When Is a Written Contract Required Under the UCC?

Both lawyers and business owners 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're 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 to be valid. In legal lingo, a law requiring a contract to be in writing is known as a "statute of frauds."

The Uniform Commercial Code (UCC), too, takes into account that commercial agreements are often unwritten. As a result, the UCC generally doesn't 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 isn't 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 More Than $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, and
• be signed by the person the contract is being enforced against.

(U.C.C. § 2-201 (2023).)

The contract doesn't need to be signed by both parties. But if you want to make the other party to a written contract comply with the contract, then that party must've signed it. In other words, a party that doesn't sign a written contract generally can't be forced by a court to abide by that contract.

For example, suppose Patrick sells fresh fish, and Bob owns a seafood restaurant. At the seafood market one morning, Bob agrees to buy $600 worth of fish from Patrick. Patrick writes down Bob's order, and Bob promises to return later with payment when he picks up the fish. Bob doesn't sign anything and never returns to pick up the fish or to pay Patrick. Because the contract is worth more than $500 and Bob never signed anything, Patrick can't force Bob to honor their verbal deal.

When a Written Contract Is Missing Terms

The written contract to be enforced doesn't have to be detailed. In fact, even if it fails to include or incorrectly states contract terms—for example, date of delivery or unit price—it's still enforceable. In cases where terms are left out, there are usually UCC rules that'll supply them. Many of these rules include default provisions that say that the supplied term will be whatever's reasonable in the circumstances.

For instance, suppose Shurgood and Bonizonda, the presidents of two different technology companies, meet for a business lunch. During lunch, they discuss having Bonizonda's company, Bonizonda Computer Corporation (BCC), make computer controllers for Shurgood's company.

In this meeting, both presidents agree that:

• BCC will produce and sell 30 computer controllers to Shurgood
• Shurgood will pay BCC $500 per controller, and
• BCC will deliver these controllers within 45 days.

Bonizonda writes on a blank page of his notebook, "BCC will deliver 30 controllers within 45 days at $500 apiece." 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's in breach of that contract.

Note that the contract in this example doesn't say where the controllers should be delivered. In the absence of a specified delivery location, the UCC terms would step in (as long as the state adopted these terms into law).

Under the UCC, the delivery location would be the seller's place of business. (U.C.C. § 2-308 (2023).) So, if Shurgood wants these controllers, she'd need to pick them up at BCC.

An Exception to the General Sale of Goods Rule

There's one notable exception to the requirement that contracts for the sale of more than $500 worth of goods be in writing. If the goods involved are "specially manufactured goods"—that is, they're specially made for the buyer and can't be sold to anyone else—then a deal without a signed written contract could still be enforceable. (U.C.C. § 2-201(3) (2023).)

Let's go back to our example above. Suppose BCC custom makes the computer controllers for Shurgood's company, and these controllers are useless for any other purpose. Then, even though Shurgood didn't 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

Under the UCC, leases involve personal property like:

• office equipment
• machinery, and
• vehicles.

The UCC doesn't cover commercial real estate leases. So, you'd have to look elsewhere in your state's laws for rules for leasing office space and warehouses.

Under the UCC, any lease requiring total payments of $1,000 or more must be in writing. (U.C.C. § 2A-201 (2023).)

For example, suppose you want to lease a printing machine for a year and the payments are $300 per month. The total payment for the year-long lease would be $3,600 ($300 x 12 months). So, for the lease to be enforceable, you'd need to sign a written contract.

The UCC's statute of frauds for lease contracts is similar to the statute of frauds for sales of goods contracts.

Leases don't need to be detailed. As with the UCC's statute of frauds for contracts for the sale of goods, UCC lease contracts don't need to be highly detailed to be enforceable. For example, a description of the leased goods is sufficient if it "reasonably identifies" the goods. (U.C.C. § 2A-201 (2023).)

Leases can omit terms. As with sales contracts, lease contracts can leave out or incorrectly state certain terms and still be enforceable—at least for the duration specified in the lease contract.

Agreements Creating a Security Interest: A Writing Is Required

A security interest is a creditor's legal claim to a debtor's collateral. When a debtor is trying to get approved for a business loan or for an equipment purchase, they'll usually offer up collateral (something that they own) to the creditor as a way to assure the creditor that they're taking the loan or purchase seriously and that they'll make their payments.

The creditor doesn't get the collateral right away and—if everything goes well—will never get the collateral. The debtor isn't giving the creditor title to the collateral. The debtor merely gives the creditor the legal right to take the collateral if they don't make their payments. Put another way: When the debtor doesn't make their payments, the creditor can legally take the debtor's collateral because the debtor has given the creditor a security interest in the collateral.

How to Enforce a Security Interest

Under the UCC, a security interest is only enforceable against a debtor if:

• there's a written contract (called a "security agreement"), and
• the debtor signs the agreement.

(U.C.C. § 9-203 (2023).)

When a security interest becomes enforceable, it "attaches" to the collateral. (For more information, read how to attach and perfect a security interest.)

Example: Attachment of a Security Interest

Probably the easiest way to understand how a security interest attaches is with an example.

Suppose Martin's company makes specialized parts for airplanes and he has just signed an agreement to supply parts to a major airplane manufacturer. However, to fulfill the agreement, Martin's company needs new machinery and a lot of raw materials.

Currently, his business 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 for the loan. So, Martin gives the bank a legal right to take possession of the new machinery (which the UCC calls "equipment") and the raw materials (which the UCC calls "inventory") if he misses his loan payments.

In this example:

• Martin's company is the debtor
• the bank is the creditor
• the machinery and materials are the collateral, and
• the bank's legal rights to the machinery and materials are the bank's security interests in the collateral.

Here, for the security interest to attach and be enforceable, Martin would need to sign a written security agreement. Of course, in practice, banks always have multiple loan papers requiring signatures in these situations. These documents generally include not only the security agreement but also a financing statement. The financing statement is usually filed with a public office to put other potential creditors on notice of the bank's security interest in the collateral.

A Word on Parol Evidence and Conduct

Usually, anything not contained in the written agreement is irrelevant. As long as the required conditions are met, the parties are generally bound by the terms in the written contract. But under the UCC, there are situations where other evidence can be considered in addition to the written contract to determine the terms of the agreement.

While the contents of written contracts generally carry substantial legal weight, sometimes things not contained in a written contract—such as the parties' oral statements (in legal lingo, "parol evidence") or actions (conduct)—might be relevant in a contract dispute.

The UCC's articles on sales of goods and on leases (Articles 2 and 2A) provide rules in this regard. More specifically, the UCC says that the terms of a written contract can 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 aren't inconsistent with the original contract, so long as the original contract isn't found to be the complete, final agreement between the parties (which generally is a matter to be decided by a court).

In these cases, the written agreement might not be the final say. If you're striking a deal to sell, purchase, or lease goods, your statements and actions outside of the contract can come into play.

Additional Guidance on Written Agreements

When making a business deal, it's in your best interest to get everything in writing no matter who or what you're dealing with. This way, in regard to the statute of frauds, you won't have to spend time making the call on whether your agreement is enforceable and, if it is, under what terms. When writing your agreement, you should also add a clause that says the written agreement is final and represents the complete understanding between the parties.

Make sure you also check your state's laws. While all states have adopted most of the UCC, there might be some variation between your state's laws and the UCC model rules. Specifically, be aware that Louisiana hasn't adopted Articles 2 and 2A of the UCC. If you have additional legal questions about your specific situation, you can always talk to an attorney. They can provide legal advice about the enforceability of your contract and your obligations under it.