Put Your Contracts In Writing

If it’s important, put it in writing. Seems like common sense, doesn’t it? Yet you’d be surprised how much business gets done in the absence of a written agreement. Legally speaking, written contracts aren’t strictly necessary in many situations. A contract will exist, regardless of whether reduced to writing, if the evidence shows an offer was made and accepted, that legally sufficient consideration was exchanged, and that both parties agreed on all material terms. The statute of frauds requires that certain types of contracts–like real estate contracts and contracts for the sale of goods worth over $500–be in writing or supported by written evidence, but contracts not covered by the statute of frauds are enforceable in Virginia even if they are purely oral. (See Va. Code §§ 8.2-201, 11-2). But why would you want to go through the trouble of having to prove the existence of a verbal agreement? The whole point of entering into a contract is to acquire a legally enforceable right. If the other party breaches the agreement and you need to enforce your rights in court, you’ll need to be able to prove the existence of a valid contract, that it was breached by the other party, and that you were damaged as a result. Proving these three things is a lot easier if the terms of the agreement are reflected in a document signed by both parties.

As I read the recent opinion in Monogram Snacks Martinsville, LLC v. Wilde Brands, Inc. (a case that involved a dispute between two snack-food manufacturers, one of which is one of the largest in the country), I was surprised to learn the parties never bothered to put the terms of their agreement in writing. As a result, when Monogram decided to sue Wilde for breach of contract, it had to go through a whole ordeal to convince the court that a contract even existed in the first place.

The basic facts, according to the opinion, go something like this. Wilde makes a product called “chicken chips,” which is basically what it sounds like: chips made from chicken instead of potato. To scale up its production, it entered into an arrangement with Monogram under which Monogram would mass-produce the chicken chips in its facility in Martinsville, Virginia. For roughly two years, the arrangement seemed to be working: Monogram produced the chips in its facility and Wilde would pick up the finished product and arrange for distribution. Nothing was put in writing. Eventually, Wilde became frustrated at all the additional costs Monogram was charging: things like $100,000 to install a small test fryer, $450,000 for installing a larger fryer, and additional add-on expenses for supplies, labor, and machinery. Eventually, Monogram was charging $38 per case of chips. Wilde only charged its customers $33 per case, so it decided to terminate the relationship. It stopped paying Monogram’s invoices and Monogram refused to deliver 176 pallets of finished product. Litigation followed.

Among other issues in the case, Monogram wanted payment for those 176 pallets. Monogram argued that Wilde had a contractual obligation to pay for them. Wilde’s response to that claim, in effect, was “what contract?” Nothing had been reduced to writing. All the parties had, according to Wilde, was a “trial phase” to see whether a formal contractual relationship would be mutually beneficial. And how could there be a contract, it argued, when the parties didn’t even see eye-to-eye on what the pricing was supposed to be?

Ultimately, the court found that the evidence was sufficient to allow the jury to decide whether a contract was formed. Contracts don’t necessarily need to be in writing. They can be oral, observed the court, provided they are “sufficiently definite to enable a court to give it an exact meaning,” and provided they “obligate the contracting parties to matters definitely ascertained or ascertainable.” (See Smith v. Farrell, 98 S.E.2d 3, 7 (Va. 1957)).

The court looked primarily to the course of conduct between the parties to determine whether they may have formed an enforceable agreement:

For over two years, Wilde placed regular orders with Monogram to produce its chicken chips. Monogram invoiced Wilde for those services, and Wilde paid those invoices. Wilde and Monogram both made substantial investments in machinery, supplies, and labor to scale up the production of chicken chips in the Martinsville facility under this agreement. Moreover, Wright testified that “[t]here was a business decision in 2018 that said that [Monogram was] going to manufacture for $25 a case”…, indicating the parties reached an agreement on arguably the most material contract term: price.

Evidence that Monogram started charging $38 per case rather than $25 per case did not mean that an agreement was never formed. Wilde had produced evidence that the parties had agreed on $25 per case. Therefore, evidence that Monogram was charging a higher amount related to whether the oral agreement was being honored, not to whether an agreement existed at all.

Wilde then tried to convince the court that if the agreement was oral, it was unenforceable under the statute of frauds. The statute of frauds renders unenforceable any contract for the sale of goods at $500 or more unless a party can produce a “writing sufficient to indicate that a contract for sale has been made between the parties” that is “signed by the party against whom enforcement is sought.” (See Va. Code § 8.2-201).

The court rejected this argument because it disagreed with Wilde’s characterization of its arrangement with Monogram as a transaction for the “sale of goods.” Sure, Monogram was delivering pallets of chicken chips to Wilde, but the purpose of their arrangement was for Monogram to provide the service of large-scale manufacturing. The “predominant purpose” of the contract is what matters here–if the predominant purpose is the provision of services, the statute of frauds does not apply. (See Princess Cruises, Inc. v. Gen. Elec. Co., 143 F.3d 828, 832 (4th Cir. 1998)).

So the court denied Wilde’s motion for summary judgment on the contract claim and allowed Monogram to present its case to a jury. Still, imagine how much stronger Monogram’s case would be if it was armed with a written contract, signed by Wilde, stating exactly what the terms of the deal were. Instead, Monogram will now have to convince a jury that there actually was a deal and that Wilde needs to honor the terms it verbally agreed to.