In most states, there are certain types of agreements that must be in writing to be enforceable. Typically, any agreement that is worth more than $500 must be in writing. Also, agreements that take longer than one year are required to be in writing.
First, as this agreement is not in writing, the statute of frauds is a law that says certain kinds of contracts have to be in writing in order to be enforceable in a court of law. The writing also has to be signed by the person, or that person's agent, who is responsible for the contract. Contracts that have to be in writing include:
•Contracts for the sale of land or for any interest in land
•Contracts when one party is agreeing to become personally responsible for another party's debt
•Contracts that cannot be performed within one year
Contracts for the sale of goods are also covered by the statute of frauds. The portion of the original English statute that applies to goods is currently embodied in § 2-201 of the Uniform Commercial Code (UCC), which has been adopted in every state except Louisiana. Section 2-201 provides that a contract for the sale of goods for the price of $500 or more cannot be enforced through a lawsuit unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent. The UCC also includes other statute of frauds provisions for various transactions involving personal property.
Impact on Businesses
What does this mean if you are running a small business? It means that:
•If you place an oral order for more than $500 worth of goods and the seller fails to deliver the goods, you cannot sue the seller because the contract was not in writing and it was not signed by the seller
•If you agree to purchase land, the contract is not in writing and the seller decides to sell the land to someone else, you will not win in a lawsuit against the seller. Although you can file the lawsuit, the seller can win a lawsuit by claiming, in defense, that the contract was in violation of the statute of frauds.
•If you orally agree to perform a service more than a year in advance, you cannot enforce the agreement against the customer. The lawsuit will be barred by the statute of frauds.
Avoiding Application of the Statute
There are ways to avoid the application of the statute of frauds:
•The best way to avoid problems under the statute of frauds is to make sure that your contracts are in writing and signed by the other party to the contract. That way, if the other party fails to perform his agreement, you can pursue a lawsuit for relief.
•If a contract has been partially completed, then the statute of frauds can no longer be used as a defense. For example, if you order goods worth more than $500 without a written contract, pay half of that sum at the time of the order, and the seller fails to deliver the goods, the statute of frauds will not apply and will not prevent you from seeking relief by filing a lawsuit against the other party to the contract.
•The legal doctrine of equitable estoppel bars a party from setting up the statute of frauds as a defense if that party has misrepresented some fact bearing upon the statute's satisfaction, thereby inducing the other party to rely on that fact to his loss. The fact misrepresented may be that the statute is inapplicable or already satisfied; more often it is found in a promise to sign a sufficient written document at a future time.