A statute of frauds is a law that requires that certain contracts be in writing, and that those contracts be signed by the parties who are to be bound by the contract.

The Statute of Frauds

Although there is significant variation between jurisdictions, the most common types of contracts to which a statute of fraud applies are:

• Contracts involving the sale or transfer of an interest in real property;

• Contracts to answer for the debt or duty of another;

• Contracts that, by their terms, cannot be completed within one year.

  The fact that performance of a contract is not completed within one year does not mean that it is voidable under a statute of frauds. For the statute to apply, the actual terms of the contract must make it impossible for performance to be completed within one year; and

• Certain contracts for the sale of goods, under the Uniform Commercial Code (UCC).

Statutes of fraud also commonly prohibit oral contracts entered in consideration of marriage -- where one person promises to provide something to the other in exchange for the marriage, as occurs with a prenuptial agreement.

To satisfy the requirements of a typical statute, the writing must identify the contracting parties, recite the subject matter of the contract such that it can reasonably be identified, and present the essential terms and conditions of the parties' agreement. (Under the Uniform Commercial Code, to satisfy the statute, the writing for the sale of goods need only be signed by the party to be charged, and a quantity term.)

Even without respect to the Statute of Frauds, it is good practice to reduce the essential terms of any contract to a signed, written agreement. Even when a Statute of Frauds does not apply to an oral contract,¹ it may be very difficult to prove and enforce the contract in the absence of a written agreement.

The Purpose of a Statute of Frauds

The purpose of a statute of frauds is, as the name suggests, to prevent injury from fraudulent conduct. There is some criticism of the continued existence of these statutes, as they are often used by parties who freely entered into fair contracts yet wish to avoid having to fulfill their agreements.

At the same time, the abuses these statutes were designed to prevent are quite real, so a strong argument remains to keep them in place. It is also arguably good public policy to require that parties to certain significant transactions, such as those of long duration or which involve real estate, reduce their agreements to writing. A writing will both reduce the chance of future litigation, and also give the parties the opportunity to take a second look at the terms and conditions of their agreement before it becomes final.

The Effect of a Statute of Frauds

A statute of frauds does not of itself render a contract void. The statute makes certain contracts voidable by one of the parties, in the event that the party does not wish to follow through on the agreement.

• A contract that is void cannot be enforced.
• A contract that is voidable remains valid unless one of the parties chooses to void the contract.

Exceptions to the Statute of Frauds

As the strict application of a statute of frauds can create an unjust result, in some situations a party to a contract that would otherwise be invalid under a statute of frauds will nonetheless be able to enforce it on the basis of partial performance (also known as part performance) or promissory estoppel.

• Partial performance can be asserted to bar a party who has accepted partial performance by another party under the contract from asserting the Statute of Frauds in order to avoid meeting its own contractual obligations.

• Promissory estoppel² exists where significant inequities (unfairness) would result from releasing a party from the contract, and the party seeking release knew or reasonably should have known that those inequities would be created at the time of the original agreement. For example, where the party which seeks to be released knew that the other party would incur significant expense in obtaining materials which cannot be transferred to other work, a court may find that under the circumstances the contract should be enforced despite the statute of frauds.

As previously noted, if all parties agree that they are bound by the contract, the contract will remain enforceable despite the statute of frauds.

Avoiding Unjust Outcomes

The act of voiding a contract is not intended to enrich one party to an agreement at the expense of another. When a contract is voided by a court, the court will normally attempt to return the parties to their original condition. For example, in the context of a contract for the sale of goods, the party voiding the contract will typically be ordered to return any unused goods, returning the portion that is unused along with compensation for any goods that were consumed, or to return a purchased item while compensating the seller for any wear and tear or damage.

For a contract involving the provision of services for which some services have already been provided, the court will usually order compensation in quantum meruit, the reasonable market value of the services received. For contracts under the Uniform Commercial Code, the UCC addresses this type of situation by providing that the contract remains enforceable to the extent that a seller ahs accepted payment or that a buyer has accepted the delivery of goods covered by the contract.

Footnotes

[1] Sometimes the phrase "verbal contract" is used to describe an unwritten or oral contract. As one meaning of verbal; is "in words", in order to avoid any ambiguity it is best to refer to an unwritten contract as an "oral contracts".

[2] The elements of promissory estoppel are typically:

1. A clear and definite offer;

2. Reasonable expectation of reliance on the offer;

3. Reasonable reliance on the offer by the party receiving the offer; and

4. Detriment as a result of reliance on the offer.