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Special Issues in Breach of Oral Contract Cases

Special Issues in Breach of Oral Contract Cases

The Appellate Division of the Supreme Court of New York, Second Department recently heard the very interesting case of Crozier v. Sauers. Perhaps unfortunately, the case highlights what can happen when a dispute occurs between friends and family. The case also involves some of the special evidentiary issues that crop up whenever oral contracts get litigated.

Background of the Case

The plaintiff and his wife were close family friends with the defendant Sauers. The plaintiff testified that Sauers asked the plaintiff for a loan of $180,000 in order to expand the defendant’s automotive glass business. Sauers himself testified that the purpose of the loan was to purchase an existing auto glass company and for a down payment on two additional buildings that would be used by the auto glass business for corporate purposes.

The record and evidentiary exhibits at trial showed that the plaintiff had written four checks made out to “T&M Corp.” T&M Corp was the name that defendant had chosen for the auto glass business. Defendant did in fact deposit these checks into the T&M Corp. Corporate account. The money in the corporate account was subsequently used to buy the auto glass company, but the two buildings were never purchased. Sauers testified that the remainder of the money was used to pay for corporate expenses, and the plaintiff did not argue with this assertion or provide any contrary evidence.

Plaintiff alleges that, pursuant to the oral agreement regarding the loan, defendant agreed to be personally liable for the loan if T&M corp. could not repay it. The trial court indeed ruled in favor of plaintiff, stating that defendant was personally liable for the balance of the outstanding loan, some $89,000.

The issue of personal liability is significant mainly because it means the business owner, as in this case, may be responsible for payment even if the business goes bankrupt. Although not at issue in this particular case, business owners who accept personal liability for business debts may lose their life savings or even their home, as they are valid targets for creditors. The creation of state LLC statutes that allow for small businesses to be created as limited liability corporations has, as one of its policy goals, the elimination of personal liability for business debts as an incentive to create small businesses.

Analysis: Oral Contracts and Evidence

In general, written contracts offer some advantages. They are a clear, definite record of the agreement and they contain evidence (such as signatures) that both parties intended to be bound to the deal. A rule known as the Parol Evidence Rule (see previous blog entries) prevents outside evidence about, e.g. oral representations made by the parties, if a written contract is unambiguous on its face. There is a judicial preference for the memorializing aspect of a written contract.

With oral contracts, much of the above goes out the window. The evidence heard is necessarily Parol in nature. There is no written memorial of the deal, instead there may or may not be written records, such as the personal checks in this case.

Here, the court heard testimony by both sides about the terms of the oral deal. The court focused on the parties’ intent: the loan was to be used for corporate purposes. Whether or not the buildings were purchased or whether the funds were used for corporate expenses was largely irrelevant to the court. Thus, the purpose of the oral contract was not breached – the funds were used for corporate purposes. The personal liability issue illustrates the evidentiary quandary in which a court finds itself. Generally, in these situations, the court weighs the testimony of each side as equally credible, as in here. Since the plaintiff is the one who alleged personal liability of the defendant, the plaintiff was responsible for showing, via the evidence, that this liability was agreed upon. Since presumably the defendant disagreed, the court viewed the conflicting testimony as cancelling out. Without evidence to show personal liability, the plaintiff’s theory of the case failed.

Please, for the reasons illustrated above, be careful when entering into oral contracts for large sums of money. Retaining experienced counsel is a very good idea - please do not hesitate to contact our office for a consultation.

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