Tag: oral contract

Integration Clause Bars Trader’s Commission Claims Against Financial Firm

Integration clauses – also called “merger” clauses – are staples of commercial contracts in diffuse business settings.  The Northern District of Illinois recently found that an integration clause in a compensation agreement defeated a futures trader’s claims for unpaid commissions in Colagrossi v. UBS Securities, LLC, 2014 WL 2515131 (N.D.Ill. 2014).
The plaintiff alleged that in 2005, he and his then employer entered into an oral agreement for commission payments earned on foreign futures transactions.  When that employer was absorbed by another entity in 2006, the plaintiff signed a written employment agreement with the new company –  one that contained an integration clause.  The agreement was silent on the oral futures deal that plaintiff cut with his ex-employer. Plaintiff’s successor employer then folded into a third entity.  Plaintiff signed a second employment agreement in 2007 with the new (“third”) employer.  That agreement also contained an integration clause and made no mention of the 2005 oral commission arrangement.
After he was fired, the plaintiff sued his new employer for unpaid commissions and bonuses totaling about $2M in total.  He filed counts for breach of oral contract and a claim under the Illinois Wage Payment and Collection Act.  The defendant moved for summary judgment on plaintiff’s claims.
 Ruling: Motion granted.  Summary judgment for defendant.  Plaintiff’s claims dismissed.
 Q: Why?
 A:  Both written employment agreements (the one he signed in 2005 with defendant’s predecessor and the one he signed with defendant in 2006) contained integration clauses that provided that the agreement stated the entire terms of the parties’ agreement and superseded all prior verbal agreements or representations touching on the plaintiff’s employment. 
    
In Illinois, where contracting parties include a contractual integration clause (i.e., a clause stating that the written agreement is complete and final and reflects the entire understanding of the parties), they are manifesting their intent to protect themselves against after-the-fact changes to the contract.  The purpose of an integration clause is to establish that negotiations leading up to a written contract are not the agreement and to also guard against a party to the agreement trying to alter the contract’s meaning by trying to explain his state of mind when the contract was signed.
 Here, both written employment agreements contained an integration clause that stated the parties’ entire agreement was reduced to writing and that also precluded plaintiff’s attempt to rely on oral promises that pre-dated the contracts’ execution.  The clauses broadly applied to bar reliance on oral agreements relating to the “subject matter” of the contracts.  Since plaintiff’s oral contract claim for commissions  went to the heart of the employment agreements’ purpose, the oral agreement was defeated by each contract’s integration clause. (*4-5).
The Court also rejected the plaintiff’s claim for bonus payments that was premised on the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 (the Wage Act).  The Wage Act applies broadly to wages, salaries, commissions and bonuses; so long as they are based on an employment agreement (written or oral).  820 ILCS 115/2 (http://paulporvaznik.com/the-illinois-wage-payment-and-collection-act-some-basics/697).  Here, the plaintiff’s Wage Act claim was not only defeated by the two integration clauses (one in each employment contract) but also because an employer’s past practice of paying bonuses isn’t enough to make out a viable Wage Act count. (*6-7); Carroll v. Merrill Lynch, 2011 WL 1838563 *17 (N.D.Ill. May 13, 2011) (granting summary judgment to employer on employee’s Wage Act claim because “past practice itself is not enough to support a wage claim”); Stark v. PPM America, Inc., 354 F.3d 666, 672 (7th Cir.2004)(same).
Take-aways: Integration clauses will be enforced as written.  If they are broad and clearly-worded, the clauses will defeat a party’s attempt to modify the plain text of a contract.  The case is also noteworthy for its discussion of the Wage Act.  While the Wage Act’s scope is broad, this case clearly illustrates that a claim based on the Act must allege more than an employer’s past practice or course of conduct in making bonus payments.  Instead, there must be an express agreement – written or oral – to support an employee’s claim under the Act.

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.