1. 14 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 14 Writing and Formality Chapter 14 Writing and Formality

2. 14 - 2 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Statute of Frauds State statute that requires certain types of contracts to be in writing. Intended to ensure that the terms of important contracts are not forgotten, misunderstood, or fabricated.

3. 14 - 3 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Most states require the following types of contracts to be in writing: Contracts involving interests in land Contracts that by their own terms cannot possibly be performed within one year Collateral contracts where a person promises to answer for the debt of another Promises made in consideration of marriage

4. 14 - 4 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts required to be in writing (continued) : Real estate agents’ contracts Agents’ contracts where the underlying contract must be in writing Promises to write a will Contracts to pay debts barred by the statute of limitations or discharged in bankruptcy

5. 14 - 5 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts required to be in writing (continued) : Contracts to pay compensation for services rendered in negotiating the purchase of a business Contracts for the sale of goods for more than $500 Finders fee contracts

6. 14 - 6 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Involving Interests in Land Any contract that transfers an ownership interest in real property must be in writing under the Statute of Frauds to be enforceable. –Real Property –Fixtures

7. 14 - 7 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Involving Interests in Land (continued) Real Property Land Buildings Trees, Plants, Crops Soil Minerals Timber Other things that are permanently affixed to the land Real Property Land Buildings Trees, Plants, Crops Soil Minerals Timber Other things that are permanently affixed to the land Fixtures Personal property that is permanently affixed to the real property –e.g., built-in cabinets in a house Fixtures Personal property that is permanently affixed to the real property –e.g., built-in cabinets in a house

8. 14 - 8 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Involving Interests in Land (continued) Other contracts that transfer an ownership interest in land must be in writing under the Statute of Frauds. These interests include: –Mortgages –Leases –Life Estates –Easements

9. 14 - 9 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Involving Interests in Land (continued) Part Performance Exception An equitable doctrine that allows the court to order an oral contract for the sale of land or transfer of another interest in real property to be specifically performed if it has been partially performed and performance is necessary to avoid injustice.

10. 14 - 10 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman One Year Rule An executory contract that cannot be performed by its own terms within one year of its formation must be in writing. Intended to prevent disputes about contract terms that may otherwise occur toward the end of a long-term contract. Contract may be oral if the performance of the contract is possible within the one year period.

11. 14 - 11 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman One Year Rule (continued) Employment contracts are often for periods longer than one year. These contracts should be in writing to be enforceable.

12. 14 - 12 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Collateral Promises Collateral Contract – occurs where one person agrees to answer for the debts or duties of another person. –Required to be in writing under the Statute of Frauds. Guaranty Contract – the contract between the guarantor and the original creditor.

13. 14 - 13 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Original and Guaranty Contracts Contract No. 1 Contract No. 2 Original Contract Guaranty Contract Guarantor agrees to pay the debt if the debtor fails to pay the creditor. Debtor Guarantor Creditor

14. 14 - 14 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Collateral Promises (continued) The Main Purpose Exception If the main purpose of a transaction and an oral contract is to provide pecuniary benefit to the guarantor, –The collateral contract is treated like an original contract, and –Does not have to be in writing to be enforced.

15. 14 - 15 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts for the Sale of Goods Section 201 of the Uniform Commercial Code (UCC) is the basic Statute of Frauds provision for sales contracts. Contracts for the sale of goods costing $500 or more must be in writing to be enforceable.

16. 14 - 16 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts for the Sale of Goods (continued) Equal Dignity Rule A rule that states that agents’ contracts to sell property covered by the Statute of Frauds must be in writing to be enforceable.

17. 14 - 17 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts for the Sale of Goods (continued) Electronic Signature in Global and National Commerce Act (2000) Federal statute designed to place the world of electronic commerce on a par with the world of paper contracts in the U.S. Recognizes electronic contracts as meeting the writing requirement of the Statute of Frauds for most contracts.

18. 14 - 18 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Promissory Estoppel An equitable doctrine that permits enforcement of oral contracts that should have been in writing. Where this doctrine applies, the promisor is estopped (prevented) from raising the Statute of Frauds as a defense to the enforcement of the oral contract.

19. 14 - 19 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Promissory Estoppel (continued) The oral promise is enforceable against the promisor if three conditions are met: 1. The promise induces action or forbearance of action by another. 2. The reliance on the oral promise was foreseeable. 3. Injustice can be avoided only by enforcing the oral promise.

20. 14 - 20 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Sufficiency of the Writing Formality of the Writing Required Signature Integration of Several Writings

21. 14 - 21 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Formality of the Writing Generally, the law only requires a writing containing the essential terms of the parties’ agreement. Any writing can be enforceable under this rule. A written contract does not have to be drafted by a lawyer or formally typed to be legally binding.

22. 14 - 22 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Required Signature The Statute of Frauds and the UCC require the written contract, whatever its form, to be signed by the party against whom enforcement is sought. The signature of the person who is enforcing the contract is not necessary.

23. 14 - 23 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Required Signature (continued) Electronic Signature in Global and National Commerce Act (2000) Recognizes an electronic signature, or E-signature. The act gives an E-signature the same force and effect as a pen-inscribed signature on paper.

24. 14 - 24 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Integration of Several Writings The combination of several writings to form a single contract. The entire writing does not have to appear in one document to be an enforceable contract. –Incorporation by reference –Implied integration

25. 14 - 25 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Interpreting Contract Words and Terms If the parties have not defined the words and terms of a contract, the courts apply the following standards of interpretation : Ordinary words are given their usual meaning according to the dictionary. Technical words are given their technical meaning unless a different meaning is clearly intended.

26. 14 - 26 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Interpreting Contract Words and Terms (continued) Specific terms are presumed to qualify general terms. Where a preprinted form contract is used, –Typed words prevail over preprinted words. –Handwritten words prevail over both preprinted and typed words.

27. 14 - 27 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Interpreting Contract Words and Terms (continued) If both parties are members of the same trade or profession, words will be given their meaning as used in the trade. Words will be interpreted to promote the principal object of the contract. If there is ambiguity in a contract, the ambiguity will be resolved against the party who drafted the contract.

28. 14 - 28 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Parol Evidence Rule Parol Evidence – Any oral or written words outside the four corners of the written contract. Parol Evidence Rule –Originally developed by courts as part of the common law of contracts. –The UCC has adopted the parol evidence rule as part of the law of sales contracts.

29. 14 - 29 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Parol Evidence Rule (continued) The rule states that if a written contract is a complete and final statement of the parties’ agreement, any prior or contemporaneous oral or written statements that alter, contradict, or are in addition to the terms of the written contract are inadmissible in court regarding a dispute over the contract.

30. 14 - 30 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Exceptions to the Parol Evidence Rule Parol evidence may be admitted in court if it: Shows that a contract is void or voidable. –e.g., evidence that the contract was induced by fraud, misrepresentation, duress, undue influence, or mistake. Explains ambiguous language.

31. 14 - 31 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Exceptions to the Parol Evidence Rule (continued) Concerns a prior course of dealing or course of performance between the parties or a usage of trade. Fills in the gaps in the contract. Corrects an obvious clerical or typographical error. –The court can reform the contract to reflect the correction.

32. 14 - 32 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Parol Evidence Rule (continued) Merger, or Integration Clause A clause in a contract that stipulates that it is a complete integration and the exclusive expression of the parties’ agreement. Parol evidence may not be introduced to explain, alter, contradict, or add to the terms of the contract.

33. 14 - 33 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Writing Requirements for International Contracts United Nations Convention on Contracts for the International Sale of Goods (CISG) Article 11 of the Convention states: –“A contract of sale need not be concluded in or evidenced by writing an is not subject to any other requirement as to form.” –“It may be by any means, including witnesses.”

34. 14 - 34 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Writing Requirements for International Contracts (continued) Article 96, however, authorizes a contracting nation that requires written sales contracts, –To stipulate at the time of ratification that Article 11 (and some other provisions of the Convention) does not apply if any party operates a business in that nation.