14 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 14 Writing and Formality Chapter 14 Writing and Formality

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 14 - 1

Chapter 14Writing and Formality

Chapter 14Writing and Formality


Statute of FraudsStatute of Frauds

State statute that requires certain State statute that requires certain types of contracts to be in writing.types of contracts to be in writing.

Intended to ensure that the terms of Intended to ensure that the terms of important contracts are not forgotten, important contracts are not forgotten, misunderstood, or fabricated.misunderstood, or fabricated.


Most states require the following types of contracts to be in writing:

• Contracts involving interests in land

• Contracts that by their own terms cannot possibly be performed within one year

• Collateral contracts where a

person promises to answer for

the debt of another

• Promises made in consideration

of marriage


Contracts required to be in writing (continued):

• Real estate agents’ contracts

• Agents’ contracts where the underlying contract must be in writing

• Promises to write a will

• Contracts to pay debts barred by the statute of limitations or discharged in bankruptcy


Contracts required to be in writing (continued):

• Contracts to pay compensation for services rendered in negotiating the purchase of a business

• Contracts for the sale of goods for more than $500

• Finders fee contracts


Contracts Involving Interests in Land

• Any contract that transfers an ownership interest in real property must be in writing under the Statute of Frauds to be enforceable.– Real Property– Fixtures


Contracts Involving Interests in Land (continued)

Real Property• Land• Buildings• Trees, Plants,

Crops• Soil• Minerals• Timber• Other things

that are permanently affixed to the land

Real Property• Land• Buildings• Trees, Plants,

Crops• Soil• Minerals• Timber• Other things

that are permanently affixed to the land

Fixtures• Personal

property that is permanently affixed to the real property– e.g., built-in

cabinets in a house

Fixtures• Personal

property that is permanently affixed to the real property– e.g., built-in

cabinets in a house



• Other contracts that transfer an ownership interest in land must be in writing under the Statute of Frauds.

• These interests include:– Mortgages– Leases– Life Estates– Easements



• Part Performance ExceptionAn equitable doctrine that allows the court to order an oral contract for the sale of land or transfer of another interest in real property to be specifically performed if it has been partially performed and performance is necessary to avoid injustice.


One Year Rule• An executory contract that

cannot be performed by its own terms within one year of its formation must be in writing.

• Intended to prevent disputes about contract terms that may otherwise occur toward the end of a long-term contract.

• Contract may be oral if the performance of the contract is possible within the one year period.


One Year Rule (continued)

• Employment contracts are often for periods longer than one year.

• These contracts should be in writing to be enforceable.


Collateral Promises• Collateral Contract –

occurs where one person agrees to answer for the debts or duties of another person.– Required to be in writing

under the Statute of Frauds.

• Guaranty Contract – the contract between the guarantor and the original creditor.


Original and Guaranty Contracts

Contract No. 1Contract No. 1

Contract No. 2Contract No. 2

Original ContractOriginal Contract

Guaranty ContractGuaranty Contract

Guarantor agrees to Guarantor agrees to pay the debt if the pay the debt if the debtor fails to pay debtor fails to pay the creditor.the creditor.

DebtorDebtor

GuarantoGuarantorr

CreditorCreditor


Collateral Promises (continued)

The Main Purpose Exception

• If the main purpose of a transaction and an oral contract is to provide pecuniary benefit to the guarantor,– The collateral contract is

treated like an original contract, and

– Does not have to be in writing to be enforced.


Contracts for the Sale of Goods• Section 201 of the

Uniform Commercial Code (UCC) is the basic Statute of Frauds provision for sales contracts.

• Contracts for the sale of goods costing $500 or more must be in writing to be enforceable.


Contracts for the Sale of Goods (continued)

Equal Dignity Rule

• A rule that states that agents’ contracts to sell property covered by the Statute of Frauds must be in writing to be enforceable.


Contracts for the Sale of Goods (continued)

Electronic Signature in Global and National Commerce Act (2000)

• Federal statute designed to place the world of electronic commerce on a par with the world of paper contracts in the U.S.

• Recognizes electronic contracts as meeting the writing requirement of the Statute of Frauds for most contracts.


Promissory Estoppel• An equitable doctrine that

permits enforcement of oral contracts that should have been in writing.

• Where this doctrine applies, the promisor is estopped (prevented) from raising the Statute of Frauds as a defense to the enforcement of the oral contract.


Promissory Estoppel (continued)

The oral promise is enforceable against the promisor if three conditions are met:

1. The promise induces action or forbearance of action by another.

2. The reliance on the oral promise was foreseeable.

3. Injustice can be avoided only by enforcing the oral promise.


Sufficiency of the Writing

Formality of the Formality of the WritingWriting

Required SignatureRequired Signature

Integration of Integration of Several WritingsSeveral Writings


Formality of the Writing• Generally, the law only

requires a writing containing the essential terms of the parties’ agreement.

• Any writing can be enforceable under this rule.

• A written contract does not have to be drafted by a lawyer or formally typed to be legally binding.


Required Signature• The Statute of Frauds and

the UCC require the written contract, whatever its form, to be signed by the party against whom enforcement is sought.

• The signature of the person who is enforcing the contract is not necessary.


Required Signature (continued)

Electronic Signature in Global and National Commerce Act (2000)

• Recognizes an electronic signature, or E-signature.

• The act gives an E-signature the same force and effect as a pen-inscribed signature on paper.


Integration of Several Writings• The combination of several

writings to form a single contract.

• The entire writing does not have to appear in one document to be an enforceable contract.– Incorporation by reference– Implied integration


Interpreting Contract Words and TermsIf the parties have not defined the words and terms of a contract, the courts apply the following standards of interpretation:

• Ordinary words are given their usual meaning according to the dictionary.

• Technical words are given their technical meaning unless a different meaning is clearly intended.


Interpreting Contract Words and Terms (continued)

• Specific terms are presumed to qualify general terms.

• Where a preprinted form contract is used,– Typed words prevail over

preprinted words.– Handwritten words prevail

over both preprinted and typed words.


Interpreting Contract Words and Terms (continued)

• If both parties are members of the same trade or profession, words will be given their meaning as used in the trade.

• Words will be interpreted to promote the principal object of the contract.

• If there is ambiguity in a contract, the ambiguity will be resolved against the party who drafted the contract.


The Parol Evidence Rule• Parol Evidence – Any oral

or written words outside the four corners of the written contract.

• Parol Evidence Rule– Originally developed by courts

as part of the common law of contracts.

– The UCC has adopted the parol evidence rule as part of the law of sales contracts.


The Parol Evidence Rule (continued)

The rule states that if a written contract is a complete and final statement of the parties’ agreement, any prior or contemporaneous oral or written statements that alter, contradict, or are in addition to the terms of the written contract are inadmissible in court regarding a dispute over the contract.


Exceptions to the Parol Evidence RuleParol evidence may be admitted in court if it:

• Shows that a contract is void or voidable.– e.g., evidence that the

contract was induced by fraud, misrepresentation, duress, undue influence, or mistake.

• Explains ambiguous language.


Exceptions to the Parol Evidence Rule (continued)

• Concerns a prior course of dealing or course of performance between the parties or a usage of trade.

• Fills in the gaps in the contract.

• Corrects an obvious clerical or typographical error.– The court can reform the

contract to reflect the correction.


The Parol Evidence Rule (continued)

Merger, or Integration Clause

• A clause in a contract that stipulates that it is a complete integration and the exclusive expression of the parties’ agreement.

• Parol evidence may not be introduced to explain, alter, contradict, or add to the terms of the contract.


Writing Requirements for International ContractsUnited Nations Convention on Contracts for the International Sale of Goods (CISG)

• Article 11 of the Convention states:– “A contract of sale need not be

concluded in or evidenced by writing an is not subject to any other requirement as to form.”

– “It may be by any means, including witnesses.”


Writing Requirements for International Contracts (continued)

• Article 96, however, authorizes a contracting nation that requires written sales contracts,– To stipulate at the time of

ratification that Article 11 (and some other provisions of the Convention) does not apply if any party operates a business in that nation.

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14 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 14 Writing and Formality Chapter 14 Writing and Formality