Does An Agreement Really Have To Be In Writing?

• Posted on: May 17 2017

Attorneys are often asked whether an oral agreement is enforceable. Most will say that the answer depends on the law and the facts surrounding the agreement.

As an initial matter, to be enforceable, an oral agreement must contain the elements of a binding contract, e.g., an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms. (This Blog wrote about these elements here and here.) Even if these elements are present, the agreement must still satisfy the statute of frauds.

In New York, the statute of frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally.

On May 4, 2017, the Appellate Division, First Department, had the opportunity to consider, among other things, GOL § 5-701(a)(1) in Galopy Corp. Int’l, N.V. v. Deutsche Bank, A.G., 2017 NY Slip Op. 03599.

General Obligations Law § 5-701 (a)(1) – Agreements That by Their Terms are “Not To Be Performed Within One Year From The Making Thereof”:

The statute of frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons, 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages, 63 N.Y.2d 449, 454 (1984).

The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  D&N Boening, 63 N.Y.2d at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id.

In D&N Boening, the Court of Appeals provided examples of oral agreements that fell outside the Statute of Frauds despite questions surrounding the possibility of performance within one year.  These included agreements:

where either party had the option to terminate the agreement on seven months’ notice (Blake v Voigt, 134 N.Y. 69); where the agreement merely set the terms of anticipated prospective purchases but did not bind either party to any particular transaction (Nat Nal Serv. Stas. v Wolf, 304 N.Y. 332); where defendant had the option to discontinue at any time the activities upon which the agreement was conditioned (North Shore Bottling Co. v Schmidt & Sons, 22 N.Y.2d 171); where defendant had the option of selling at any time the property on lease to plaintiff for four years (Coinmach Inds. Corp. v Domnitch, 37 N.Y.2d 889); where no provision in the agreement directly or indirectly regulated the time for performance despite the extreme unlikelihood of its completion within one year (Freedman v Chemical Constr. Co., 43 N.Y.2d 260, 265); where employment was terminable for any just and sufficient cause wherever dismissal was deemed necessary for the welfare of the company (Weiner v McGraw-Hill, Inc., 57 N.Y.2d 458, 462).

Id. at 455-56.

However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id. at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg, 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id.

Galopy Corp. Int’l, N.V. v. Deutsche Bank, A.G.:

In Galopy, the plaintiff, Galopy Corporation International, N.V. (“Galopy”), alleged that it provided collateral to guarantee the obligations of U21 Casa de Bolsa, C.A. (“U21”), a Venezuelan broker-dealer, under a derivative transaction entered into between U21 and Deutsche Bank AG (“Deutsche Bank”) in November 2009. Galopy claimed that it had an oral agreement with Deutsche Bank in which the latter agreed to return the collateral to Galopy at the conclusion of the transaction. According to Galopy, in breach of that agreement, Deutsche Bank AG paid the collateral to U21 after U21 was placed into liquidation by Venezuela’s securities regulator. Galopy claimed approximately $62.7 million in damages as a result of Deutsche Bank’s alleged failure to return the collateral purportedly provided by Galopy to guarantee U21’s obligations under the transaction.

On August 18, 2016, Justice Shirley Werner Kornreich of the Supreme Court, New York County, granted in part and denied in part Deutsche Bank’s motion to dismiss the Amended Complaint, dismissing Galopy’s claims for promissory estoppel, unjust enrichment, and money had and received, but sustaining Galopy’s claim for breach of an oral contract.

Galopy appealed, claiming, among other things, that the court erred by dismissing its claims for promissory estoppel, money had and received, and unjust enrichment. Deutsche Bank cross appealed, arguing that the oral agreement violated General Obligations Law §5-701(a)(1).

The First Department unanimously reversed the motion court’s decision only to the extent it denied the motion as to the breach of contract cause of action. In doing so, the Court found that:

The alleged oral contract had a settlement date of July 10, 2011, and therefore could not be performed within a year. The possibility of its being terminated earlier does not remove the contract from the scope of the statute of frauds. Unlike the situation in Financial Structures Ltd. v UBS AG (77 AD3d 417 [1st Dept 2010]), which involved an oral agreement with “methods of acceleration” that “would . . . advance[] the period of fulfillment” (id. at 418 [internal quotation marks omitted]), the termination provision in this case unwound and canceled the transaction.

Citations omitted.

Takeaway:

In a perfect world, all contracts would be reduced to writing and signed by both parties, so that courts could determine the rights and obligations of the parties to the agreement. Unfortunately, we do not live in a perfect world. Therefore, whenever possible, people should have their agreements in writing and signed by both parties. If they do not have a written agreement, it does not necessarily mean that they cannot enforce their agreement, but it does mean that there are many impediments to overcome to convince a court to enforce it.

So, to answer the question in the title of this post, the response is not necessarily. But, it is preferable, if not strongly urged.

Tagged with: Business Law, Business Litigation, Commercial Litigation