Friday, April 6, 2012

Oral Versus Written Contracts: The Supreme Court of Virginia's Decision in Dixon v. Hassel & Folkes

In March, we posted a quiz (here) based on the facts of Dixon, LLC v. Hassel & Folkes, PC.

Dixon, a recent decision by the Supreme Court of Virginia, examines two questions that arise frequently in the business and real estate contexts:
  1. Under what facts and circumstances have two parties entered into a legally binding contract?
  2. If a contract does exist, under what facts and circumstances is it a written (as opposed to an oral) contract?

In Dixon, a dispute arose about the boundary line between two properties.

One of the property owners sued its surveyor, alleging that a mistake by the surveyor was a breach of contract that triggered the boundary dispute with the neighbor and thereby caused harm to the property owner.


At the beginning of the surveying project, the surveyor sent the owner an engagement letter that included the following language: "Should you find this proposal acceptable, please sign both copies of this proposal in the space provided below and return a fully executed copy to us. Receipt of the executed copy will serve as the written agreement."

You can probably guess what happened next: the owner did not sign the proposal. Nevertheless, the surveyor surveyed the boundary lines, and the owner paid the surveyor for the work.


The prelimimary question is whether an enforceable contract exists between the owner and the surveyor.  Justice Mims, writing for the Supreme Court, disposes of this question quickly: a contract existed between the owner and the surveyor, as evidenced by both parties' performance (work by the surveyor, payment by the owner). 

The practice lesson as to question #1 is straightforward, but it bears repeating: many agreements are (or can become) binding legal contracts even absent a written instrument (subject, however, to the Statute of Frauds, about which you can read here and here).


The more perplexing question in Dixon is whether the contract between owner and surveyor was written or oral. 

The significance of the question lies in the timing of the lawsuit: in Virginia, a claim for breach of an oral contract is barred (by the statute of limitations) after 3 years, whereas a claim for breach of a written contract is barred after 5 years

In Dixon, the owner filed his claim more than 3 (but less than 5) years after the surveyor completed its work.  This timeframe means the owner's lawsuit against the surveyor is barred if the Court determined that the contract was an oral contract.


The owner in Dixon argued that the contract was written (and therefore the lawsuit was not barred by the 3-year time limit), since the original proposal -- though never signed by the owner -- had been signed by the surveyor. 

The Court disagreed, stating that the surveyor imposed a reasonable prerequisite on the formation of a written contract. Justice Mims writes:
"It is well-settled that parties may contract as they choose so long as the terms they adopt are not prohibited by statute or public policy... No such prohibition barred [the surveyor] from requiring [the owner] to sign and return the Writing as a condition precedent to its becoming a written contract. By failing to sign and return the Writing, [the owner] rejected that term of the agreement... and there was no written contract."

For anyone out there who deals with contracts on a regular basis, Mims' opinion is (potentially) big stuff!  Here's why:

In the context of Dixon, the oral/written determination "only" affected the statute of limitations analysis (from the owner's perspective, of course, this was sufficient to have his claim dismissed, thus the quotes around the word "only").

If extrapolated to other situations, however, the Court's decision could mean that if you are presented with a written agreement, but it includes language stating that a written agreement will exist only if you countersign the document, then the terms of the original written agreement may not be enforceable against the party which presented it to you.


Perhaps anticipating the extent to which the Court's reasoning could be used to thwart a party's reasonable expectations as to when a written contract exists, Justice McLanahan wrote an unusually strong dissent in Dixon

The dissent is particularly persuasive in arguing that the surveyor's performance of the terms of its written agreement (and its acceptance of payment by the owner!) should constitute a waiver of its stated requirement that a written agreement would exist only if the document were signed by the owner.

Regardless of whether one agrees with Justice Mims or Justice McLanahan, the practice lesson is clear: clients should be careful to determine whether a countersignature is necessary in order to create a written contract enforceable against the party who has presented a document.

No writing required when it comes to April tulips.

With best wishes for a happy Easter to all...