Commercial Division Blog
Posted: February 24, 2018 / Categories Commercial, Contracts
Claim for Referral Fees Barred by Statute of Frauds
On February 6, 2018, Justice Emerson of the Suffolk County Commercial Division issued a decision in MacKay v Paesano, 2018 NY Slip Op 50212(U), holding that a claim for referral fees was barred by the statute of frauds and could not be saved by the doctrine of partial performance, explaining:
The sixth cause of action alleges that the parties had an enforceable agreement, which the defendants breached by failing to compensate the plaintiff in accordance with its terms. Paesano seeks dismissal of this cause of action on the ground that it is barred by the statute of frauds.
Contrary to the plaintiff's contentions, the statute of frauds, specifically General Obligations Law § 5-701 (a) (10), is applicable to the facts of this case. General Obligations Law § 5-701(a)(10) bars the enforcement of an oral agreement to pay compensation for services rendered in negotiating, inter alia, a business opportunity. Negotiating includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction. An agreement to compensate a plaintiff for procuring customers for a defendant falls squarely within the broad language of General Obligations Law § 5-701(a)(10).
The plaintiff contends that the part-performance exception takes this matter out of the statute of frauds. The doctrine of part performance is purely an equitable doctrine, unrecognized at law. It, therefore, does not apply when the action is pleaded as one at law and seeks only money damages, without any specific prayer for equitable relief. While the plaintiff does not seek specific performance of the alleged oral agreement, he has asserted a cause of action for promissory estoppel.
Promissory estoppel eludes classification as either entirely legal or entirely equitable. When a plaintiff sues for contract damages and uses detrimental reliance as a substitute for consideration, the analogy is to an action at law. On the other hand, when a plaintiff uses promissory estoppel to circumvent application of the statute of frauds, the claim is more equitable in nature. To invoke the power that equity possesses to trump the statute of frauds, a plaintiff must demonstrate an "unconscionable" injury, which the plaintiff has not done in this case. In the absence of a claim for equitable relief, the doctrine of part-performance is not applicable.
Moreover, part-performance may be invoked only if the plaintiff's actions can be characterized as unequivocally referable to the alleged agreement. It is not sufficient that the oral agreement gives significance to the plaintiff's actions. Rather, the actions alone must be unintelligible, or at least extraordinary, and explainable only with reference to the oral agreement. In sum, the plaintiff's actions must be inconsistent with any other explanation.
The actions upon which the plaintiff relies (studying for and passing the Series 65 Exam and his efforts to affiliate Frank MacKay Talent with Morgan Stanley) are not unequivocally referable to the alleged oral agreement. There are a myriad of reasons why the plaintiff may have become a Registered Investment Advisor and sought to affiliate with Morgan Stanley, including that he was acting on his own behalf. As previously noted, the record reflects that Frank MacKay Talent and Morgan Stanley executed a Professional Alliance Agreement in early 2013. Neither the defendants nor P.C. Wealth Management, which employs the defendants, are referred to anywhere in that agreement. Accordingly, the sixth cause of action for breach of contract is dismissed as barred by the statute of frauds.
(Internal quotations and citations omitted) (emphasis added).
Contract law--usually straightforward--has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, sometimes there are ways to escape from those traps, but the exceptions are narrow and, as shown here, difficult to meet. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.