final and complete agreement between the parties is called a(n) contract.

ey Points in Chapter • • • • --, contracts are just as legal as written contracts if

ontain offer and acceptance, consideration, compe- - parties, and legal purpose and if the terms of these

ontracts can be proven in a court of law. Every state has a law called the statute of frauds,

- .::h requires certain contracts to be in writing to be en- -.:eable. The most common of these are (1) a contract to -onally pay the debt of another person, (2) a contract ~rsonally pay the debt of a deceased person, (3) a con-

- .:t involving the sale of an interest in real property, a contract made in consideration of marriage, (5) a

-uact that by its terms cannot be performed within - year from the date the agreement was formed, and

a contract for the sale of goods for the price of $500 - :nore.

In most states written evidence required by the stat- -~ of frauds may be an informal memorandum (record) -- must contain all the essential terms of the agree- ::nr, including the names of the parties, the subject -aer of the agreement, the consideration, and any ma- .al terms. It must be signed at least by the party who

..J be held responsible (party being sued). The signa- -e of this person may be handwritten, printed, typed,

portant Legal Terms

-~morandum parol evidence rule

stamped, or signed electronically if all parties agree to use e-signatures.

The parol evidence rule states that when a contract has been reduced to a writing as the final statement of agreement between the parties, it cannot be changed by any oral or written agreement made prior to the writing. Parol evidence may be introduced, however, to explain certain terms or words that are vague or confusing, or to prove that the written contract lacked certain terms orig- inally agreed upon but accidentally left out of or typed incorrectly in the written contract. Parol evidence may also be presented to show that the written contract was illegal, that fraud was involved, or that one person was mentally incompetent.

Oral proof of any changes to the writing after the written contract was made can be presented in court if the party presenting the proof shows that the later agree- ment contained consideration.

A written contract may be changed by a subsequent oral agreement if the written contract was not required to be in writing under the state's statute of frauds. If the contract being modified must be in writing, the modifi- cation must also be in writing.

----- ------------- prenuptial agreement statute of frauds

estions and Problems for Discussion -------------------------------------------- As you read through the chapter, what are four key points that were made about the statute of frauds?

- Does putting a contract in writing guarantee that its terms will not be questioned by the parties at the rime of performance?

- Under what circumstances will the courts not allow parol evidence to be introduced in a lawsuit relating ro the terms of a written contract?

4. Thompson, the owner of a successful floral shop, orally promised Franks, an experienced floral arranger, a bonus of $10,000 and a monthly salary if Franks would work for Thompson for two years. The bonus was to be paid at the end of the two-year period. Franks actually did work for the full term of the oral agreement. Will the statute of frauds prevent Franks from collecting the bonus?

5. The Roc Co. entered into an oral contract to pay Willis and Associates, a certified public accounting firm, $35,000 to perform a complete audit of its accounting records. The report was to cover a period of ten months but due fourteen months from now. Willis agreed orally to perform the audit and to begin within three months. Regardless of the delay in beginning the audit, Willis agreed to meet the fourteen-month deadline for completion. Does the contract fall within the statute of frauds?

6. Madan's son was arrested for driving while intoxicated and had to hire an attorney to defend him in court. The attorney requested to be paid $1,500, one-half in advance and the remainder at the conclusion of the court hearing. Because the son did not have the funds, Madan, in the presence of several other attorneys in the law office, told his son's attorney that he would pay the fee out of his own pocket following the court hearing. Because Madan was a well-to-do businessperson in the community, the attorney agreed to these terms. Following the court hearing in which the son was convicted, Madan refused to pay as agreed, claiming that the attorney had done a poor job representing his son. The attorney sued, but Madan defended, claiming that his agreement to pay was not legally binding on him because it was made orally. Can the attorney collect her fee?

7. Moralle orally promised Hanson that if she agreed to marry him, he would give her a large monthly expense account, a new car every two years, and a vacation trip each year to a destination of her choice. Hanson accepted, and they were married. Moralle, however, did not keep his promises. Hanson sued Moralle on his promises. Will she succeed in this suit?

Cases for Review

1. A landlord entered into a lease (contract) with a tenant. A clause in the lease stated that the tenant would use the premises only for a gasoline station, car wash, and related activities. The landlord sued to terminate the lease, claiming that the tenant had violated an oral agreement, which was made at the time the lease was drawn up, not to add a convenience store to the gas station. Was this oral agreement binding on the tenant? (Snow v. Win, 607 P.2d 678)

2. Whitman Heffernan Rhein & Co., a financial advisory company, sued the Griffin Company to recover compensation for services rendered in negotiating the purchase of a business (Resorts International) from Donald Trump. The agreement between Whitman and Griffin had been made orally, but it should have been in writing under the New York statute of frauds. The trial court decided

8. Lisi, vice president of the National Football Association, made arrangements to hold the association's annual convention at the Marvel Hotel and Convention Center. He met with Brock, the hotel manager, one year before the scheduled event. They orally came to terms on several important points, including room rates, meal prices, and exhibit space charges. Brock was then replaced by a new manager, Talbot. Lisi met with Talbot to review the oral agreement he had made with Brock, intending to draw up a written contract to cover these points. Talbot had no record of this agreement and refused to honor any prior arrangements, claiming instead that because of inflation, prices should be raised 20 percent. Can Lisi legally require Talbot to abide by the original oral agreement he had with Brock?

9. McLean orally agreed to manage several of Orcini aerobics studios in Los Angeles for three years at a salary of $35,000 a year. After six months, McLean decided to quit her job and move to the East Coast. Orcini had to hire a new manager at a salary of $38,000 a year. Orcini claimed that McLean was liable for damages of $3,000 a year for breach of contract until McLean's original contract expired. Is Orcini correct in his claim?

10. Bain lived in Bristol Harbor, a resort area along the Atlantic coast. She entered into a written agreement to sell her daily catch of fresh lobster at an agreed price to a local restaurant owner during the tourist season. At the end of the tourist season, Bain sued the restaurant owner for an additional $2,000. At the trial, she claimed that shortly before signing the contract, the restaurant owner orally agreed to pay her a $2,000 bonus. Can Bain introduce the oral agreement as evidence and collect the $2,000 bonus:

for Griffin, but Whitman appealed. Should the appeals court decide for Whitman? (Whitman Heffernan Rhein & Co., Inc. v. The Griffin Co. , 557 N.Y.S.2d 342)

3. Jones (appellee) signed a printed contract form agreeing to purchase a house from Long. Long alsc signed the form. At the time of signing, Jones also made a down payment as evidence of her good fai--- to go through with the contract. The down payment was to be applied to the purchase price upon completion of the sale of the house. Jones later refused to go through with the contract and ended up suing Long for the return of the down payment. At trial, Jones introduced parol evidence that an understanding existed between Long's ager: and her that she could not buy the house unless sh;: sold her house first, and that her house was not sold. Jones won her case at the trial level. Long

.ippealed on the grounds that it was improper for ~e trial court judge to rule for Jones based on the arol evidence rule regarding the agreement

between Long's agent and Jones. Long claims that -he contract for the sale of the house had been :educed to writing as the final and complete agreement and parol evidence could not be ~troduced to alter that agreement in any way. How would you rule in this case? (Court of Appeals of T"entucky, 319 S.W.2d 292)

- Bratman, an attorney, had a client who was injured .n an automobile accident and was being treated by ::)r. Healy. Bratman orally promised to pay Healy his medical fees out of the proceeds of any award made to his client as the result of a lawsuit based on •he accident if the client did not pay the fees. When -he client was awarded $15,000 for his injuries,

L. l

Bratman refused to pay Healy, invoking the statute of frauds . Can Healy legally hold Bratman liable for his oral promise to pay? (Healy v. Bratman, 409 N .Y.S.2d 72)

5. Malo, an architect, signed a contract with Gilman to design an office building. Nothing was said in the contract about the size, style, or maximum cost of the building, only an estimated cost. When the bids for the building came in, they were so much more than the estimated cost that Gilman decided not to build the building. He also refused to pay Malo for his services. In court, Gilman tried to introduce evidence that there had been conversations about maximum costs. Malo claimed that this was not possible under the parol evidence rule. Is Malo correct? (Malo v. Gilman, Ind. 379 N.E.2d 554)

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