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Oral Contracts Can Bring Litigation Headaches

Oral Contracts Can Bring Litigation Headaches

It should go without saying that any business contract you enter into should be in writing. Oral or handshake agreements are inadvisable, as they may lead to misunderstandings—and litigation—over the precise nature of each party's obligations. Still, many business relationships continue to rely on oral or unwritten promises, and in many cases, such agreements are enforceable in court.

Kroshnyi v. US Pack Courier Services, Inc.

Here is a recent example from an ongoing federal civil lawsuit. The case involves a group of companies that offer package delivery services in and around New York City. Between 1987 and 2000, the companies hired several delivery drivers—primarily immigrants from Eastern Europe—and paid them a per-delivery fee rather than an hourly wage.

The drivers contend they were orally promised 60 percent commissions on each delivery. The company and its owner claimed he paid commissions based on "a price list which we agreed to pay at a minimum to the driver," but denied ever promising 60 precent.

In 2001, the drivers sued the company and the owner, arguing breach of contract in addition to other claims. A federal judge granted the defendants summary judgment on the plaintiffs' breach of contract claims. A jury later awarded damages to the plaintiffs on based on other New York law claims.

The2nd U.S. Circuit Court of Appeals, which hears all federal appeals from New York, disagreed with the trial court's decision and said a jury should hear the breach of contract arguments. The trial court's decision was based on the statute of frauds, which is a legal requirement that certain contracts will only be enforced if they are made in writing and signed by the parties. As applicable here, New York'sstatute of frauds provides, "Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking [b]y its terms is not to be performed within one year from the making thereof."

This means a New York court will not enforce an unwritten agreement if it cannot be performed within one year. As the 2nd Circuit noted, the New York statute of frauds is construed "narrowly," meaning as long as there is a possibility an oral agreement can be performed within one year, the courts will enforce it. So the question here was whether the alleged oral promise of 60 percent commissions fell within this one-year rule.

The plaintiffs said their oral agreements never included an ending or termination date. According to the 2nd Circuit, that meant as a matter of New York law they were "at-will" employment agreements, which either party could terminate at any times. Without an express termination provision, it was theoretically possible for either side to end the agreement within one year. Accordingly, the trial court was wrong to grant summary judgment on the basis of the statute of frauds.

Always Get it in Writing

The 2nd Circuit's decision is by no means a final victory for the plaintiffs. They will still need to prove at trial that they entered into valid oral contracts with the defendants. Had they got their commission agreements in writing at the outset, much time and money would have been saved. The lesson here is that, even if an unwritten agreement may be enforceable, it is always better to draft a written contract. If you need advice on contracts or any other New York business law matter,contact our offices today.

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