Court Upholds Statute of Frauds Requirement of a Signed Agreement
2008-0200. Olympic Holding Co., L.L.C. v. ACE Ltd., Slip Opinion No. 2009-Ohio-2057.
Franklin App. No. 07AP-168, 2007-Ohio-6643. Judgment of the court of appeals reversed, and cause remanded to the trial court.
Moyer, C.J., and Lundberg Stratton, O'Connor, Lanzinger, and Cupp, JJ., concur.
Pfeifer and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2009/2009-Ohio-2057.pdf 
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(May 7, 2009) In a decision announced today, the Supreme Court of Ohio ruled that a party’s breach of an alleged promise to sign an agreement does not eliminate the requirement under Ohio’s statute of frauds that a contract is enforceable only if it is in writing and has been signed by the party against whom enforcement is sought.
The Court’s 5-2 decision, authored by Justice Evelyn Lundberg Stratton, also held that a party may not invoke the doctrine of “promissory estoppel” to prevent an opposing party from asserting the affirmative defense of the statute of frauds; that damages recovered under promissory estoppel are an adequate remedy for the breach of an oral promise in the absence of a signed agreement; and that a joint venture agreement that does not comply with the statute of frauds is unenforceable and therefore cannot impose any fiduciary duties on the parties.
The case involved a proposed business arrangement between a group of three title companies collectively known as Olympic Holding Company LLC and a New York-based reinsurance company, ACE Capital Title Reinsurance Company. Over a period of months, the parties negotiated terms of a business venture in which the Olympic companies would jointly acquire ownership of a separate Columbus-based company, the Olympic Title Insurance Company (OTIC), and ACE would then enter into a joint venture with OTIC to provide a new integrated system of title insurance and reinsurance that would be marketed nationally.
After exchanging multiple drafts of a proposed reinsurance agreement with ACE, the Olympic Holding companies went forward with the purchase of OTIC. When they informed ACE that the acquisition was complete, ACE advised them that it was likely to be spun off by its corporate parents and was unlikely to proceed with the reinsurance agreement. The day after learning of ACE’s cancellation, the Olympic Group signed and sent its own draft of the residential reinsurance agreement to ACE for signature. ACE refused to execute the agreement.
The Olympic companies sued ACE and its parent companies in Franklin County Common Pleas Court asserting multiple claims including breach of a joint venture agreement; breach of fiduciary duty; negligent misrepresentation; fraud; tortious interference with business and contractual relationships; and promissory estoppel (failure to keep a promise on which another party has relied to its detriment). ACE filed motions for summary judgment seeking dismissal of all claims. It asserted that, under the Ohio statute of frauds, R.C. 1335.05, no party may assert a breach of contract claim against another party for allegedly violating an agreement that will not be completed within one year “unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith ...” Because there had never been a signed agreement between the parties, ACE argued, it had no contractual obligations or fiduciary duties to the plaintiffs.
The trial court granted summary judgment dismissing the plaintiffs’ breach of contract, breach of fiduciary duty and negligent misrepresentation claims based on the statute of frauds. However the court found that the plaintiffs’ claims for promissory estoppel and tortious interference were not subject to summary judgment.
The plaintiffs appealed. The 10th District Court of Appeals partially reversed the trial court’s decision and reinstated Olympic’s breach of contract and breach of fiduciary duty claims against ACE. In its opinion, the 10th District held that the statute of frauds cannot be raised as a defense against a breach of contract claim if the plaintiff can show that it acted to its own detriment after relying on the defendant’s promise to sign a written agreement. The court of appeals also held that it is possible for joint venturers to incur fiduciary obligations to each other regardless of whether there is a written agreement then in force between them, and that there was at least a genuine issue of material fact regarding whether there was a fiduciary duty between ACE and the Olympic partners.
ACE sought and was granted Supreme Court review of the 10th District’s rulings.
In today’s decision, Justice Stratton wrote that while courts in a number of other jurisdictions have held that, under various circumstances, promissory estoppel may be used to remove an agreement from having to comply with the statute of frauds, “(W)e decline to adopt that exception under the circumstances of this case because it is both unnecessary and damaging to the protections afforded by the statute of frauds.”
Justice Stratton noted that the purpose of the statute of frauds is to prescribe a clear standard of what is needed to form a contract, and to strongly motivate parties to follow those requirements by establishing that “unless the parties adopt the prescribed mode of manifesting their wishes, they will be ignored. The reason for ignoring them, for applying the sanction of nullity, is to force them to be self conscious and to express themselves clearly.”
“Courts have long recognized that a signed contract constitutes a party’s final expression of its agreement, wrote Justice Stratton. ... “Thus, the statute of frauds is necessary because a ‘signed writing provides greater assurance that the parties and the public can reliably know when such a transaction occurs.’ ... If promissory estoppel is used as a bar to the writing requirements imposed by the statute of frauds, based on a party’s oral promise to execute the agreement, the predictability that the statute of frauds brings to contract formation would be eroded. Parties negotiating a contract would no longer know what signifies a final agreement. Promissory estoppel used this way would open contract negotiations to fraud, the very evil that the statute of frauds seeks to prevent.”
“We decline to recognize an exception to the statute of frauds even when the promise to execute an agreement is fraudulent or misleading. If a party establishes that a promise to execute an agreement is misleading or fraudulent, promissory estoppel is an equitable remedy available to recover reliance damages. As recognized by the Supreme Court of Utah, ‘[i]n most instances of negotiations for transactions included within the Statute [of Frauds], a reduction of the contract to writing is contemplated and, in all probability, the parties will discuss who will draw the instrument and when and where it will be signed.’ ... However, until parties execute the agreement, ‘[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. ‘Until the documents are signed and delivered the game is not over. Businessmen would be undesirably inhibited in their dealings if expressions of intent and the exchange of drafts were taken as legally binding agreements.’”
“Accordingly, we hold that a party may not use promissory estoppel to bar the opposing party from asserting the affirmative defense of the statute of frauds, which requires that an enforceable contract be in writing and signed by the party to be charged, but may pursue promissory estoppel as a separate remedy for damages. ... An action for damages under promissory estoppel provides an adequate remedy for an unfulfilled or fraudulent promise. ‘The doctrine of promissory estoppel comes into play where the requisites of contract are not met, yet the promise should be enforced to avoid injustice.’... Thus, promissory estoppel is an adequate remedy for a fraudulent oral promise or breach of an oral promise, absent a signed agreement.
With regard to the Olympic partners’ claims that ACE violated a fiduciary duty to them arising from the parties’ purported joint venture, Justice Stratton wrote: “In this case, the dispute over what constituted a joint venture or what the parties’ obligations were before the contracts were even signed demonstrates the policy reasons that underlie the statute of frauds. ... In Garg v. Venkataraman (1988) ... the court stated, ‘While joint venture agreements may be oral, they are, nonetheless, still contracts, and thus subject to all of the applicable requirements of contract law, including the Statute of Frauds.’ Thus, Garg held that if a joint agreement does not comply with the statute of frauds, it is unenforceable and cannot impose any fiduciary duties upon the parties. We agree with Garg and therefore hold that a joint-venture agreement that does not comply with the statute of frauds is unenforceable, and an unenforceable joint-venture agreement cannot impose any fiduciary duties on the parties.”
Justice Stratton’s opinion was joined by Chief Justice Thomas J. Moyer and Justices Maureen O’Connor, Judith Ann Lanzinger and Robert R. Cupp.
Justice Terrence O’Donnell entered a dissent that was joined by Justice Paul E. Pfeifer. Justice O’Donnell wrote that in his view the majority’s holding “leads to an unjust result and will adversely affect business in Ohio, much of which involves complex transactions that must of necessity be taken on a step-by-step and handshake basis. This court should instead join the majority position among jurisdictions that have considered this issue, embrace the view espoused by legal scholars, and hold that the equitable doctrine of promissory estoppel may preclude assertion of a statute of frauds defense.”
Citing Ohio court decisions dating back to 1824, and rulings from more than a dozen other states, Justice O’Donnell said most courts and legal scholars who have considered the issue have concluded that a party should be able to invoke promissory estoppel “‘to defeat what would be an unconscionable use of the Statute (of frauds), and guard ... against the utilization of the Statute as a means for defrauding innocent persons who have been induced or permitted to change their position in reliance upon oral agreements within its operation.’”
Contacts
Kathleen M. Trafford, 614.227.1915, for ACE Title Reinsurance Company.
Michael H. Carpenter, 614.365.4100, for Olympic Holding Company LLC.