Most every state has adopted some form of a “Statute of Frauds” or SoF Statute, prohibiting the enforcement of certain oral contracts. Application of SoF Statutes to contracts has been questioned on many occasions. Over the last 35 years I have fielded hundreds of questions from clients as to how, when and under what circumstances SoF Statutes may apply. Many clients are surprised to learn oral contracts they deemed unenforceable are legally binding because SoF Statutes are commonly misunderstood.
Very few know SoF Statutes are rooted in archaic laws dating back to feudal England. In 1677, almost 350 years ago, English Parliament adopted “An Act for Prevention of Frauds and Perjuries” which was subsequently adopted by most every state in our country. As their namesake suggests, SoF Statutes were intended to prevent witnesses from committing perjury by trying to manufacture contracts where none existed. However, SOF Statutes were never intended to prevent parties from entering or enforcing all oral contracts.
Standard SoF Statutes adopted by most states apply to six categories of oral contracts, only four of which have any application to most commercial contracts. The four common categories of oral contracts to which SoF Statutes apply in the construction industry include:
- i) agreements that cannot be completed with one year,
- ii) agreements involving interests in real estate, including construction easements,
- iii) agreements assuming the debts of another, including indemnity agreements and surety bonds, and
- iv) agreements to purchase “goods” valued more than $500.
The other two types of oral contracts barred by the typical SoF Statute have no application to commercial contracts, because they deal with promises of marriage and promises relating to wills, trusts, and estates. So, unless the oral contract you are seeking to enforce fits within one of the four categories identified above, the standard SoF Statutes would not apply.
Aside from limited application, “exceptions have swallowed the rule” with respect to enforcement of standard SoF Statutes. Many commentators have compared SoF Statutes to a slice of “swiss cheese” because the courts have created so many “loopholes” or exceptions to their enforcement. Common exceptions include:
- 1) agreements that have been partially performed,
- 2) agreements evidenced by a partial writing,
- 3) agreements supported by promissory estoppel or detrimental reliance,
- 4) agreements acknowledged by the parties, and
- 5) agreements reflecting a main purpose.
Applying these exceptions reveals why SoF Statutes have such limited enforcement with respect to oral agreements.
Exceptions one through three find the most common application to non-enforcement of SoF Statutes upon construction projects. Very few oral agreements are not evidenced by some form of partial performance, a partial writing, reliance giving rise to estoppel, or a combination of all three. For example, parties frequently take some form of action in reliance upon oral agreements, whether ordering materials or scheduling manpower, making payments and arrangements therefor, or otherwise changing their plans. Alternatively, parties often exchange letters of intent, e-mails, text messages or revise project schedules and payment applications based upon oral agreements. Such types of conduct are often sufficient to satisfy one or more of the first three exceptions to SoF Statutes.
Although less common, exceptions four and five can also serve to support non-enforcement of the SoF Statutes to oral agreements. There have been instances where a party through its employees acknowledge, or otherwise admit, an oral agreement was reached, but deny enforceability because no written agreement was signed. The main purpose exception applies only to oral guaranty, indemnity, or suretyship agreements and requires a showing that the party against whom the agreement is sought to be enforced gained an economic advantage through the oral agreement. These latter two exceptions have less to do with conduct taken with respect to the oral agreement than to do with admissions, whether express or implied establishing existence of the oral agreement.
The days when a “handshake” was sufficient to form a contract still exist, although are far less common than in the past. Many years ago, two sophisticated clients established a multi-million-dollar contract for the construction of a factory by taking a Polaroid photograph in front of a project sign containing details about the project. The photograph was a sufficient writing to create an enforceable oral contract back then and would very likely be sufficient to satisfy one or more of the exceptions under the standard SoF Statutes today. So next time someone tells you oral agreements are not enforceable under an SoF Statute, give some thought as to whether and to what extent the oral agreement is a valid and binding contract?