When Is a Written Contract Required Under the UCC?
Written agreements are only required in certain transactions under the UCC. Learn the rules for written contracts and the statute of frauds for sales contracts, leases, and security interests in commercial transactions.
Both lawyers and businesspeople will tell you that, when you make a deal with someone, you should always “get it in writing.” In practice, however, many commercial deals are made on a handshake. Or, to put it slightly more formally, they are based on an oral contract or on the actual conduct of the parties. To a great extent, general contract law reflects this fact: Only certain types of contracts must be in writing in order to be valid. In legal lingo, a law requiring a contract to be in writing is known as a statute of frauds.
The UCC, too, takes into account that commercial agreements are often unwritten and generally does not require contracts to be in writing. In fact, the UCC requires written contracts in only a few situations, such as:
- certain contracts for the sale of goods under UCC Article 2
- certain lease contracts for goods under UCC Article 2A; and
- agreements that create a security interest in personal property where the property is not in the possession of the secured party (the creditor).
Also, the UCC exempts one particular kind of contract, involving securities (such as stock in a corporation), from a more general contract rule that would otherwise require such a contract to be in writing.
Sale of Goods: Contracts Over $500 Must Be In Writing
Generally speaking, the UCC requires that any contract for the sale of goods with a price of $500 or more must be in writing. The contract must be signed “by the party against which enforcement is sought.” In other words, a party that does not sign a contract in this context generally cannot be forced by a court to abide by that contract.
The written contract need not be detailed. In fact, even if it fails to include or incorrectly states various contract terms (for example, date of delivery; unit price), it is still enforceable. In cases where terms are omitted, there are usually UCC rules that will supply them. Many of these rules include default provisions that state that the supplied term will be whatever is reasonable in the circumstances.
Example. Shurgood and Bonizonda, the presidents of two different technology companies, meet for a business lunch. During the lunch, they discuss having Bonizonda’s company produce and sell to Shurgood’s company a set of thirty computer controllers, which both Bonizonda and Shurgood understand are worth about $500 apiece. They also discuss the timing for delivery of the controllers, and Bonizonda suggests that his company, Bonizonda Computer Corporation (BCC), can deliver within 45 days. At the end of the lunch, Bonizonda writes on a blank page of his notebook, “BCC will deliver 30 controllers within 45 days.” He then signs and dates the page, tears it out of the notebook, hands it to Shurgood, and goes back to his office. Generally speaking, this notebook page would be a valid contract, and if BCC fails to deliver 30 controllers within 45 days, it is in breach of that contract.
Note that the contract in this example does not provide a unit price for the computer controllers. However, if a dispute arose over that price, Shurgood and Bonizonda might look to UCC Section 2-305, which indicates that, by default, the price will be “a reasonable price at the time for delivery.” A reasonable price, in turn, might, for example, be the current market price for the computer controllers.
Finally, one notable exception to the requirement that contracts for sale of goods in excess of $500 must be in writing involves so-called specially manufactured goods. If, in the above example, the computer controllers were custom-made for Shurgood’s company, and useless for any other purpose, then even though Shurgood did not sign the contract, she would be legally obligated to pay for the thirty controllers if they were delivered on time.
Lease Contracts: Leases Over $1,000 Must Be In Writing
In the UCC, leases (or, more formally, lease contracts) relate to personal property, like office equipment, machinery, and vehicles, rather than to real estate. Under the UCC, any lease requiring total payments of $1,000 or more must be in writing. As with the UCC’s statute of frauds for contracts for the sale of goods, UCC lease contracts do not need to be highly detailed in order to be enforceable. For example, a description of the leased goods is sufficient if it "reasonably identifies” the goods. Moreover, as with sales contracts, lease contracts may omit or incorrectly state certain terms and still be enforceable—at least for the duration of the lease as stated in the lease contract.
Agreements Creating a Security Interest: A Writing Is Required
Security interests generally have to do with loans, collateral, debtors, and creditors. Probably the easiest way to understand how this works is with an example.
Example. Martin’s company makes specialized parts for airplanes and he has just signed an agreement to supply parts to a major airplane manufacturer. The deal ultimately will be very profitable. However, to fulfill the agreement, Martin’s company needs new machinery and a lot of raw materials. Currently, the company doesn’t have enough money to buy those things. So, Martin goes to a bank to get a loan. In exchange for the money being loaned, the bank requires Martin’s company to provide collateral (security) for the loan. More specifically, the bank requires Martin to provide the bank with a legal right to take possession of the new machinery (which the UCC calls equipment) and the raw materials (which the UCC calls inventory), as well as the legal right to take any payment due under the contract with the airplane manufacturer, if Martin’s company fails to repay the loan. In this example, Martin’s company is the debtor, the bank is the creditor, the machinery, materials, and contract payments are collateral—and the bank’s legal rights to the machinery, materials, and payments constitute the bank’s security interest in the collateral.
In order for the bank to have a legally enforceable security interest in the collateral—what the UCC calls an attachment of a security interest—there must be a written security agreement that is authenticated (which basically means signed) by Martin’s company. Of course, in practice, banks always have multiple loan papers requiring signatures in these situations. These generally include not only the security agreement, but also a financing statement that is filed with a public office to put other potential creditors on notice of the bank’s security interest in the stated collateral.
Sale of Securities: No Writing Required
One statute of frauds which is part of general contract law, and not specific to the UCC, states that contracts for activities that cannot be performed within one year must be in writing in order to be valid. However, the UCC states this general contract rule does not apply to a contract for the sale or purchase of securities, and that such a contract is enforceable even if it is not in writing. The UCC has an official comment on this rule which explains that any benefits that a statute of frauds would provide in preventing fraudulent claims in this context “are outweighed by the obstacles” such a rule would create for modern securities transactions.
A Word on Parol Evidence and Conduct
While the contents of written contracts generally carry substantial legal weight, there are situations where things not contained in a written contract, such as oral statements (in legal lingo, parol evidence) or actions (conduct) may be relevant in the event of a contract dispute. The UCC’s articles on sales of goods and on leases provide rules in this regard. More specifically, the UCC states that the terms of a written contract may be supplemented by:
- the subsequent actions of the parties or by standard practices in a particular industry or kind of business (taken together, what the UCC calls course of performance, course of dealing, or usage of trade); and
- additional contract terms that are not inconsistent with the original contract, so long as the original contract is not found to constitute the complete agreement between the parties (which generally is a matter to be decided by a court).