Last month, I had a post about a recent Ohio Supreme Court case, Olympic Holding Co., L.L.C v. Ace Ltd. (2009), 122 Ohio St.3d 89, 2009-Ohio-2057, in which the Court rejected a claim that promissory estoppel removed an agreement from the statute of frauds in the context of negotiations between sophisticated business entities concerning a proposed five-year agreement. The Eighth District Court of Appeals has issued an opinion in which it relied on the Olympic Holding case, holding that promissory estoppel did not remove a case from the statute of frauds in a transaction involving a proposed sale of real estate. Seaman v. Fannie Mae, Cuyahoga App. No. 92751, 2009-Ohio-4030 (affirming motion to dismiss under Civ. R. 12(B)(6)). In Seaman, the plaintiffs-appellants alleged that Fannie Mae “represented to appellants that the price and terms were agreed and instructed appellants to execute the purchase agreement attached to the complaint and to pay the earnest money to appellee,” and that they detrimentally relied on the promise “‘by paying the earnest money, foregoing the purchase of other properties and spending time and resources on the purchase of the subject property.’” Fannie Mae never signed the agreement. The Eighth District unanimously held, “[i]n most negotiations for transactions included within the statute of frauds, the parties contemplate that the contract will be reduced to writing. If a written agreement is contemplated, reliance upon statements made before an agreement is signed will be unreasonable as a matter of law, particularly when sophisticated business parties are involved in the negotiations.” (emphasis added).

Tags: Contracts, Statute of Frauds

It’s a well-settled rule of law that certain agreements must be reduced to writing and signed. Ohio has codified that rule, known as the “statute of frauds,” in Chapter 1335 of the Ohio Revised Code. For example, R.C. 1335.05 provides that “an agreement that is not to be performed within one year from the making thereof” must be in writing and signed.

What happens when sophisticated business entities enter into lengthy negotiations concerning a five-year joint venture agreement, which reach an advanced stage, including an exchange of nine drafts of a proposed written agreement, one party allegedly promises the other that the agreement would be signed, the other party relies on that statement, and then the first party indicates that it won’t go forward with the agreement? In the lawsuit that follows, can the first party raise the statute of frauds as an affirmative defense to a breach of contract claim, because nothing was signed?

Yes, according to the Supreme Court of Ohio in in a recent 5-2 decision, Olympic Holding Co., L.L.C v. Ace Ltd. (2009), 122 Ohio St.3d 89, 2009-Ohio-2057. The Court rejected the plaintiffs’ claim that doctrine of promissory estoppel (see the dissent for a fuller discussion of the doctrine) removed the agreement from the statute of frauds and barred the statute of frauds as an affirmative defense. The Court held, “‘[r]eliance on a statement of future intent made prior to the conclusion of negotiations in a complex business transaction is unreasonable as a matter of law. * * * Such a rule is particularly appropriate when two sophisticated business entities are involved in negotiations.’” (emphasis added) (citations omitted). The Court further held, “promissory estoppel is an adequate remedy for a fraudulent oral promise or breach of an oral promise, absent a signed agreement,” and that the plaintiffs could, under a promissory estoppel theory, pursue their claim for reliance damages (which represented a smaller measure of damages than what the plaintiffs sought). The majority noted the presence of disclaimers on each page of the term sheets that were exchanged early in the negotiations, that it was “not an offer of insurance,” and on the drafts that were exchanged later in the negotiations, that the document was “for discussion purposes only” and didn’t represent an offer to enter into a transaction. The majority also noted ancillary agreements that remained in draft form.

The dissent states that “an overwhelming majority of jurisdictions recognize that promissory estoppel may bar a party from asserting a defense under the statute of frauds in certain circumstances” and was persuaded that application of the Statute of Frauds in the case was inequitable. For example, the parties had reached a “mutual understanding on the essential terms of their joint business venture,” and the plaintiffs were told that the agreement was “just awaiting signature.” The dissent would have adopted a rule that promissory estoppel “‘may be used to preclude a defense of statute of frauds, but only when there has been (1) a misrepresentation that the statute’s requirements have been complied with or (2) a promise to make a memorandum of the agreement.’” (citation omitted).

Tags: Contracts, Statute of Frauds