Tag: letter of intent

LOI From Hell (?) – It’s Too Illusory For Car Dealership Manager to Enforce – IL 1st Dist.

A complicated Letter of Intent (LOI) involving parties to a planned car sales venture lies at the heart of Dicosola v. Ryan, 2015 IL App(1st) 150007, a case that addresses the level of consideration required to support a written contract in Illinois.

The plaintiff alleged that under the LOI, the defendant was to invest $1M with the plaintiff who would, along with her business partner, use those funds to establish and run the dealership.  In return for her investment, the defendant would get a 10% share of the business.  The LOI also called for the defendant to establish a 401(k) account for the benefit of the parties. 

Decried as a “drafting nightmare” by the court for its chaotic structure, the LOI was silent on the timing: it didn’t say when the dealership would open, how plaintiff would utilize defendant’s funds or even what the plaintiff’s and her partner’s roles were once the dealership went live.

When the defendant pulled out of the deal, the plaintiff sued for breach of contract and specific performance.  The trial court dismissed the complaint with prejudice and the plaintiff appealed.

Held: Dismissal affirmed

Reasons/Rules:

An LOI, like any other contract, must show offer, acceptance, consideration as well as definite and certain terms.

Consideration means a bargained-for exchange of promises or performances and can consist of a promise, an act or a forbearance. Consideration requires one party getting and the other giving something of value.  Otherwise, it’s an illusory promise.  A promise is illusory where the promisor isn’t really promising to do anything or where his promised performance is optional.

Contractual performance will deemed optional (and illusory) where there is no fixed time or duration for the contemplated services or where one parties obligations are terminable at will.

Here, the plaintiff’s promise was illusory since the LOI didn’t specify when she would perform general manager services for the inchoate dealership. Since the LOI lacked a specific start and end date, the Court held the LOI was too indefinite to be enforced.  The lack of clarity on the timing question led the court to conclude there was no consideration to support the plaintiff’s breach of contract claims. (¶¶ 18-20)

Afterwords:

1 – Parties should craft their business agreements with enough specifics for it to be enforced. By only providing aspirational language (“I will do this” or “I plan to do this”) with no specific timing requirements, a contracting party risks a contract being deemed illusory and unenforceable.

2 – Where one party to a contract’s obligations are to occur in the future, the contract language should provide an end date or duration for those services.

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.