10 / 29 / 2015

No Paper, No Deal ... Mostly.

The great film producer, Samuel Goldwyn, famously said, “a verbal contract isn’t worth the paper it’s written on.”  If he could only see the deals done in the 21st century.  In our continued series on contract enforcement and references to the Lord of the Rings, we look at the defense of “you got no paper to prove your deal.”  Yes, that is a defense ... although it is usually phrased much better in formal proceedings.

Texts, tweets and emails are great to share stories with friends, but when contracts are negotiated in such piecemeal fashion, businesses often later disagree on the terms of the deal.  Substituting sober second thought reduced to a formal proposal with digital communication hammered out in mere seconds has resulted in larger and larger deals negotiated on smaller and smaller exchanges between the parties.  On large volume transactions, it is almost commonplace for buyers and sellers to disagree on the contract terms. One side is not trying to rip off the other, but each has come to view the transaction differently.

In most states, including Texas, the Uniform Commercial Code (UCC) governs transactions involving the sale of goods. If the value of goods is more than $500, the UCC, requires a certain type of paper trail, at least with respect to the quantity of goods involved in the transaction, signed by the party against whom enforcement is sought. If no paper trail evidences the terms of the deal, there is no deal.  It falls within what the UCC refers to as the statute of frauds.  Falling within the statute of frauds simply means that there is no writing sufficient to prove an enforceable deal.

So, you may ask, what terms need to be in writing to satisfy the statute of frauds, and make a deal enforceable?  Price?  Description?  You would think so, but no.  The term that a sale of goods writing must identify is the quantity of goods sold.  Cases addressing the statute of frauds defense typically have one side attempting to invoke the statute of frauds to avoid the deal. It is a technical argument, but one that is used increasingly as the economy slows down when one party does not want to or cannot perform. Much like Thror’s map in The Hobbit, except under special circumstances the moon letters (the deal) will not appear revealing the true intent of the parties, but of course, like any technical argument, there are exceptions which, under the right circumstances, (whether a midsummers eve during a crescent moon in the LORR or specific language in a writing) will circumvent the Statute of Frauds, allowing a deal to be enforced.

For example, the UCC contemplates a 10 day red flag period.  If the seller ships the goods, and the buyer receives it, the buyer has 10 days from delivery to complain that there was no deal.  Makes sense.  You cannot keep the goods and claim that there was not deal.

A common “oops” occurs when one of the parties claims there is no deal because no required paper trail / writing exists, but in court testifies about the terms of the deal.  If this happens, then the person cannot deny the deal existed; the law is not that silly.

In cases of specially manufactured goods that can only be used by the buyer, a court starts scratching its head when the buyer raises the defense of no paper trail. The rationale, of course, is that the seller would not have undertook to specially manufacture a good unless it was confident that a deal was struck.  More importantly, the seller cannot resell such specially manufactured goods.

Finally, acceptance of the goods is pretty good evidence that the parties agree, at least, on the quantity.  And quantity, more than any other term, governs the application of this defense.

So, even as businesses may want to avoid a deal they struck, for whatever reason, and raise the statute of frauds as a defense, the party seeking enforcement has options to prove up the deal, whether with a scrap of paper, email correspondence, or court proceedings.

Doing deals is necessary to the human business condition.  Successful deals make for successful businesses. To quote Adam Smith: “man, an animal that makes bargains.”  If you have an issue with a B2B transaction for the sale of goods, visit with the business lawyers of the Vethan Law Firm, P.C.  With lawyers in Houston, Dallas and San Antonio, we are the real deal.

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