Oral Modifications to Written Agreements? Better Get Them in Writing Says the Commercial Division

March 21, 2022

In Castle Restoration & Constr., Inc. v Castle Restoration, LLC, Suffolk County Commercial Division Justice Elizabeth H. Emerson refused to enforce an oral agreement that allegedly modified a prior written agreement between the parties. In this blog post, we see how the Court applied a variety of contractual principals to determine the validity of the oral agreement.

In the Castle litigation, , plaintiff Castle Restoration & Construction, Inc.  (“Castle Inc.”) entered into an asset-sale agreement with defendant Castle Restoration LLC (“Castle LLC”) that included the transfer of equipment and a list of clients from Castle Inc. to Castle LLC (the “Agreement”). The purchase price of the deal was $1.2 million.  Castle LLC paid Castle Inc. $100,000 at closing and gave Castle Inc. a promissory note for the remaining amount due under the Agreement (the “Note”). Castle LLC defaulted on the Note.

Prior Litigation by Castle Inc.

As a result of Castle LLC’s default, Castle Inc. commenced an action and moved for summary judgment in lieu of complaint. Nassau County Commercial Division Justice Stephen A. Bucaria denied Castle Inc.’s motion. On appeal, Castle LLC hung its hat on a subsequent oral agreement allegedly entered into by the parties in which Castle LLC agreed to provide Castle Inc. with labor and materials for additional construction projects, the value of which would be used to offset Castle LLC’s obligations under the Note (the “Oral Agreement”).

The Second Department reversed Justice Bucaria’s decision, granting Castle Inc.’s motion for summary judgment and holding that the “breach of a related contract cannot defeat a motion for summary judgment on instrument for the payment of money only” unless the two contracts are “inextricably intertwined.” The Second Department held that the Agreement and the subsequent Oral Agreement were not inextricably intertwined and reversed the lower court’s decision.

No-Oral Modification Provision

After its defeat in the Second Department, Castle LLC brought an action against Castle Inc. alleging claims for breach of contract, fraud in the inducement, and unjust enrichment. Castle Inc. moved for summary judgment. Justice Elizabeth H. Emerson granted the motion, dismissing all but two breach of contract claims against Castle Inc.

First, Castle LLC alleged that Castle Inc. breached the Agreement by failing to perform the work-in-progress, which remained unfinished at the time of the closing. Second, Castle LLC alleged that Castle Inc. breached the Oral Agreement in which Castle LLC agreed to complete Castle Inc.’s work-in-progress in exchange for a reduction in its obligation under the Note. Specifically, Castle LLC alleges that Castle Inc. failed to pay Castle LLC for the work it performed under the Oral Agreement.

Although it denied summary judgment on the breach of contract claims, the court noted that if the Oral Agreement was valid, it would have relieved Castle Inc.’s obligation under the Agreement to complete the work-in progress, thus precluding Castle LLC from prevailing on its breach of the Agreement claims against Castle Inc.

The case went to trial.  The court recognized that the Agreement contained a no-oral-modification provision. Contracts that contain such provisions are typically protected by the Statute of Frauds and therefore must be in writing (see General Obligations Law § 15-301[1] [“A written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent”]). Accordingly, an oral agreement alone is not enough to modify the terms of an agreement.

“A party’s admission of the existence and essential terms of an oral agreement is sufficient to take the agreement out of the statute of frauds” (Camhi v Tedesco Realty, LLC, 105 AD3d 795 [2d Dept 2013]). However, the statute of frauds applies when the parties dispute the terms and conditions of the agreement (Komlossy v Faruqi & Faruqi, LLP, 714 Fed Appx 11, 14 [2nd Cir 2017]).  Although both Castle LLC and Castle Inc. acknowledged that they entered into the Oral Agreement by which Castle LLC agreed to complete Castle Inc.’s work-in progress, the parties disagreed as to the terms of the Oral Agreement, i.e., how Castle LLC was to be compensated for its work.  The court ultimately determined that the Oral Agreement was unenforceable.

Breach of Contract Claims

In analyzing the court’s decision with respect to Castle LLC’s breach of contract claims against Castle Inc., we must recall the essential elements of a breach of contract claim: (1) the existence of a contract; (2) the plaintiff’s performance pursuant to the contract; (3) the defendant’s breach of his or her contractual obligations; and (4) damages resulting from the breach (Canzona v Atanasio, 118 AD3d 837, 838 [2d Dept 2014]).  An element often overlooked is the plaintiff’s own performance under the contract.

“A party will not be able to prevail on a breach-of-contract claim unless it proves, by a preponderance of the evidence, that it performed its own obligations under the contract” (Innovative Biodefense, Inc. v VSP Tech., Inc., 176 F Supp 3d 305, 317 [SD NY 2016]). “Thus, a party is relieved of its duty to perform under a contract when the other party has committed a material breach” (Franklin Pavkov Constr. Co. v Ultra Roof, Inc., 51 F Supp 2d 204, 215 [ND NY]). A breach is considered “material” if it goes to the root of the agreement between the parties.  When, a party fails to make payment pursuant to the terms of a contract, the party is in material breach of the agreement, thus relieving the other party’s obligation to perform under the contract.

Because the court determined that the Oral Agreement was unenforceable, Castle LLC was unable to offset its obligations to Castle Inc. under the Agreement. Thus, since Castle LLC failed to make payment on the Note, the court determined that Castle LLC was in material breach of the Agreement. Castle Inc. was therefore discharged of its duty to perform under the Agreement. The Court ultimately found in favor of Castle Inc. with respect to both breach of contract claims.

Takeaway:

Although oral modifications to contracts are common, they may not always be enforced. When analyzing whether an oral modification is enforceable you have to consider, among other things, whether the written agreement has a no-oral-modification provision; whether the parties acknowledge that an oral agreement exists; and whether the parties agree with respect to the terms of the oral agreement. Otherwise, the oral agreement may be barred by the statute of frauds.