Firm to Farm: The Statute of Frauds and Sales of Goods

Is a handshake as good as your word? That is the topic of today’s blog post by RFD-TV farm legal expert Roger A. McEowen — the ability to enforce oral contracts for the sale of goods.

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Overview

On April 16, 1677, the English Parliament passed the “Statute of Frauds.” The new law required that certain contracts be in writing to be enforceable. In the United States, nearly every state has adopted, and retained, a statute of frauds. Most recently, state legislatures have had to amend existing laws to account for electronic communications and specify whether those communications satisfy the writing requirement.

A type of contract that must be in writing to be enforceable is one that involves the sale of goods worth $500 or more. Obviously, this type of contract will involve many contracts involving the sale agricultural commodities and other agricultural goods. But, there are exceptions to the writing requirement for contracts that would otherwise have to be in writing to be enforceable.

The ability to enforce oral contracts for the sale of goods—that is the topic of today’s post.

The Writing Requirement

The writing requirement for sales of goods is found in a state’s version of §2-201 of the UCC. The official version, adopted by most states, is applicable only when the goods have a price of $500 or more. In addition, under UCC §1-206, there is an overall statute of frauds for every contract involving a contract for the sale of personal property having a value in excess of $5,000. Thus, for personal property except “goods” a contract is not enforceable beyond $5,000 unless there is some writing signed by the party against whom enforcement is sought.

Obviously, farmers and ranchers engage in many contractual situations that require a writing to be enforceable. They also engage in many deals on a handshake and/or verbal basis. Often these informal arrangements work out fine, but when they do not, the Statute of Frauds issue can arise. An example of this occurred in a Nebraska case involving an alleged oral contract for the sale of beans in 1990. It is an older case, but the principles of the case are still directly applicable today.

The Case of the Contentious Crop

Facts. In Joseph Heiting & Sons v. Jacks Beans Co., 236 Neb. 765 (1990), the plaintiff sued for breach of an alleged oral contract for the sale of beans to the defendant. The defendant’s business involves buying beans and processing them for later sale. The defendant’s procedure for buying beans is for a grower to bring the beans to the defendant’s facility where the facility manager samples 500 grams from a load to grade them. If the result of the grading was acceptable to the grower, the beans would be dumped in a bin at the facility and commingled with beans from other growers. When the defendant’s bins are filled, the beans are transported to the defendant’s processing plant for processing. If the grower and the defendant do not reach a sale/purchase agreement within 30 days, the beans are considered to be stored (even though they may have already been processed) and a storage charge of $.003/hundredweight/day applies. The price paid for beans is set daily and is posted in the grading room at the facility and broadcast over a local radio station. Typically, the process of calling in and selling the beans is not in writing.

The plaintiff delivered beans to the defendant over an 11-day period totaling 2,837.75 hundred-pound bags. Each load was graded, weighed and a scale ticket was provided. The beans were of the highest quality and were commingled with other beans at the defendant’s facility. The day after all of the plaintiff’s beans had been delivered, the plaintiff told the defendant to sell the plaintiff’s beans at a time when the posted price at the facility was $19 per bag. The defendant’s manager told the plaintiff that he would “call them in.” The plaintiff believed that all of the plaintiff’s beans would be sold, but was later informed of “limited buying,” although the defendant claimed to have informed the plaintiff of the limited buying restriction at the time the plaintiff called to request the defendant to sell the beans. However, the defendant made no attempt to sell the beans until they were actually sold six months later at a price of $15 per bag. The plaintiff sued for breach of an alleged oral contract for the sale and purchase of the beans at $19 per bag.

The trial court granted summary judgment for the defendant, finding that no contract had been formed.

Contract elements. On appeal, the plaintiff claimed that the defendant’s posting of the price at its facility constituted an offer that the plaintiff accepted. However, the Nebraska Supreme Court (Court) determined that the posting was only an invitation for growers to negotiate with the defendant. The Court reasoned that the offer was actually the plaintiff informing the defendant of the plaintiff’s willingness to sell beans stored at the defendant’s facility for the posted price – the sell orders. The defendant didn’t notify the plaintiff of any acceptance or rejection of the offer, and did not verify the “purchase” of the beans when they were sold six months later. Rather, the acceptance was by silence. But, the Court determined that whether the plaintiff’s offer was accepted when the beans were delivered (via silence or inaction) was a material issue of fact as to contract existence. Thus, the trial court’s grant of summary judgment was improper.

Statute of Frauds. On the Statute of Frauds issue, the Court concluded that it clearly applied. The sale of beans involved a sale of goods in excess of $500. Thus, the sale/purchase transaction for the beans had to be in writing to be enforceable. However, the plaintiff claimed that the commingling of the delivered beans followed by shipment of beans to the processing facility where there were eventually processed amounted to receipt and acceptance of the goods under the applicable state version of the Uniform Commercial Code (UCC). Neb. U.C.C. §2-201(3)(c).

If that were the case, the transaction would be removed from the Statute of Frauds. But, the Court disagreed, noting that the defendant had to “receive and accept” the beans to make the Statute of Frauds inapplicable. Mere delivery of the beans to the defendant’s facility was not enough, by itself. An “acceptance” was also required. Whether acceptance had occurred was inconclusive, the Court determined - the beans had left the plaintiff’s control; the plaintiff’s particular beans could not be returned after they were commingled; and the defendant had nothing left to do except pay for the beans. As a result, the Court held that an issue remained as to whether there was receipt and acceptance of the beans to bar the application of the Statute of Frauds. The trial court’s grant of summary judgment for the defendant on this issue was also improper.

The Court also determined that the conduct of the parties could also indicate that a binding oral contract had been formed. This was another fact question for the trial court jury to determine.

Final decision. Ultimately, the Court reversed the trial court and remanded the case for further proceedings. The trial court jury had to dig into the facts and determine whether an oral contract existed as an exception to the Statue of Frauds.

Conclusion

The case points out the peril of oral agreements. Farmers and ranchers engage in frequent transactions similar to the one in the 1990 Nebraska case. The rules applicable to such transactions have not changed, and one can be fairly certain that the farming operation in the case had sold beans like this on many prior occasions. A good lesson is to get agreements in writing; give good thought concerning how the agreement is written; and abide by it. While a written agreement is no guarantee that problems will not arise, it will likely minimize the chances that they will.

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