STATUTE OF FRAUDS: WHAT IS IT AND WHAT DOES IT DO?

This month, we take a break from analyzing Texas business structures in favor of examining Texas’ statute of frauds. The statute of frauds is well known among industry professionals but, unbeknownst to many industry outsiders, often thwarts attempts to enforce oral agreements.

What is the Statute of Frauds and What Does it Require?

The Texas statute of frauds is codified in chapter 26 of title 3 of the Texas Business and Commerce Code. Although the statute of frauds appears in the Business and Commerce Code, it applies in a wide variety of industries, transaction, and areas of law. For example, the statute of frauds impacts real estate transactions, the oil and gas industry, and even family law. At heart, the statute of frauds requires that certain types of agreements be in writing.

To What Types of Transactions Does the Statute of Frauds Apply?

The statute of frauds applies to many types of transactions. Below is a list of transactions bound by the statute of frauds:

·      any agreement by an estate executor or administrator to pay estate debts;

·      any agreement by one person to act as guarantor or surety for another’s debt or default;

·      any agreement in which marriage is exchanged for some other consideration;

·      any agreement for the sale of real estate;

·      any lease of real estate for a term longer than one year;

·      any agreement that cannot be fully performed in one year from the agreement’s execution;

·      any agreement to pay a commission for the sale or purchase of minerals, mineral interests, or an oil and gas mining lease or royalty; and

·      certain agreements involving medical liability.

A Closer Look

Despite the straightforwardness of some of the transaction types covered by the statute of frauds, some of these merit a closer examination or boast more nuance than may initially appear. For example, agreements in which marriage is exchanged for some other consideration include not only an exchange of marriage for some good or asset but also prenuptial agreements. The latter may not come to mind immediately when reading the statute of frauds since a prenuptial agreement does not precisely see one party exchanging willingness to marry for a promise to release or decide claims to marital property; this category of the statute of frauds nevertheless includes such agreements.

Agreements that cannot be fully performed in one year from the agreement’s execution also merit examination. This category does not entail simply all agreements that last longer than one year; rather, it entails agreements that must last longer than one year. For example, suppose an agreement terminates upon completion of a project that will last ten to fourteen months. The statute of frauds does not bind this agreement because the parties may complete the project in less than one year, however improbable this outcome may be. Likewise, suppose another agreement terminates upon the earlier of two conditions, one that will with certainty occur in six months and another that will occur in eighteen months. The statute of frauds will apply to this agreement because the agreement will terminate in less than one year notwithstanding the second, eighteen-month condition. Conversely, if the same agreement terminates upon the latter of the same definite and certain conditions, the statute of frauds will apply because the agreement must last more than one year despite the first, six-month condition.

Why Should I Care About the Statute of Frauds?

The statute of frauds can seriously impact the legality of many agreements. If the statute of frauds applies to your agreement, you may not be able to sue a party for breaching the agreement. This means you may recovery any damages following from a breaching party’s malfeasance. Due to the high stakes, concerned parties should review the statute of frauds before beginning negotiations on an agreement. Negotiating parties should decide in advance whether the statute of frauds requires a written contract and should communicate expectations for a written contract to the other party. When in doubt, draft a written contract or consult an attorney.

Samy Diab

Attorney

Diab Law Firm, PLLC