Heyl Royster

 


Heyl Royster

 

Back to the Basics: The Statute Of Frauds

9/30/13

Introduction

The Statute of Frauds under the Uniform Commercial Code provides that a contract for the sale of goods for more than $500 is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made and signed by the party against whom enforcement is sought. In other words, if two businesses have agreed that one will sell one hundred pounds of steel to the other (for more than $500), and the buyer later decides to purchase elsewhere, the seller can only enforce the agreement if there is a written confirmation that is signed by the buyer.

The Exception to a Required Signed Contract under the Statute of Frauds

However, as is typical with the law, there is an exception. If, within a reasonable time, a writing in confirmation of the contract and sufficient against the seller is received and the party receiving it has reason to know its contents, this written confirmation is adequate. Looking at the above scenario with the one hundred pounds of steel, this exception means that if the seller sent the buyer a written confirmation of their oral agreement within a reasonable period of time, the agreement would now be enforceable, despite the fact that the buyer did not sign it.

While these provisions might seem basic, there are a number of questions that arise. The most common are: what is a reasonable period of time? How does one business know if the other business has received its written confirmation? What if the party receiving the written confirmation disagrees with its terms? Are there any other rules that businesses should keep in mind?

What is a Reasonable Period of Time?

There are various holdings regarding the reasonableness of when a written confirmation is received. One case, Bureau Service Co. v. King, 308 Ill. App. 3d 835 (3d Dist. 1999), held that a delay of over eight months in sending confirmatory memoranda was unreasonable. According to a recent Illinois decision, reasonable means reasonable under the circumstances, which is a question of fact. Irvington Elevator Company v. Heser, 2012 IL App (5th) 110184, ¶ 23.

The Court in Irvington Elevator Inc. v. Heser discussed the reasonableness of time in which a written confirmation of a contract is received. In Irvington Elevator, the plaintiff filed a breach of contract claim regarding a grain contract, and the defendant claimed Statute of Frauds as a defense. On appeal, the Fifth District looked to the Statute of Frauds and the definition of a reasonable amount of time, and also discussed the course of dealing between the parties and usage of trade in the industry. The court distinguished Bureau Service Co., first by saying that contracts confirmed 16 days to 4 months are far less than the 8 months in Bureau Service Co. Moreover, it refused to adhere to a bright line test, stating that "[b]y its very nature, the meaning of the phrase 'within a reasonable time' connotes flexibility." Irvington Elevator Company v. Heser, 2012 IL App (5th) 110184, ¶ 17.

As shown by Irvington Elevator and Bureau Service Co., the definition of "reasonable" will differ in different situations. For instance, if a business typically sends its written confirmation two weeks after the agreement is made, it is unlikely that a court will find this to be unreasonable. However, if this same business were to wait two months, the court might find this to be unreasonable, even though in other cases (such as Irvington Elevator), longer periods of time were found to be reasonable.

The best advice would be to send a written confirmation as soon as possible. If this time period varies, try to be as consistent as possible.

How Does One Business Know if the Other Business Has Received its Written Confirmation?

Because the Statute of Frauds does not require the sending of a written confirmation, but rather the receipt of a written confirmation, it can lead to some confusion. For instance, a business will not know if the business to which it sent the written confirmation received it, unless they want to call and ask (a tedious task). Further, a business trying to deny the existence of a contract might deny its receipt of the confirmation even if it did in fact receive it. So, what is the best way for a business trying to enforce a contract to show receipt?

In Tabor & Co. v. Gorenz, 43 Ill. App. 3d 124 (2d Dist. 1976), the plaintiff provided direct testimony that the customary procedure at its business was to mail the written confirmation, but the specific person who mailed the confirmation was not identified. The defendant claimed that upon his denial of the receipt of the confirmation, the plaintiff was required to prove the mailing by producing the direct testimony of the person who mailed it. The defendant further argued that it was insufficient to merely prove an office custom of mailing without direct proof that procedure was followed in this particular instance. The court disagreed, finding there was evidence of an office custom with corroborating evidence to establish that the custom was followed. When the receipt of a written confirmation is denied, "the question of receipt is a question of fact." Pillsbury Co. v. Buchanan, 37 Ill. App. 3d 876, 878 (4th Dist. 1976).

Again, it is very important for businesses to be consistent in their practices. Not only should written confirmations be sent as soon as possible, but a business should follow the same procedures for each of these mailings. Then, if another business ever denies the receipt of confirmation, the business who performed the mailing can easily produce an affidavit outlining their mailing procedures, which the courts will take into consideration.

What If the Party Receiving the Confirmation Disagrees with its Terms?

Of course, it would not be fair if any business could require an agreement simply by sending a written confirmation to another business. Also, since the exception to the Statute of Frauds allows enforceability without signature, the terms and pricing of the agreement may be misconstrued in the written confirmation. In these situations, the business receiving the written confirmation must object in writing within ten days of its receipt. Another good reason to keep a close eye on incoming mail!

Are There Any Other Rules that Businesses Should Keep in Mind?

There are less common instances where an unsigned agreement may be enforceable. One of these situations is when the goods sold are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business. In this instance, the seller must have made a substantial beginning of their manufacture or commitments for their procurement. A good example would be a company that agrees to make 1,000 personalized pens for another business. The company begins the manufacture, but the buyer denies the agreement and the seller has no contract with the buyer's signature. These personalized pens obviously cannot be sold to another business, and this exception would apply.

A seller or buyer can also enforce an agreement without the signature of the other if the payment has been made and accepted or if goods have been received and accepted. For instance, if the buyer pays the seller and the seller accepts this payment, the seller must perform regardless of whether the seller has signed a contract. Likewise, if the seller delivers the purchased goods and the buyer accepts these goods, the buyer must pay the seller.

Conclusion

In sum, the best piece of advice is to have all agreements signed. However, if this is not possible at the time an agreement is made, make sure to send a written confirmation evidencing the product, quantity and price (as well as any other agreed upon terms) to the other party as soon as possible. Finally, make sure to keep all business practices consistent.