Let’s look at the following scenario:
You own a retail store that sells sporting goods. One day a large truck pulls up to your store and the driver claims he is delivering the $10,000.00 supply of baseballs, baseball gloves, and bats that you ordered last week. While you remember discussing a potential purchase with the manufacturer, you never ordered any baseball supplies. In order to figure out what is going, you call up the manufacturer to explain there must be a mistake. The manufacturer is not having it. Despite your protests, he asserts that you placed a special order over the phone because all the goods have your store’s logo on them. You state that he is mistaken and that you are not paying for these supplies. The manufacturer tells you that he is going to sue you for breach of contract and that you should expect to hear from his lawyer soon. So what the heck is going on? Did you accidentally form a contract and now you’re on the hook for $10,000?
What is the statute of frauds?
If you read our previous blog post, you know that a large majority of contracts do not need to be memorialized with a signed, written document in order to be valid. However, because of the nature of some types of transactions, a signed written document is required in order to have a valid, enforceable contract. This requirement is what is known as the “statute of frauds.”
The statute of frauds is an affirmative defense to a breach of contract claim. In order to enforce certain types of contracts against parties, the claimant must demonstrate that the party to be charged signed a written document articulating the terms of the agreement. As its name suggests, the purpose of the statute of frauds is to prevent parties from fraudulently making up contracts out of thin air and going to court to enforce them. Generally, there are six types of contracts that require a signed written document in order for it to be enforceable:
- Contracts in consideration of marriage (e.g. prenuptial agreements).
- Contracts that cannot be completed within one year.
- Contracts for the transfer any interest in land.
- Contracts by the executor of the will to pay a debt of the estate with the executor’s money.
- Contracts for the sale of goods valued at $500.00 or more.
- Contracts in which one party acts as a guarantor for another party’s debt or obligation.
In the situation described above, you were accused of breaching a contract for the sale of goods valued at $500.00 or more. This means that in order for the alleged contract between you and the manufacturer to be valid, the agreement needs to be in writing and signed by the party to be charged (in the above scenario, you are the party to charged). In this scenario, you have a strong defense against the manufacturer.
When would the statute of frauds defense not apply?
However, the statute of frauds is meant to protect you from the fraud of others, not protect you from the liability caused by your own fraud! Using the same scenario as above, let's say that you did form an oral contract to purchase $10,000 worth of goods from the manufacturer. In fact, even though there was no written contract, or even emails exchanged while negotiating, the manufacturer recorded your phone conversation, so there is no way to deny that you made an agreement. If this occurs, it’s highly unlikely that a court would recognize a that statute of frauds defense just because there is no signed written document. At the very least, a court would likely award the manufacturer the cost of producing the goods, and maybe even the entire value of the sale.
If somebody is accusing you of breaching a contract you believe does not exist, contact the business lawyers at the Vethan Law Firm.