Article New York Law Journal

When Is an Oral Agreement Sufficiently Definite to Be Enforceable?

12 December 2016

Commercial litigators often take for granted that contract cases—at least, "real" and meritorious contract cases—involve a written agreement. Written contracts are certainly what our clients and transactional partners typically hand to us when business disputes start heading to litigation. Most of us can remember more than one case where the parties endlessly briefed the proper construction of a sentence in a lengthy agreement that seems to account for every bit of minutiae surrounding the possible interpretation of that sentence. After all, contracts are creatures of agreement and, absent mutual assent on material terms, there is no agreement.

Surely, then, no credible plaintiff could come to court seeking to enforce an alleged 20-year-old oral agreement to jointly develop real property worth millions where the intended disposition of the property was left TBD. Indeed, the terms of an agreement are required to be sufficiently definite so that "the judiciary can give teeth to the parties' mutually agreed terms and conditions when one party seeks to uphold them against the other." At the same time, New York law tolerates some uncertainty in enforceable agreements and, in fact, permits courts to supply missing essential terms when those terms can be supplied "objectively." Similarly, case law has construed New York's statute of frauds narrowly, giving effect to oral agreements that may seem unenforceable at first glance. The combination of these factors gives plaintiffs latitude to plead non-dismissible contract claims based on oral "agreements."

A recent decision in New York County's Commercial Division, Slabakis v. Schik , 2016 N.Y. Slip Op. 31584(U), illustrates this precise scenario. The plaintiff, Angelo Slabakis, was the indirect owner (through a partnership) of a 19th century townhouse located on Park Avenue in Manhattan. In 1992, Slabakis's partnership defaulted on its mortgage. In 1996, after about four years of legal wrangling, the lender sold that defaulted mortgage to 890 Park Realty, an entity headed by Walter Schik, for $1.5 million.

According to Schik, the reason he purchased the mortgage was simple: He saw an opportunity to buy prime real estate at a discount.

According to Slabakis, Schik agreed to purchase the mortgage as part of a new joint venture between the two of them. The business of the alleged joint venture was redevelopment or sale of the property after a number of existing tenancies had been terminated. Slabakis claimed that Schik agreed to "advance" $1.5 million to the joint venture to satisfy the existing mortgage. Schik was supposed to then foreclose and obtain title to the property. Slabakis would retain an unspecified "equity interest" in the property and repay the $1.5 million from his share of the joint venture's proceeds. According to Slabakis, the question of where those proceeds would come from (either a sale of the property or further development of the property) was intentionally left undecided. In the meantime, Slabakis' job was to get the existing tenants to move out at Slabakis' own expense. That work took 13 years, as the building had at least nine rent-controlled or rent-stabilized apartments. In fact, it was 2009 before the building was empty and ready for either a sale or further development. It was at this point that the alleged joint venture broke down, because Schik refused to engage in discussions regarding disposition of the building after it was vacant.

In mid-2015, just short of six years later, Slabakis sued for breach of the oral joint venture agreement (as well as a number of other causes of action). Schik moved to dismiss, saying that there never was a joint venture, and that even Slabakis's version of the facts amounted to an agreement that was too indefinite to enforce and that would be barred by the statute of frauds. For his part, Schik acknowledged that Slabakis helped vacate the building. But Schik said that work was consideration for a separate loan that Schik made to Slabakis a year later (and that agreement was in writing).

Slabakis had a better day in court than many might guess. While the court dismissed his complaint, he was given leave to re-plead, and the court rejected a number of Schik's arguments that, intuitively, seem correct.

First, the court rejected Schik's statute of frauds arguments. Schik argued that as a practical matter, it is impossible within one year to purchase a mortgage, foreclose, oust nine rent-regulated tenants, and then somehow dispose of a property. But, consistent with both statutory language and case law, the court concluded that the statute of frauds only barred agreements that, by their own terms, could not be completed within a year. It does not, however, bar agreements where there is at least "a possibility, however remote" of completion within a year. The court also rejected the statute of frauds argument that the supposed oral agreement was "a contract … for the sale, of any real property, or an interest therein." Instead, the court concluded that the oral agreement (which, by plaintiff's own version of events, required the purchase of a mortgage and foreclosure on real property) was simply a joint venture "regarding real estate" and therefore not barred. This conclusion was consistent with recent First Department precedent.

Second, the court rejected Schik's argument that the lack of an agreement on disposition of the property made any contract indefinite and unenforceable. Citing recent First Department authority, the court held that it can supply missing essential terms if there is an "objective method" for doing so. Basu v. Alphabet Mgmt. Co. , 127 A.D.3d 450 (1st Dep't 2015). And the court thought that result made sense: "It would be odd to reach a definitive decision on what to do with a property in the future, especially given the well-known risk of real estate market fluctuations. That the parties left themselves the flexibility with respect to their handling of the Building does not defeat the enforceability of the alleged agreement." Nonetheless, the court did not reach the issue of how such a gap could be filled "objectively," and indeed noted that the complaint did not address the parties' agreement as to the way in which the issue would be resolved.

As of the publication date of this article, Slabakis has re-plead his complaint, and has attempted to fill in the gaps that the court was not willing to look past. Nevertheless, the trial court's decision is a stark reminder of the power of oral agreements in New York—even when they involve decades-old, multimillion dollar real estate deals.

Matthew Solum, P.C.

Practices