Chapter 14
Writing and Formality
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Statute of Frauds
State statute that requires certain types
of contracts to be in writing.
Intended to ensure that the terms of
important contracts are not forgotten,
misunderstood, or fabricated.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
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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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
Fixtures
• Personal
property that is
permanently
affixed to the
real property
– e.g., built-in
cabinets in a
house
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Contracts Involving Interests in Land
(continued)
• 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Contracts Involving Interests in Land
(continued)
• Part Performance Exception
An 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice
Hall, Business Law, sixth edition,
R. Cheeseman
performance
of Henry
the
contract
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One Year Rule (continued)
• Employment contracts are
often for periods longer than
one year.
• These contracts should be in
writing to be enforceable.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
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Original and Guaranty Contracts
Debtor
Guarantor
Contract No. 1
Original Contract
Contract No. 2
Creditor
Guarantor agrees to
pay the debt if the
debtor fails to pay
the creditor.
Guaranty Contract
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
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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
© 2007 Prentice
Hall, Businessof
Law, Frauds
sixth edition, Henry
R. Cheeseman
Statute
for
most
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
promise.
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Sufficiency of the Writing
Formality of the
Writing
Required Signature
Integration of
Several Writings
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Interpreting Contract Words and Terms
If 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
© 2007 Prentice
Hall, Business
Law, sixth edition, Henry R. Cheeseman
clearly
intended.
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
© 2007 Prentice
Hall, Business
Law, sixth edition,
R. Cheeseman
who
drafted
theHenry
contract.
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
14 - 29
Exceptions to the Parol Evidence
Rule
Parol 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Writing Requirements for International
Contracts
United 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.”
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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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