Question: What does legal capacity mean? What happens if someone with no legal capacity signs a contract?

14 Apr 2023,2:39 PM

 

Discussion #8

Consideration comes in many forms. Financial exchange is the most common but there are many other ways to demonstrate value when bargaining for consideration. Find an interesting case or fact by the court as “legally bargained for consideration” under contract law. Also explain the difference between a gift or gift promise. Why is it important to understand the difference? What is promissory estoppel?

What does legal capacity mean? What happens if someone with no legal capacity signs a contract?

 

Chapter 13

13.

Defenses to Contract Enforceability

Valeri Potapova/Shutterstock.com

Focus Questions

The five Focus Questions below are designed to help improve your understanding. After reading this chapter, you should be able to answer the following questions:

What is the difference between a unilateral and a bilateral mistake?

What are the elements of fraudulent misrepresentation?

What is the essential feature of undue influence?

What types of contracts must be in writing to be enforceable?

What is parol evidence? When is it admissible to clarify the terms of a written contract?

Introduction

“Understanding is a two-way street.”

Eleanor Roosevelt 1884–1962 (First Lady of the United States, 1933–1945)

An otherwise valid contract may still be unenforceable if the parties have not genuinely agreed to its terms. The lack of voluntary consent is a defense to the enforcement of a contract. As Eleanor Roosevelt stated in the chapter-opening quotation, “Understanding is a two-way street.” If one party does not voluntarily consent to the terms of a contract, then there is no genuine “meeting of the minds,” and the law will not normally enforce the contract, as we discuss in the first part of this chapter.

Voluntary consent (assent) may be lacking because of mistake, fraudulent misrepresentation, undue influence, or duress. Generally, parties who demonstrate that they did not genuinely agree to the terms of a contract can choose either to carry out the contract or to rescind (cancel) it and thus avoid the entire transaction.

A contract that is otherwise valid may also be unenforceable if it is not in the proper form. For instance, if a contract is required by law to be in writing and there is no written evidence or electronic record of it, the contract will not be enforced.

13–1. Mistakes

We all make mistakes, so it is not surprising that mistakes are made when contracts are created. In certain circumstances, contract law allows a contract to be avoided on the basis of mistake.

It is important to distinguish between mistakes of fact and mistakes of value or quality. Only a mistake of fact makes a contract voidable. Also, the mistake must involve some material fact—a fact that a reasonable person would consider important when determining a course of action.

Mistakes of fact occur in two forms—unilateral and bilateral (mutual). A unilateral mistake is made by only one of the contracting parties, whereas a mutual mistake is made by both. We look at these two types of mistakes next and illustrate them graphically.

13–1a. Unilateral Mistakes

A unilateral mistake occurs when only one party is mistaken as to a material fact. Generally, a unilateral mistake does not give the mistaken party any right to relief from the contract. In other words, the contract normally is enforceable against the mistaken party.

Example 13.1.

Elena intends to sell her jet ski for $2,500. When she learns that Chin is interested in buying a used jet ski, she sends him an e-mail offering to sell the jet ski to him. When typing the e-mail, however, she mistakenly keys in the price of $1,500. Chin immediately sends Elena an e-mail reply accepting her offer. Even though Elena intended to sell her jet ski for $2,500, she has made a unilateral mistake and is bound by the contract to sell it to Chin for $1,500.

This rule has at least two exceptions. * The contract may not be enforceable in either of the following situations.

The other party to the contract knows or should have known that a mistake of fact was made.

The error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. If, for instance, a contractor’s bid was significantly low because of a mistake in totaling the estimated costs, any contract resulting from the bid normally may be rescinded.

In both situations, the mistake must still involve some material fact.

13–1b. Bilateral (Mutual) Mistakes

A bilateral mistake is a “mutual misunderstanding concerning a basic assumption on which the contract was made.”* When both parties are mistaken about the same material fact, the contract can be rescinded, or canceled, by either party, although it is usually the adversely affected party that takes that step. Note that, as with unilateral mistakes, the mistake must be about a material fact.

Contract May Be Reformed

Focus Question

1.

What is the difference between a unilateral and a bilateral mistake?

Rather than rescind a contract flawed by a bilateral mistake, judges often prefer to reform the agreement. Reformation allows a court, using its powers of equity, to restore the original goals of the parties who entered into the contract.

Case Example 13.2. Jason Allen was injured in a work-related automobile accident. Allen’s employer had workers’ compensation insurance with Accident Fund Insurance Company of America. After a series of disputes and negotiations, Allen and Accident Fund entered into a voluntary payment agreement (VPA) under which the insurance company consented to pay Allen $264.53 per week for 54.2 weeks.

Neither side noticed, however, that the arithmetic of the VPA was wrong. Accident Fund should have been paying Allen $264.53 per week for 131.7 weeks, not 54.2 weeks. A Michigan appellate court found that the faulty calculations had escaped the notice of both parties. To correct this bilateral mistake, the court ordered that the VPA be reformed with the correct figures, reflecting the intentions of Allen and Accident Fund at the time of their agreement. *

When the Parties Reasonably Interpret a Term Differently

A word or term in a contract may be subject to more than one reasonable interpretation. If the parties to the contract attach materially different meanings to the term, their mutual misunderstanding may allow the contract to be rescinded or reformed.

Case Example 13.3.

Offshore Energy Services (OES) contracted with companies to provide workers at offshore oil drilling operations. In its contract with rig operators, OES had an indemnity provision stating that it would insure the companies for tort claims filed against them by an OES employee. Raylin Richard, an OES employee, was injured while working on an oil rig. Richard filed a personal injury suit against Anadarko Petroleum, the head of that drilling project.

OES paid $2.5 million to Richard to settle the lawsuit, but OES’s insurance company, Liberty Mutual, denied coverage. Liberty took the position that the indemnity clause in the contract between OES and Anadarko explicitly covered “subcontractors” but did not mention “contractors” like Anadarko. Both OES and Anadarko had thought that the indemnity provision applied to subcontractors and contractors, so they claimed that there had been a mutual mistake. The district court agreed and reformed the contract to include the word contractors as well as subcontractors. Thus, Liberty Mutual had to cover the amounts OES paid. *

Ethical Issue

Should a surviving member of Lynyrd Skynyrd abide by a thirty-year-old consent decree? One of the biggest songs of the 1970s was “Free Bird” by the southern rock group Lynyrd Skynyrd. Not too long after its release, the group’s touring plane crashed, killing band members Ronnie Van Zant and Steve Gaines, among others. A decade later, all surviving band members became bound by a consent decree allowing the surviving musicians to tell only their personal individual stories rather than the story of the band. The order also prohibited the use of the group’s name by any surviving member.

Flash forward three decades. Former Lynyrd Skynyrd drummer Artimus Pyle, along with Cleopatra Films, went into production of a biopic about the plane crash entitled Street Survivors: The True Story of the Lynyrd Skynyrd Plane Crash. Van Zant’s brother, Johnny, and others sought a permanent injunction blocking the production and distribution of the film. The president of Cleopatra Films argued that the company had First Amendment rights to make the movie. The presiding judge ruled otherwise. “None of the defendants received the requisite authorization under the terms of the consent order in depiction of [Ronnie] Van Zant or Gaines or in the use of the Lynyrd Skynyrd name, and therefore all have violated the consent order.” *

13–1c. Mistakes of Value

If a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract normally is enforceable.

Example 13.4.

Pablo buys a violin from Bev for $250. Although the violin is very old, neither party believes that it is valuable. Later, however, an antiques dealer informs the parties that the violin is rare and worth thousands of dollars. Here, both parties were mistaken, but the mistake is a mistake of value rather than a mistake of fact. Because mistakes of value do not warrant contract rescission, Bev cannot rescind the contract.

The reason that mistakes of value do not affect the enforceability of contracts is that value is variable. Depending on the time, place, and other circumstances, the same item may be worth considerably different amounts. When parties form a contract, their agreement establishes the value of the object of their transaction—for the moment. Each party is considered to have assumed the risk that the value will change in the future or prove to be different from what was originally thought. Without this rule, almost any party who considered a bargain unfair could argue mistake.

13–2. Fraudulent Misrepresentation

Although fraud is a tort, the presence of fraud also affects the authenticity of the innocent party’s consent to a contract. When an innocent party is fraudulently induced to enter into a contract, the contract usually can be avoided because that party has not voluntarily consented to the terms.* Normally, the innocent party can either rescind the contract or enforce it and seek damages for any harms resulting from the fraud.

Generally, fraudulent misrepresentation refers only to misrepresentation that is consciously false and is intended to mislead another. That is, the person making a fraudulent misrepresentation knows or believes that the assertion is false or knows that there is no basis (stated or implied) for the assertion.*

Focus Question

2.

What are the elements of fraudulent misrepresentation?

Typically, fraud involves the following elements:

A misrepresentation of a material fact must occur.

There must be an intent to deceive.

The innocent party must justifiably rely on the misrepresentation.

To collect damages, a party must have been harmed as a result of the misrepresentation.

13–2a. Misrepresentation Has Occurred

The first element of proving fraud is to show that misrepresentation of a material fact has occurred. This misrepresentation can occur by words or actions. For instance, an art gallery owner’s statement “This painting is a Picasso” is a misrepresentation of fact if the painting was done by another artist. Similarly, if a customer asks to see only Jasper Johns paintings and the owner immediately leads the customer over to paintings that were not done by Johns, the owner’s actions can be a misrepresentation.

 

Know This

To collect damages in almost any lawsuit, there must be some sort of injury.

 

Sometimes, a party agrees to enter into a contract on the basis of a promise that is not included in the document evidencing the agreement. Suppose that the document includes a merger clause, which states, “This agreement contains the entire agreement between the parties. There are no understandings or agreements between the parties except as expressly set forth.” The issue in the following case concerned the effect of a merger clause on an allegation that the contract containing it was procured by fraud.

 

Case 13.1.McCullough v. Allstate Property and Casualty Insurance Co.

Alabama Court of Civil Appeals, 256 So.3d 103 (2018).

Facts

Allstate Property and Casualty Insurance Company issued a policy to Jerry McCullough, insuring his pickup truck. McCullough loaned the truck to an acquaintance, who returned it damaged. McCullough filed a claim on the policy. Allstate treated the claim as involving multiple different claims (each with a $250 deductible). Allstate also reported these claims to an insurance exchange, Verisk Analytics Automobile Property Loss Underwriting Service (A-PLUS).*

 

Contending that the damage had resulted from only one claim, McCullough filed a suit in a federal district court against Allstate. The insurer agreed to settle the suit for $8,000. McCullough agreed to this amount, but only if Allstate corrected the report to reflect that he was making only one insurance claim and that Allstate paid nothing on that claim. (McCullough did not feel that the $8,000 was a payment for the damage to his truck.) Allstate’s lawyer sent McCullough an e-mail agreeing to these terms, but the promise was not included in the release and settlement agreement that the parties signed. The release had a merger clause saying that there were no other agreements, verbal or otherwise, between the parties except as set forth in the contract.

 

Later, McCullough learned that Allstate had reported to A-PLUS that it had paid $8,000 to him on his claim. He filed a suit in an Alabama state court against Allstate, seeking damages for fraud. Both parties filed motions for summary judgment. The court granted Allstate’s motion and denied McCullough’s. McCullough appealed.

 

Issue

Should McCullough be allowed to present evidence that the release was procured by fraud?

Decision

Yes. A state intermediate appellate court reversed the lower court’s summary judgment in favor of Allstate, affirmed the court’s denial of McCullough’s motion for summary judgment, and remanded the case. Genuine issues of material fact precluded summary judgment on McCullough’s claim for fraud.

Reason

Allstate argued that McCullough’s claim was barred by a merger clause in the release. The appellate court pointed out that under Alabama state law, a merger clause does not bar evidence of fraud in the inducement of a contract. “To hold otherwise is to encourage deliberate fraud.” Thus, Allstate’s motion for summary judgment should not have been granted.

McCullough’s motion for summary judgment, however, was properly denied. McCullough asserted that he settled the federal lawsuit because he was promised that no payment on the claim would be on record. The release did not specify this promise, and Allstate later reported an $8,000 payment to A-PLUS. The court concluded that these allegations presented “a genuine issue of material fact as to whether Allstate, willfully to deceive, or recklessly without knowledge, agreed to report an amount of $0 on the claim and whether McCullough reasonably relied on any representation outside those contained in the release.”

Critical Thinking

Legal Environment In most cases involving the interpretation and application of a contract, a party is not allowed to present evidence outside the document expressing the parties’ agreement. Why not?

What If the Facts Were Different? Suppose that under the law, a merger clause barred evidence of fraud in the inducement of a contract. How would this affect contract negotiations? Would the result in this case have been different? Discuss.

Misrepresentation by Conduct

Misrepresentation also occurs when a party takes specific action to conceal a fact that is material to the contract.* Therefore, if a seller’s actions prevent a buyer from learning of some fact that is material to the contract, the seller’s behavior constitutes misrepresentation by conduct. It would also be misrepresentation by conduct for a seller to untruthfully deny knowledge of facts that are material to the contract when a buyer requests such information.

13–2b. Intent to Deceive

The second element of fraud is knowledge on the part of the misrepresenting party that facts have been misrepresented. This element, usually called scienter,* or “guilty knowledge,” generally signifies that there was an intent to deceive.

 

Scienter clearly exists if a party knows that a fact is not as stated.

Example 13.8.

Richard applies for a position as a business law professor two weeks after his release from prison. On his résumé, he lies and says that he was a corporate president for fourteen years and taught business law at another college. After he is hired, his probation officer alerts the school to Richard’s criminal history. The school immediately fires him. If Richard sues the school for breach of his employment contract, he is unlikely to succeed. Because Richard clearly exhibited an intent to deceive the college by not disclosing his personal history, the school can rescind his employment contract without incurring liability.

Scienter also exists if a party makes a statement believing that the statement is not true or makes a statement recklessly, without regard to whether it is true or false. Finally, this element is met if a party says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Innocent Misrepresentation

If a person makes a statement that the person believes to be true but that actually misrepresents material facts, the person is guilty only of an innocent misrepresentation, not of fraud. When an innocent misrepresentation occurs, the aggrieved party can rescind the contract but usually cannot seek damages.

Example 13.9.

Bryant submits an application for no-fault automobile insurance with State Farm in which he states that he has not received any traffic citations for three years. State Farm accepts the application, and Bryant pays the premium.

Soon thereafter, State Farm discovers that, one year and eight months earlier, Bryant had been cited for operating a motor vehicle while impaired. Even if Bryant’s misrepresentation on the application is an innocent mistake, State Farm can void the insurance contract and return the premium because the misrepresentation is material.

Negligent Misrepresentation

Sometimes, a party will make a misrepresentation through carelessness, believing the statement is true. Such a misrepresentation may constitute negligent misrepresentation if the party did not exercise reasonable care in uncovering or disclosing the facts or did not use the skill and competence that the party’s business or profession requires.

Example 13.10.

Dirk, an operator of a weight scale, certifies the weight of Sneed’s commodity. If Dirk knows that the scale’s accuracy has not been checked for more than three years, his action may constitute negligent misrepresentation.

In almost all states, negligent misrepresentation is equal to scienter, or knowingly making a misrepresentation. In effect, negligent misrepresentation is treated as fraudulent misrepresentation, even though the misrepresentation was not purposeful. In negligent misrepresentation, culpable ignorance of the truth supplies the intention to mislead, even if the defendant can claim, “I didn’t know.”

13–2c. Justifiable Reliance on the Misrepresentation

The third element of fraud is reasonably justifiable reliance on the misrepresentation of fact. The deceived party must have a justifiable reason for relying on the misrepresentation. Also, the misrepresentation must be an important factor (but not necessarily the sole factor) in inducing the deceived party to enter into the contract.

Know This

A statement of opinion is neither a contract offer, nor a contract term, nor fraud.

Reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements (such as “this pickup truck will get fifty miles to the gallon”). The same rule applies to defects in property sold. If the defects would be obvious on inspection, the buyer cannot justifiably rely on the seller’s representations. If the defects are hidden or latent, however, the buyer is justified in relying on the seller’s statements.

Case Example 13.11.

Clifford Cronkelton negotiated with Patrick Shivley to buy a car wash in Ohio that had closed down due to bankruptcy. Cronkelton inspected the property and knew that he would have to replace some of the equipment, but he was concerned that the property needed to be winterized to protect it from damage. Shivley assured Cronkelton that the winterizing would be done.

Shivley contacted Guaranteed Construction Services, LLC, which hired Strayer Company to winterize the property. Strayer told Shivley that the only way to avoid problems was to leave the heat on at the car wash, but Shivley knew that the bank had shut off the heat. Later, the car wash was damaged by freezing. Although Shivley informed the bank about the damage, he did not tell Cronkelton, who did not become aware of the damages until after he had he bought the car wash. Cronkelton sued Guaranteed and Shivley for fraud and won. He was awarded more than $140,000 in damages. The defendants appealed. The reviewing court affirmed, holding that Cronkelton had justifiably relied on Shivley’s representations that the car wash had been winterized.*

13–2d. Injury to the Innocent Party

Most courts do not require a showing of harm in an action to rescind a contract. These courts hold that because rescission returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary. In contrast, to recover damages caused by fraud, proof of harm is universally required. The measure of damages is ordinarily equal to the property’s value had it been delivered as represented, less the actual price paid for the property.

In some situations, it may be difficult to identify an “innocent” party. Each year, for example, numerous essays are sold online to students who pass the work off as their own. To learn about the contractual ramifications of these transactions, in which neither party is entirely innocent, see this chapter’s Adapting the Law to the Online Environment feature.

13–3. Undue Influence and Duress

A contract lacks voluntary consent and is unenforceable if undue influence or duress is present.

13–3a. Undue Influence

Undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party’s free will. A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.*

One Party Dominates the Other

In various types of relationships, one party may have an opportunity to dominate and unfairly influence another party. Minors and elderly people, for instance, are often under the influence of guardians (persons who are legally responsible for them). If a guardian induces a young or elderly ward (the person whom the guardian looks after) to enter into a contract that benefits the guardian, the guardian may have exerted undue influence. Undue influence can arise from a number of confidential or fiduciary relationships, including attorney-client, physician-patient, guardian-ward, parent-child, husband-wife, and trustee-beneficiary.

The essential feature of undue influence is that the party being taken advantage of does not exercise free will in entering into a contract. It is not enough that a person is elderly or suffers from some mental or physical impairment. There must be clear and convincing evidence that the person did not act with free will. Similarly, the existence of a fiduciary relationship alone is insufficient to prove undue influence.

13–3b. Duress

Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement. The use of threats to force a party to enter into a contract constitutes duress, as does the use of blackmail or extortion to induce consent. Duress is both a defense to the enforcement of a contract and a ground for rescission of a contract.

To establish duress, there must be proof of a threat to do something that the threatening party has no right to do. Generally, for duress to occur, the threatened act must be wrongful or illegal, and it must render the person who receives the threat incapable of exercising free will. A threat to exercise a legal right, such as the right to sue someone, ordinarily does not constitute duress.

13–4. The Writing Requirement

Another defense to the enforceability of a contract is form—specifically, some contracts must be in writing. All states require certain types of contracts to be in writing or evidenced by a written memorandum or an electronic record. In addition, the party or parties against whom enforcement is sought must have signed the contract, unless certain exceptions apply (as discussed later in this chapter). In this text, we refer to these state statutes collectively as the Statute of Frauds.

 

Focus Question

4.

What types of contracts must be in writing to be enforceable?

The following types of contracts are said to fall “within” or “under” the Statute of Frauds and therefore require a writing:

Contracts involving interests in land.

Contracts that cannot by their terms be performed within one year from the day after the date of formation.

Collateral, or secondary, contracts, such as promises to answer for the debt or duty of another.

Promises made in consideration of marriage.

Under the Uniform Commercial Code, contracts for the sale of goods priced at $500 or more.

The actual name of the Statute of Frauds is misleading because it does not apply to fraud. Rather, in an effort to prevent fraud, the statute denies enforceability to certain contracts that do not comply with its requirements. The name derives from an English act passed in 1677 that was titled “An Act for the Prevention of Frauds and Perjuries.”

13–4a. Contracts Involving Interests in Land

A contract calling for the sale of land is not enforceable unless it is in writing or evidenced by a written or electronic memorandum. Land is real property and includes all physical objects that are permanently attached to the soil, such as buildings, fences, trees, and the soil itself. The Statute of Frauds operates as a defense to the enforcement of an oral contract for the sale of land.

Example 13.13.

Skylar contracts orally to sell his property in Fair Oaks to Beth. If he later decides not to sell, under most circumstances, Beth cannot enforce the contract.

The Statute of Frauds also requires written evidence of contracts for the transfer of other interests in land, such as mortgage agreements and leases. Similarly, an agreement that includes an option to purchase real property must be in writing for the option to be enforced. The issue in the following case was whether a contract for a sale of land met this requirement.

Case 13.2.Sloop v. Kiker

Court of Appeals of Arkansas, Division III, 2016 Ark.App. 125, 484 S.W.3d 696 (2016).

Facts

Russell and Sally Kiker owned a house in Newton County, Arkansas. Mona Sloop agreed to buy it for $850,000. The parties signed a contract that identified the property by its street address and stipulated a $350,000 down payment, which was nonrefundable if closing did not occur by August 31. On the same day, they executed a deed containing a formal, legal description of the property by metes and bounds. (Metes and bounds is a way of describing the boundary lines of property according to the distance between two points.) They also agreed that Sloop could live in the house as caretaker until the August 31 deadline.

When the closing had not occurred by September 6, the Kikers filed a suit in an Arkansas state court against Sloop, seeking an order to remove her from the property and a declaration that they were entitled to keep the down payment. Sloop filed a counterclaim for the return of the $350,000. She argued that their contract violated the Statute of Frauds. The court issued a summary judgment in the favor of the Kikers. Sloop appealed.

Issue

Does a contract that describes the real property being sold by its street address satisfy the Statute of Frauds?

Decision

Yes. A state intermediate appellate court affirmed the judgment of the lower court.

Reason

Sloop argued that the contract did not satisfy the Statute of Frauds because it did not identify the Kikers as the sellers and it did not contain a sufficient description of the property. The court pointed out, however, that the deed the parties executed on the same day as the contract identified the Kikers as “grantors” and included a legal description of the property. “Generally, instruments executed at the same time by the same parties, for the same purpose, and in the course of the same transaction, are, in the eyes of the law, one instrument and will be read and construed together.

“Moreover, if a contract furnishes a means by which realty can be identified—a key to the property’s location—the Statute of Frauds is satisfied.” In this case, the designation in the contract of the premises by its street address met the requirement of the Statute of Frauds that the property being transferred be described with sufficient certainty for it to be identified.

Critical Thinking

Legal Environment Why does the Statute of Frauds require that a contract for a sale of land contain a sufficient description of the property?

What If the Facts Were Different? Suppose that the court in the Sloop case had not construed the deed and the contract as one instrument but as separate documents. How might that have affected the result? Explain.

13–4b. The One-Year Rule

Contracts that cannot, by their own terms, be performed within one year from the day after the contract is formed must be in writing to be enforceable. The reason for this rule is that the parties’ memory of their contract’s terms is not likely to be reliable for longer than a year.

Time Period Starts the Day after the Contract Is Formed

The one-year period begins to run the day after the contract is made.

Example 13.14.

Superior University forms a contract with Kimi stating that she will teach three courses in history during the coming academic year (September 15 through June 15). If the contract is formed in March, it must be in writing to be enforceable—because it cannot be performed within one year. If the contract is formed in July, in contrast, it will not have to be in writing to be enforceable—because it can be performed within one year.

13–4c. Collateral Promises

A collateral promise, or secondary promise, is one that is ancillary (subsidiary) to a principal transaction or primary contractual relationship. In other words, a collateral promise is one made by a third party to assume the debts or obligations of a primary party to a contract if that party does not perform. Any collateral promise of this nature falls under the Statute of Frauds and therefore must be in writing to be enforceable.

Primary versus Secondary Obligations

An understanding of this concept requires the ability to distinguish between primary and secondary promises and obligations. A promise to pay another person’s debt (or other obligation) that is not conditioned on the person’s failure to pay (or perform) is a primary obligation. A promise to pay another’s debt only if that party fails to pay is a secondary obligation. A contract in which a party assumes a primary obligation normally does not need to be in writing to be enforceable, whereas a contract assuming a secondary obligation does.

Example 13.17.

Nigel tells Dr. Lu, an orthodontist, that he will pay for the services provided for Nigel’s niece. Because Nigel has assumed direct financial responsibility for his niece’s debt, this is a primary obligation and need not be in writing to be enforceable. In contrast, if Nigel commits to paying his niece’s orthodontist bill only if her mother does not, it is a secondary obligation. In that situation, Lu must have a signed writing or record proving that Nigel assumed this obligation for it to be enforced.

 

An Exception—The “Main Purpose” Rule

An oral promise to answer for the debt of another is covered by the Statute of Frauds unless the guarantor’s purpose in accepting secondary liability is to secure a personal benefit. Under the “main purpose” rule, this type of contract need not be in writing.* The assumption is that a court can infer from the circumstances of a case whether a “leading objective” of the promisor was to secure a personal benefit.

Example 13.18.

Carrie contracts with Custom Manufacturing Company to have some machines custom made for her factory. She promises Newform Supply, Custom’s supplier, that if Newform continues to deliver the materials to Custom for the production of the custom-made machines, she will guarantee payment. This promise need not be in writing, even though the effect may be to pay the debt of another, because Carrie’s main purpose is to secure a benefit for herself.

 

Another typical application of the main purpose doctrine occurs when one creditor guarantees a debtor’s debt to another creditor to forestall litigation. The purpose is to allow the debtor to remain in business long enough to generate profits sufficient to pay both creditors. In this situation, the guaranty does not need to be in writing to be enforceable.

13–4d. Promises Made in Consideration of Marriage

A unilateral promise to make a monetary payment or to give property in consideration of marriage must be in writing.

Example 13.19.

Evan promises to buy Celeste a house in Maui if she marries him. Celeste would need written evidence of Evan’s promise to enforce it.

The same rule applies to a prenuptial agreement—an agreement made before marriage that defines each partner’s ownership rights in the other partner’s property.

Example 13.20.

Before marrying country singer Keith Urban, actress Nicole Kidman entered into a prenuptial agreement with him. Kidman agreed that if the couple divorced, she would pay Urban $640,000 for every year they had been married, unless Urban was using drugs. In that event, he would receive nothing.

13–4e. Contracts for the Sale of Goods

The Uniform Commercial Code (UCC) includes Statute of Frauds provisions that require written evidence or an electronic record of a contract for the sale of goods priced at $500 or more. (This low threshold amount may be increased in the future.)

A writing that will satisfy the UCC requirement need only state the quantity term (six thousand boxes of cotton gauze, for instance). The contract will not be enforceable for any quantity greater than that set forth in the writing.

Other agreed-on terms can be omitted or even stated imprecisely in the writing, as long as they adequately reflect both parties’ intentions. A written memorandum or series of communications (including e-mail) evidencing a contract will suffice, provided that the writing is signed by the party against whom enforcement is sought.

13–4f. Exceptions to the Statute of Frauds

Exceptions to the applicability of the Statute of Frauds are made in certain situations. We describe those situations in the following subsections.

Partial Performance

When a contract has been partially performed and the parties cannot be returned to their positions prior to the contract’s formation, a court may grant specific performance. Specific performance is an equitable remedy that requires that a contract be performed according to its precise terms. The parties still must prove that an oral contract existed, of course.

In cases involving oral contracts for the transfer of interests in land, courts usually look at whether justice is better served by enforcing the oral contract when partial performance has taken place. For instance, if the purchaser has paid part of the price, taken possession, and made valuable improvements to the property, a court may grant specific performance.

In some states, mere reliance on certain types of oral contracts is enough to remove them from the Statute of Frauds. Under the UCC, an oral contract for goods priced at $500 or more is enforceable to the extent that a seller accepts payment or a buyer accepts delivery of the goods.

13–4g. Sufficiency of the Writing

A written contract will satisfy the writing requirement of the Statute of Frauds, as will a written memorandum or an electronic record that evidences the agreement and is signed by the party against whom enforcement is sought. The signature need not be placed at the end of the document but can be anywhere in the writing. A signature can consist of a typed name or even just initials rather than the full name.

What Constitutes a Writing?

A writing can consist of any confirmation, invoice, sales slip, check, fax, or e-mail—or such items in combination. The written contract need not be contained in a single document to constitute an enforceable contract. One document may incorporate another document by expressly referring to it. Several documents may form a single contract if they are physically attached—such as by staple, paper clip, or glue—or even if they are only placed in the same envelope. 13–5. The Parol Evidence Rule

Focus Question

5.

What is parol evidence? When is it admissible to clarify the terms of a written contract?

Sometimes, a written contract does not include—or contradicts—an oral understanding reached by the parties before or at the time of contracting. For instance, a landlord might tell a person who agrees to rent an apartment that cats are permitted, whereas the lease contract clearly states that no pets are allowed. In determining the outcome of such disputes, the courts look to a common law rule called the parol evidence rule.

Under this rule, if a court finds that a written contract represents the complete and final statement of the parties’ agreement, then it will not allow either party to present parol evidence. Parol evidence is testimony or other evidence of communications between the parties that is not contained in the contract itself. Thus, a party normally cannot present evidence of the parties’ “prior or contemporaneous agreements or negotiations” if that evidence contradicts or varies the terms of the parties’ written contract.*

The following case involved an alleged contract that appeared to be unenforceable for lack of consideration. One of the parties sought to present evidence outside the written terms of the deal to establish consideration. Could the court consider this evidence?

 

Case 13.3.Habel v. Estate of Capelli

Court of Appeals of Wisconsin, 2020 WI App 15, 391 Wis.2d 399, 941 N.W.2d 858 (2020).

Facts

Alfred Habel operated a sports memorabilia business. John Capelli, a good customer, took some items for which he promised to pay later. When Habel sought payment, Capelli told him that he did not want his family to know how much he had spent and proposed that, in exchange for forbearance on the debt, Habel could sell Capelli’s entire collection on his death and take a commission. Habel agreed, and they wrote out the terms, which gave Habel the choice not to perform the sale.

Sixteen years later, Capelli died. Habel showed the written agreement to Capelli’s widow, Julie, who refused to let Habel sell the collection. Habel filed a suit in a Wisconsin state court against Capelli’s estate, seeking specific performance or damages.

The estate argued that because the written terms gave Habel the option not to perform, there was no consideration on his part for the deal, making it unenforceable. The court agreed and granted a judgment in favor of the estate. Habel appealed, claiming that his forbearance was consideration.

Issue

Did the parol evidence rule prevent Habel from presenting evidence of his purported forbearance?

Decision

Yes. A state intermediate appellate court affirmed the judgment of the lower court. Habel’s alleged agreement with Capelli was unenforceable for lack of consideration.

Reason

When the written terms of an alleged contract are at issue, the parol evidence rule prevents a party from presenting evidence that contradicts or varies those terms.

In the terms of the alleged contract at issue in this case, Habel did not promise to do anything. Capelli “willed” Habel the right to sell Capelli’s sports memorabilia collection. But the document provided that the parties’ “agreement” could be terminated “in the event Habel shall not accept” to perform it. Under this provision, Habel assumed no obligation and could opt out of the deal. The alleged contract was thus rendered unenforceable for lack of consideration.

The court reasoned that it could not consider evidence of Habel’s claim because the circumstances from which forbearance allegedly arose were not set out in the terms. The parol evidence rule barred the court’s review of any such extrinsic evidence. “Habel’s parol evidence cannot be used to vary or add terms, such as consideration—some detriment or obligation by Habel—when the document makes clear that all mutual promises are set forth therein.”

Critical Thinking

Legal Environment Why is evidence of a prior negotiation or agreement that contradicts or varies the terms of a written agreement inadmissible in a court under the parol evidence rule?

 

What If the Facts Were Different? Suppose that the written terms of the deal between Habel and Capelli had referred to other documents, such as unpaid invoices for Capelli’s purchases, to be included as part of their alleged agreement. Would the result have been different? Discuss.

Example 13.23.

Simpson orally agrees to sell some land next to a shopping mall to Terro Properties. Simpson gives Terro an unsigned memo that contains a legal description of the property, and Terro gives Simpson an unsigned first draft of their contract. Simpson sends Terro a signed letter that refers to the memo and to the first and final drafts of the contract. Terro sends Simpson an unsigned copy of the final draft of the contract with a signed check stapled to it. Together, the documents can constitute a writing sufficient to satisfy the Statute of Frauds and bind both parties to the terms of the contract as evidenced by the writings.

What Must Be Contained in the Writing?

A memorandum or note evidencing an oral contract need only contain the essential terms of the contract, not every term. There must, of course, also be some indication that the parties voluntarily agreed to the terms. As mentioned, under the UCC, a writing evidencing a contract for the sale of goods need only state the quantity and be signed by the party against whom enforcement is sought.

Under most state laws, the writing must also name the parties and identify the subject matter, the consideration, and the essential terms with reasonable certainty. In addition, contracts for the sale of land usually must state the price and describe the property with sufficient clarity to allow these terms to be determined without reference to outside sources.

Note that because only the party against whom enforcement is sought must have signed the writing, a contract may be enforceable by one of its parties but not by the other.

Example 13.24.

Rock orally agrees to buy Betty’s lake house and lot for $350,000. Betty writes Rock a letter confirming the sale by identifying the parties and the essential terms of the sales contract—price, method of payment, and legal address—and signs the letter. Betty has made a written memorandum of the oral land contract. Because she signed the letter, she normally can be held to the oral contract by Rock. Betty cannot enforce the agreement against Rock, however. Because he has not signed or entered into a written contract or memorandum, Rock can plead the Statute of Frauds as a defense.

13–5a. Exceptions to the Parol Evidence Rule

Know This

The parol evidence rule and its exceptions relate to the rules concerning the interpretation of contracts.

Because of the rigidity of the parol evidence rule, courts make several exceptions. These exceptions include the following:

 

Contracts subsequently modified. Evidence of a subsequent modification (oral or written) of a written contract can be introduced in court. Oral modifications may not be enforceable, however, if they come under the Statute of Frauds (such as a modification that increases the price of the goods being sold to more than $500). Also, oral modifications will not be enforceable if the original contract provides that any modification must be in writing.*

Voidable or void contracts. Oral evidence can be introduced in all cases to show that the contract was voidable or void (for instance, induced by mistake, fraud, or misrepresentation). The reason is simple: if deception led one of the parties to agree to the terms of a written contract, oral evidence indicating fraud should not be excluded. Courts frown on bad faith and are quick to allow the introduction at trial of parol evidence when it establishes fraud.

Contracts containing ambiguous terms. When the terms of a written contract are ambiguous, evidence is admissible to show the meaning of the terms.

Case Example 13.25.

Howard and Eleanor Windows owned a home in Pennsylvania. When raw sewage backed up in the city’s sewer system and infiltrated their home, they filed a claim with their homeowner’s insurance company, Erie Insurance Exchange. Erie denied coverage under the insurance policy’s general exclusion for water damage caused by “water or sewage which backs up through sewers and drains.” The Windowses sued Erie for breach of contract.

Erie claimed that the parol evidence rule applied and prevented the Windowses from presenting evidence that contradicted the water-damage exclusion in the policy. The court disagreed and allowed the Windowses to present their case to a jury, which awarded them more than $75,000 in damages. Erie appealed. The appellate court affirmed the jury’s verdict, reasoning that the term “backs up” was not defined in the contract and was subject to more than one reasonable interpretation.*

13–5b. Integrated Contracts

In determining whether to allow parol evidence, courts consider whether the written contract is intended to be a complete and final statement of the terms of the agreement. If it is, the contract is referred to as an integrated contract, and extraneous evidence (evidence from outside the contract) is excluded.

 

Case Example 13.27.

Volvo Trucks makes heavy-duty trucks. Andy Mohr Truck Center was one of its dealers for a few years, until the relationship soured and they ended up in litigation. Volvo sought to terminate Mohr’s dealership, claiming that Mohr had misrepresented a material fact in connection with its dealership application.

Mohr supposedly had orally promised Volvo that it would build a new long-term facility for the dealership if Volvo awarded the contract to Mohr (the “new-facility claim”). Mohr claimed that Volvo had orally promised to give Mohr a Mack Truck dealership franchise because Volvo owned Mack Truck (the “Mack claim”). Neither of these alleged promises was written in the parties’ contract, which contained an integration clause. A federal district court dismissed the new-facility claim and the Mack claim. A federal appellate court affirmed, noting that both Volvo and Mohr were sophisticated parties that had experience with franchises and dealer agreements. The existence of an integration clause in their contract made it unreasonable for them to rely on any representations made outside of the contract.*

A contract can be either completely or partially integrated. If it contains all of the terms of the parties’ agreement, then it is completely integrated. If it contains only some of the terms and not others, it is partially integrated. If the contract is only partially integrated, evidence of consistent additional terms is admissible to supplement the written agreement.* Note that parol evidence is admitted only to add to the terms of a partially integrated contract. For both completely and partially integrated contracts, courts exclude any evidence that contradicts the writing.