Contracts – Fall 2010 Professor Kundawala Statute of Frauds Introduction and Overview • Not all agreements have to be reflected on paper. • “Statute of Frauds” refers generally to each states’ particular statute or common law relating to the requirement that certain contracts must be in writing in order to be enforceable. • History of Statute of Frauds dates back to 1677 England “An Act for Prevention of Frauds and Perjuries” passed by English Parliament. What is the general rule? • A contract that is within the scope of the Statute of Frauds may not be enforced unless a memorandum of it is written and signed by the party seeking to be charged. • Who is the party seeking to be charged? Usually, the defendant. The party who has been sued for breach of contract. The party against whom enforcement is sought. • This rule applies to contract modifications as well. Remember, a modification is a separate contract. General Purpose of Statute of Frauds • Prevent injury from fraudulent conduct – Perjured or unreliable oral testimony • Facilitate proof of the fact and terms of certain types of agreements • Good public policy to require writing of certain types of contracts – Reduces chance of future litigation – Gives parties a second chance to review the terms before they become final What types of contracts come within the scope of the Statute? • Generally, there are 6 types of agreements that come “within” the scope/application of the Statute of Frauds: 1. contracts for the sale of land or an interest in land 2. contracts that cannot be performed within a year (not applied rigidly, as demonstrated by McIntosh v. Murphy, p. 880) 3. contracts for the sale of goods in excess of $500 (see UCC 2- 201; c.f. Revised UCC raises amount to $5,000 – not yet adopted) 4. surety agreements (contracts to answer for the debt or obligation of another; i.e., a co-signer, guarantor, etc.) 5. contracts of executors or administrators to answer for the duty of their decedents 6. contracts in consideration of marriage (pre-nups, etc., not a promise to marry/engagement) Assuming the Statute applies, is the contract reflected in a written memorandum? • What is a written memorandum? No particular form needed – just something that reflects the agreement and is signed by the party to be charged. A writing on a tangible surface (i.e., piece of paper). E- mail? Under the UCC and some common law jurisdictions yes. An e-mail can be reduced to tangible form through a printer. • Written memorandum can be made up of several writings. How many writings were involved in Crabtree v. Elizabeth Arden Sales Corp. (p. 875)? • Writings could be made at different times. • Need not even be directed to the other party; i.e., internal memo. • Types of writings that have been held to satisfy the Statute: a letter, an e-mail, a telegram, a receipt, an invoice, a check, a price list, meeting minutes, another contract, a will, etc. • May be made either before or after contract formation. Before written offer. After letter acknowledging deal. What must the memorandum contain to be sufficient to satisfy the Statute? 1. Identify the parties to the contract and show that a contract has been made by them 2. Indicate the nature of the contract and its subject matter 3. State the essential terms of the promises to be performed under the contract Sufficient? - Evidentiary bar is set low. You just need enough to show existence of a contract. Writing doesn’t have to contain all terms. Remember Texaco v. Pennzoil (p. 42)? Did that memorandum contain all terms for the multi-billion dollar deal at issue? Missing or unclear terms can be supplied by parol evidence. Remember parol evidence can be oral or written. - Compliance with the Statute is a completely different issue from adequate proof of the contract for the purpose of relief. Memorandum must be signed by party to be charged. • This requirement is not universally applied by the courts. • Modern test whether the other party reasonably believes that the asserted signer’s intention is to authenticate the writing as the asserted signer’s own. • What kind of signature will work? Regular signature, initials, symbol, an “X”, e-mail/digital signature, company letterhead, etc. • Signature can be at the end of the writing (traditional) or in the case of letterhead, at the top of the writing. • Need not be signed by both parties. • Signature can be made by party to be charged or his/her agent (i.e., authorized employee) or representative (i.e., an attorney representing the party). • Exception UCC 2-201(2) a signed writing is not required in sale of goods among merchants. Unsigned confirmatory memorandum sent afterwards is okay, unless recipient objects within 10 days. Memorandum Several Writings • “The memorandum exacted by the statute … may be pieced together out of separate writings, connected with one another either expressly or by the internal evidence of subject matter and occasion.” Judge Cardozo in Marks v. Cowdin, 123 N.E. 139, 141 (N.Y. 1919); see bottom of text at p. 876. Crabtree v. Elizabeth Arden, p. 875 • Parties and Procedural History: Crabtree, employee- plaintiff. Elizabeth Arden, employer-defendant. Trial court awarded Crabtree damages in amount of $14,000 and appellate division affirmed. • Relevant facts? Crabtree’s employment agreement was evidenced by two payroll cards (signed by employer after employment began) and employer’s memorandum of her oral offer, which recorded all essential terms but was unsigned. Crabtree left his employment before his two years was up because they didn’t pay him the correct amount and he sued the employer. Employer claimed that there was no agreement and even if there was an agreement, the SOF bars its enforcement. Why would SOF bar enforcement? Crabtree v. Elizabeth Arden, p. 875 • Issue? Whether the memorandum requirement of the SOF is satisfied by multiple documents. • Holding? Yes. SOF doesn’t require the memorandum to be in one document. • Law/Analysis – Who prepared the writings at issue here? Employer did. “Where each of the separate writings has been subscribed by the party to be charged [here, the employer+, little, if any difficulty is encountered.” Top of p. 877. – Did the signed writings make reference to the employer’s memorandum? Crabtree v. Elizabeth Arden, p. 875 • Law/Analysis, cont’d – Here, the employment agreement was evidenced by two payroll cards (signed by employer after employment commenced and contained all essential terms except for contract duration). – The employment agreement was also evidenced by an unsigned office memorandum prepared by employer’s agent. That memorandum contained language which suggested the contract’s duration was two years. The memorandum didn’t reference the other writings (payroll cards). – Can the court consider the office memorandum? Crabtree v. Elizabeth Arden, p. 875 • Law/Analysis, cont’d – NY Court of Appeals rejected the view of some jurisdictions that there must be “a reference, of varying degrees of specificity, in the signed writing to that unsigned.” This case was a trend setter and now reflects the modern trend. – Court held that it’s enough that “a sufficient connection between the papers is established simply by a reference in them to the same subject matter or transaction … and oral testimony is admitted to show the connection between the documents and to establish the acquiescence of the party to be charged, to the contents of the one unsigned.” Less rigidity in application. – In light of all of the circumstances, including the identity of the terms contained in the writing, “it is apparent … that all three *writings+ refer on their face to the same transaction” and that oral evidence was admissible to explain a reference in one of the payroll cards to ‘contractual arrangements’ with the employer.” – SOF was therefore satisfied. AFFIRMED. – Risks of subject matter or transaction test? Occasional enforcement of an agreement that was in fact never made. Does the risk outweigh benefit? This court doesn’t think so, nor do many others that follow. What benefit? Enforcement of legitimate agreements and the resulting stability. Exceptions to Application of SOF: If SOF applies but is not complied with, is there any way to enforce the agreement? 1. Judicial Admission Exception 2. Estoppel and Promissory Estoppel 3. Part Performance Exception Judicial Admission Exception – In Crabtree, the employer denied the existence of any agreement to employ Crabtree for two years. What if, during the litigation, the employer admitted that such an agreement had been made? Would that affect employer’s SOF defense? – Judicial Admission Exception a party that admits the existence of the contract in pleadings or sworn testimony (deposition or court testimony) should not be allowed to raise the SOF as a defense. – UCC supports this exception (see UCC 2-201(3)(b)). Common law acceptance of the judicial admission exception varies state by state. Regardless, try to get your opponent to admit existence of contract in a deposition or cross examination at trial. Estoppel and Promissory Estoppel Exception • Equitable estoppel may be used to protect reliance on a false factual assertion; i.e., if one of the parties says that he has made a signed written note of the contract (when he really hasn’t) and the other party reasonably relies on this assertion. • Promissory estoppel comes into play when there is no false factual assertion inducing reliance, but one of the parties justifiably relies on the oral contract as a promise and suffers some detriment as a result. Part Performance Exception • Part performance after the making of an oral contract provides some reliable evidence that a contract was in fact made. Thus, some courts allow the SOF to be circumvented if there is part performance of an oral contract. • Courts do not follow this exception universally, mileage varies on a state by state basis. • Courts require very clear showing that conduct demonstrates the existence of a contract. In addition, some courts require some degree of harm/prejudice to have been suffered in reliance on the agreement by the party seeking enforcement. • UCC provides for two exceptions. See UCC 2-201(3): (1) Goods specially manufactured for the buyer (can’t be easily sold to anyone else) and (2) the goods have been paid for OR the goods have been delivered and accepted. McIntosh v. Murphy, p. 880 • Parties and Procedural History: McIntosh, employee- plaintiff. Murphy, employer-defendant. Trial court found for plaintiff and awarded damages in the amount of $12,103.40. With respect to whether the contract was performable within one year (whether the contract was within scope of SOF), the trial court said to the defendant that “*he+ make*s+ the law look ridiculous, because one day is Sunday and the man does not work on Sunday; the other day is Saturday; he is up in Fresno. He can’t work down there… I don’t want to make the law look ridiculous…” Fn. 1, p. 881. McIntosh v. Murphy, p. 880 Ridiculous? This is ridiculous. Is asserting the one year requirement of the SOF really ridiculous? McIntosh v. Murphy, p. 880 • Relevant Facts: McIntosh entered into an oral employment contract with Murphy whereby McIntosh was to provide managerial services for Murphy’s Chevy-Olds dealership in Honolulu. In reliance on this oral agreement, McIntosh moved from Los Angeles to Honolulu (sold possessions, leased an apartment, lost other employment opportunities, etc.). After only 2 ½ months, Murphy fired McIntosh on the grounds that McIntosh was unable to close deals and couldn’t train the salesmen. McIntosh sued for breach of contract. McIntosh v. Murphy, p. 880 • Issue: Whether the plaintiff can maintain an action on the alleged oral contract in light of the prohibition of the SOF making unenforceable an oral contract that cannot be performed in one year’s time. • Holding: Yes. McIntosh v. Murphy, p. 880 • Law/Analysis – What is the general rule regarding contracts not performable in one year’s time? • General rule a contract not to be performed within one year from its making is unenforceable if not in writing. – Did this court say the contract was performable in one year’s time? • No. The court side-stepped the issue by basing its decision on the doctrine of equitable estoppel. McIntosh v. Murphy, p. 880 • Law/Analysis, cont’d – Does this court believe in a mechanical application of the SOF? • No. A mechanical and rigid application of the SOF is no longer justified and can in fact promote fraud. (Remember, the SOF was designed to prevent fraud.) – What does this court say about what we can do? • Judicial circumvention of SOF through court’s equity powers. • Hawaii has recognized equitable doctrines (part performance) by enforcing an oral contract to convey real estate. Other courts have also enforced contracts on equitable grounds, despite SOF. McIntosh v. Murphy, p. 880 • Law/Analysis, cont’d – Monarco v. Lo Greco California Supreme Court decision supporting equitable enforcement of contracts despite application of SOF. – Court finds the Restatement (section 217A, now section 139) very persuasive as well. – What does the Restatement say? McIntosh v. Murphy, p. 880 • Law/Analysis, cont’d – Restatement, section 139, states: • (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce action or forbearance is enforceable notwithstanding the SOF if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires. • (2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: (a) the availability and adequacy of other remedies (e.g., cancellation and restitution); (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; (c) the extent to which the action or forbearance corroborates evidence of the making and terms of a promise, or the making and terms are otherwise established by clear and convincing evidence; (d) the reasonableness of the action or forbearance; (e) the extent to which the action or forbearance was foreseeable by the promisor. McIntosh v. Murphy, p. 880 • Law/Analysis, cont’d – Court adopts Restatement approach. – Under this approach… • It is clear that McIntosh’s move to Honolulu from LA was foreseeable by Murphy. • Injustice can only be avoided by the enforcement of the contract and the granting of money damages. • No other remedy is adequate McIntosh is jobless and hungry in Honolulu. • Also clear that there was an agreement of some kind because McIntosh performed for 2 ½ months and was paid for his services. [Restatement sec. 139(c) – the terms are established by clear and convincing evidence] • Dissent? – Circumvention of the Statute of Frauds is not for the courts to do. Judiciary shouldn’t legislate from the bench. Lawrence v. Anderson, p. 899 • Parties and Procedural History: Lawrence, physician- plaintiff. John Anderson’s estate, defendant. Subsequently, Anderson’s daughter was added as a defendant. Trial court directed a verdict for defendant. Physician appealed. • Facts: Dr. Lawrence answered an emergency call to assist John Anderson after Anderson suffered severe injuries from a car accident. Dr. performed services at the scene and at the hospital, but nevertheless, Anderson died a few days after the accident. Dr. sent a bill to Anderson’s estate, but the bill was not paid. Lawrence v. Anderson, p. 899 • Facts, cont’d – Allegation that daughter of decedent John Anderson promised to pay for services. – Charles Brown, witness, corroborated this with his trial testimony. He testified that the daughter said, “I want my father taken care of, and give him the best care you can give him, and what the charges are … I will pay for it.” – Suit was finally brought after bill went unpaid for over a year. Lawrence v. Anderson, p. 899 • Issue: Whether the daughter’s statement created a primary or secondary obligation to pay the doctor for his services. Why does this matter? • The agreement was not in writing, so we have to determine if the SOF applies. If secondary, it is a surety obligation. Surety obligations are subject to the SOF, which means you need a writing. If it is primary, the SOF is not applicable and no writing is necessary. • Primary/Original I will pay for it. • Secondary/Collateral I will pay for it, if my father doesn’t. Lawrence v. Anderson, p. 899 • Holding: Daughter’s statement created a primary obligation, but physician elected to treat Anderson on his own credit as evidenced by the fact that he sued Anderson’s estate first rather than the daughter. So the promise was collateral, not primary. As collateral, a writing is required under the SOF. • Law/Analysis: Extension of credit to the third party involved (Anderson) requires a written promise on the part of the promisor. Factual circumstances indicate that physician elected to treat Anderson as the primary debtor. Since credit was extended to Anderson, the daughter’s promise to pay is collateral; i.e., the physician treated the daughter’s statement of “I will pay for it” as “I will pay for it if my father doesn’t.” No writing, no enforcement. • Judgment of the trial court AFFIRMED. • If doctor had sued the daughter first, there may have been a different result. Shaughnessy v. Eidsmo, p. 908 • Is the oral agreement in this case subject to the Statute? – Yes, it’s an oral lease agreement with an option to purchase the land. It is an agreement for the sale of land or an interest in land. • Is there a writing or memorandum evidencing the oral agreement? – No writing or memorandum. Result? Agreement would not be enforceable due to the SOF. • Did the buyers partially perform the oral agreement? – Yes, they moved in, paid rent, paid on purchase of a stove and further, they exercised their option to purchase the property. Shaughnessy v. Eidsmo, p. 908 • Was there an oral contract to purchase the land? – Yes, as soon as the buyers exercised their option, an oral contract to purchase the land “came into being.” • Is there a way around the SOF? – Yes, the doctrine of part performance creates an exception. But in the Brown case, this same court adopted the fraud theory which meant that plaintiff had to show reliance AND alteration of position such that plaintiff would incur an unjust and unreasonable injury. • Restatement view taking possession and making part payment, when done in reliance on an oral contract, are sufficient to remove the contract from the scope of SOF. Shaughnessy v. Eidsmo, p. 908 • Court adopts the Restatement principle and overrules prior precedents which require plaintiff to show reliance + injury. • Rule taking possession, coupled with making part payment, in reliance upon and with unequivocal reference to the buyer- seller relationship, without proof of irreparable injury through fraud, is sufficient to avoid the SOF. • Dean Pound’s academic view fraud and part performance are two independent grounds to avoid application of SOF and as such, the two shouldn’t be commingled by the courts. • Prof. Williston and the Restatement support Dean Pound’s view. • Judgment of the trial court affirmed. Buyers get a vendee’s (buyer’s) interest in the property for $5,000 as a purchase price. Effect of Non-Compliance with SOF • Some jurisdictions call a non-compliant contract invalid or void, of no force and effect. • Other jurisdictions call a non-compliant contract unenforceable. • This is really a distinction without a difference. • If a contract is subject to the SOF, and the SOF is not complied with (or if not complied with, no exceptions apply), the contract will not be enforced. • Practice tip: Pleading SOF must be done affirmatively in defendant’s answer; i.e., as an affirmative defense rather than through a general denial of plaintiff’s allegations.