A that you buy me a new

A statute of frauds will typically cover those oral contracts involving a guarantor. This means that certain requirements must be met before these contracts can be enforced. This lesson explores guarantor contracts and the typical statute of frauds.

Guarantor

A guarantor is a party that guarantees another party’s debt.

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A guarantor is sometimes called a surety. These contracts involve a promise to pay for the debt of another if that person doesn’t pay the debt.A statute of frauds is a state law that covers certain types of oral contracts.

This includes a promise by a guarantor or surety to a creditor to pay the debt or perform the obligation of a principal debtor. Note that a guarantor or surety contract doesn’t discharge the principal debtor.For example, let’s say that you help me buy a new car. You tell the dealer that you promise to pay my car payments if I’m unable to pay. That’s a guarantor or surety contract.

You’re the guarantor on my car loan.Now let’s say that you buy me a new car. You promise the dealer that you’ll make the car payments.

This isn’t a guarantor or surety contract. You aren’t guaranteeing my debt. Instead, you’re incurring your own debt.

Statue of Frauds Requirements

A statute of frauds applies to certain categories of oral contracts, including guarantor contracts. The states vary, but there are usually six categories covered by a state’s statute of frauds:

  1. Promises that involve marriage as consideration
  2. Contracts that can’t be performed within one year
  3. Contracts that involve the sale or transfer of land
  4. Contracts that involve promises by executors to pay estate debts
  5. Contracts that involve a promise to act as a guarantor or surety
  6. Contracts that involve the sale of goods worth more than $500

All statutes of frauds establish two key requirements for these types of contracts:

  1. There must be a written memorandum of the contract. A memorandum of the contract is a writing that proves the agreement.

  2. The memorandum must be signed by the party that disputes the contract.

Guarantor contracts are unenforceable unless they meet these two requirements. Note that it’s not necessary to have a formal, written contract. The memorandum should simply prove that an oral contract was made and prove any material terms of that contract.

Material terms will usually include items such as the parties to the contract and the amount to be paid.It’s also usually not necessary for both parties to sign the memorandum. For example, after you orally guarantee my new car loan and I have my new car, I lose my job and you refuse to make my payments.

If I want to enforce this oral contract against you, then you must have signed the memorandum.

Contracts Involving Guarantors

Businesses often encounter contracts that involve one party guaranteeing the debt of another party. Let’s take a closer look at guarantor or surety contracts.A guarantor can be a person or a company.

Many businesses sell items. These businesses are highly likely to encounter guarantor contracts. For example, let’s say I own a pet grooming business. I need to buy some new hair dryers for my dog clients. I purchase three dryers, on credit, from ABC Dryer Company.My business can’t afford to pay cash for the dryers, so the business agrees to make payments. I also agree that if my business can’t make the payments, then I will personally make the payments.

This is a guarantor contract. I’ve personally guaranteed my business’s debt.Many loan applicants use guarantors. It’s a common practice when a loan applicant is unable to secure a loan on its own, such as when the applicant has poor credit or no credit history. Some applicants use more than one guarantor. When there are multiple guarantors, each one will typically be liable for the entire amount of the loan.

Exceptions

There are three important exceptions to a statute of frauds involving guarantors.First, the contract doesn’t have to be in a signed writing if the guarantor makes the promise to the debtor instead of to the creditor. For example, you help me buy a new car.

I’m nervous about the purchase, so you tell me that you promise to pay my car payments if I’m unable to pay. This contract won’t fall under a statute of frauds because you made the promise to me, the debtor, rather than to the car dealer, who is the creditor.Second, the contract doesn’t have to be in a signed writing if the guarantor promises to be primarily responsible for the debt. For example, you help me buy a new car. I’m nervous about the purchase, so you tell the car dealer that you promise to pay my car payments. This contract won’t fall under a statute of frauds because you are primarily responsible for the debt, rather than guaranteeing my debt.

Third, the contract doesn’t have to be in a signed writing if it falls under the main purpose rule. This means that a statute of frauds won’t apply if the guarantor makes the promise to a creditor for the guarantor’s own benefit. For example, you help me buy a new car. I work for you, and I need a car to make deliveries for you. I’m nervous about the purchase, so you tell the car dealer that you promise to pay my car payments if I’m unable to pay.

You need me to have a car. This contract won’t fall under a statute of frauds because you guarantee my debt in order to profit yourself.

Lesson Summary

Let’s review. A statute of frauds typically covers six contract categories.

These are:

  1. Promises that involve marriage as consideration
  2. Contracts that can’t be performed within one year
  3. Contracts that involve the sale or transfer of land
  4. Contracts that involve promises by executors to pay estate debts
  5. Contracts that involve a promise to act as a guarantor or surety
  6. Contracts that involve the sale of goods worth more than $500

Businesses commonly encounter contracts that involve a promise to act as a guarantor or surety. This means that one party promises to fulfill the obligation of another party. Normally, this involves one party promising to pay the debt of another should that party not pay the debt.Note that there are three important exceptions to a statute of frauds involving a guarantor contract. First, the contract doesn’t have to be in a signed writing if the guarantor makes the promise to the debtor instead of to the creditor.

Second, the contract doesn’t have to be in a signed writing if the guarantor promises to be primarily responsible for the debt. Third, the contract doesn’t have to be in a signed writing if it falls under the main purpose rule. This means that a statute of frauds won’t apply if the guarantor makes the promise to a creditor for the guarantor’s own benefit.

Learning Outcomes

When you have completed the lesson, you should be able to tell what makes a contract a statute of fraud.

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