Oral Contracts in Illinois – Are they Enforceable?

shakehandsYes.  Oral contracts are enforceable.  The main exceptions are contracts governed by the Statute of Frauds (SOF), which requires certain contracts to be in writing.  See 740 ILCS 80/1, 2; 810 ILCS 5/2-201.  The Illinois Credit Agreements Act (ICA) also requires certain agreements to lend money in a commercial setting be in writing. 815 ILCS 160/1 et seq.

I still use the mnemonic device I learned in my bar review course – MYLEGS  – to determine whether a writing is required.

M = “marriage” (contracts in consideration of marriage – i.e., “if you paint my house the color pewter, I promise to marry you”); Y =  “year” (contract can’t be performed in the space of one year must be in writing), L = “land” (contracts for sale of interest in land); E = executor (contracts with executors of estates) G = “goods” (over $500) and S is for “suretyship” (if a third party guarantees a debt, it must be in writing).

The Featured Case:  Rosenthal v. Battery Partners VI, LP, 2011 WL 10068993 (1st Dist. 2011), a factually dense case involving a dispute over an investment scheme, provides a good summary of Illinois oral contract law.

The Facts: Plaintiff trader sued two partnerships for breach of a verbal contract to pay plaintiff about $5 million as a finders fee after plaintiff introduced defendants to one of plaintiff’s trading contacts.

Plaintiff’s oral contract claim was based on some telephone conference calls during which defendants’ agents supposedly promised to pay plaintiff millions after defendants sold their exchange shares.  But when plaintiff ran afoul of British trading rules, defendants cut plaintiff out of the deal and refused to pay anything despite earning over $12 million from the sale of their shares.

The trial court entered summary judgment for the defendants on the basis that the alleged oral contract was unenforceable because it wasn’t in writing and it lacked consideration. 2011 WL 10068993, *5.

The Holding: The First District affirmed summary judgment for the defendants and found that the oral contract was unenforceable.

Reasoning:

In finding for the defendants (and denying recovery to the plaintiff), Rosenthal posits some key oral contract basics:

– where parties have assented to all oral contract terms, the mere reference to a future written document will not negate the existence of a valid oral contract;

– if the parties’ clear intent is that neither will be legally bound until the execution of a formal written agreement, no contract comes into existence: even where all the material terms are (verbally) agreed on;

– the parties’ conduct and statements after an oral agreement “may be decisive of the question whether a contract had been made;”

– The factors a court considers when examining whether parties to an oral agreement intended to later  reduce it to writing are (1) whether the contract is usually put in writing; (2) how detailed or simple the contract is; (3) the amount of money involved; (4) whether the oral agreement requires a formal writing to fully express the parties’ promises; and (5) whether the parties’ negotiations signalled that a written document would be forthcoming.  *7.

Applying these rules, the First District found that the alleged oral agreement was one typically reduced to writing since the agreement was factually complex and involved arcane pricing formulas.  The court also noted that   any oral agreement based on a single phone call was too flimsy to enforce in light of the high dollar value involved. and the resulting written contract.  The fact that a detailed writing that governed the subject matter of the oral agreement later materialized bolstered this finding. *8-9.

Take-aways: Oral contracts are generally enforceable in Illinois.  If contracting parties’ intent is to later reduce an oral agreement to writing, the parties should clearly say so.

The more convoluted a deal and the more money involved, the more likely the court will find a writing was intended and invalidate an oral contract claim.

 

Quantum Meruit Basics – Illinois Law

QMQuantum meruit (Latin derivation: “as much as he deserved”) has repeatedly saved the day in situations where my client has performed services for a defendant but there is a contractual defect (such as missing price terms or an unclear completion date)that makes suing under a breach of contract impossible.  Time and again, quantum meruit has proved to be a valuable fallback or “Plan B” to a failed breach of express contract claim.  The remedy has ensured that my client at least gets something in situations where it would normally get nothing.

I’ve found quantum meruit to be especially useful in view of the realities of modern-day business transactions.  In my experience, it seems that contracts are often entered into by people (usually non-lawyers) who are bound and determined to get a deal done.  No matter what.  This single-mindedness of purpose often results in a myopic focus on finalizing the agreement instead of a meaningful consideration of a deal’s details or the possible consequences that could flow from a future breach.  It’s no surprise then, that key contract terms are often omitted, agreements aren’t signed, or are signed by the wrong parties.

Bernstein and Grazian, P.C. v. Grazian and Volpe, P.C., 402 Ill.App.3d 961 (1st Dist. 2010) provides a good summary of  quantum meruit’s pleading and proof elements.  The case is a partnership dispute between two law firms fighting over  – what else? – fees.  The plaintiffs (a dissolved law firm and representative of a deceased partner of that firm) filed suit for monetary and injunctive relief against defendants,  two former law partners of the plaintiff firm and those partners’ current firm. 

The trial court ruled against plaintiffs on breach of fiduciary duty and breach of contract claims but entered judgment for plaintiffs on a quantum meruit theory – awarding them 10% of the attorneys’ fees collected on open files which defendants’ firm assumed after plaintiff firm’s dissolution.  Id. at 965-966.   The First District reversed.  It held that there was insufficient evidence for the court to award 10% of attorneys’ fees earned on all pending cases which were formerly plaintiff’s (and were now defendants’ cases).  Volpe, 402 Ill.App.3d at 980. 

The black letter quantum meruit elements: (1) plaintiff performed a service to benefit the defendant; (2) he did not perform the  service gratuitously; (3) defendant accepted plaintiff’s service; and (4) no contract existed to prescribe payment for this service. 

The quantum meruit plaintiff has the burden of proving that valuable services were rendered by him, that the services were received by defendant, and the circumstances are such that it would be unjust to allow the defendant to retain the benefits of plaintiff’s services.  The measure of quantum meruit recovery is the “reasonable value of work” and the plaintiff must show that its uncompensated services were of measurable benefit to defendant.  Volpe, 402 Ill.App.3d at 979. 

The Court held that while defendants did benefit from plaintiff’s legal services, plaintiff failed to offer sufficient evidence to substantiate the trial court’s quantum meruit award.  Id. at 979-80.  The plaintiff didn’t offer the court any basis to quantify the value of the plaintiff’s services.  As a result, the plaintiffs ended up with nothing.

Conclusion – I always file quantum meruit as an alternative claim to a breach of contract claim.  Illinois  Code Sections 2-604 and 2-613 permit alternative pleading.  This does two things: (1) it ensures that my client at least gets something in the event of a contract defect or if my client is in breach; and (2) it mitigates the all-or-nothing nature of only proceeding on a breach of contract theory.  When pleading quantum meruit, I also make sure I don’t incorporate by reference my breach of contract allegations.  

By definition, quantum meruit can’t co-exist with a breach of express contract claim.  Some firms love (and I do mean love) to file motions to strike complaints on this basis.  The Volpe case ( and others like it) shows that a quantum meruit plaintiff must do more than simply allege that he benefitted a defendant.  Instead, the plaintiff must produce competent evidence that quantifies the monetary value of plaintiff’s services.