Verbal agreements can be binding under New York law, but it is always best to have a written contract to ensure enforceability and help prevent misunderstandings. Verbal agreements can become binding contracts if they otherwise meet legal requirements for contract formation. However, there are some types of agreements that must be in writing under New York’s Statute of Frauds to be enforceable contracts. While you may feel safe with a handshake deal, if something goes wrong, you may have no recourse in court. If you are considering or have entered into an oral agreement, it is important to know whether it is enforceable.
What Are the Requirements for a Valid Contract?
A contract is a legally binding agreement between two or more parties. To be validly formed and enforceable, a contract must have these elements:
- Offer and acceptance. One party must clearly offer something, and the other party unequivocally accept the terms of the offer.
- Both sides must give and receive something of value.
- Mutual assent and intent to be bound. There must be a “meeting of the minds” that shows an intent to be bound by the agreement and acceptance of its essential terms.
- Capacity and Authority. The offeror and the acceptor must have the ability to enter into the contract and bind either themselves or the party they represent (for example, when signing on behalf of a business).
When a contract is written out, the words of the contract should provide evidence of these elements. However, in a verbal agreement, the parties need to show evidence of these elements. For example, meeting of the minds may be evidenced by other communications between the parties as well as their conduct. If a dispute arises, courts can determine whether there is a valid contract “implied in fact,” meaning that the existence of an enforceable agreement can sometimes be implied from the facts, circumstances, and conduct of the parties.
When Must an Agreement Be in Writing?
New York General Obligations Law § 5-701, called the Statute of Frauds, requires certain agreements to be in writing, specifically in the following circumstances:
- There is no possibility of full performance of its terms within one year;
- The contract involves real property;
- One party assumes responsibility for the financial obligations of another individual or entity;
- The contract is made in consideration of marriage, except mutual promises to marry;
- The contract involves a promise to make a testamentary disposition;
- The contract involves the sale of goods for $500 or more; or
- The contract involves a promise to pay a debt discharged in bankruptcy.
The New York Statute of Frauds, named after a long established seventeenth century common law rule, is enforceable in Court. Any claim to enforce a verbal agreement may be immediately dismissed in Court if it violates the Statute of Frauds. New York Civil Practice Law and Remedies § 3211(a)(5); D&N Boening, Inc. v. Kirsch Beverages Inc., 63 N.Y.2d 449, 453-454 (1984); Apostolos v. R.D.T. Brokerage Corp., 159 A.D.2d 62, 64-65 (1st Dept. 1990) (oral commission agreement unenforceable).
Are There Exceptions to the Statute of Frauds?
An agreement which the Statute of Frauds requires to be in writing may still be enforceable in some cases, such as:
- Admission under oath. If the party being sued to enforce the contract admits in its pleading, testimony, or otherwise, in court that a contract was made, the court will deem the agreement enforceable without a written contract.
- Promissory estoppel. This doctrine applies when one party reasonably and foreseeably relies on the other party’s clear and unambiguous promise and injury results from that reliance. The Court of Appeals formally adopted this exception recently in Matter of Hennel, 2017 NY Slip Op. 05266 (June 29, 2017). When using promissory estoppel to overcome the Statute of Frauds, the claimant must show that not enforcing the verbal agreement would be unconscionable; not merely unjust or unfair. Unconscionable injury is harm well beyond what is expected from breaking a promise. Merex A.G. v. Fairchild Weston Sys., Inc., 29 F.3d 821, 826 (2d Cir. 1994). In general, “lost profits, lost fees, forgone business opportunities or damage to business reputation” will not show unconscionable harm. Darby Trading Inc. v. Shell Int’l Trading & Shipping Co., 568 F. Supp. 2d 329, 341 (S.D.N.Y. 2008) (internal quotations and citation omitted). Promissory estoppel is a narrow exception not available under New York law to circumvent the Statute of Frauds. Steele v. Delverde S.R.L., 662 N.Y.S.2d 30, 31 (1st Dep’t 1997) (dismissing promissory estoppel claim).
- Partial performance. An agreement may be enforceable where a party has partly performed, under New York General Obligations Law § 5-703. Examples include if a party paid all or part of a purchase price for land, began manufacturing a specialty product, or delivered all or a portion of goods or made full or partial payment and the goods or payments were accepted. Korman v. Corbett, 183 A.D.3d 608, 123 N.Y.S.3d 192 (2d Dep’t 2020) (per curiam), to rearg. denied, July 24, 2020. However, partial performance will not create enforceability where the contract is unable to be performed within a year. Gural v. Drasner, 2013 NY Slip Op. 08391 (1st Dept. December 17, 2013) (overruling prior cases).
- Merchant’s Exception. Verbal agreements between merchants may be enforceable where one party delivers goods or sends written confirmation of the terms of the agreement and the other party does not object within 10 days. New York Uniform Commercial Code §§ 2-201(2), (3).
Ideally, parties should consult an attorney to prepare a written agreement and execute it properly. While a verbal agreement or promise may be enforceable, there is a risk that a court will find that the parties cannot show the elements of contract formation absent a writing. If you have entered into an oral agreement, at a minimum keep careful documentation of discussions, communications, and performance of both parties and consult experienced counsel on how to protect your rights.
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