Tuesday, May 03, 2005

No Fraud Here

For some strange reason, I've always had a sneaking suspicion that the statute of frauds tends to be used more to effect fraud or, perhaps more appropriately stated, to protect the perpetrator of a fraud, then it does to prevent fraud. In Salisbury Building Supply Co., Inc. v. Krause Marine Towing Co., the Maryland Court of Special Appeals turned back an attempt to protect the perpetrator.

Prior to the formation of the towing company, its principal, Joseph Krause, and the building supply company signed a document that purported to be a memorandum of understanding between the two companies. The memorandum provided that the towing company would supply services to the building supply company for a period of five years. Shortly thereafter, the towing company was organized as a corporation and for two years it provided services pursuant to the terms of the memorandum. At that point, the building supply company sold substantially all of its assets to a new company and then ceased operations. Neither the new firm nor the old entity honored the arrangement with Krause. Krause then sued the building supply company. Krause produced unchallenged evidence that it suffered lost profits for the unexpired term of the deal in an amount in excess of $165,000 and received an jury award in that amount. Salisbury appealed, contending that the agreement was unenforceable due to the application of the statute of frauds.

Under the Maryland statute of frauds, a contract that cannot be performed within one year is not enforceable unless the agreement "or some memorandum or note of it, is in writing and signed by the party to be charged." The Court stated that "in analyzing whether a memorandum or note is sufficient to satisfy the statute of frauds, courts should focus upon the statute’s purpose, namely, prevention of fraudulent claims" and quoted Williston on Contracts as follows:
In determining the requisites and meaning of "a note or memorandum in writing," courts often look to the origin and fundamental purpose of the Statute of Frauds. In fact, a failure to do so will often result in a futile preoccupation with the numerous and conflicting precepts and decisions involving the clauses providing for a note or memorandum, and a corresponding failure to see the forest for the trees.

The Statute of Frauds was not enacted to afford persons a means of evading just obligations; nor was it intended to supply a cloak of immunity to hedging litigants lacking integrity; nor was it adopted to enable defendants to interpose the Statute as a bar to a contract fairly, and admittedly, made. In brief, the Statute "was intended to guard against the perils of perjury and error in the spoken word." Therefore, if after a consideration of the surrounding circumstances, the pertinent facts and all the evidence in a particular case, the court concludes that enforcement of the agreement will not subject the defendant to fraudulent claims, the purpose of the Statute will best be served by holding the note or memorandum sufficient even though it is ambiguous or incomplete.
The Court allowed the enforcement of the deal the parties had reached even though the memorandum was entered into prior to the date of formation of the plaintiff and it affirmed the judgment in favor of the towing company.

At least in this case, the statute of frauds was not used as a shield to protect the party breaching the contract.

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