Oral Contracts in New York: How Valid Are ‘Handshake’ Agreements?

Oral Contracts in New York: How Valid Are ‘Handshake’ Agreements?

8.5.2024

By Geoffrey A. Mort

Famous film producer Samuel Goldwyn is reputed to have remarked that “an oral contract is not worth the paper it’s written on.” Goldwyn’s alleged comment echoes a widespread sentiment in the legal profession and elsewhere that oral contracts are of dubious validity and are “very difficult to enforce.”[1] In reality, New York courts, to a surprising extent, recognize oral agreements in a wide variety of situations and, in an age where many communications are by electronic means, are more receptive to verbal agreements than they have been in the past.

An oral contract is nothing more than a contract whose terms have been agreed to by a verbal communication. Notwithstanding several rules requiring particular types of contracts to be in writing, oral contracts in New York are equally as valid as written ones, and “parties may enter a binding oral agreement even if” they “contemplate memorializing their contract in a formal document.”[2] That said, counsel advocating the existence of an oral contract need to be aware of a handful of key requirements for such a contract to be deemed to exist.

Key Elements of Oral Contracts

In determining whether an oral contract exists, courts do not look at the “subjective intent” of either party to the alleged agreement.[3] Rather, “what matters are the parties’ expressed intentions, the words and deeds which constitute objective signs in a given set of circumstances.”[4] Although a wide range of “words and deeds” are found sufficient to establish an oral contract, as discussed below, counsel must be wary of several important pitfalls in arguing for the existence of an oral contract.

The court in Allen v. Cox[5] pointed out perhaps the most significant of these pitfalls when it stated that “[o]ral agreements are generally binding unless the parties have explicitly indicated their intention to be bound only by an executed written agreement.” Allen involved a promise by an individual to her domestic partner that “if you take care of me until I get completely through this recovery [from a serious illness], I will give you the settlement money [from a successful medical malpractice lawsuit].”[6i] The defendant argued that the plaintiff promisor had failed to plead the necessary elements of a valid breach of contract claim. The court, however, looked at the facts and observed that the plaintiff had entered into an oral contract by agreeing to his partner’s offer, did in fact care for her, was not paid and suffered damages because of the breach. Significantly, no agreement that the parties’ contract must be in writing had been made, and the court denied the defendant’s motion to dismiss.

That there be no expression of a “right not to be bound absent a writing”[7] is the first and most important of several factors set forth in Winston v. Mediafare Ent. Corp.[8] that courts still look to in deciding whether an oral contract was made.[9] That this obstacle may not be difficult to overcome was demonstrated by the court in Westside Winery, holding that an email between the parties stating that they “will have to paper this and of course confirm the details with our clients”[10] did not reserve the right to be bound only by a writing. Similarly, in 223 Sam, LLC v. 223 25th Street, LLC,[11] the court found that a series of emails between the parties relied on by the defendant did not overtly demonstrate that the parties did not intend to be bound without formal written execution, and thus there existed a triable issue of fact as to whether there was an oral contact.

A second key consideration is whether an oral agreement encompasses all the material terms of the contract as opposed to some being left still to negotiate. The requirement of mutual assent depends in part on whether either party, after the purported oral agreement was made, sought to renegotiate any of its material terms or made new demands. As such, a “mere agreement to agree, in which a material term is left for future negotiations, in unenforceable.”[12]

This principle is not, however, as rigid as it might seem. Even in the mid-20th century, the courts stressed that an oral “contract is not necessarily lacking in all effect merely because it expresses the idea that something is left to future agreement.”[13] Still, today, as long as there is a “meeting of the minds”[14] on the material terms of an agreement, an oral contract will be deemed to exist. Defendants’ attempts to show relatively minor, non-material late changes to an agreement as defeating mutual assent fail more than they succeed. A good example of this is the court’s conclusion in Personal Water Craft Product SARL v. Robinson:[15] “[t]he fact that plaintiff’s counsel added boilerplate language to an otherwise substantively identical version of the oral agreement does not undermine the evidence . . . that the defendants intended to be bound by the oral agreement.”

In the hurly-burly of exchanges about the details of an agreement, particularly when the parties are under tight time constraints, it is not uncommon for small details to be left unsettled for the short term or for the parties to concur that a written document setting forth the contract’s terms should later be prepared. As a result, where “all of the substantial terms of a contract” are agreed upon, the “understanding that the contract should be formally drawn up and put in writing [does] not leave the transaction . . . without binding force.”[16]

Yet another way to demonstrate that a binding oral contract exists is partial performance by one of the parties. As the Second Circuit held in Kim v. Kyu Sung Cho,[17] partial performance “by one party and the acceptance of such performance by another party can satisfy” the requirement that there be an agreement. Westside Winery concerned a dispute between two companies over the sale over a shipment of wine. That the defendant accepted and paid for some of the wine after it was delivered, which was one term of the parties’ agreement, was deemed to represent partial performance. Accordingly, the court found that the plaintiff had “plausibly allege[d] an enforceable oral settlement agreement”[18] Partial performance was therefore considered sufficient to show that parties had made a binding oral agreement, “notwithstanding the absence of a written, executed contract.”[19]

The Statute of Frauds Impediment

The most common argument against the existence of an oral contract arguably is that it violates the statute of frauds.[20] Simply put, the statute of frauds provides that “an agreement is void if it is not in writing and subscribed by the party to be charged therewith” if the agreement “by its terms is not to be performed within one year from the making thereof.”[21] At times, whether the statute of frauds applies to an agreement is a relatively clear-cut issue. One such case is R.G. Group, Inc. v. Horn & Hardart Co.,[22]where the terms of the agreement were such that there was no real doubt that the contract could not be performed in one year or less, and the plaintiff admitted that this was the case. The court then predictably held that no valid oral contract existed for that reason.

However, in many cases the terms of an oral agreement are such that it is unclear as to whether an agreement can in fact be performed within a year. When that is the case, statute of frauds arguments often fail. For example, disputes over oral partnership agreements, which frequently encompass an agreement to form a partnership for an indefinite period, often involve the statute of frauds and fall into this category. In Prince v. O’Brien,[23] the court found that because the term of the partnership was not firmly established, the oral agreement in question was not barred by the statute of frauds. Indeed, any “oral agreement that is terminable at will” could be “perform[ed] within one year and, therefore, does not come within the statute of frauds.”[24]

As such, all that is necessary for an oral agreement to not run afoul of the statute of frauds is that it be capable of being performed within a year, even if a longer period seems likely. Thus, an oral employment agreement that allows for an employee’s termination for cause (so long as the cause event is not a breach of the agreement itself) is not invalidated by the statute of frauds, in that a cause termination within a year is at least possible.[25]

Conclusion

In practice, the widespread notion that it is an uphill battle to enforce an oral contract is contradicted by the ways in which many courts have addressed the issue of when a verbal agreement is a valid contract. The court in Nygren v. Greater New York Mutual Insurance Co.[26] articulated the majority view that “[i]n general, oral agreements, so long as they comply with the requirements for a contract, are legally enforceable.”

While a written contract is obviously preferable, counsel should not be reluctant to argue for the enforceability of an oral contract when the conditions discussed above have been satisfied. Cautioning a client not to seek revisions in an agreement once it is reached and ensuring that there is nothing in writing stating that the parties will only be bound by a written agreement are critical steps in building an argument that an enforceable oral contract exists.

Oral agreements are anything but unusual in today’s business world, and situations where a party makes an oral agreement but then has second thoughts and attempts to withdraw from it are relatively common and often lead to litigation. Counsel representing plaintiffs in such cases would be well advised to keep in mind the core principle set forth by the New York Court of Appeals that most courts continue to embrace and adhere to: “parties . . . should be held to their promises.”[27]

Geoffrey A. Mort is of counsel to Kraus & Zuchlewski, where he focuses on employment discrimination litigation as well as separation and employment agreements. He served as an assistant corporation counsel in the New York City Corporation Counsel’s Office and as an assistant circuit executive for the United States Second Circuit. Mort co-chairs the Workplace Rights and Responsibilities Committee of NYSBA’s Labor and Employment Law Section and is on the Executive Committees for the Labor and Employment Law and Cannabis Law sections.

Endnotes

[1] Justin Kloss, Are Verbal Agreements Enforceable?, Kloss Stenger & Gormley, July 10, 2024, https:/klosslaw.com/verbal-agreements-enforceable.

[2] LeDestri Foods, Inc. v. 7-Eleven, Inc., 2019 U.S. Dist. LEXIS 216164 (W.D.N.Y. Dec. 16, 2019), quoting R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir. 1984).

[3] Rule v. Brine, Inc., 85 F.3d 1002, 1010 (2d Cir. 1996).

[4] Id.

[5] 2011 U.S. Dist. LEXIS 63796, *7 (S.D.N.Y. June 16, 2011).

[6] Id. at *2.

[7] Westside Winery, Inc. v. SMT Acquisitions, LLC, 511 F. Supp. 3d 256, 261 (E.D.N.Y. Jan. 4, 2021).

[8] 777 F.2d 78 (2d. Cir. 1985).

[9] The other factors are (1) whether there was partial performance of the contract; (2) whether any significant terms were left to negotiate; and (3) whether the agreement was the type of contract usually committed to writing.

[10] Westside Winery, 511 F. Supp. 3d at 262.

[11] 161 A.D. 3d 716, 718 (2d Dep’t 2018).

[12] New World Trading Co. v. Avshalomov, 2012 U.S. Dist. LEXIS 137823, *12 (S.D.N.Y. Sept. 24, 2012), quoting Tractebel Energy Marketing, Inc. v. AVP Power Marketing, Inc., 487 F.3d 89, 95 (2d Cir. 2007).

[13] May Metro. Corp. v. May Oil Burner Corp., 290 N.Y. 260, 264 (1943).

[14] McFadden v. Clarkson, 2010 U.S. Dist. LEXIS 50526, *4 (E.D.N.Y. May 18, 2010).

[15] 2017 U.S. Dist. LEXIS 143336, *21 (S.D.N.Y. Sept. 1, 2017).

[16] 223 Sam, LLC v. 223 15th Street, LLC, 161 A.D. 3d 716 (2d Dep’t 2018), quoting Matter of Municipal Consultants & Publs. v. Town of Ramapo, 47 N.Y.2d 144, 149 (1979) (emphasis added).

[17] 706 Fed. App’x. 1, 2 (2d Cir. 2017).

[18] Westside Winery, Inc. v. SMT Acquisitions, LLC, 511 F. Supp. 3d 256, 264 (E.D.N.Y. Jan. 4, 2021).

[19] CoraMed USA, LLC v. Alexion Pharms, Inc., 2023 U.S. Dist. LEXIS 173276, *18 (E.D.N.Y. Sept. 27, 2023).

[20] New York General Obligations Law, § 5-701 (a)(1) (McKinney 1978 & Supp 1983-84).

[21] Sheehy v. Clifford Chance Rogers & Wells LLP, 3 N.Y.3d 554, 559-60 (2004).

[22] LeDestri Foods, Inc. v. 7-Eleven, Inc., 2019 U.S. Dist. LEXIS 216164 (W.D.N.Y. Dec. 16, 2019).

[23] 234 A.D.2d 12, 12 (1st Dep’t 1996).

[24] Murphy v. CNY Fire Emergency Services, 225 A.D.2d 1034, 1035 (4th Dep’t 1996).

[25] Andruff v. World Travel Holdings, PLC, 2002 U.S. Dist. LEXIS 9066, *12 (S.D.N.Y. May 22, 2002).

[26] 2009 U.S. Dist. LEXIS 26078, *3 (D. Conn. Mar. 27, 2009).

[27] Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y. 2d 475, 483 (1989).