statute of frauds – Paul Porvaznik

Federal Court Grapples with Illinois Account Stated and Joint Venture Theories in Broken Airline Pact

The Illinois Northern District recently examined the contours of Illinois fiduciary duty, account stated, and joint venture breach claims in Flair Airlines v. Gregor, LLC, 2018 WL 4404649 (N.D.Ill. 2018)(slip copy).

The plaintiff airline company hired the defendants to rebrand and create a technological infrastructure for the airline including a website and online reservation system. While the defendants/counter-plaintiffs prepared a written agreement that formalized the terms of the venture (which called for future multi-year profit-sharing agreements, among other things), the airline never signed the agreement. This was done, according to counter-plaintiffs, for the airline to buy time to form a competing business in Canada and to leverage the fruits of defendants’ work.

The parties’ business relationship eventually crumbled and the airline sued defendants for unfair competition and deceptive trade practices. (The thrust of the complaint was that defendants were wrongfully using plaintiff’s domain names and websites, among other allegations).

Defendants counter-sued for account stated, breach of fiduciary duty, and breach of the never-signed joint venture agreement. The airline moved to dismiss all counterclaims.

The Court first denied the plaintiff’s motion to dismiss defendants’ account stated claims.

In Illinois an account stated is a form of proving damages on a pre-existing obligation. It is an alternative legal theory to one sounding in breach of contract for a plaintiff to recover the same damages asserted in a contract action.

An account stated determines the amount owed between parties who have previously conducted monetary transactions with each other.

Where a plaintiff renders a statement of account to a defendant who retains the statement beyond a reasonable amount of time without objection, the law views this as a tacit acknowledgement of the statement’s validity.

However, an account stated “cannot be made the instrument to create an original liability; it merely determines the amount of the debt where liability previously existed.”

The Court found that the counter-plaintiffs’ allegations that they regularly sent invoices to the plaintiff who then retained them without objection, were enough to state a colorable account stated claim.

The court also sustained the counter-plaintiffs’ breach of fiduciary duty claim against the airline.

Under Illinois law, a breach of fiduciary duty plaintiff must allege (1) a fiduciary relationship, (2) a breach of the fiduciary duty, and (3) injury resulting from the breach. Fiduciary duties exist as a matter of law in a joint venture relationship.

The court found the counter-plaintiffs’ allegations that they formed a joint venture with the airline to expand its business and build the airline’s operations and reservations systems and the airline’s abandonment of the venture was enough to state a viable fiduciary duty claim under Federal notice pleading standards.

On the counter-plaintiffs’ breach of joint venture (JV) claim, the Court noted that under Illinois law, a JV exists where there is (1) an express or implied agreement to carry on an enterprise, (2) a manifestation of intent by the parties to be associated as joint venturers; (3) a joint interest as shown by the parties’ contribution of property, financial resources, effort, skill or knowledge; (4) a degree of joint ownership over the enterprise including the mutual right to exercise control over it; and (5) the joint sharing of profits and losses.

The court rejected the plaintiffs’ argument that the joint venture claim was defeated by the Statute of Frauds. In Illinois, a contract that cannot be performed within the space of one year must be in writing in order to be enforceable. The plaintiff argued that since part of the alleged JV contemplated future three-year contracts between the airline and the defendants’ company, a writing was required.

The Court disagreed. It found the unsigned JV provided evidence of the key terms of the parties’ business arrangement and that even so, a sender’s name on an email could satisfy the signature requirement of the Statute of Frauds.

The court ultimately dismissed the counter-plaintiffs’ JV claim though since the counterclaim didn’t properly identify the JV members. The Court granted the counter-plaintiffs’ 14 days leave to replead the JV count.

Take-aways:

Where a plaintiff sends a statement of account to another who retains the statement beyond a reasonable time without objection, this can establish an account stated.

A joint venture doesn’t have to be in writing and can give rise to breach of fiduciary duty claim.

On the Statute of Frauds question, this case solidifies the dual propositions that (1) the formal execution of a contract isn’t necessary if a court can piece together the key contract terms through various writings, and (2) a properly authenticated email can serve as proxy for signature requirement of Statute of Frauds.

‘Lifetime’ Verbal Agreement To Share in Real Estate Profits Barred by Statute of Frauds – IL 1st Dist.

I previously summarized an Illinois case illustrating the Statute of Frauds’ (SOF) “one-year rule” which posits that a contract that can’t possibly be performed within one year from formation must be in writing.

Church Yard Commons Limited Partnership v. Podmajersky, 2017 IL App (1st) 161152, stands as a recent example of a court applying the one-year rule with harsh results in an intrafamily dispute over a Chicago real estate business.

The plaintiff (a family member of the original business owners) sued the defendant (the owners’ successor and son) for breach of fiduciary duties in connection with the operation of family-owned real estate in Chicago’s Pilsen neighborhood. The defendant filed counterclaims to enforce a 2003 oral agreement to manage his parents’ realty portfolio in exchange for a partnership interest in the various entities that owned the real estate. The trial court dismissed the counterclaim on the basis that the oral agreement equated to a “lifetime employment contract” and violated the SOF’s one-year rule. Defendant appealed.

Result: Counterclaim’s dismissal affirmed.

Reasons:

The SOF’s purpose is to serve as an evidentiary safeguard: in theory, the Statute protects defendants and courts from proof problems associated with oral contracts since “with the passage of time evidence becomes stale and memories fade.” (¶ 26; McInerney v. Charter Golf, Inc., 176 Ill.2d 482, 489 (1997).

An SOF defense is a basis for dismissal under Code Section 2-619(a)(7).

Section 1 of the SOF, 740 ILCS 80/1, provides: “No action shall be brought…upon any agreement that is not to be performed within the space of one year from the making thereof” unless the agreement is in writing.

Under this one-year rule, if an oral agreement can potentially be performed within the space of one year (from creation), regardless of whether the parties’ expected it to be performed within a year, it does not have be in writing. As a result, contracts of uncertain duration normally don’t have to comply with the one-year rule – since they can conceivably be performed within a year.

What About Lifetime Employment Contracts?

Lifetime employment agreements, however, are the exception to this rule governing contracts of unclear duration. Illinois courts view lifetime contracts as pacts that contemplate a permanent relationship. And even though a party to a lifetime agreement could die within a year, the courts deem a lifetime agreement as equivalent to one that is not to be performed within a space of a year. As a result, a lifetime employment contract must be in writing to be enforceable.

Here, the 2003 oral agreement involved the counterplaintiff’s promise to dedicate his life to furthering the family’s real estate business. It was akin to a lifetime employment agreement. Since the 2003 oral agreement was never reduced to writing, it was unenforceable by the counterclaim under the SOF one-year rule. (¶¶ 30-31)

What About the Partial Performance Exception?

The Court also rejected counter-plaintiff’s partial performance argument. In some cases, a court will refuse to apply the SOF where a plaintiff has partially or fully performed under an oral contract and it would be unfair to deny him/her recovery. Partial performance will only save the plaintiff where the court can’t restore the parties to the status quo or compensate the plaintiff for the work he/she did perform.

Here, the Counterplaintiff was fully compensated for the property management services he performed – it received management fees of nearly 20% of collected revenue.

Afterwords:

This case validates Illinois case precedent that holds lifetime employment contracts must be in writing to be enforceable under the SOF’s one-year rule. It also makes clear that a party’s partial performance won’t take an oral contract outside the scope of the SOF where the party has been (or can be) compensated for the work he/she performed. The partial performance exception will only defeat the SOF where the performing party can’t be compensated for the value of his/her services.

Is It a New Contract Or Modification of an Existing One? Illinois Case Discusses Why It Matters

In business relationships that contemplate a series of reciprocal services, it’s at times unclear if extra services are being offered as a modification to an existing contract or are done as part of a new agreement. Landmark Engineering v. Holevoet, 2016 IL App (1^st) 150723-U examines this sometimes fine-line difference and illustrates in stark relief the importance of honoring contractual provisions that require contract changes to be in writing and signed by the parties.

The defendant hired the plaintiff under a written contract to do some engineering work including a soil study on a parcel of land the defendant was going to sell. The plaintiff’s work would then be submitted to the governing county officials who would then determine whether the sale could go through.

The contract, drafted by plaintiff, had a merger clause requiring that all contract modifications be in writing and signed by the parties. When the plaintiff realized the contract’s original scope of work did not satisfy the county’s planning authorities, the plaintiff performed some $50,000 in additional services in order to get county approval.

The plaintiff argued the defendant verbally authorized plaintiff to perform work in a phone conversation that created a separate, binding oral contract. For her part, the defendant asserted that the extra work modified the original written contract and a writing was required to support the plaintiff’s additional invoices.

The defendant refused to pay plaintiff’s invoices on the basis that the extra work and accompanying invoice far exceeded the agreed-upon contract price. Plaintiff sued and won a $52,000 money judgment at trial.

Reversing, the appeals court examines not only the reach of a contractual merger clause but also what constitutes a separate or “new” contract as opposed to only a modification of a pre-existing one.

In Illinois, a breach of oral contract claim requires the contract’s terms to be proven with sufficient specificity. Where parties agree that a future written document will be prepared only to memorialize the agreement, that oral agreement is still binding even though the later document is never prepared or signed.

However, where it’s clear that the parties’ intent is that neither will be legally bound until a formal agreement is signed, no contract comes into existence until the execution and delivery of the written agreement.

Illinois law defines a contractual “modification” as a change in one or more aspects of a contract that either injects new elements into the contract or cancels others out. But with a modification, the contract’s essential purpose and effect remains static. (¶¶ 35-36)

In this case, since the plaintiff submitted a written contract addendum (by definition, a modification of an existing agreement) to the defendant after their telephone conversation (the phone call plaintiff claimed was a new contract), and defendant never signed the addendum, am ambiguity existed concerning the parties intent. And since plaintiff drafted both the original contract and the unsigned addendum, the ambiguity had to be construed in defendant’s favor under Illinois contract interpretation rules.

Since the unsigned addendum contained the same project name and number as the original contract, the appeals court found that the record evidence supported a finding that the addendum sought to modify the original contract and was not a separate, new undertaking. And since defendant never signed the addendum, she wasn’t bound by it.

Afterwords:

The case serves as a cautionary tale concerning the perils of not getting the party to be charged to sign a contract. Where one party fails to get the other to sign it yet still does work anyway, it does so at its peril.

Here, since both the original and unsigned addendum each referenced the same project name, description and number, the court found plaintiff’s extra work was done in furtherance of (and as a modification to) the original contract. As the contract’s integration clause required all changes to be in writing, the failure of defendant to sign off on the addendum’s extra work doomed the plaintiff’s damage claims.

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