♪ [music playing] >> all rise please. department one of the orange county court is now in session. the honorable russell a. bostrum is the judge presiding. >> your honor, we feel that the plaintiff in this case has utterly failed to establish the necessary grounds on which it would be entitled to judgment. we think there are two basics reasons for this. >> counselor, do you have any other witnesses or evidence you wish to produce at this time? >> no your honor. >> your honor, i'd like to make a motion at this time. >> all right, why don't you both approach the bench? >> do you swear to tell the truth, the whole truth, and nothing but the truth so help you god? >> i do. >> you may be seated. please state your full name, spelling your last name for the record. ♪ [music playing]

>> your honor, while plaintiff concedes that there were certainly oral discussions, the tes of the agreement-- >> for most of us, the word contract conjures up images of a written document that's long, solemn, and difficult to understand. however, a valid contract may not need to be a written document at all. for example, suppose sam mee bill at a party and offers to sell his personal computer for $400. bill agrees, but when he shows up with e money the next day sam informs him that he got a better offer and sold the computer to someone else. the question is, was there actually a contract in this instance, or was sam within his rights

in reneging on his original commitment to sell bill the computer. in this case, the verbal agreement between sam and bill constitutes a valid contract. a contract that sam broke by not selling bill the computer. in many instances, however, an oral contract is not enforceable. the burden rests with the party seeking to enforce the contract to establish that a contract actually exists, and without written proof it can be very difficult to establish anything definitive. sometimes the memory of one, or both parties, to an oral contract may fail or be distorted either by wishful thinking or outright deceit. as a result, a written contract is usually considered the preferred form for a contract to take and in some instances it is the only form a court will honor. generally, the reason a contract needs to be in writing

is to make it enforceable in court. unless there is some kind of special exception, a court will not enforce certain agreements if they are not in writing. keep in mind though that a contract that is supposed to be writing may be perfectly acceptable even if the parties have only agreed orally, as long as both parties perform the terms of the contract. the reason writing is required is to permit the parties to go to court if a problem arises. to better understand this preference for written contracts, we need to take a look back in time at the historical underpinnings of whahas come to be contract law. [narrator] >> prior to the latter part of the 17th century, english common law provided that parties to a contract could not testify. this led to the practice of hiring third party witnesses to advance the cause of parties in contract disputes. providing evidence and ging testimony became a kind of commercial enterprise in which money,

rather than truth, was the ultimate currency. as a result, the english system in the late 1600s was riddled with perjury. in the year 1677, to help stem the tide of this rampant dishonesty, the english parliament passed a legal statute. it was called "an act for the prevention of frauds and perjuries." it required that certain classes of contracts had to be in writing to be enforceable. today, every state in the united states has what's called a statute of frauds, modeled after the original english statute. >> it's a statute that specifies that some contracts have to be in writing before the court will enforce them. and one area that the courts are very concerned with is a contract in which one person agrees to pay a debt for another person. and the court feels that those contracts do need to be written

because the person who's made this promise is getting nothing out of it. >> another category that falls within the statute of frauds requiring a writing is the contract for the sale of real property or where there is an interest in land involved. 'cause real property would be land or anything permanently affixed thereto. another e that's involv with thawould be- another category, that is, of contracts falling within the statute of frauds, is the one where it cannot be performed within one year. >> for example, you could enter into a contract on march 15th, and the contract will run from june 15th one year to june 14th the following year. the contract only takes a year, but it will not be performed within a year because you entered into it in march, so that type of contract has to be in writing. and the reason the law requires those types of agreements to be in writing is because of the length of them, the extent of the obligation. >> another category falling within the statute of frauds

is the contract for the sale of goods over $500. >> the law has just set a minimum standard and said anything at this figure or above has to be in writing. anything beneath that is less troublesome in terms of courts having to litigate the issue. >> another category falling within the statute of frauds, therefore requiring a writing, is where you have a contract personally binding the executor, the administrator, or the personal representative of a deceased's estate. >> now this doesn't apply if you're talking about paying the debts of the deceased from the estate the deceased left. that is just standard when a person dies. that person's estate is used to cover his or her debts at the time of death. but we're talking about a situation where one of the family, the executor, one of the heirs agrees to pay personally from non-estate funds the debts

of a decedent. >> the last category following within the statute of frauds is the promise in consideration of marriage. >> an excellent example of this is what is referred to as an anti-nuptial agreement, or sometimes pre-nuptial agreement is the term lay people use, where the parties enter into an agreement before they get married so that they waive their marital rights in each other's property. >> the original british statute, "an act for the prevention of frauds and perjuries," has had an enduring impact on legal thought. not only in great britain, but in the united states as well. in this country, the statutes of fraud dictate the kinds of contracts that must be in writing to be enforceable. as we've heard, these types of contracts cover a wide range of different business situations, t they share one important element. they apply to transactions in which the potential for fraud

is considered especially high, or in which the consequences of fraud are especially serious. and as we're about to see, if the contracin question falls under the statute of frauds, it will not be enforceable if it's not in writing. [narrator] >> until about six months ago, these three business people were partners in a thrivg company. one of them, hank jorgensen, then appached the others with a plan to buyut al randolph's interest in the firm. randolph had frequently talked about making a career change, so jorgensen's plan seemed a good way to make everyone happy. they agreed that jorgensen would pay randolph in six monthly installments. the next day, the third partner, leonard andrews, mentioned that in the unlikely event jorgensen had a problem coming up with the money, he, andrews, would pick up the tab. of course at the time, none of them thought

this would be necessary, so a handshake and a toast later, alan randolph transferred his interest in the business to hank jorgensen. as promised, jorgensen made payments like clockwork for the next four months, at which point the impossible happened, and hank jorgensen ran out of money. after several unsuccessful attempts to settle the matter amicably, randolph sued jorgensen, then turned to andrews and reminded him of his commitment to back up jorgensen in the event of default. leonard andrews denied liability, claiming he had no idea that his gesture of good faith offering to back up jorgensen could result in his being held legally responsible for jorgensen's debt. as you might imagine, alan randolph had a somewhat different view of the original agreement between himself and his partners. when jorgensen defaulted, randolph fully expected leonard andrews to step in and provide financial assistance.

when andrews refused, randolph then sued both andrews and jorgensen. the question, of course, is whether there was ever an enforceable contract between randolph and andrews to pay for jorgensen's debt, or simply a verbal understanding that's not enforceable. >> jorgensen's promise to pay for the partnership agreement, which randolph agreed to sell, is clearly enforceable even though it's oral. but andrews' promise by which he guaranteed to pay for the interest if jorgensen could not raises a different problem. >> so we have two people promising to pay money to the seller. the first promise, the buyer's promise, what we call the original promise, is enforceable even though it was oral. the guarantor's promise, what we call the collateral promise, is enforceable only if it was in writing. that's a pretty significant distinction, and we ought to make sure we understand just what it is about promises

that makes them collateral. >> there are three people involved in the promise, first of all. there is the buyer and seller who made the original agreement to transfer the partnership interest, and then there is the guarantor who agreed to pay for the interest only if the buyer couldn't or wouldn't. second, there are really two separate promises. there is the buyer's promise to pay for the partnership interest when it's transferred, and then there is the guarantor's promise to pay, again only if the buyer couldn't or wouldn't. and finally, the guarantor's promise, the collateral promise, is contingent. he has to pay for the partnership interest only if the original buyer doesn't perform on his agreement. >> well this distinction makes a lot of sense. from our everyday experience we know that people commonly promise to pay money if they expect to get something in return. and the buyer here expected to get the seller's partnership interest, and so we'll accept that that kind of promise could be made without having to see something in writing.

on the other hand, the guarantor's promise is really unusual. the guarantor is promising to pay money even though the guarantor never expected to get anything in return from the seller. and it seems fair in that kind of case to have somebody have a writing to prove that indeed that kind of promise was made. >> ad tha's wh the buyer's promise to pay for the partnership interest is enforceable, even though it's oral. while the guarantor's promise to pay if the buyer can't must be in writing under the statute of frauds to be legally enforceable. [narrator] >> shortly after the buyer and the seller in this transaction reached agreement on a sale price, the buyer came up with a down payment. the seller then left town on extended business before taking care of the necessary paperwork. during his absence, the buyer did a substantial amount roviowo on the property, including painting and wallpapering,

and even moved into the property as agreed to by the seller before he left town. anxious to conclude the deal, the buyer pressed the seller's agent to conclude the necessary paperwork. unfortunately, when the seller returned, he informed the buyer that their deal was off. it seems that between the time the buyer completed her renovations and the ller returned from s business trip, therwas a new offer from someone who was wling to pay more mone for the property. the seller concluded that his verbal agreement with the original party wouldn't prevent him from taking the latest offer. he based this on the fact that a written contract is normally required for the sale of real property. he gave the matter considerabl thought, but ultimately decided that he couldn't turn down this new and substantially tter offer, so he didn't, which left the original buyer out in the cold d mad enough to sue, which he did. the estion is, did the handshakand verb agreement constitute an enforceable contract?

>> well, generally of course, the statute of frauds requires that all transactions involving interest in land must be in writing to be legally enforceable. and that includes not only the sale of land, as in this case, but leases and other transactions involving interest in land, like mortgages. >> well, in the ordinary case it makes sense to expect that parties will put their contracts for interest in land in writing. these contracts are generally for a lot of money. there are tax considerations. the government has to know who has title to what property, and generally there's no rush. people have time to put their agreements in writing. but it seems that in this case to allow the seller to back out of the deal on the ground that there was no writing would be really to perpetrate a fraud and not to prevent one. >> i agree with you. and in fact the statute of frauds has an exception

for the kind of activities the buyer has engaged in in this case. here the buyer has made a down payment on the property and with the permission of the seller, the buyer has made improvements to the property and has even taken possession of the property. >> so these activities of the buyer in essence substitute for the writing that the statute of frauds would require and really make it fair for a court to enforce a promise. >> that's right. so there is an exception to the statute of frauds requirement that transactions in land be put in writing to be legally enforceable when you have the kind of part performance that the buyer engaged in in this case. [narrator] >> on april first, the heartland corporation reached a verbal agreement with debra rutherford. according to the terms of the agreement, ms. rutherford would work for heartland as national sales director for one year, beginning on the 15th of june. rutherford began her new position as planned,

but decided on the first of december to resign and cept a positn with anotherirm. the heartland corpation was more than just disapinted. it had invested a great deal of time and money in training its new employee. heartland officials attempted to perade rutherford to stay, even going so far as to sweeten thoriginal deal. their efforts, however, proved unsuccessful, and finally the decision was made at corporate headquarters that the only way to hold on to rutherford was to threaten her with a lawsuit that would force her to repay the salary they'd invested in her. the question, of course, is whether or not debra rutherford was contractually bound to remain with the heartland corporation. >> the question in this case is whether ms. rutherford is contractually obligated to heartland because of an oral promise that she made to work for them. now i think we should make it clear at the outset that she cannot be forced to continue to work for heartland

if she chooses not to do so. if she is contractually obligated and leaves early, she might have to pay something by way of damages if by leaving early she causes some kind of harm. now that being said, common sense suggests that she ought to be contractually obligated. she entered into the agreement, she began working for heartland, she had certainly been paid by heartland. and if we're to hold people to the agreements that they enter into, she ought to be contractually obligated. >> on the other hand, the statute of frauds provides that contracts that cannot be performed within a year must be in writing in order to be egally enforceable the reason for that presumably is that we don't want to hold people to major time commitments on the basis of an oral promise. so the question in this case is, was this contract one that could not be performed within a year. >> well the date of the oral promise was on april first,

and ms. rutherford promised to begin working on june 15th and then to work for a year from that date. >> as the statute of frauds is applied, the term of the contractual commitment is measured from the date the parties enter into the agreement. here, the parties made the agreement on april first and ms. rutherford's performance would not be complete until june 14th of the following year, a period of some 14 and a half months. since this was a contract that could not be performed within a year and it was not in writing, it would not be enforceable under the statute of frauds. >> well i take it that under that same reasoning that if heartland decides to dismiss ms. rutherford before the year is over, that they would not violate any of her contractual rights by doing so. >> that's right. under the statute of frauds the contract would not be enforceable by either party against the other.

[narrator] >> the bellwether corporation contracted with one of its suppliers to provide replacement parts valued at $18,000. this agreement was formulated during a telephone conversation. it was never put in writing. shortly thereafter, officials from both sides met to discuss the design specifications needed to produce the parts. it was determined that the design requirements were so unique that the parts would have to be made to order. the supplier produced and shipped the first 100 parts. however, within a matter of days of that first shipment, bellwether officials decided it made more sense to install new equipment than to repair the old machinery. they immediately contacted their supplier and cancelled the contract. the supplier chose to ignore the cancellation and shipped not only the remaining parts that had been ordered, but an invoice for the balance of the $18,000. bellwether sent both parts and invoice back

to the supplier, at which point the supplier sent bellther a letter threatening legal action if bellwether did not live up to the contract. the question here is whether the original telephone agreement between bellwether and the supplier is a legally enforceable contract. >> the general rule under the statute of frauds is that contracts for the sale of goods worth more than $500 must be in writing to be enforceable. that means here, as in the case of other statute of frauds provisions, that there must be a written document signed by the party against whom enforcement of the contract is sought, in this case, bellwether. since the contract here involved $18,000 worth of goods and the original agreement was made over the telephone, if the law didn't go beyond that general rule it would appear that this contract would not be enforceable since it was not in writing. >> well, of course, this traditional rule has been modified in many states by provisions of the uniform commercial code. and it may be that one or more of the exceptions under the ucc

would render this contract enforceable. >> well let's look at those exceptions. the uniform commercial code does repeat the general rule that contracts for the sale of goods worth more than $500 must be in writing to be enforceable. however, it also provides three exceptions for the enforcement of oral contracts. the first exception applies in cases of part performance, that is where the buyer has accepted some of the goods or paid for some of the goods. under this exception, an oral contract can be enforceable, but only to the extent of the part performance. >> well looking at this exception, in fact there is some evidence of part performance here by bellwether. the goods were shipped to bellwether-- a partial shipment at least-- and bellwether waited a day or two before notifying the supplier that it no longer wished to go ahead with the original contract. however, since the supplier shipped the rest of the parts to bellwether, the supplier seems definitely interested

here in enforcing the entire agreement, not just collecting for its initial order and, therefore, i don't think this exception will be of much interest to the supplier in this case. >> well a second exception provides that when the party against whom contract enforcement is sought, in this case bellwether, admits in court that there was a contract, the contract can be enforced even though it was oral. here, bellwether has cancelled the contract, shipped back all of the goods, and refused to pay for any of them. so it seems unlikely that they would admit there is a contract. a third exception applies to goods specially manufactured for the buyer. in such a case, if the buyer rejects the goods, they're not easily sold to others. under this third exception the whole contract can be enforced even though it is not in writing, whether or not there has been part performance. >> looking at this exception, the supplier did manufacture these parts specifically for bellether.

these parts were not taken out of its general inventory that was sold to a number of buyers, but were specifically manufactured for bellwether's equipment. therefore, even though this contract was oral and even though it was for an amount in excess of $500, because of the fact that these goods were specifically manufactured and are not suitable for sale to others, it is quite likely that the court will enforce this contract. [narrator] >> as the foregoing examples demonstrate, there are certain kinds of contracts that must be put in writing. if they're not, they don't satisfy the requirements contained in the statute of frauds, which means they're not enforceable. this is a critical fact for anyone doing business to understand. but there's more involved than simply realizing that some contracts need to be in writing. it's equally important to take the next step and determine the details of the written contract, specifically

what information about the transaction needs to be in writing and what form does this writing need to take. >> the court is looking for sufficient detail in the writing to show what was agreed. they want more than just, i'm going to buy some, and then you put your initials on it. they want to see the parties-- they would like to see both parties named and they normally will. they want to see the quantity or quality of the goods or services involved. they want some statement of consideration that shows that there is in fact an exchange of value between the parties. >> a contract can be pieced together from various forms of writing. for example, you can take memoranda between the parties. you can take letters. you can take notes. you can take various things and group them together and have enough information to satisfy the requirements for the statute of frauds. >> the statute of frauds does not require that both parties

sign the agreement. so the way that the law applies is to say that there must be a signature by the party to be charged. >> signature does not mean what most people outside the legal profession think. most people when you mention signature think of an autograph, which in the law is referred to as a manual subscription, just to confuse lay persons. signature in the law is basically any mark, any symbol that a party uses to authenticate a writing. >> if a contract falls into one of the categories we've just looked at, then the statute of frauds applies, and that contract has to be in writing to be enforceable. if the statute of frauds doesn't pertain, then that contract can be oral or written, and it doesn't have to follow any particular form. it might even be partly oral and partly written.

for example, a verbal acceptance of a written offer may result in the creation of an enforceable contract. if a contract is in writing, it doesn't necessarily have to be a formally worded document composed by an attorney. as a matter of fact, it can be pieced together from several different documents, say a series of letters, writings, and telegrams. this convenient flexibility is good news for most business people, but it also poses some potentially serious pitfalls, like the fact that any oral communication may result in the formation of a binding contract. a telephone conversation for example, sometimes viewed as a preliminary step in the negotiation of a contract, can result in a claim that a contract was actually formed. to avoid falling into this or any other kind of contractual trap, it's imperative that all business communication, oral as well as written,

be absolutely clear. one way to guarantee this is to tell the other party that there is no contract until an appropriate written document is developed and signed by both parties. if the parties in a transaction decide to live dangerously and rely on an oral agreement, and there's even the slightest chance of a misunderstanding, the oral communication should be followed with something in writing. when it passed "an act for the prevention of frauds and perjuries" in 1677, the britisharliament recognized the need for written coracts in certain situations. and that need is something that still applies today, more than 300 years later. ♪ [music playing]

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