When Will New York Courts Enforce An Oral Contract Modification?

A recent decision by the Commercial Division of the New York State Supreme Court highlights the risks of relying on an oral contract modification. While written contracts may be modified by subsequent oral agreements or conduct, the court's decision in Castle Restoration LLC v. Castle Restoration & Construction, Inc. makes clear that such modifications may not be enforceable if they are prohibited by the statute of frauds.

Oral Contract Modification

Defendant Robert Castaldi was the president of Castle Restoration & Construction, Inc. (Castle Inc.), which performed exterior restoration and waterproofing of commercial buildings in New York City and in the tri-state area. His wife, defendant Diane Castaldi, was its sole shareholder. In 2012, the Castaldis agreed to sell their business to plaintiff, Castle Restoration LLC (Castle LLC). On March 15, 2012, Castle Inc. entered into an asset sale agreement with Castle LLC. The sale included the transfer of equipment and a list of clients from Castle Inc. to Castle LLC. The purchase price was $1.2 million.

Castle LLC paid Castle Inc. $100,000 at the closing and gave Castle Inc. a promissory note in the amount of $1.1 million. The note was payable in consecutive monthly installments commencing on April 15, 2012. Castle LLC defaulted on the note by failing to make the first payment on April 15, 2012, and Castle Inc. filed suit. In response, Castle LLC argued that it was not delinquent on the note because the parties entered into a subsequent oral agreement in which Castle LLC agreed to provide Castle Inc. with labor and materials for additional construction projects, the value of which would be used to offset Castle LLC's obligation under the note. The key issue before the Commercial Division was whether the alleged oral agreement was enforceable.

Commercial Division's Decision

The Commercial Division ultimately determined that the alleged oral contract modification was unenforceable. In support, the court cited the no-oral-modification provision of the asset-sale agreement, along with New York law providing that parties to a written agreement who include a proscription against oral modification are protected by the statute of frauds (General Obligations Law § 15-301).

As the Commercial Division explained, any contract containing such a clause can't be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought. "Put otherwise, if the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controls," the court wrote. "Thus, the authenticity of any amendment is ensured."

The Commercial Division acknowledged that a party's admission of the existence and essential terms of an oral agreement can sometimes be sufficient to take the agreement out of the statute of frauds. In this case, while the defendants acknowledged that Castle Inc. entered into an oral agreement with Castle LLC in which Castle LLC agreed to complete Castle Inc.'s work-in-progress, they did not agree on the terms of the oral agreement, specifically how Castle LLC was to be compensated for its work.

"The statute of fraud applies when, as here, the parties acknowledge an oral agreement, but dispute its terms and conditions. The effect of the statute of frauds is to render an oral contract coming within its operation unenforceable, and such a contract cannot form the basis or foundation for an action," the court wrote. "Accordingly, the alleged oral agreement between the plaintiff and Castle Inc. is unenforceable, and there can be no recovery thereunder."

The Commercial Division noted that the oral modification would not have been enforceable even if the statute of frauds did not apply because there was no "meeting of the minds," which is an essential element of every contract. "If the parties understand the contract's material terms differently, there is no meeting of the minds," the court wrote. "Here, the parties clearly disagreed on how Castle LLC was to be paid for its work. Since the parties never reached a meeting of the minds on that material term, the alleged oral agreement is unenforceable."

Finally, the Commercial Division also found in favor of the defendant Castle LLC with regard to the breach of the asset-sale agreement, concluding that Castle Inc. failed to hold up its end of the bargain. "While Castle Inc. may have breached the asset-sale agreement, Castle LLC also breached the agreement by failing to make any payments on the promissory note for the $1.1 million balance due on the purchase price," the court wrote. "Moreover, Castle LLC's breach occurred on April 15, 2012, almost immediately after the parties signed the asset-sale agreement on March 15, 2012. Castle LLC's failure to pay the purchase price constituted a material breach of the asset-sale agreement, discharging Castle Inc. of its duty to perform."

Key Takeaway

As the Commercial Division's decision makes clear, a contract modification must contain all the necessary elements to form a binding agreement — an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. Additionally, it is always advisable to reduce contract modifications to writing. A written contract modification ensures that both parties are on the same page and reduces the risk that a court will subsequently deem the contract changes unenforceable. As with all business contracts, working with experienced counsel can help avoid costly legal mistakes.

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