A recent ruling in the Suffolk County Commercial Division highlights the risk a party faces when agreeing to, and later attempting to, enforce an oral modification to a written contract.  In Castle Restoration LLC v. Castle Restoration & Construction, Inc.,[1] Commercial Division Justice Elizabeth Emerson determined that New York’s statute of frauds rendered an oral modification unenforceable and, ultimately, left the enforcing party with no remedy in its commercial dispute.

Background

The matter involved a dispute between two companies engaged in the business of exterior restoration and waterproofing for commercial buildings: Castle Restoration & Construction, Inc. (“Castle Inc.”) and Castle Restoration LLC (“Castle LLC”).  In March 2012, Castle Inc. and Castle LLC entered into an asset-sale agreement pursuant to which Castle Inc. transferred its equipment and client list to Castle LLC, in exchange for $1.2 million.  Castle LLC paid $100,000 at the closing and gave Castle Inc. a promissory note for the balance of $1.1 million.  The note was payable in consecutive monthly installments commencing on April 15, 2012.  Castle LLC immediately defaulted on the note by failing to make the first payment, and litigation ensued. 

At issue in the litigation was an oral modification claimed by Castle LLC.  Castle LLC argued that under the asset-sale agreement, Castle Inc. was obligated to complete all work-in-progress that remained unfinished as of the closing date, and that the parties entered into a subsequent oral agreement in which Castle LLC agreed to provide Castle Inc. with labor and materials for the completion of that work-in-progress, the value of which would offset Castle LLC’s obligation under the promissory note.

Litigation between the parties proceeded on multiple fronts.  In a prior action, Castle Inc. brought a claim to recover on the promissory note and moved for summary judgment in lieu of complaint.  Castle LLC opposed the motion by arguing it was not delinquent on the note due to the parties’ subsequent oral agreement, which it claimed Castle Inc. had breached.  The trial court denied the motion, but the Second Department reversed, concluding that Castle Inc.’s purported breach of the subsequent oral agreement could not defeat its motion for summary judgment on the promissory note unless the note and the oral agreement were “inextricably intertwined.”[2]  In the Second Department’s view, they were not.

Castle LLC thereafter brought a separate action in the Suffolk County Commercial Division asserting ten causes of action against Castle Inc., including for breach of the asset-sale agreement and breach of the subsequent oral agreement.  After all other claims were dismissed on summary judgment, the parties proceeded to a bench trial on those two claims. 

Analysis

On the cause of action for breach of the oral agreement—under which Castle LLC allegedly would be compensated for providing labor and materials for the completion of Castle Inc.’s work-in-progress—the court determined the statute of frauds rendered that oral agreement unenforceable. 

The court observed that the parties’ asset-sale agreement contained a no-oral-modification provision, which meant that the parties were “protected by the statute of frauds.”[3]  The court explained that “[a]ny contract containing such a clause cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought.”[4]  Accordingly, the default presumption was that the parties’ written agreement controlled.

The court allowed that, under certain circumstances, a party’s “admission of the existence and essential terms of an oral agreement” could be “sufficient” to take that agreement “out of the statute of frauds.”[5]  In this case, Castle Inc. acknowledged that the parties had entered into an oral agreement, but disagreed as to how Castle LLC would be compensated for that work under the oral agreement.  Because the parties disputed an essential term of the oral agreement, Castle Inc.’s admission as to the agreement’s existence did not remove it from the statute of frauds.  The court therefore concluded that Castle LLC could not recover on the oral agreement.[6] 

On the cause of action for breach of the asset-sale agreement—under which Castle Inc. had an obligation to complete all work-in-progress that remained unfinished as of the closing date—the court determined that Castle LLC was entitled to no recovery due to its failure to perform its own material obligations under the agreement.  Here, the court observed that “a party is relieved of its duty to perform under a contract when the other party has committed a material breach,” such as “[f]ailure to tender payment.”[7]  As applied here, the court observed that Castle LLC’s failure to make any payments on the promissory note for the $1.1 million balance due on the purchase price excused Castle Inc.’s obligation to further perform its obligations.  

Conclusion

The Castle litigation offers an important reminder about the inherent risks of orally modifying a written agreement, as that oral modification may later be deemed unenforceable under New York’s statute of frauds.  The Castle litigation highlights two factors relevant to the enforceability question: (1) whether the written contract contains a no-oral-modification clause, and (2) notwithstanding such a clause, whether the party against whom enforcement is sought admits the existence and material terms of that oral modification.  Application of these factors will depend on the specific facts of a case.  Of course, to guard against the risk of unenforceability, the best practice is to reduce subsequent modifications to writings.