Understanding When Contracts Are Considered Enforceable
In general, a contract is enforceable if it meets the elements of a contract. For a contract to be enforceable, certain conditions must be present: One common misconception that can arise about contracts is that in order to be enforceable, contracts must be in writing. Written contracts are, of course, a feasible alternative to verbal contracts, but many contracts are actually not written down. However , it is important to know the basic requirement for contract enforceability: that there is mutual assent in addition to consideration. Contracts made orally are still valid and enforceable if they meet all of the requirements for an enforceable contract. A simple example of verbal agreement going awry may be two parties agreeing on the amount and price of items that will be sold from one party to the other. When party A places the order and receives the items, however, they may find that the quantity shipped is less than the amount ordered. A violation of the agreement, or breach of contract, has occurred because party B did not deliver the items that party A ordered. Even though there is no written document, this verbal agreement is a valid contract and is enforceable in court.
An Overview of the Statute of Frauds
The Statute of Frauds is a legal concept that provides rules regarding when a contract must be in writing in order to be enforceable. The purpose of the Statute of Frauds is to prevent fraud and injury to parties, which can happen when one party has the power to dictate a written version of the agreement. The Statute of Frauds, itself, does not require contracts to be in writing; it simply provides that certain types of contracts must be in writing to be enforceable. Any written document evidencing a contract within the scope of the Statute of Frauds will suffice, as long as it is signed by the party against whom enforcement is sought. Even if part of the agreement is not in writing, the agreement can still be enforceable to the extent that it is in writing unless the agreement or the action seeking to enforce it is specifically proscribed by the Statute of Frauds.
Exceptions to the Written Contract Requirement
Generally, for most contracts, an oral agreement, if clear enough, may be enforceable, as the issue becomes one of evidence (are there sufficient circumstances or words of agreement to be able to parse out the contract terms). However, there are key exceptions in which a written agreement is required otherwise the contract could become unenforceable:
- Zoning: You must establish an easement or restriction upon use of real property exceeding one year.
- Sale of Goods When the transaction is $500.00 or more (UCC 2-201).
- An Estate: of an heir, executor, or administrator (if disposition of action is over one year); or on promise by executor to pay (personal representative) – estate debts.
- Loans: Upon promises to lend money or promise to postpone on debts (if the promises themselves are over $1000.00)
- Sale of Land Ownership: Upon any contract having "bond, note or other evidence of indebtedness secured by mortgage or other lien upon real property".
Types of Contracts that Are Required to Be Written
Not all contracts must be in writing to be enforceable, but certain contracts typically do require a written form by law. Local laws in the state where the contract is being entered into will govern which agreements require a written form.
Common contracts that almost always require a written form include real estate agreements and marriage agreements. While all states will vary in law, the following contract types typically require a written form in California, for example:
Marriage agreements (contracts entering into a marriage)
Unmarried cohabitation agreements (contracts entered into by people living together now or in the future)
Real estate purchase agreements
Lease agreements for more than one year
Contracts to buy goods worth more than $500
Contracts to pay someone else’s debt
Contracts that take longer than a year to perform
Unless otherwise governed by local laws, contracts covered by the Statute of Frauds in your state almost always must be in writing to be enforceable.
The Legal Ramifications of Oral Contracts
The legal consequences of an unwritten contract can be significant. In fact, while an oral contract is generally enforceable, there are a host of consequences if a written contract is required but has not been obtained.
In California, for example, failure to comply with the statute of frauds renders the contract unenforceable. California Civil Code §1698(d). Significant, if a contract is required to be in writing and is not, the default rule is that the benefit of the bargain is gone. On the other hand, there are always exceptions – that contracts which are not required to be in writing can be enforced if the party seeking to enforce the contract can establish that the other party to the contract would suffer substantial loss and depriving that party of the benefit of the bargain would be a grievous wrong. Smith v. Jones, (2007) 150 Cal. App. 4th 962, 970. In addition, if performance of the contract is not required until after the death of one of the contracts parties, it is not required to be in writing and can be enforced accordingly. California Civil Code §1624(b)
In Arizona if a contract is required by Arizona law to be in writing, and yet is not, then the contract is not enforceable as a contract. Clark v. Edwards, 109 Ariz. 365 (1973). The contract is absolutely void and unenforceable, and court will not grant any equitable remedy regarding the contract . There are a few exceptions. For example, where a contract is required to be in writing, but yet the party wanting to enforce the unwritten contract provides clear and convincing evidence of the contract, then under efforts to implement the contract none of the parties should suffer an injustice thereby. That is especially true when to do otherwise would leave the parties in a status quo ante as to the parties’ respective rights and duties, or to give the party the benefit of his bargain. Hawley v. Eubank, 5 Ariz. 203 (1903) Therefore, in that exceptional case, the court may be able to provide a remedy. Lee v. First Federal Sav & Loan Assoc., 92 Ariz. 233 (1962).
A third example is in (Idaho) where an oral contract is required to be in writing, and yet is not, then the party who could have enforced the contract cannot enforce the contract, even through equitable remedies such as quantum meruit or unjust enrichment. Gardner v. Molstead, 48 P. 189 (Idho 1896).
One very real and important example of a situation where this comes up is in real estate transactions. In California, the statute of frauds requires a contract for the sale of real property to be in writing, and signed by the party to be charged. California Civil Code §1624(a)(3) If a contract for the sale of real property is not in writing, and signed by the party to be charged, the contract is unenforceable as a matter of law.
Creating Written Contracts: Practical Tips
For all contracts, there are a few best practices to follow to maximize the chance that it is enforceable. The following draft liquor license agreement incorporates these best practices. It includes:
- Names of the Parties – The full and legal names of each of the parties are listed at the top of the agreement where they can be easily found. This is much better than attempting to incorporate a schedule, addendum, or other document into the agreement by listing it at the end in Section 23: Miscellaneous.
- Address of Each of the Parties – The address for each party is listed in the agreement so that there is no confusion as to where notices must be sent. Again, this is a better practice than waiting for the last page to have the address attached.
- Signature Blocks with the Names of Each of the Parties – There are signature blocks with the names of each of the Parties written out above the signature lines. In California, if the contract is an agreement for the sale of real property, recording the contract with the county recorder’s office validates the conveyance. However, if the contract does not have a notary public acknowledgement, there needs to be a provision in the agreement confirming that the signatures of the parties are authentic.
- Sections on Arbitration and Attorneys Fees – The dispute section has an arbitration provision and protections for the prevailing party’s attorneys fees.
- Specific Provisions on Licensing and Licensing Issues – California Alcoholic Beverage Control requires that liquor license applications be filed for approval with the city and county where the license will be located. For this reason, the Seller here is requiring that the Buyer not take any actions with respect to the liquor license except as authorized by law. Accordingly, the Liquor License Schedule is incorporated into the agreement and imposes requirements for the proper completion of the application process.
There may be circumstances when any contract should be notarized. In California, notaries take an acknowledgment. This means that the signer acknowledges that "he [or she] has executed the same freely and voluntarily and for the uses and purposes therein set forth." One source states "an acknowledgment is a formal declaration made by a person before an authorized official, such as a notary public, that the instrument was executed by him voluntarily."
However, generally, you want an acknowledgment to be as simple as possible. Sometimes it is efficient to make the acknowledgment one size fits all. To do so, you can include a general acknowledgment at the end of each document. For example, a general attachment acknowledgment might say:
"ACKNOWLEDGMENT
State of California, County of _____ _______________, the undersigned, being duly sworn, deposes and says that he/she is the ___ _of __ _______________ a __ ___corporation, that he/she is authorized to execute this certificate on behalf of ___ _______________ and it is his/her act that affirms that he/she personally known to him/her or proved to him/her on the basis of satisfactory evidence to be the person whose name(s) is/are subscribed to the within instrument. If required by law, this instrument was signed in the presence of a notary public who is a public officer. Executed and certified this ___ day of ____ ____, at _______________, California. ______________ ______________ ______________ Notary Public for _______________ ______________ ______________
This is the acknowledgment portion of a statement and you can leave the first paragraph blank so there is a square to handwrite the name of the contract.
Consulting a Lawyer for Assistance with Contract Disputes
If you have a contract dispute or are evaluating the terms of your new business agreement, it is advisable to seek legal advice from experienced contract attorneys. Whether or not your contract requires that it be in writing, having a skilled contract draftsperson translate the terms and conditions into a water-tight document will help to avoid litigation. In addition, many types of contracts are so detailed that it is wise to have an expert review the terms long before any disputes arise.
In some cases, you may want your attorney to add provisions that are not required to make the document enforceable , but which add to your protection should a dispute arise. For example, you may want an arbitration clause included in the contract that can reduce the expense involved in a court proceeding.
Another reason to consult a contract attorney is when your business is using form contracts that must be filled out before the contract becomes binding. You may have blanks to complete such as pricing or timeframe, or it may be a contract with several aspects, each of which could lead to litigation. You and your business do not want to risk your financial health by failing to have every point addressed in such a contract.