Statute of Frauds- California Contract Rules
What is the Statute of Frauds?
The statute of frauds requires certain contracts to be signed and contain the major elements of the agreement.
The ability to enter into a binding agreement is a cherished right of most people and perhaps the most central part of business life.
But how do you know when to have a written agreement and/or an agreement that needs to be signed?
The Statute of Frauds requires that certain types of contracts must be in writing to be enforceable. The purpose of the Statute of Frauds is to avoid the likely turmoil and conflict that can arise when parties fight over what was said and what was promised when creating the contract.
Put simply, if the contract is going to be in effect for a long amount of time, or is of major significance, then the California Courts will require that the contract be in writing.
What is the Statute of Frauds and When Does a Contract need to be Signed?
The “Statute of Frauds” requires that certain types of contracts be written and signed by all parties in order to be considered binding and enforceable. Here are some examples of contracts that the Courts have deemed most important and most susceptible to fraud, and have determined that Statute of Frauds is applicable :
- any agreement that take more than a year to complete;
- real estate;
- sale of goods worth at least $500,
- and repaying the debts of others.
Again, the purpose of the Statue of Fraud is to reduce the likelihood of fraud from occurring. Because many people would prefer to make an oral agreement, and avoid the cost of hiring an attorney to draft a well written contract, it would be incredibly hard to provide sufficient proof of what the exact terms agreed to by both parties. If one party felt that they have been wronged under the agreement, it would be difficult to prove in court.
The Statue of Frauds requires that written agreements include the signatures of both parties as well as details about the exact terms of agreement to which both parties may be held in a dispute. It is not necessary for the contract itself to be in writing, but there must be some note in writing signed by the parties in the contract, in order for the agreement to be valid. In addition, the terms must be definite and not overly ambiguous.
The following types of contracts are considered invalid unless the contract itself, or a “note or memorandum thereof,” is in written form and signed by the party to be charged. [CA Commercial Code Sec. 1624]
- Any agreement such that its terms may not be completed within a year.
- A promise to pay the debt of another.
- An agreement for the lease of a property for a period exceeding one year in length, or for the sale of real property. The party to be charged must sign the written agreement.
- An agreement establishing that an agent or broker has the authority to purchase, sell, or lease real estate for a period exceeding one year.
- An agreement that will not be performed during the lifetime of the promisor.
- An agreement by a purchaser of real property to establish indebtedness by paying a mortgage.
- An agreement to loan money worth more than $100,000 made by a person whose business is to lend.
Commercial Transactions and the Statute of Frauds:
The Courts requirements are much more relaxed when dealing with commercial contracts. Their logic is that merchants have more experience in day to day business transactions and therefore can get away with less protection. In addition, the requirement of a signed writing my cause an undue burden on getting business done in a timely fashion for merchants.
Sale of Goods
“A contract for the sale of goods for the price of five hundred dollars ($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” [CA Commercial Code Sec. 2201 (1)]. If a written confirmation of the contract is received, between merchants, by the party to be charged within a reasonable amount of time, and no written notice of objection is given within 10 days thereafter, the contract is enforceable [CA Commercial Code Sec. 2201 (2)].
Valid Agreement under the Statue of Frauds:
In order for an agreement to be considered valid and enforceable under the Statute of Frauds, the agreement must:
|Requirements for a Valid Contract under the Statute of Frauds|
|Element 1||Must be in written form.|
|Element 2||Easily identify the subject matter of the contract.|
|Element 3||Contain the essential terms of the agreement.|
|Element 4||Be signed by all parties.|
Exceptions to the Statute of Frauds
The following special circumstances serve as exceptions to the Statute of Frauds and are considered enforceable agreements that would otherwise be considered invalid under the rules of the statute.
- If custom goods were manufactured for a specific order, the agreement would be enforceable even if the order was made on oral terms.
- When there exists a written confirmation of agreement between two merchants, i.e. an invoice identifying the goods, quantity, and price of an order.
- If the party being charged admits there was a valid oral agreement, the agreement can still be enforceable.
If one party has already carried out a significant portion of their duties as outlined by an oral agreement before the other party challenges the validity of the oral agreement, they can still be entitled to the amount they are due for that portion of the goods.
If an oral agreement is made between two parties and one party begins to incur costs necessary to fulfill their part of the agreement, the other party cannot claim that this agreement is unenforceable under the Statute of Frauds because they were clearly aware of the agreement and allowed the other party to incur costs. Promissory Estoppel requires that a clear offer was made, there was an expectation of reliance on the offer, the party receiving the offer could reasonably rely on the offer, and there was a reliance on the offer that led to a significant loss for the receiving party.
Miscellaneous Contracts That Always Require a Writing:
“A mortgage can be created, renewed, or extended, only by writing, executed with the formalities required in the case of a grant of real property” [CA Civil Code 2922]
“A premarital agreement shall be in writing and signed by both parties. It is enforceable without consideration” [CA Family Code 1611].