Practical Insights for Business Owners
Client Q&A: We had an agreement, but . . .
We had an agreement, but . . .
If lawyers had their way, every business transaction would be documented by a comprehensive written contract signed by everyone involved. But the reality is often different. Sometimes the parties discuss additional terms that are not included in the written agreement. Sometimes the parties exchange multiple emails and it is difficult to pinpoint what the final agreement is. And sometimes there is only an oral agreement. Is it legally binding? And if so, what are the terms?
When Must An Agreement Be In Writing?
There is no universal requirement that agreements be in writing to be legally enforceable. But there are numerous specific categories of agreements for which such a strict rule exists. The legislation prescribing such categories is commonly referred to as the Statute of Frauds.
Historically, the types of agreements covered by the Statute of Frauds were included on a piecemeal basis, so there is little consistency. For instance, New York law generally requires the following kinds of agreements to be in writing: real estate transactions; guarantees to pay another person’s debt; assignments of certain insurance policies; contracts to pay a commission or finder’s fee; and long-term contracts that, by their terms, cannot be performed within one year. These are just a few common examples, but by no means an exhaustive list. Some of these categories have exceptions: for instance, leases for less than six months are exempt from the general rule concerning real estate transactions, and some professionals (such as auctioneers, attorneys and real estate brokers) are exempt from the general rule concerning commissions and finder’s fees.
How Much of a Writing is Enough?
If an agreement falls within the Statute of Frauds, it has to be in writing – but that does not necessarily mean a formal contract drafted by lawyers. A letter, a memorandum, an email, even a note scribbled on a restaurant napkin may be enough – as long as it adequately states all the essential terms of the parties’ agreement and clearly expresses the parties’ intent to be bound. But the Statute of Frauds will not be satisfied if a material term of the agreement is missing – in other words, if the document reflects only the parties’ “agreement to agree” at a future time, rather than their consent to be bound as of the writing.
Do You Have an Alternative if a Contract is Unenforceable Under the Statute of Frauds?
If there is nothing at all to document a deal covered by the Statute of Frauds, then the agreement will likely be unenforceable. But that may not be the end of the story; sometimes, there is other recourse. For instance, the party providing goods or services in reliance upon a contract that fails under the Statute of Frauds may be able to recover the fair market value of such goods or services by making a claim for unjust enrichment or under another equitable theory. Of course, such recovery may be very different from the terms of the parties’ oral agreement, but that is the price of neglecting the Statute of Frauds.
On the other hand, agreements not covered by the Statute of Frauds may be oral. But is this a good idea? The terms of an oral argument are often difficult to prove, because the other side’s understanding or recollection of the agreed-upon terms may be significantly different from your own, and this problem will only get worse as time passes and the business relationship sours. (Remember that, by definition, the only agreements that need to be enforced in court are ones where the contracting parties are in conflict). You may need witnesses or other extrinsic evidence to compensate for that missing piece of paper. So, if an agreement is important to you, it is better to put it in writing.
What if a writing exists but you also have a separate oral agreement? That can be a problem, especially if the two are in some way inconsistent. Even where the transaction does not fall within the Statute of Frauds, the so-called parol evidence rule will preclude introduction of witness testimony concerning oral discussions to contradict the express terms of a written contract. Many contracts also contain some boilerplate variety of an “integration clause,” stating that the contract represents the entire agreement between the parties and that any oral agreements concerning the same subject matter are void. Another common clause would say that the contract cannot be changed orally and that any amendment must be in writing and signed by all parties (or at least by the party against whom it is being enforced). Such clauses make it more difficult to argue that the written contract was orally modified. Although common in day-to-day business, oral promises that certain contractual provisions will not be relied upon are usually unenforceable.
The Parol Evidence Rule
In any event, New York law requires that a written contract that is clear and unambiguous on its face must be construed in accordance with its plain language and express terms. To the extent the contractual language is ambiguous, however, the parties can use extrinsic evidence to clarify its meaning – and that is where contract negotiations and other oral communications will likely be considered.
Contracts Induced By Fraud
Of course, for these rules to apply, the written contract has to be valid to begin with. One way to challenge the validity of a contract is to assert fraudulent inducement – i.e. that you only entered into the contract because you were deceived by the other party’s intentional false statements (which could have been made orally). Again, the language of some contracts is designed to preclude that possibility by stating that, in entering into the agreement, the parties did not rely on any representations except those explicitly stated in the agreement. But again, for such clauses to apply, the contract needs to be valid – and if the whole contract was induced by fraud, it may be a nullity. This is where it gets tricky . . .
Course of conduct
Finally, it is important to remember that sometimes a contract may be modified by something more powerful than words – conduct. Courts have recognized that performance of contractual duties, or lack thereof, may be powerful indicators of the parties’ understanding and interpretation of the agreement, as well as of their intentions to abide by it, change it, or repudiate it.
While based on simple principles, contract law gets nuanced and quite complicated. If you have a contractual issue, be sure to consult with competent counsel. We have extensive experience in preparing and negotiating contracts for our clients as well as in resolving contractual disputes in litigation and arbitration.