Decoding the Statute of Frauds and Its Impact in North Carolina

This article provides a brief overview of the statute of frauds, what types of contracts it applies to, the requirements for compliance with the statute, exceptions to the statute, and the consequences for non-compliance.

What is the Statute of Frauds?

The statute of frauds is a rule of law designed to prevent the enforcement of unfounded fraudulent claims by requiring that certain agreements be in writing to be enforceable in a court of law. The British Parliament originally enacted the statute of frauds in the latter half of the seventeenth century, and today, it has been adopted in some form or fashion in every state. North Carolina’s statute of frauds is codified in Chapter 22 of the North Carolina General Statutes. The name of that chapter, which reinforces the underlying purpose and requirement of the statute, is “Contracts Requiring Writing.”

Generally speaking, the statute of frauds is satisfied if the party seeking to enforce the promise can produce (1) a writing or some memorandum of the promise and (2) that is signed by the party against whom enforcement is sought.[1]  North Carolina’s statute of frauds covers five separate types of transactions:  (1) promises to answer for (to pay) the debt of another;[2] (2) contracts for the sale or lease of an interest in real property;[3] (3) promises to pay a debt previously discharged in bankruptcy;[4] (4) commercial loans in excess of $50,000.00;[5] and (5) contracts for the sale of goods where the price of the goods sold exceeds $500.00.[6]

Relevance to Construction Contracts in North Carolina

Construction projects routinely involve several transactions that implicate the statute of frauds. First, the owner may be purchasing or leasing the real property to be improved by the project. Second, the bank or lender(s) funding the project are likely extending commercial credit which, for most projects, will exceed $50,000.00. Finally, the general contractor and the vendors and subcontractors on the project will typically be providing, in addition to labor and services, materials and supplies used in the project which constitute “goods” under the Uniform Commercial Code (“UCC”) and are thus governed by the UCC’s statute of frauds, such as lumber, concrete, electrical and mechanical products, windows, doors, and the like.

Key Requirements for Construction Contracts

As discussed above, the two key requirements to satisfy the statute of frauds are a writing evidencing the promise(s) to be enforced and a signature by the party against whom enforcement is sought. 

Compliance with the Statute of Frauds

A short hypothetical is illustrative of how the issue may arise in a construction case. Assume Acme Corporation is hired by an owner of real property to build a shopping center on the land. Representatives of Acme Corporation and the owner each sign a construction contract outlining the scope of the project, the cost of the project, and the parties’ agreement as to when and how the contract is to be performed. Acme Corporation then asks Carl Carpenter to perform $10,000 of framing work on the project, including providing $4,000 worth of lumber, but Acme and Carl never sign a contract memorializing this agreement. Carl does the work, but Acme refuses to pay him. Carl wants to sue Acme to collect the $10,000 he is owed, but he doesn’t have a written contract. 

Implications of Non-Compliance

Carl has a statute of frauds problem.[7]  However, there is some relief available to Carl, but it is not as favorable as what he would have been entitled to had he secured a written, signed contract from Acme for the project.

First, Carl can sue Acme for quantum meruit, or unjust enrichment. In the absence of a written contract, Carl can seek to enforce what is referred to as an “implied contract” or a “contract implied in law.”  The rub is that if Carl had a written contract, he would be entitled to recover the contract price ($10,000) from Acme. However, in an unjust enrichment claim, Carl’s recovery is limited to the reasonable value of the goods and services he provided to Acme. Since most contractors build in a profit margin into their agreements, the reasonable value of the goods and services Carl provided to Acme is likely less than $10,000, so Carl will likely recover less than he could have if there had been a signed written contract.

Second, Carl can seek to enforce the agreement against Acme for the lumber provided under the UCC.  Unlike most of the statute of frauds provisions in North Carolina law, the UCC’s statute of frauds provides several unique exceptions to the requirement of a signed writing. One such exception is that a contract for the sale of goods in excess of $500 (recall that Carl effectively sold $4,000 worth of lumber to Acme) is enforceable even without a signed writing with respect to goods “which have been received and accepted.” N.C. Gen. Stat. §  5-2-201(3)(c). Thus, if Carl can prove that he provided $4,000 worth of lumber to Acme, and that Acme accepted the lumber by allowing it to be installed via the framing work, he can recover the contract price for the lumber even without a contract signed by Acme. The problem is this exception only applies to contracts for the sale of goods, not to labor or services, so if the contract was subject to the statute of frauds and was not governed by the UCC,[8] Carl would be stuck with seeking payment under an unjust enrichment/quantum meruit theory.

Best Practices for Compliance

Clearly, Carl would have been much better off having secured a written contract signed by Acme before undertaking his work on the project. But there are several other significant reasons why Carl would have been materially better off with a contract signed by Acme. 

First, construction litigation often involves claims between contractors and subcontractors regarding whether a party fully performed its scope of work or whether the party’s performance was in compliance with the contract. A written contract with a clearly outlined scope of work and clearly defined requirements for the deliverables provides a contractor or subcontractor with a stronger defense against such claims since there is written evidence of what each party was required to do. For example, Acme could defend Carl’s lawsuit by claiming that it was not required to pay him because he did not perform the work he was supposed to perform. If Carl had a written contract with clear requirements for his scope of work, he would be better positioned to overcome this defense.

Second, litigation is expensive, and North Carolina, like most jurisdictions, follows the “American Rule,” which is that each party to a lawsuit is responsible for paying its own costs and expenses, including its attorneys’ fees. Exceptions to the American Rule are available only where a statute, or the parties’ written contract, provides for “fee shifting,” or the payment of the reasonable attorneys’ fees of the prevailing party by the non-prevailing party.[9] Thus, in Carl’s case, he might win the battle and recover a judgment for say $9,000, but he could wind up losing the war if he had to pay his attorney $10,000 to recover that judgment. If he had obtained a written contract signed by Acme that contained a fee-shifting provision, he could shift some (or all) of his legal expenses to Acme to be recovered in addition to his money damages.

Third, construction projects are often large and complicated undertakings involving potentially dozens of subcontractors, vendors, and other professionals. In such large projects, it is not uncommon for a subcontractor’s scope of work to be changed on one or more occasions to adapt its performance to new developments with the project. Such change orders typically constitute an amendment of the parties’ original contract and alter the parties’ respective rights and liabilities thereunder. Thus, it is just as important, if not more so, to ensure that any change orders on a contract are likewise reduced to writing and signed by the parties to the contract, ideally before the subcontractor undertakes to perform the change order. Well-drafted contracts can not only help establish claims in litigation, or defend against claims of non-performance or breach—they can oftentimes help avoid litigation entirely by ensuring that each party to the contract is well aware of its obligations and responsibilities with respect to the project.  

Exceptions to the Statute of Frauds

In addition to the exception discussed above for goods received and accepted under the UCC statute of frauds, there are a few other exceptions that may help take the place of a signed writing. For the sale of goods under the UCC, the statute of frauds does not apply if the goods sold are to be specially manufactured for the buyer and are not suitable for resale to others in the seller’s ordinary course of business. Thus, assume Carl is instead a concrete fabricator, and Acme orders prefabricated concrete structures with very specific and unusual dimensions that Carl would be unable to sell to anyone else.  Once Carl has begun manufacturing the structures, Acme is bound to pay him the contract price for them, even in the absence of a written contract signed by Acme.[10]  Similarly, if Carl sues Acme to enforce his agreement and Acme admits in its answer that it did, in fact, contract with Carl to provide $4,000 worth of lumber, Carl can recover that price from Acme even without a contract signed by Acme.[11]  Additionally, as discussed above, an aggrieved party may sue under a theory of unjust enrichment to recover for goods and services provided, but in the absence of a signed written contract, the party will be limited to the recovery of the reasonable value of the goods and services, not the contract price.

Practical Tips for Contractors and Developers

As discussed above, there are a number of reasons why contractors and developers should ensure that there is a written contract signed by all parties before undertaking a construction project.  This requirement is perhaps even more important when dealing with subcontractors and vendors because, due to the often relatively small amounts of those contracts when compared with the overall cost of the project, there is a tendency to downplay or ignore the importance of a signed contract when dealing with smaller discrete portions of the project. Additionally contractors and developers should consider using pre-drafted form contracts for their projects, such as those prepared by the American Institute of Architects (“AIA”). These contracts have boilerplate provisions that can be modified as needed and are more likely to include provisions that the parties might have overlooked had they drafted an agreement from scratch.  Finally, it is critical to have an experienced attorney review construction contracts before they are finalized and executed, as an experienced attorney can assist contractors and developers in ensuring that their contracts comply with all applicable laws, will be enforceable in court, and accurately memorialize the rights, obligations, and duties of each of the parties.

[1] Note that it is not strictly required that the party enforcing the contract have signed it—only the party against whom enforcement is sought.  However, practically speaking, most written contracts are signed by all parties to the contract.  See, e.g., N . Gen. Stat. §  22-1 (emphasis added) (requiring that promises to answer for the debt of another are not enforceable absent the promise being “in writing, and signed by the party charged therewith . . . .”).

[2] N.C. Gen. Stat. § 22-1.

[3] N.C. Gen. Stat. § 22-2.

[4] N.C. Gen. Stat. § 22-4.

[5] N.C. Gen. Stat. § 22-5.

[6] N.C. Gen. Stat. § 25-2-201.

[7] For simplicity, this analysis assumes that the entire contract is governed by the UCC. In reality, courts analyze these types of “mixed” contracts, which involve both the provision of services and the sale of goods, under the “predominant purpose” test to determine whether the entire contract is governed by the UCC or by other laws.

[8] The UCC will either apply to the entire contract or not at all, so if Carl can satisfy the exception under the UCC for goods accepted and delivered, he would be able to recover the entire contract price, not just that portion of the contract price allocated to the lumber (goods).

[9] See, e.g., N.C. Gen. Stat. §  6-21.2.

[10] N.C. Gen. Stat. § 25-2-201(3)(a). 

[11] N.C. Gen. Stat. § 25-2-201(3)(b).