What Is Contract Law?
Contract law applies to agreements between people, business entities, and/or groups. Each state has its own laws that govern the interpretation and enforcement of contracts, and contract law exists in both statutes and common law. Common law consists of precedent created by courts’ statutory interpretations.
When a party to a contract fails to fulfill its obligations, it is called a “breach of contract.” The injured party can file a breach of contract lawsuit to seek damages and/or to compel the other party’s performance under the agreement. But interpreting and enforcing contracts is not always easy or straightforward.
Texas contract law recognizes both oral and written contracts. Oral contracts are ambiguous and require the court to review evidence to determine the intent of the parties. For certain types of transactions, oral agreements are not enforceable under the Texas statute of frauds.
The Statute of Frauds in Texas
The statute of frauds is an affirmative defense in a Texas breach of contract law case. If successful, the defense can render a contract unenforceable. The statute of frauds is designed to prevent fraud by requiring that certain types of transactions be in writing. Note that the statute of frauds does not apply to a contract that is fully executed by both parties.
The statute of frauds dates back to 1677 when the English Parliament passed “An Act for prevention of Frauds and Perjuryes.” That Act was intended to prevent misunderstandings and fraud associated with oral agreements. America’s founders were influenced by the Act in deciding that written and signed agreements reduced controversies and litigation.
The statute of frauds is codified in Tex. Bus. & Comm. Code § 26.01(a) & (b). Under the statute, a promise or agreement is not enforceable unless it is:
- In writing
- Signed by the person charged with the promise or by someone lawfully authorized to sign for them
Section 26.01(b) provides that under Texas contract law, the statute of frauds applies to contracts regarding:
- Contracts that will be performed more than 1 year from the date of the agreement
- Promises by an executor or administrator “to answer out of his own estate for any debt or damage due from this testator or intestate”
- A promise by one person to “answer for the debt, default, or miscarriage of another person”
- Contracts for the sale of real estate
- Real estate lease agreements with lease terms exceeding 1 year
- Certain payments related to mineral interests
- Certain medical arrangements
Under Texas contract law statutes, contracts involving marriage or “on consideration of nonmarital conjugal cohabitation,” must be in writing. For example, Texas courts have previously considered the application of the statute of frauds to agreements regarding engagement rings.
In Curtis v. Anderson, 106 S.W.3d 251 (2003), the plaintiff gave Anderson a ring. The engagement ended just two months later, and Anderson refused to return the ring. The plaintiff argued that Anderson had agreed to return the ring if the engagement was called off for any reason. The Court held in Anderson’s favor since the agreement was not in writing.
A suretyship agreement involves the promise by one person to answer for the “debt, default, or miscarriage of another person.” To satisfy the statute of frauds under Texas contract law, a memorandum of suretyship must include:
- The parties involved;
- A manifestation of the intent to guarantee an obligation; and
- A clear description of the obligation that is being guaranteed.
Contracts Not to be Performed Within One Year
Contracts that fall under this provision have been heavily litigated in Texas courts. That’s because it’s not always clear whether a promise to perform can be completed in less than a year. Moreover, agreements do not always specify a deadline for completing performance.
Texas courts have held that agreements that don’t require performance within a specified amount of time are generally not subject to the statute of frauds. In Bratcher v. Dozier, 162 Tex. 319 (1961), the plaintiff agreed to work as a mechanic for the defendant. The agreement was not in writing and did not specify how long the employment relationship would last. The mechanic was fired just a few months later and sought damages. The defendant raised the statute of frauds as a defense. The Court held that the statute of frauds didn’t apply, because, “There is nothing in the agreement itself to show that it cannot be performed within a year according to its tenor and the understanding of the parties.”
Promises by an Executor or Administrator
Texas contract law statutes define a testator as a person that dies leaving a will, while someone that dies without having a will is said to have died intestate. The testator specifies the party(s) that will serve as the Executor of the will. Promises that are made by the Executor or a personal representative of the estate for any debt or damage from the person that they represent must be in writing. But the statute of frauds does not apply to obligations that are incurred after the death of the decedent.
The statute of frauds applies to some arrangements made by a physician or healthcare provider. Texas contract law statutes define health care provider as “any person, partnership, professional association, corporation, facility, or institution duly licensed, certified, registered, or chartered by the State of Texas to provide health care.”
The term includes registered nurses, dentists, podiatrists, pharmacists, chiropractors, optometrists, health care institutions, or any person, partnership, professional association, corporation, facility, or institution duly licensed, certified, registered, or chartered by the State of Texas to provide health care.
Sales of Real Estate and Lease Agreements
The statute of frauds applies to contracts for the sale of real property and to lease agreements that are longer than one year. For example, an agreement to lease an apartment to a tenant for two years would have to be in writing to be enforceable under Texas contract law.
Payments Related to Mineral Interests
Under Texas contract law, the statute of frauds generally applies to a promise to pay a commission for the sale or purchase of a mineral interest or oil and gas leaseholds.
There are two important exceptions to the statute of frauds under Texas contract law: promissory estoppel and partial performance.
The plaintiff typically raises promissory estoppel as a counterdefense to the defendant’s statute of frauds defense. If successful, promissory estoppel will overcome the statute of frauds and allow the enforcement of an oral agreement. To raise the defense, the agreement that is subject to the promise must have been in writing at the time that an oral promise to sign it was made. To find in favor of the party raising the promissory estoppel defense, the court must find that:
- The promisor made a promise that they should have expected would cause the promisee some definite and substantial injury;
- That the injury did in fact occur; and
- That the promise must be enforced to avoid the injury.
The damages that can be recovered are those that restore the party to the position that they would have been in had they not relied on the promise, rather than the total amount of profits expected under the agreement.
The court can enforce an agreement that fails to satisfy the statute of frauds if there has been partial performance under the contract. But only if the denial of enforcement would amount to a virtual fraud.
For example, in Zaragoza v. Jessen, a couple agreed to sell their home to another couple. The sellers drew up an agreement that stated that the purchasers would assume the payment of the sellers’ first mortgage on the home and pay a $73,000 down payment, a portion of which would pay off the second mortgage on the home.
Following the purchasers’ performance under the agreement, the sellers were to deed over the property. But the sellers never signed the agreement, and after the purchasers paid the down payment, began paying the mortgage payments, made improvements to the property, and paid the property taxes. The sellers refused to sign the deed, asserting the statute of frauds as a defense. Since the purchaser had performed their obligations, the court in this case found in their favor and enforced the agreement.
What Are the Elements of a Valid Contract?
Under Texas contract law, an agreement must have several core elements to constitute a legally binding contract. These include:
- Offer and acceptance
- Lawful purpose
- Lawful consideration
- Certainty and completeness of terms
- Mutual consent
Offer and Acceptance
An offer is the first step in a contract. It occurs when one party makes a promise to do or refrain from doing something at some point in the future. While the concept of an offer may seem straightforward, it is not always clear that a valid offer has been made. For example, the person may have been joking or the statement may be too ambiguous.
The other party must unambiguously accept the offer. An offer can be expressed through words or performance as specified in the contract. And acceptance must occur while the offer is still open. The offer may include a definite time frame or the party making the offer could withdraw it before it is accepted. If the party receiving the offer changes the conditions of the offer, then it is rejected and constitutes a counter-offer.
The contract must be for a lawful purpose. For example, suppose a supplier agrees to sell a retailer a shipment of T-shirts. This transaction constitutes a lawful purpose. But suppose it turns out that the T-shirts are stolen goods. In this case, the contract is void since the purpose has become unlawful.
Consideration contract law can be confusing since consideration is a legal term that laypeople are often unfamiliar with. Consideration means something of value that is promised in exchange for the specified action. The presence of consideration distinguishes contracts from gifts.
Lawful consideration can include money, services, or an agreement to refrain from doing something. But the exchanged item must be legal. (Returning to the example above, the stolen T-shirts do not constitute lawful consideration).
As a general rule, all parties to an agreement must give consideration. However, courts will typically not determine the adequacy of consideration unless there is evidence of wrongdoing and/or the contract benefits one party much more than the other.
Certainty and Completeness of Terms
The terms of an agreement must be clear and complete. They should specify who the parties are, their obligations, and the consideration to be paid. When interpreting contracts, courts will consider the contract as a whole and the ordinary meaning of the words used therein.
The parties to the contract must have a “meeting of the minds,” when entering into the agreement. This means that both parties understood and agreed to the terms. But they must do so voluntarily and not as a result of undue influence, duress, coercion, or a misrepresentation. If the court determines that the agreement was not made voluntarily, then the contract will be void.
A contract may also be void if there is a mutual mistake with respect to an important issue. But a mistake by only one party may still be enforceable.
The parties must have the legal capacity to enter into the contract. This means that they have reached the age of majority and are of sound mind. Like many states, the age of majority under Texas contract law is 18. Sound mind means that the parties do not suffer from cognitive impairments such as dementia or are not under the influence of intoxicants.
Types of Contracts
Texas contract law recognizes both written and oral contracts. Oral contracts are valid and enforceable as long as they include all the elements of a contract and are not used in a transaction that falls under the statute of frauds. But there are also four other categories of contracts that have implications under Texas law:
- Express contracts
- Implied-in-fact contracts
- Unilateral/bilateral contracts
An express contract is just that: The terms are expressly stated in the contract. This category is the standard written contract that most people picture when they think of contracts. These contracts tend to be the safest and fairest to all parties since the obligations are spelled out and will generally be enforced by the court in the event of a dispute.
An implied-in-fact contract is one that can be inferred from the facts and circumstances of the case. The court will look at the actions of the parties to determine whether they had a meeting of the minds. Note that the outcome is less likely to be fair to both parties since the nature of their agreement is left to the interpretation of the court.
A quasi-contract is similar to an implied-in-fact contract. But with a quasi-contract, the court can impose obligations on the parties even if they did not make any formal promises. Note again that the court’s interpretation is less likely to be fair to both parties but is used in the interest of justice.
A unilateral contract is one where the actions of one party solely benefit the other. There is no exchange of promises but only an exchange of performances. A bilateral contract involves two parties exchanging promises that are mutually beneficial.
When Do I Have to Get a Written Contract in Texas?
A common question that people have is whether a contract must be in writing to be enforceable under Texas contract law. The short answer is “no.” If one party agrees to do something in exchange for the other party’s promise to do something else, there is a valid and enforceable agreement. Texas contract law recognizes oral agreements, and countless people use them daily in both their personal and professional lives.
While oral agreements are efficient, it is generally a good idea to put an agreement in writing. There are several reasons for this. First, as we discussed above, certain types of contracts must be in writing under the statute of frauds. For instance, an agreement to sell your home to a third party must be in writing to be enforceable. Second, a written agreement expressly details the mutual understanding of the parties. It includes important terms such as the price to be paid or the services to be delivered. The parties know what to expect and are more likely to receive satisfactory performance under the contract.
Third, results under Texas breach of contract law can be harsh. Texas breach of contract law arises when one party asserts that the other did not perform their obligations under the agreement. In the absence of a duly executed written contract, the interpretation of the agreement will be left to the court. The court will consider the facts and circumstances surrounding the formation of the contract to determine the intent of the parties and whether the parties satisfactorily performed their obligations. The court’s interpretation is not always consistent with what the parties originally intended and may not produce an equitable result.
Verbal vs. Written Contracts
Here’s an example that illustrates the importance of written agreements: Suppose that you hire a contractor to install a new floor in your kitchen. You agree to obtain and provide the flooring materials and to pay the contractor $2,000 for labor. You pay half of this amount upfront. In these types of transactions, it is not uncommon for the parties to have a simple handshake deal.
The contractor shows up the next day, removes the old flooring, and begins to install the new flooring. About halfway through the job, you notice that some of the wood planks are not straight and that there are large gaps between some of the boards. You ask the contractor to repair the boards, but they refuse, stating that they will have to charge more to redo the work. An argument ensues and the contractor leaves without completing the job.
Now, what do you do? Your floor is a mess, and you have to hire someone else to finish the job. But what if the new contractor charges significantly more? And what about the money that you paid to the first contractor? You decide to file a breach of contract claim against the contractor. But without a written agreement, you will need to prove that there was a verbal contract as well as the terms of your agreement.
You could show the court copies of emails or text messages, a copy of the check or a receipt, and photographs. But the contractor will also get to tell their side of the story. They may argue that they completed the work or that the price was more than $2,000 and that you still owe them money. If you hire an attorney, proving your case under Texas breach of contract law will be more expensive since it requires more time and effort.
Written contracts generally leave no room for ambiguity. The contract will include the price, scope of work, and even provisions that cover a default by either party. The court will look to the contract to resolve the dispute and is more likely to reach a decision that is equitable to the parties.
Contact our Texas Contract Lawyers Today
Texas contract law can be complex. The courts recognize both oral and written agreements. Oral agreements are ambiguous, and courts must consider the facts and circumstances to determine the intent of the parties. But for certain types of transactions, oral agreements are not enforceable under the Texas statute of frauds. There are several exceptions to the statute of frauds, but their scope is limited and will not apply in many cases.
For these reasons, it is advisable to enter into written agreements. Written contracts clearly define the terms of the agreement and the obligations of the parties. In the event of a breach of contract, the court is more likely to reach an equitable decision. For questions about Texas contract law or to discuss your case, contact one of our experienced Texas contract lawyers today.