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.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.

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