8.1 General Perspectives on the Statute of Frauds

Introduction to the Statute of Frauds

In prior chapters, we have focused on the question of whether the parties created a valid contract and have examined the requirements of agreement through offer and acceptance, consideration, capacity and legality. Assuming that these requirements have been met, we now turn to the form and meaning of the contract itself. This Chapter answers two important questions:

1. Does the contract have to be in a written form?
2. If the contract is in written form and there is a dispute, how do we know what the contract means?

Generally, a contract need not be in writing to be enforceable. However, over time and due to concerns about fraudulent contracting, several statutes were enacted that have the impact of requiring certain contracts to be written in order to be enforceable.

Historical Perspective

Historically, an oral agreement to pay a high-fashion model $2 million to pose for photographs is as binding as if the language of the deal were printed on parchment and signed in the presence of twenty witnesses. For three centuries, however, a large exception grew up around what came to be known as the Statute of Frauds. The first Statute of Frauds was enacted in England in 1677 under the formal name “An Act for the Prevention of Frauds and Perjuries.” The English statute’s two sections dealing with contracts read as follows:

[Sect. 4]…no action shall be brought

• whereby to charge any executor or administrator upon any special promise, to answer damages out of his own estate;
• or whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person;
• or to charge any person upon any agreement made upon consideration of marriage;
• or upon any contract or sale of lands, tenements or hereditaments, or any interest in or concerning them;
• or upon any agreement that is not to be performed within the space of one year from the making thereof;

unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized.

[Sect. 17]…no contract for the sale of any goods, wares and merchandizes, for the price of ten pounds sterling or upwards, shall be allowed to be good, except the buyer shall accept part of the goods so sold, and actually receive the same, or give something in earnest to bind the bargain or in part of payment, or that some note or memorandum in writing of the said bargain be made and signed by the parties to be charged by such contract, or their agents thereunto lawfully authorized.

As may be evident from the title of the act and the language used within it, the general purpose of the law is to provide evidence, in areas of some complexity and importance, that a contract was actually made. Succinctly, the purpose is to prevent fraud in certain types of contracts by requiring a written contract.

Notice, of course, that this is a statute; it is a legislative intrusion into the common law of contracts. In addition, the name given to this class of statutes can be somewhat confusing. These statutes do not deal with fraud as you might normally think of it. They are, instead, attempts to avoid fraud in contracting. The Statute of Frauds, therefore, tells us when a contract is required to be evidenced by a writing and signed by the party to be bound to that contract.

The Statute of Frauds has been enacted in form similar to the seventeenth-century act in every state except Maryland and New Mexico – where judicial decisions have given it legal effect – and Louisiana. With minor exceptions in Minnesota, Wisconsin, North Carolina, and Pennsylvania, the laws all embrace the same categories of contracts that are required to be in writing. Early in the twentieth century, Section 17 was replaced by a section of the Uniform Sales Act, and this in turn has now been replaced by provisions in the Uniform Commercial Code (UCC).

Figure 8.1 Contracts Required to Be in Writing

However ancient, the Statute of Frauds is alive and well in the United States. Today it is used as a technical defense in many contract actions, often with unfair results: it can be used by a person to wriggle out of an otherwise perfectly fine oral contract (it is said then to be used “as a sword instead of a shield”). Consequently, courts interpret the law strictly and over the years have enunciated a host of exceptions—making what appears to be a simple law quite complex. Indeed, after more than half a century of serious scholarly criticism, the British Parliament repealed most of the statute in 1954. Even in New Jersey, in 1995 there was some rolling back of our home state requirements for the Statutes of Frauds. Yet, because business transactions regularly span across state lines, it is important to each common Statute of Frauds that is in place in the United States today.

8.2 Contracts that must be Written under the Statute of Frauds

Five different areas of the Statute of Frauds appear in this section. For each statute, the general requirements are set forth, followed by exceptions to the general requirements.

Contracts Affecting an Interest in Land

Almost all contracts involving an interest in land are subject to the Statute of Frauds. For purposes of this statute, “land” is interpreted broadly to include such things as the actual land (e.g. ground and soil) and things attached to that land, such as trees or buildings. “Contracts that involve an interest in land” is also a broad description, which includes the sale, mortgage or lease of real property (including homes and buildings). This interest can also include profits from the land, the creation of easements on the land, and the establishment of other interests through restrictive covenants and agreements concerning the permissive use of the land.

While there are some exceptions to the writing requirement, such as a contract to sell crops grown on land, and short-term leases (usually for a term of one year or less), it is wise to put land-related contracts in writing when you are unsure if your land contract falls within the Statute of Frauds.

Exceptions to the Requirement to Place Contracts Affecting an Interest in Land in Writing

The past performance doctrine is one exception to the Statute of Frauds requirement for interest in land. While an oral contract to sell land is not normally binding, if the buyer has taken possession and made improvements on the property, courts will usually say the case is out of the statute, and the party claiming an oral contract can attempt to prove the existence of the oral contract.

Suppose that Seller agrees to sell a tract of land to Buyer for $100,000. There is no written agreement, but Buyer pays the purchase price to Seller and takes possession of the land. Buyer begins the process of making improvements to the land including erecting a fence. The actions of the seller, accepting the money, and the buyer, taking possession and making improvements, provide the confidence that this is not a fraudulent transaction. Courts can enforce this oral agreement using the exception of past performance.

The One-Year Rule

An agreement that cannot be performed within one year from its making must be evidenced by some writing to be enforceable. Memories of an oral contract can fade over time, and so under this one-year rule requiring a written contract, a documentation of the agreement will be available in the case of a later dispute between the contracting parties, or their representatives. The critical time frame is how long it will take to complete the contract from the time the contract is made until performance is complete. Consider the following examples. Which of these must be written? Which can be oral?

1. Today, Bob agrees to work for Alice for a period of 13 months.
2. Today, Bob agrees to work for Alice for a period of 7 months. His employment will begin 6 months from now, and continue for 7 months thereafter until complete.
3. Today, Bob agrees to work for Alice for a period of 11 months.

Example 3 can be oral since this contract will certainly take less than one year. Example 1 must be written since this contract will certainly last more than one year. Example 2 must also be written. Even though the period of employment itself is only seven months, since that period does not begin until six months from now, the total length of the contract is 13 months. So, a written contract would be required to enforce the contract in Example 2.

Exceptions to the One-Year Rule

The one-year rule has been universally interpreted to mean a contract that is impossible to be fully performed within one year. Under the possibility test, if there is even the slightest chance of carrying out the agreement completely within a year, an oral contract is enforceable. For example, an oral agreement to pay a sum of money on a date 13 months from today is enforceable since it is possible that the payment could be made earlier, even tomorrow. Even for contracts where it would be unlikely to complete performance within a year, as long as it is possible to do so, the exception still applies. For example, a contract to construct a very large residential complex that would normally take around two years to complete would not need to be written under this Statute because, technically, if enough construction workers were employed, the complex could possibly be completed within a year. Unless there is a fixed term longer than a year, some courts have even found that a contract which involves the performance of a person can be oral because any person may die within the year, and therefore their contract would not fall within the statute.

Contracts in Consideration of Marriage

An agreement that relies on the promise to marry as consideration for some other promise must be written under the Statute of Frauds. For instance, if Carter proposes marriage to Max, and Max agrees to marry Carter as long as Carter also gives Max a car, this agreement must be written. Mutual promises to marry, however are not within the rule. For instance, if Carter proposes marriage to Max, and Max agrees to marry Carter, there is no promise that is part of the marriage proposal. Therefore, this marriage proposal agreement need not be written.

In addition, the Statute of Frauds governs such promises where marriage is the consideration regardless of who makes the promise. Suppose Carter’s father had said to Carter, “If you marry Max and settle down, I will give you $1 million.” The father’s promise to Carter is not enforceable unless written.

A common application of this area of the Statute of Frauds is used for prenuptial agreements. These are agreements that some people use prior to entering a marriage so that they can establish ownership rights in their own property and limit the ownership rights of the future spouse. Such agreements would be effective once the marriage takes place and could stipulate how assets will be treated upon divorce or death. This Statute of Frauds would also apply to postnuptial agreements where the consideration would be agreeing to continue with the marriage.

There are no specific exceptions for these types of agreements, but they are limited in application to people who use marriage as consideration and then get married. People who cohabitate are not covered by this area of the Statute of Frauds, although other areas might apply in those situations. It is also important that when a prenuptial agreement is used, the voluntariness of the agreement is clear so that any future court reviewing the agreement would not be concerned about enforcing it. If the agreement is unclear, or appears involuntary at the time it is used, a court might decline to enforce it and instead make equitable adjustments of property of the marriage to avoid an injustice.

Promises to Pay the Debt of Another

A promise to pay the debt of another person if that person does not pay their own debt must be written under the Statute of Frauds. Such promises can be called a collateral promise or a secondary promise because the promise is ancillary to some other promise. For example, Alex wants to take out a loan for their first car. Alex has not yet established credit, and so due to their poor credit history, the lender asks for a guarantor who will agree to make the payments if Alex fails to pay. Alex asks their mother to guarantee the debt. The mother’s agreement with the lender is the secondary promise, and must be written in order for the lender to enforce it if Alex defaults in the future. In this scenario, the mother is a surety or guarantor (the terms are essentially synonymous); someone who promises to perform upon the default of another.

This agreement distills down to the following: B agrees to pay C if A does not. B is making an agreement with C that is collateral—on the side—to the promise A is making to C.

This rule only applies to a collateral promise. For example if Alex’s mother agrees to make half of the payments on Alex’s car loan, this would not be a collateral but instead be a primary promise. Thus, under this rule, the Statute of Frauds would not require that the promise be reduced to writing. In other words, where A and B both agree to pay C this is a direct promise, not a collateral promise.

Moreover, under this rule the debt paid for someone else need not be money, but can be any contractual duty. For example, if Alex agrees to work off some car payments at the dealership car wash, Alex’s mother can promise to show up and wash cars if Alex fails to do so. This, too, would be a secondary or collateral promise, and therefore it must be written to be enforceable.

Exception to Promises to Pay the Debt of Another

The main purpose doctrine is a major exception to the surety provision of the Statute of Frauds. Under this doctrine, the reason for agreeing to act as a surety is considered when determining if a written agreement is required. If the main purpose of this agreement was to secure an economic advantage for the surety, then the agreement is not bound by the Statute of Frauds writing requirement. Suppose, in the previous example, that Alex’s mother is really the one who wants the car, but doesn’t want to buy one herself. Instead she agrees to act as surety, knowing all along that she will be the one using the car to get back and forth to work and run daily errands. In such a situation, the agreement to pay Alex’s debt, even when the agreement was oral, would be binding on Alex’s mom since her main purpose in making this agreement was her own transportation needs, and not Alex’s.

Normally, the main purpose rule comes into play when the surety desires a financial advantage to herself that cannot occur unless she provides some security. For example, the board chairman of a small company, who also owns all the voting stock, might guarantee a printer that if his company defaulted in paying the bill for desperately needed catalogs, he would personally pay the bill. If his main purpose in giving the guarantee was to get the catalogues printed in order to stave off bankruptcy, and thus to preserve his own interest in the company, he would be bound by an oral agreement. 

Agreements of Executor or Administrator

The promise by an executor or administrator of an estate to answer personally for the debt or other duty of the deceased is analogous to the surety provision—it must be evidenced by some writing if it is to be enforced. For an agreement to be covered by the statute, there must have been an obligation before the decedent’s death. Thus, if the executor arranges for a funeral and guarantees payment should the estate fail to pay the fee, an oral contract is binding, because there was no preexisting obligation. If, however, the decedent has made his own arrangements and signed a note obligating his estate to pay, the executor’s promise to guarantee payment would be binding only if written. The main purpose exception to the surety provision applies to this section of the Statute of Frauds as well.

The Uniform Commercial Code

Contracts for the sale of goods in the amount of $500 or greater must be evidenced by some writing to be enforceable. Section 2-201 of the UCC states:

[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 his 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.

Thus, to satisfy the requirement of the UCC, a contract for goods worth $500 or more must have the quantity of goods as well as the signature of the party against whom enforcement is sought. For example, if a buyer contracts with a seller to purchase 10,000 widgets for $1,000, the written contract for sale must include the quantity of widgets – 10,000 – and at least one signature. If the buyer wants to enforce the contract as against the seller, the buyer needs the seller’s signature. Similarly, if the seller seeks to sue buyer for breach of contract, the seller needs the buyer’s signature on the contract.

This UCC Code section has no impact on sales of goods below $500 so oral agreements for the sale of goods valued at less than $500 are fully enforceable without exception.

Exceptions under the UCC

There are four exceptions to the UCC’s Statute of Frauds requirement that are relevant here.

The Ten-Day-Reply Doctrine

The UCC holds merchants to a higher standard of conduct than non-merchants. The ten-day-reply doctrine provides that in a contract between two merchants, if an oral agreement is reached and one party sends the other a written statement confirming it, the other party has ten days to object in writing or the agreement is enforceable. 

“Specially Manufactured Goods”

This UCC provides an exception for a seller that has manufactured goods to the buyer’s specifications or who has made “either a substantial beginning of their manufacture or commitments for their procurement.” Assuming that the goods are unsuitable for sale to others, if the buyer repudiates the oral agreement, the seller will be able to seek remedies even if the agreement for the specially manufactured goods was oral.

The “Admission” Exception

This exception arises when the party against whom enforcement is sought admits in testimony or legal papers that a contract was in fact made.  That said, the admission will not permit enforcement of all claimed terms of the contract; enforcement is limited to the quantity of goods admitted.

The “Payment or Delivery and Acceptance” Exception

Similar to the past performance exception for the sale of interest in land, the UCC provides that an oral contract for goods in excess of $500 will be upheld if payment has already been made and accepted, or if the goods have been received and accepted. 

Other Writing Requirements

In addition to these requirements, the UCC provides that agreements for the sale of securities (e.g., most stocks and bonds) usually need to be evidenced by a writing, and agreements for property not included in the sales or securities articles of the UCC that exceed $5,000 in value need to be so evidenced.  Included here would be intangible property such as rights to royalties and to mortgage payments, and other rights created by contract. And in many states, other statutes require a writing for several different kinds of contracts. These include agreements to pay commissions to real estate brokers, to make a will, to pay debts already discharged in bankruptcy, to arbitrate rather than litigate, to make loans, and to make installment contracts.

8.3 Sufficiency of the Required Writing

Now that we’ve set out the types of agreements where the contractual intentions must be evidenced by a writing, it is time to understand what is required to provide enough evidence of the agreement such that it will be enforced in situation where a writing is required.

Writing Requirement under the Common Law

When asked to think about a contract, you might picture a student loan document you recently signed, or your insurance policy, or even the license agreement for your Apple Account. These are all written documents that would satisfy the writing requirement under the common law, but much simpler documentation will also suffice in many cases. For example, written documents like a check, a receipt, a written notation on an envelop, and other simple documents also satisfy the requirement of a writing under the common law.

The writing need not contain every term, but it must recite the subject matter of the contract in a way that would be understandable in the context of the transaction. For example, a written agreement to buy a parcel of land is usually sufficiently definitive if it refers to the parcel in such a way that it could be mistaken for no other—for example, “seller’s land in Allentown,” assuming that the seller owned only one parcel there. Beyond the subject matter, the essential terms of promises to be performed must be written out; but all of the little details need not be. If an essential term is missing, it cannot be enforced, unless it can be inferred or imposed by rule of law. A written contract for the sale of land containing every term but the time for payment, which the parties orally agreed would be upon delivery of the deed, is sufficient. (A contract that omitted the selling price would not be.)

The parties must be named in the writing in a manner sufficient to identify them. Their whole names need not be given if initials or some other reference makes it inescapable that the writing does concern the actual parties. Reference to the agent of a party identifies the party. Possession of the writing may even be sufficient: if a seller gives a memorandum of an oral agreement for the sale of his land, stating all the terms, to the buyer, the latter may seek specific performance even though the writing omits to name or describe him or his agent. 

In a few states, consideration for the promise must be stated in writing, even if the consideration has already been given. Consequently, written contracts frequently contain such language as “for value received.” But in most states, failure to refer to consideration already given is unnecessary. The situation is different, however, when the consideration is a return promise yet to be performed. Usually the return promise is an essential term of the agreement, and failure to state it will vitiate the writing.

Writing Requirement Under the UCC

In contracts for the sale of goods, the writing must be signed by the party to be charged, and the parties must be sufficiently identified.  The quantity of the items purchased must also be set forth in the writing. But consideration, including the selling price, need not be set forth for the memorandum to meet the requirements of the UCC, though obviously it makes sense to do so whenever possible. By contrast, UCC Sections 1-206 and 3-319 concerning intangible personal property and investment securities require “a defined or stated price.”

Electronic Communications

The Electronic Signatures in Global and National Commerce Act, S. 761, popularly referred to as ESign, pertains to documentation of agreements in electronic form. The primary impact of Esign is to make almost anything reasonably indicative of a signature good enough electronically. It provides the following:

Notwithstanding any statute, regulation, or other rule of law [other than subsequent parts of this same statute], with respect to any transactions in or affecting interstate or foreign commerce—

a signature, contract, or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form; and

a contract relating to such transaction may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation.…

The term “transaction” means an action or set of actions relating to the conduct of a business, consumer or commercial affairs between two or more persons, including any of the following types of conduct—

• the sale, lease, exchange, or other disposition of [personal property and intangibles]
• the sale, lease, exchange or other disposition of any interest in real property, or any combination thereof.

The term “electronic signature” means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

8.4 Exceptions; Oral Rescission

The basic rule is that contracts governed by the Statute of Frauds are unenforceable if they are not sufficiently written down. If the agreement contains several promises, the unenforceability of one promise will generally render the other promises unenforceable also. Because this can lead to injustice in some situations, in addition to the specific exceptions discussed above there are some general exceptions to the Statute of Frauds as well.

Full Performance

If an oral contract has been performed fully by both sides, its unenforceability under the statute of frauds is moot. Having fulfilled its function (neither side having repudiated the contract), the agreement cannot be rescinded on the ground that it should have been, but was not, reduced to writing.

Detrimental Reliance

Some relief may be granted to one who has relied on an oral contract to her detriment. For a partially performed contract that is unenforceable under the Statute of Frauds, restitution may be available. Suppose George orally agrees to landscape Arthur’s fifteen acres, in return for which George is to receive title to one acre at the far end of the lot. George is not entitled to the acre if Arthur defaults, but he may recover for the reasonable value of the services he has performed up to the time of repudiation. Somewhat related, if one side has reasonably and foreseeably relied upon a promise in such a way that injustice can only be avoided by enforcing it, some courts will use promissory estoppel to preclude the necessity of a writing, but the connection between the alleged oral contract and the detrimental reliance must be convincing.

Oral Rescission

Most contracts required to be in writing may nonetheless be rescinded orally. The new (oral) agreement is treated in effect as a modification of the old one, and since a complete rescission will not usually trigger any action the statute requires to be in writing, the rescission becomes effective in the absence of any signed memorandum.

Some agreements, however, may not be rescinded orally. Those that by their terms preclude oral rescission are an obvious class. Under the UCC, certain agreements for the sale of goods may not be orally rescinded, depending on the circumstances. For instance, if title has already passed to the buyer under a written agreement that satisfies the statute, the contract can be rescinded only by a writing. Contracts for the sale of land are another class of agreements that generally may not be orally rescinded. If title has already been transferred, or if there has been a material change of position in reliance on the contract, oral agreements to rescind are unenforceable. But a contract that remains wholly executory, even though enforceable because in writing, may be rescinded orally in most states.

Contract Modification

Contracts governed by the Statute of Frauds may be modified orally if the resulting contract, taken as a whole, falls outside the statute. The same rule applies under the UCC.  For example, a written contract for the sale of a new bicycle worth $1,200 may be orally modified by substituting the sale of a used bicycle worth $450, but not by substituting the sale of a used bike worth $600. The modified contract effectively rescinds the original contract.

8.5 The Parol Evidence Rule

The Purpose of the Parol Evidence Rule

Written contracts, especially substantial ones, simply don’t appear out of thin air. Negotiations, agreements and understanding necessarily precede the conclusion of a final deal. In a negotiation leading up to a contract parties write letters, talk by telephone, meet face-to-face, send e-mails, and exchange thoughts and views about what they want and how they will reciprocate. They might even make a few promises seeking to entice the other side to keep negotiating, knowing that they can or will not keep all of those promises in a final agreement. As this sort of negotiation winds down toward a tentative agreement, the parties must place their agreements into a written document that reflects what all of those negotiations finally led to.

Once the final version of the agreement is reduced to a written document that the parties sign, what should happen to the letters, phone calls, emails, and the promises that didn’t make it to the written contract? The parol evidence rule answers this question.

Parol Evidence Rule at Common-Law

The rule at common law is this: a written contract intended to be the parties’ complete understanding discharges all prior or contemporaneous promises, statements, or agreements that add to, vary, or conflict with it.

The parol evidence rule (parol means oral) is a substantive rule of law that operates to bar the introduction of evidence intended to show that the parties had agreed to something different from what they finally arrived at and wrote down. It applies to prior written as well as oral discussions that don’t make it into the final written agreement. Though its many apparent exceptions make the rule seem difficult to apply, its purposes are simple: to give freedom to the parties to negotiate without fear of being held to the consequences of asserting preliminary positions, and to give finality to the written contract that results.

For example, suppose that Seller and Buyer enter into a final written contract for the sale of a car after negotiations about the price and other features of the automobile. The written agreement states that Seller will sell the car to Buyer for $10,000, and that Buyer will pay the full amount in cash upon delivery. If Buyer later tries to introduce evidence at trial of a prior oral agreement in which Seller agreed to accept $9,000 for the car if Buyer instead picked up the car from the Seller, the court will apply the parol evidence rule and exclude this evidence. The court will enforce the terms of the written agreement, which state that the purchase price is $10,000 and that payment is due in cash upon delivery.

The rule applies to written contracts, whether or not the Statute of Frauds requires them to be in writing. The Statute of Frauds gets to whether there was a contract at all; the parol evidence rule says, granted there was a written contract, does it express the parties’ understanding? But the rule is concerned only with events that transpired before the contract in dispute was signed. It has no bearing on agreements reached subsequently that may alter the terms of an existing contract.

Exemptions and Exceptions to the Parol Evidence Rule

Despite its apparent stringency, the parol evidence rule does not negate all prior agreements or statements, nor preclude their use as evidence. A number of situations fall outside the scope of the rule and hence are not technically exceptions to it, so they are better phrased as exemptions (something not within the scope of a rule).

Not an Integrated Contract

If the parties never intended the written contract to be their full understanding—if they intended it to be partly oral—then the rule does not apply. If the document is fully integrated, no extrinsic evidence will be permitted to modify the terms of the agreement, even if the modification is in addition to the existing terms, rather than a contradiction of them. If the contract is partially integrated, prior consistent additional terms may be shown. It is the duty of the party who wants to exclude the parol evidence to show the contract was intended to be integrated. That is not always an easy task. To prevent a party later from introducing extrinsic evidence to show that there were prior agreements, the contract itself can recite that there were none. Here, for example, is the final clause in the National Basketball Association Uniform Player Contract: “This agreement contains the entire agreement between the parties and there are no oral or written inducements, promises or agreements except as contained herein.” Such a clause is known as a merger clause.

Void or Voidable Contracts

Parol evidence is admissible to show the existence of grounds that would cause the contract to be void. Such grounds include illegality, fraud, duress, mistake, and lack of consideration. And parol evidence is allowed to show evidence of lack of contractual capacity. Evidence of infancy, incompetency, and so on would not change the terms of the contract at all but would show it was voidable or void.

Contracts Subject to a Condition Precedent

When the parties orally agree that a written contract is contingent on the occurrence of an event or some other condition (a condition precedent), the contract is not integrated and the oral agreement may be introduced. The classic case is that of an inventor who sells in a written contract an interest in his invention. Orally, the inventor and the buyer agree that the contract is to take effect only if the buyer’s engineer approves the invention. (The contract was signed in advance of approval so that the parties would not need to meet again.) The engineer did not approve it, and in a suit for performance, the court permitted the evidence of the oral agreement because it showed that in this case there was never an agreement at all.  Note that the oral condition does not contradict a term of the written contract; it negates it. The parol evidence rule will not permit evidence of an oral agreement that is inconsistent with a written term, for as to that term the contract is integrated.

Untrue Recital or Errors

The parol evidence rule does not prevent a showing that a fact stated in a contract is untrue. The rule deals with prior agreements; it cannot serve to choke off inquiry into the facts. Thus the parol evidence rule will not bar a showing that one of the parties is a minor, even if the contract recites that each party is over eighteen. Nor will it prevent a showing that a figure in the contract had a typographical error—for example, a recital that the rate charged will be the plumber’s “usual rate of $3 per hour” when both parties understood that the usual rate was in fact $30 per hour. A court would allow reformation (correction) of such errors.

Ambiguity

To enforce a contract, its terms must be understood, so parol evidence would be allowed, but a claim of ambiguity cannot be used to alter, vary, or change the contract’s meaning.

Postcontract Modification

Ordinarily, an additional consistent oral term may be shown only if the contract was partially integrated. The parol evidence rule bars evidence of such a term if the contract was fully integrated. However, when there is additional consideration for the term orally agreed, it lies outside the scope of the integrated contract and may be introduced. In effect, the law treats each separate consideration as creating a new contract; the integrated written document does not undercut the separate oral agreement, as long as they are consistent. Buyer purchases Seller’s business on a contract; as part of the agreement, Seller agrees to stay on for three weeks to help Buyer “learn the ropes.” Buyer realizes she is not yet prepared to go on her own. She and Seller then agree that Seller will stay on as a salaried employee for five more weeks. Buyer cannot use the parol evidence rule to preclude evidence of the new agreement: it is a postcontract modification supported by new consideration. Similarly, parties could choose to rescind a previously made contract, and the parol evidence rule would not bar evidence of that.

The UCC Approach

Under Section 2-202 of the UCC, a course of dealing, a usage of trade, or a course of performance can be introduced as evidence to explain or supplement any written contract for the sale of goods. A course of dealing is defined as “a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” A usage of trade is “any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.” A course of performance is the conduct of a party in response to a contract that calls for repeated action (e.g., a purchase agreement for a factory’s monthly output, or an undertaking to wash a neighbor’s car weekly).

8.6 Interpretation of Written Agreements

Sometimes, the meaning of a word can depend on factors that are not specific to the word itself. For instance, the skill of the writer plays a role in the meaning, precision and consistency in use of words. The meaning of a word can also vary based on the context of its use. Words and phrases can be ambiguous, either when they stand alone or when they take on a different coloration from words and phrases near them Interpretation difficulties can arise for any of a number of reasons: a form contract might contain language that is inconsistent with provisions written in specific for the transaction; the parties might use jargon that is unclear; a necessary term may be inadvertently omitted; there may be assumptions about prior usage or performance that might color their understanding of the words they do use. Because ambiguities do arise, courts are frequently called on to give content to the words on paper.

The Basic Rule of Interpretation

Courts attempt to give meaning to the parties’ understanding when they wrote the contract.

The intention of the parties governs, and if their purpose in making the contract is known or can be ascertained from all the circumstances, it will be given great weight in determining the meaning of an obscure, murky, or ambiguous provision or a pattern of conduct. A father tells the college bookstore that in consideration of its supplying his daughter, a freshman, with books for the coming year, he will guarantee payment of up to $350. His daughter purchases books totaling $400 the first semester, and he pays the bill. Midway through the second semester, the bookstore presents him with a bill for an additional $100, and he pays that. At the end of the year, he refuses to pay a third bill for $150. A court could construe his conduct as indicating a purpose to ensure that his daughter had whatever books she needed, regardless of cost, and interpret the contract to hold him liable for the final bill.

Tools of Interpretation

The policy of uncovering purpose has led to a number of tools of judicial interpretation:

• More specific terms or conduct are given more weight than general terms or unremarkable conduct. Thus, a clause that is separately negotiated and added to a contract will be counted as more significant than a standard term in a form contract.
• A writing is interpreted as a whole, without undue attention to one clause.
• Common words and terms are given common meaning; technical terms are given their technical meaning.
• In the range of language and conduct that helps in interpretation, the courts prefer the following items in the order listed: express terms, course of performance, course of dealing, and usage of trade.
• If an amount is given in words and figures that differ, the words control.
• Writing controls over typing; typing controls over printed forms.
• Ambiguities are construed against the party that wrote the contract.

In this chapter, we have considered a set of generally technical legal rules that spell out the consequences of contracts that are wholly or partially oral or that, if written, are ambiguous or do not contain every term agreed upon. These rules fall within three general headings: the Statute of Frauds, the parol evidence rule, and the rules of interpretation. Obviously, the more attention paid to the contract before it is formally agreed to, the fewer the unforeseen consequences. In general, the conclusion is inescapable that a written contract will avoid a host of problems. Writing down an agreement is not always sensible or practical, but it can probably be done more often than it is. Writing almost fifty years ago—and it is still true—a law professor studying business practices noted the following:

Businessmen often prefer to rely on “a man’s word” in a brief letter, a handshake or “common honesty and decency”—even when the transaction involves exposure to serious risks. Seven lawyers from law firms with business practices were interviewed. Five thought that businessmen often entered contracts with only a minimal degree of advanced planning. They complained that businessmen desire to “keep it simple and avoid red tape” even where large amounts of money and significant risks are involved.…Another said that businessmen when bargaining often talk only in pleasant generalities, think they have a contract, but fail to reach agreement on any of the hard, unpleasant questions until forced to do so by a lawyer. 

Written contracts do not, to be sure, guarantee escape from disputes and litigation. Sometimes ambiguities are not seen; sometimes they are necessary if the parties are to reach an agreement at all. Rather than back out of the deal, it may be worth the risk to one or both parties deliberately to go along with an ambiguous provision and hope that it never arises to be tested in a dispute that winds up in court.

Nevertheless, it is generally true that a written contract has at least three benefits over oral ones, even those that by law are not required to be in writing. (1) The written contract usually avoids ambiguity. (2) It can serve both as a communications device and as a device for the allocation of power, especially within large companies. By alerting various divisions to its formal requirements, the contract requires the sales, design, quality-control, and financial departments to work together. By setting forth requirements that the company must meet, it can place the power to take certain actions in the hands of one division or another. (3) Finally, should a dispute later arise, the written contract can immeasurably add to proof both of the fact that a contract was agreed to and of what its terms were.

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References

Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 96, 106th Congress (2000).

In re Marriage of Rada, 402, 869 P.2d 254 (Mont. 1994).

Kozlowski v. Kozlowski, 395 A.2d 913 (N.J. 1978).

Pym v. Campbell, 119 Eng. Rep. 903 (Q.B. 1856).

Restatement (Second) of Contracts, Chapter 5, statutory note.

Restatement (Second) of Contracts, Section 125.

Restatement (Second) of Contracts, Section 207(f).

Restatement (Second) of Contracts, Section 207(h).

Stewart Macaulay, “Non-contractual Relations in Business: A Preliminary Study,” American Sociological Review 28, no. 1 (1963): 58–59.

Stuart Studio, Inc. v. National School of Heavy Equipment, Inc., 214 S.E.2d 192 (N.C. 1975).

Towne v. Eisner, 245 U.S. 418, 425 (1917).

Uniform Commercial Code, Section 8-319

Uniform Commercial Code, Section 1-206.

Uniform Commercial Code, Section 2-201

Uniform Commercial Code, Section 2-209(3).

Uniform Commercial Code, Section 2-210(1)