Rinke Noonan Attorneys at Law

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Established 1967 - St. Cloud, Minnesota
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Contracts

Writing

When must a contract be written. When a contract is not in writing, there is opportunity for confusion and also for mischief. If a contract is not in writing, we must look to the parties own testimony, or to their course of performance, to prove the terms of the contract. If the parties disagree, the litigation becomes a swearing contest. Why not require all contracts to be in writing, thereby reducing opportunities for dispute. The simple answer is that people like to conduct some transactions without troubling themselves with written signed documents. When you buy a television for cash, you don't sign a contract. The salesperson hands you a box, you hand her a check, and the contract is consummated without any signatures. When you open the box, you will find some warranty documents which the manufacturer intends to make part of the contract. But you did not sign them, and neither did the manufacturer. Whether the warranty documents form part of the contract, we leave for another panel.

You can place an order for merchandise over the telephone. That's a contract. If you don't pay, you can be sued for the price. You can form a partnership with (or even without) a writing. You can hire an employee orally, and if you don't pay, the employee can sue for wages. Many contracts, then, need not be written.

Statute of Frauds. Since the 17th Century, English and American law has sought to define which contracts require a writing in one or more "Statute of Frauds." The Statute of frauds derives its name from the desire to prevent fraud. They should more appropriately take the name "Statute of Written Contracts." Minnesota, like many other states has a general umbrella statute of frauds, that traces its ancestry to the old 17th Century Statute of Frauds. But statutes of frauds lurk in other places as well. The Uniform Commercial Code contains statutes of frauds--discussed below--regarding sales (Article 1 and 2), Securities and Security Agreements (Article 9). Motor Vehicle Statutes may contain statutes requiring written transfer documents, which may, or may not be construed to be a statute of frauds.

The statute of frauds has exceptions. If a contract has been fully performed (or at times partially performed), it may nonetheless be enforced according to rather complex rules. Here are some of the traditional provisions of statutes of frauds existing in most states. :

  • Transfer of Real Estate. Contracts to transfer real estate must be in writing. Why is this?? Traditionally, land--the family estate--was so centrally important to family livelihood and family status that special protections were deemed needed to protect that estate. Also, without a written record of real estate transfer, county title records could not be maintained.

  • Guaranty. A promise to pay the debt of another, a guaranty, must be in writing. Why is this?? Since ordinarily the guarantor gets nothing for himself (other than the satisfaction of seeing someone else get credit), extra protections make sense. A guarantor, the saying goes is "an idiot with a fountain pen." When a debtor fails to pay, the creditor feels wronged, and the temptation is to look around for a guarantor. Experience tells us that requiring a writing makes sense.

  • One year contract. A contract that may not be performed within one year of making must be in writing. Be careful here. The fact that a contract could possibly last more than a year does not violate the statute of frauds. If ACo orally promises to hire Imelda for two years at $2000 per month, Imelda cannot force ACo to keep her employed for two years. Imelda can, of course, collect the wages she has earned through termination. But she cannot enforce the oral two-year hire provision. Employment contracts have, as well, employment specific aspects that we'll treat elsewhere.

  • Other writing requirements: Here are some other requirements: ante-nuptual agreements (agreements regarding property division prior to marriage); Real Estate Broker agreements; promises to pay debts which have already been discharged in bankruptcy. Minnesota has a written requirement which applies to "credit agreements", that is agreements which promise to extend credit to another MSA section 513.33). Article 2 of the Uniform Commercial Code has a statute of frauds for sales of goods in excess of $500. Article 9 has a provision requiring writings to enforce a security agreement. Arbitration agreements must be written. In Minnesota, agreements to pay interest in excess of the implied statutory rate must also be in writing.

What must the agreement contain. What if the parties sign an agreement which contains some of the terms, but not all. Different statutes contain differing minimum requirements. A signature of the party charged is always required. Often both parties' signature is required. Sometimes the document must contain all of the material terms of the contract. Sometimes one must merely include sufficient information to show the nature and magnitude of the intended contract. In short, consult a lawyer for the specific minimum requirements.

Performance and Reliance. Suppose Imelda orally agrees to buy John's land for $50,000 intending to construct Imelda's Restaurant on the land. If she pays him the $50,000, can John now refuse to convey the land because the agreement was not in writing? Suppose hasn't paid him yet, but signs a contract with a builder? Suppose the builder actually begins construction. These are examples of cases where Imelda might claim that she falls within an exception (performance, part performance, estoppel) to the statute of frauds. Different states have slightly different approaches to issues of this kind. One reason behind these exceptions is that if performance has progressed to the point that it is crystal clear that the parties actually had a contract, why then should the writing requirement be enforced. Another is that circumstances arise where a party has given up something of value in reliance on the promise which cannot now be recovered.

Uniform Commercial Code: The Uniform Commercial Code applies primarily to personal property, e.g. property which isn't real estate. Section 1-206 of Minnesota's version of the Uniform Commercial Code contains the following statute of frauds applicable to personal property not otherwise covered elsewhere in the Code. Most states have similar provisions:

  • (1) Except in the cases described in subsection (2) of this section a contract for the sale of personal property is not enforceable by way of action or defense beyond $5,000 in amount or value of remedy unless there is some writing which indicates that a contract for sale has been made between the parties at a defined or stated price, reasonably identifies the subject matter, and is signed by the party against whom enforcement is sought or by that party's authorized agent.

The sale of goods, securities, and security agreements is explicitly exempted from this provision, because they are subject to other specific code provisions.

Goods: Article 2 of Minnesota's version of the Uniform Commercial Code contains a $500 statute of frauds for the sale of goods. It begins by stating that a contract for sale of goods of $500 or more needs some minimal amount of paper documentation.

  • (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense 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 the party's authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

The writing does not have to be perfect. It can omit many important terms of the agreement. It doesn't need both parties' signature, just the person who is denying the agreement. Moreover, a lesser standard applies to contracts between merchants. The idea behind this lesser standard is that merchants need more flexibility. Merchants are companies who deal in goods of the kind involved. Office Max is a merchant in copier paper, for example. A merchant cannot stay in business if it gains a reputation amongst suppliers for dishonoring orders. So the standard is lowered to allow greater flexibility:

  • (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

In other words, if Office Max orders a 500 cases of copying paper from Champion International on the telephone, Champion can bind Office Max to the contract by sending a written confirmation of the sale. The confirmation does not satisfy the section (1) statute of frauds, because Office Max hasn't signed a document. But the confirmation binds Office Max, because Office Max is a paper seller, unless within ten days Office Max sends a letter back saying "no way, we didn't place that order!"

But wait, here comes another exception. The Section continues:

  • (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable
    • (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or
    • (b) if the party against whom enforcement is sought admits in pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
    • (c) with respect to goods for which payment has been made and accepted or which have been received and accepted
  • In other words, if Office Max requests Champion to make special paper with an Office Max watermark on it, Office Max cannot repudiate its oral order after Champion begins the manufacturing process. And, if the goods have been paid for, or accepted, then the contract is enforceable.