Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 3, 2017

Unconscionability Can be Basis for Disregarding Statute of Frauds But Standard is Demanding

On June 29, 2017, the Court of Appeals issued a decision in Matter of Hennel, 2017 NY Slip Op. 05266, holding that while unconscionability can be the basis for disregarding the Statute of Frauds, the standard that must be met is a demanding one.

First, the Court of Appeals affirmed the general rule that a court can disregard the Statute of Frauds if enforcing it would lead to an unconscionable result, explaining:

The Restatement (Second) of Contracts endorses the principle that a promise inducing reasonable reliance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. This Court has previously cited section 139 of the Restatement with approval.

This Court has also recognized that the related doctrines of equitable estoppel and part performance may preclude application of the statute of frauds under certain circumstances. Furthermore, the Appellate Division departments have unanimously recognized that promissory estoppel may preclude enforcement of the statute of frauds if application of the statute would result in unconscionability.

Finally, this equitable doctrine is grounded in sound principles of fairness. As this Court has stated in a different context,

The Statute of Frauds was designed to guard against the peril of perjury; to prevent the enforcement of unfounded fraudulent claims. But, as Professor Williston observed: 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 other words, equity will not permit the statute of frauds to be used as an instrument of fraud.

We hold that where the elements of promissory estoppel are established, and the injury to the party who acted in reliance on the oral promise is so great that enforcement of the statute of frauds would be unconscionable, the promisor should be estopped from reliance on the statute of frauds.

(Internal quotations and citations omitted). Unfortunately for the respondent, the Court of Appeals further held that the Appellate Division was wrong to find an unconscionable result in the case before it, explaining:

The standard for unconscionability where one party is seeking to avoid the statute of frauds must be equally demanding, lest the statute of frauds be rendered a nullity. As the Second Circuit aptly observed in Philo Smith & Co. v USLIFE Corporation (554 F2d 34 [2d Cir 1977]):

The strongly held public policy reflected in New York’s Statute of Frauds would be severely undermined if a party could be estopped from asserting it every time a court found that some unfairness would otherwise result. For this reason, the doctrine of promissory estoppel is properly reserved for that limited class of cases where the circumstances are such as to render it unconscionable to deny the promise upon which the plaintiff has relied.

Petitioners’ proof here fell well short of demonstrating an unconscionable injury sufficient to estop respondent’s reliance on the statute of frauds. Importantly, petitioners were able to make the mortgage payments entirely from the rental income generated by the property. Petitioners do not allege that they expended any personal funds to pay the mortgage or manage and maintain the property. In addition, petitioners do not allege that there is any reason to believe that the rental income will be insufficient to satisfy the mortgage payments in the future. To the contrary, petitioners characterized the property as a break even” business.

. . .

In short, petitioners allege that they did not receive the full benefit of their oral bargain. If these facts were sufficient to prevent application of the statute of frauds, the statute of frauds would be severely undermined. Whenever an oral agreement is rendered void by the statute of frauds, one or both parties will be deprived of the benefit of their oral bargain, and some unfairness will typically result. But what is unfair is not always unconscionable. For these reasons, cases where the party attempting to avoid the statute of frauds will suffer unconscionable injury will be rare.

Here, viewing the facts in the light most favorable to petitioners, application of the statute of frauds does not render a result so inequitable and egregious as to shock the conscience and confound the judgment of any person of common sense. Respondent demonstrated that petitioners would not suffer unconscionable injury if the statute of frauds were applied, and petitioners failed to raise a disputed issue of material fact in opposition.

(Internal quotations and citations omitted).

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