Oral contracts are very common. “Handshake agreements” work when the parties are friends, family members, and when the agreement is simple. Those disagreements can be resolved between friendly parties, without the need for litigation or a breach-of-contract lawsuit.
But what if the contract is more complex and the parties cannot cooperate? If there is a dispute, will a judge enforce the oral contract? It depends.
Minnesota and other states have a law called the “Statute of Frauds” that requires certain contracts to be in writing. If you fail to have those contracts in writing, you cannot enforce them in a civil lawsuit.
This article looks at the Minnesota Statute of Frauds, its exceptions, and some tips on how to avoid oral contract disputes.
An oral contract is one where the parties make an agreement without anything in writing – it's purely verbal. There is nothing on paper, no electronic contract, no email exchanges reflecting the terms, nor any notes from a cocktail napkin. In reality, there is often something that evidences a contract, but this article generally assumes that the dispute is “his word against your word.”
Most oral contracts are valid and enforceable. If one party breaches the oral contract, the other party can sue and get a remedy. But note that it may be harder to prove the existence of an oral contract and the terms.
Was There an Oral Contract?
A basic question in many cases is this: was an oral contract formed? The important terms (“material terms” such as price) must be agreed upon and there must be an exchange of “consideration” (money or promises). If you have these basic things, you probably have a valid oral contract. If not, there would be no contract at all.
What Are the Contract Terms?
The next question is figuring out the terms of the oral contract. If you had a written contract, it would be easy to read through the terms. With an oral contract, the parties have to rely on their memories.
Likewise, the attorneys and judge must rely on the parties' testimony and “reconstruct” the oral agreement. That works fine if the parties have the same memory of their conversation. But if their memories differ or one party is dishonest, then it's very hard to reconstruct the oral contract for purposes of a breach of contract claim.
For these reasons, oral contracts are more vulnerable to mistakes or fraud (one party lying about the existence of terms of a contract). As such, some situations are not appropriate for oral contracts. That's where the “Statute of Frauds” steps in. It requires certain contracts to be in writing to be enforceable.
The Minnesota Statute of Frauds
The Minnesota Statute of Frauds (Minn. Stat. §§ 513.01-.06) is set forth in statute, but has been interpreted by a significant amount of case law.
The purpose of the Statute of Frauds is “to defend against frauds and perjuries by denying force to oral contracts of certain types which are peculiarly adaptable to those purposes.” Alamoe Realty Co. v. Mut. Tr. Life Ins. Co., 202 Minn. 457, 278 N.W. 902, 903 (1938) (citation omitted).
The Statute of Frauds is an “affirmative defense” under Minn. R. Civ. P. 8.03, so the defendant must raise it in his or her pleadings at the start of the case. It also means that the defendant has the burden of proof on this defense. So, if the plaintiff proves a contract term has been breached, the defendant then must prove that the Statute of Frauds makes the oral contract unenforceable.
The General Rule
Here is what the Statute of Frauds says at Minn. Stat. § 513.01:
No action shall be maintained, in either of the following cases, upon any agreement, unless such agreement, or some note or memorandum thereof, expressing the consideration, is in writing, and subscribed by the party charged therewith:
(1) every agreement that by its terms is not to be performed within one year from the making thereof;
(2) every special promise to answer for the debt, default or doings of another;
(3) every agreement, promise, or undertaking made upon consideration of marriage, except mutual promises to marry;
(4) every agreement, promise or undertaking to pay a debt which has been discharged by bankruptcy or insolvency proceedings.
As it says, parties must have a written contract for (1) contracts that take 1+ year to perform, (2) certain guaranties, (3) contracts related to marriage, and (4) debt discharged by bankruptcy.
Note that the Statute of Frauds issue must generally be raised by a party to that contract (usually the defendant in the lawsuit). There can be some situations where outside persons (“third parties”) are impacted by an oral contract. The third party might have a contract with one of the parties to an oral agreement or impacted by it. Generally, third persons cannot raise the Statute of Frauds defense because they are not parties to the oral agreement. See, e.g., Parkside Mobile Estates v. Lee, 270 N.W.2d 758, 762 n.4 (Minn. 1978) (stating that nonparties to an assignment could not assert the statute of frauds in their favor).
Contracts that Take 1+ Year to Perform
The Statute of Frauds requires a written contract when the parties' performance takes over one year.
Courts have said that “[t]he test is simply whether the contract by its terms is capable of full performance within a year, not whether such occurrence is likely.” Eklund v. Vincent Brass and Aluminum Co., 351 N.W.2d 371, 375 (Minn. Ct. App. 1984).
This issue has been frequently litigated in the employment law context. Generally, if your contract has a defined term (i.e., 2 years or 5 years), it cannot possibly be performed within a year and must be in writing. On the other hand, if the term is indefinite (“employment until retirement” or “permanent employment”), it could be performed within one year and is not required to be in writing. For example, the employee could quit, retire, or die within that year. In those cases, the contract would last less than a year and the Statute of Frauds would not apply.
In the leasing context, a commercial lease lasting longer than a year must also be in writing. There is a specific statute relating to leases (Minn. Stat. § 513.05) which states:
Every contract for the leasing for a longer period than one year or for the sale of any lands, or any interest in lands, shall be void unless the contract, or some note or memorandum thereof, expressing the consideration, is in writing and subscribed by the party by whom the lease or sale is to be made, or by the party's lawful agent thereunto authorized in writing; and no such contract, when made by an agent, shall be entitled to record unless the authority of such agent be also recorded.
The lesson is to put long-term contracts in writing. If you are a supplier with a 2-year contract term, put it in writing. If your contract has a series of acts that take over a year to perform, put it in writing. While there may be an applicable exception to these Statute of Frauds contracts, the best practice is to put it in writing.
Real Estate Contracts
The Statute of Frauds generally requires real estate contracts to be in writing to be enforceable. Since you generally have to record transfers of land with a Recorder's Office, there are many good reasons for a contract related to land (including a mechanic's lien) to be in writing. However, this issue is surprisingly common in real estate litigation.
The Minnesota Statute of Frauds rule for real estate contracts is Minn. Stat. § 513.04, which states:
No estate or interest in lands, other than leases for a term not exceeding one year, nor any trust or power over or concerning lands, or in any manner relating thereto, shall hereafter be created, granted, assigned, surrendered, or declared, unless by act or operation of law, or by deed or conveyance in writing, subscribed by the parties creating, granting, assigning, surrendering, or declaring the same, or by their lawful agent thereunto authorized by writing.
As the law indicates, everything other than short-term leases (less than 1 year) need to be in writing. This applies to any transfers, interests, trusts, or other land contracts. See, e.g., Franklin Auto Body Co. v. Wicker, 414 N.W.2d 509, 512 (Minn. Ct. App. 1987) (“The statutory reference to interests in land ‘is broad enough to include any right, title, or estate in, or lien upon, real estate.'”) (quotation omitted).
How much detail does the written contract require?
The amount of detail is not high. A note or memorandum could serve as evidence of the written contract. Radke v. Brenon, 134 N.W.2d 887, 890 (Minn. 1965). The memorandum should, at a minimum, usually have the following things:
(1) [a] statement of the consideration;
(2) an adequate description of the parties;
(3) an adequate description of the land;
(4) the general terms and conditions of the transaction; and
(5) subscription by the vendor.
Greer v. Kooiker, 253 N.W.2d 133, 138 (Minn. 1977).
Contracts for the Sale of Goods (UCC Contracts)
The Uniform Commercial Code (UCC) is a set of laws that governs the “sale of goods.” “Goods” are tangible things like inventory and physical products, not services. The sale of goods could be between a consumer and a “merchant" (a business), or between two merchants.
The UCC has its own “mini” Statute of Frauds for contracts involving “goods.” This can be a common source of business litigation and commercial litigation.
UCC Statute of Frauds Rule
Here is the UCC rule under Minn. Stat. § 336.2-201:
(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by the party's authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.
(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.
As the statute says, contracts for goods over $500 must have some signed writing. It doesn't have to have all terms, but it should have the important terms.
The Rule for Business-to-Business (B2B) Contracts
“Goods” contracts between merchants have additional rules that give businesses more flexibility. They can orally form the contract and then send over written confirmation at a later time. If the party fails to object to a confirmation within 10 days, the confirmation-contract is considered valid.
The UCC gives businesses further flexibility. Even if an agreement fails to meet the above requirements (i.e., written contract or written confirmation), it could still be enforceable. These kinds of oral “goods” contracts may be valid under Minn. Stat. § 336.2-201:
(a) if the goods 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 and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and accepted or which have been received and accepted (section 336.2-606).
These Statute of Frauds exceptions can be broad, especially if businesses act like a contract was formed. Once payment is made, the contract will generally be enforceable. Likewise, if the buyer orders customized goods and the seller starts making them, the contract will likely be enforced (buyer will have to pay for the goods).
There is also a UCC exception when the defendant in a lawsuit admits the existence of a contract. This is not too common, since the dispute is generally whether there was a valid oral contract. Generally, you cannot expect the opposing party to admit key facts in a lawsuit, so this exception may not arise very often.
Exceptions to the Minnesota Statute of Frauds
There are also exceptions to the Statute of Frauds for contracts that do not involve the sale of “goods”. If an exception applies, your oral contract could be valid and enforceable.
These exceptions exist because, in certain circumstances, there is further proof that an oral contract exists. Here are the main exceptions:
- Partial Performance
- Promissory Estoppel
- UCC Exceptions (referenced above)
An oral contract may be upheld when the parties start performing their obligations. This reduces the concern that a party is lying about the existence of a contract. When an oral contract is already performed, there is generally no Statute of Frauds issue.
Minnesota case law recognizes a “partial performance” exception to the Statute of Frauds, although the exception can be narrow. The partial performance exception exists to (1) prevent fraud, and (2) for situations where the parties' actions show an “unequivocally reference” to some contract between them.
Under the “unequivocal-reference” theory, partial performance occurs where the relationship of the parties, as shown by their acts rather than by the alleged contract, cannot reasonably be explained except by reference to some contract between them. In other words, their actions can only be explained by a contract between them. If so, then a court is more likely to uphold an oral contract.
Equitable Relief Limitation
The “partial performance” exception only applies in limited situations where the plaintiff seeks “equitable relief”. Equitable relief is often different than money damages. A party seeking equitable relief wants to force the other party to act (or refrain from acting).
Equitable relief includes an injunction, where the court forces a party to take action or prohibits the party from taking other action.
Another example of equitable relief is “specific performance.” A common example is when a seller of land fails to transfer title to the buyer. The buyer could sue for damages and buy another house, or the buyer could force the seller to convey land (through a court order). The Minnesota Statute of Frauds provides for a court to order specific performance. See Minn. Stat. § 513.06 (“[n]othing in this chapter contained shall abridge the power of courts of equity to compel the specific performance of agreements in cases of part performance thereof.”).
When the plaintiff in a lawsuit asks the court for money damages, the court generally must apply the Statute of Frauds and require a written contract. See, e.g., Becker v. Fst Am. State Bank of Redwood Falls, 420 N.W.2d 239, 241 (Minn. Ct. App. 1988) (“The equitable doctrine of part performance does not apply to an action at law for money damages.”). This can be a significant problem for many plaintiffs, as they may simply want money from the other party.
To make sure you prove “partial performance”, it can be helpful to document your actions and the other party's actions. This will create evidence that you could use in a later lawsuit.
“Estoppel” is sometimes a valid exception to the Statute of Frauds. See Berg v. Carlstrom, 347 N.W.2d 809, 812 (Minn. 1984) (“equitable or promissory estoppel may take an agreement outside the statute of frauds.”).
Estoppel is a legal word that meaning unfair reliance. When the other person “leads you on” and you reasonably rely on it, courts are more inclined to help you out by validating the oral contract. Estoppel is fact-specific and depends a lot on the circumstances. Minnesota courts recognize two types of estoppel: promissory estoppel and equitable estoppel.
“Promissory estoppel is the name applied to a contract implied in law where no contract exists in fact.” Del Hayes & Sons, Inc. v. Mitchell, 304 Minn. 275, 283, 230 N.W.2d 588, 593 (1975). To establish a promissory estoppel claim, a person must show these elements:
1) a clear and definite promise was made,
2) the promisor intended to induce reliance and the promisee in fact relied to his or her detriment, and
3) the promise must be enforced to prevent injustice.
Martens v. Minnesota Mining , 616 N.W.2d 732, 746 (Minn. 2000).
Minnesota courts have not taken a clear approach on when promissory estoppel validates an oral contract. Instead, the Minnesota Supreme Court has outlined a few approaches where promissory estoppel could be applied. Here are three approaches mentioned in the Del Hayes & Sons, Inc. v. Mitchell case:
- the “Restatement” approach, when the promise relied upon is a promise to reduce the contract to writing;
- an approach that rejects the use of promissory estoppel in statute of frauds cases; and
- the “least restrictive” approach, “where the detrimental reliance is of such a character and magnitude that refusal to enforce the contract would permit one party to perpetrate a fraud”.
Example of Promissory Estoppel: Person A and Person B orally agree that B will build a backyard playset. The materials must be picked up in Florida. A tells B to get the materials in Florida and will then get the job. B goes to Florida and picks up the materials. A then says “I don't want the playset anymore.” B can try to enforce the oral contract under a theory of promissory estoppel, since A led him on and B reasonably relied on A's statement.
“Equitable estoppel” is a more general doctrine that is “designed to prevent a party from taking unconscionable advantage of his own actions.” Bethesda Lutheran Church v. Twin City Constr. Co., 356 N.W.2d 344, 349 (Minn. Ct. App. 1984), review denied (Minn. Feb. 5, 1985). “An essential element of equitable estoppel is reasonable reliance” by the plaintiff. Anderson v. Minn. Ins. Guar. Ass'n, 534 N.W.2d 706, 709 (Minn. 1995). Generally, equitable estoppel is not applicable to routine or typical transactions.
The basic elements are:
1. There must be conduct—acts, language, or silence— amounting to a representation or a concealment of material facts.
2. These facts must be known to the party estopped at the time of . . . said conduct, or at least the circumstances must be such that knowledge of them is necessarily imputed . . . .
3. The truth concerning these facts must be unknown to the other party claiming the benefit of the estoppel, at the time when such conduct was done, and at the time when it was acted upon . . . .
4. The conduct must be done with the intention, or at least with the expectation, that it will be acted upon by the other party, or under such circumstances that it is both natural and probable that it will be so acted upon.
Del Hayes & Sons, Inc. v. Mitchell, 230 N.W.2d 588, 591-92 (1975).
Equitable estoppel generally requires facts involving fraud or close to fraud. If one party was untruthful or failed to disclose facts and it harmed the other party, a court could uphold an oral agreement between the parties.
Exceptions to UCC Rule
As discussed above, the Statute of Frauds rule under the UCC does not require a written contract in situations where:
- The sale of goods is for less than $500
- The sale involves “specialty goods” that the manufacturer has already starting producing for the buyer.
- The defendant in a lawsuit admits that there was a valid contract.
- The seller has accepted payment for goods.
Oral Modifications to a Contract
Oral modifications to a contract can sometimes be valid, but it is best to put them in writing. If you have a "no oral modifications clause" (NOM clause), then you have to put the changes in writing. This is a very common problem that leads to business disputes and real estate contract disputes.
Once a contract is finalized, the parties can modify it later by mutual agreement. Most changes must be in writing. Of course, if you have an oral contract, your changes would probably also be oral (note - this is a good time to put the whole contract in writing).
For any contract that you can modify orally, it is good to make some written record by text, email, letter, or otherwise. Keep in mind that there is an additional rule called the “parol evidence” rule. Parol evidence is simply evidence outside a written contract. The rule says that “when parties reduce their agreement to writing, parol evidence is ordinarily inadmissible to vary, contradict, or alter the written agreement.” Hruska v. Chandler Assoc., Inc., 372 N.W.2d 709, 713 (Minn. 1985). Basically, this means that informal attempts to modify a written contract (such as through an oral modification) might not be considered by a court if there was a later lawsuit. This is a rule of evidence.
However, a court generally considers, and can allow, an oral modification if there was an oral contract or if the written contract is unclear (ambiguity, mistake, silent on an issue). The oral modification must generally comply with the statute of frauds, but the exceptions to the statute of frauds also apply.
When a court considers parol evidence, it may apply a heightened standard of proof. See, e.g., Estate of Christie, 911 N.W.2d 833, 840 (Minn. 2018) (“clear and convincing evidence is required to prove that an oral contract for the sale of land existed, regardless of whether the party seeks damages or specific performance.”).
The lesson is to put changes to the contract in writing so that it will be considered by a court and enforceable. If you only have oral modifications, they could still be valid but you will need to present clear evidence of the modification.
When people have a civil dispute or lawsuit, they sometimes settle it with an oral agreement. This is common if there are no lawyers involved and dispute is simple. When the parties have attorneys, there is almost always a written settlement agreement, release, and other documents.
What happens if one party fails to comply with an oral settlement? It can be hard to enforce, like any oral contract.
This issue sometimes comes up when parties settle a case at the courthouse. The judge may require the parties to put their settlement “on the record”, which means they recite the terms of the agreement in front of the court (while the court reporter is recording the hearing). Judges generally enforce these agreements. See, e.g., Beach v. Anderson, 417 N.W.2d 709, 713-14 (Minn. Ct. App. 1988) (holding that settlement stipulation memorialized on the record and transcribed by a court reporter satisfied writing requirement of the statute of frauds), review denied (Minn. Mar. 23, 1988).
It never hurts to protect yourself with some written agreement or notes in writing that show a settlement. A check with a proper note in the Memo Line could be enough, but more details can be helpful.
Rule for Credit Agreements
When it comes to certain credit agreements (loans), Minnesota has a specific statute requiring them to be in writing. This basically a Statute of Frauds rule for loans. “[C]laims on agreements falling under section 513.33 fail as a matter of law if the agreement is not in writing.” Greuling v. Wells Fargo Home Mortg. Inc., 690 N.W.2d 757, 761-62 (Minn. Ct. App. 2005)
The credit agreement statute was enacted in 1985 “to protect lenders from having to litigate claims of oral promises to renew agricultural loans.” Rural Am. Bank of Greenwald v. Herickhoff, 485 N.W.2d 702, 705 (Minn. 1992). However, the statute is not limited to ag loans and could potentially apply to a broad range of credit agreements.
Here is the language of Minn. Stat. § 513.33:
For the purposes of this section, the following terms have the meanings given them:
(1) "credit agreement" means an agreement to lend or forbear repayment of money, goods, or things in action, to otherwise extend credit, or to make any other financial accommodation;
(2) "creditor" means a person who extends credit under a credit agreement with a debtor;
(3) "debtor" means a person who obtains credit or seeks a credit agreement with a creditor or who owes money to a creditor; and
(4) "signed" has the meaning specified in section 336.1-201(b)(37).
Subd. 2.Credit agreements to be in writing.
A debtor may not maintain an action on a credit agreement unless the agreement is in writing, expresses consideration, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.
Subd. 3.Actions not considered agreements.
(a) The following actions do not give rise to a claim that a new credit agreement is created, unless the agreement satisfies the requirements of subdivision 2:
(1) the rendering of financial advice by a creditor to a debtor;
(2) the consultation by a creditor with a debtor; or
(3) the agreement by a creditor to take certain actions, such as entering into a new credit agreement, forbearing from exercising remedies under prior credit agreements, or extending installments due under prior credit agreements.
(b) A credit agreement may not be implied from the relationship, fiduciary or otherwise, of the creditor and the debtor.
There have been questions about whether the usual Statute of Frauds exceptions (partial performance, estoppel, etc.) apply to credit agreements. Generally, courts have been reluctant to allow any exceptions for credit agreements. See, e.g., Stumm v. BAC Home Loans Servicing, LP, 914 F.Supp.2d 1009 (D. Minn. 2012) (under the law, promises to postpone foreclosure sale must be in writing).
This law focuses on protecting banks, lenders, and other creditors from claims by debtors. The policy forces parties to a credit agreement to put the terms in writing. If not, it will not likely be enforceable. This can be a hurdle for borrowers in loan collection disputes.
Practical Tips for Avoiding Oral Contract Disputes
- Put all agreements in writing to preserve your ability to sue if there's a dispute.
- Put any changes, amendments, and modifications to a contract in writing (especially if there is a “no oral modifications” clause in the written contract).
- Clarify any issues with the other party if the oral contract terms are unclear.
- Keep notes, emails, texts, or other communications about the oral contract (this will remind you of the terms and give you evidence to use if there is ever a dispute).
- Put all long-term leases in writing.
- When land is involved, put it in writing.
- Send a written clarification to the other party if you talk about a possible contract but have not yet finalized it. This will avoid any claim by the other person that there is an oral contract.
- Have a witness or two present when you form an oral contract. This can be useful evidence if there is ever a dispute or lawsuit over the oral contract.
- If you are a business merchant, pay close attention to any follow-up invoices, emails, or other communications you get from another merchant. Check to make sure that your terms match up. If not, promptly object and communicate with the other merchant.
- If you make an oral contract, do your best to remember the terms. This may sound obvious, but it's a problem in many oral contract disputes.
While it's best to have a contract in writing, most oral contracts are valid and enforceable. As a result, you should be careful when making any promises to another person that could be construed as an oral contract.
The Statute of Frauds is a hurdle to enforcing certain oral contracts. Generally, contracts involving real estate, long-term performance, loans, and other transactions must be in writing. Sometimes, an exception to the Statute of Frauds could make the oral contract valid and enforceable, but the exceptions are limited.
Truly, the best practice is to put all contracts in writing and be extra careful on any contracts you make orally.
If you need legal advice or representation on an oral contract dispute, Contact Us for a free consultation. With offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.
There are no comments for this post. Be the first and Add your Comment below.
Leave a Comment