December 22, 2014

Can oral discussions change the terms of a written contract?

Posted in Commercial Litigation, Real Estate by Gene Killian |

The Broadway musical “Jersey Boys” is nine years old as I write this, and seems to be turning into one of those tourist shows that never ends (like “Cats” or “The Lion King”).  In one famous scene in the play, Frankie Valli and Bob Gaudio form their 50/50 “Four Seasons” musical business partnership based on a handshake. Frankie calls it a “Jersey Contract.”

It’s a great scene, but not a great idea. It’s also not a great idea to enter into contracts without reading them carefully and understanding their implications. But it seems to happen all the time.

In the recent case of Lee v. Carabetta, for example, a businessman named Lee invested $500,000 in a real estate project in Asbury Park, and his cohorts on the project supposedly told him that his money would be secured by a mortgage on the property that was to be developed. Lee claimed that one of the defendants also told him that “his deposit would be refunded in the event the deal fell through.”

Well, guess what. The deal fell through.  And Lee’s problem was that contract documents referred to a $500,000 “initial nonrefundable cash deposit.”  Lee admitted that he saw the contract documents before he advanced the money.

In a Certification filed with the Court, though, Lee argued that he made the $500,000 deposit to “invest in property” and that he did so “in return for a mortgage on said property.”  Unfortunately, in an earlier deposition he gave in the case, Lee stated that he didn’t remember whether or not the defendants said they would provide him with a mortgage.

The case was an easy one for the Appellate Division to decide.  The Court wrote: “Even viewed liberally, plaintiff’s efforts to contradict his prior deposition testimony were properly rejected by the [trial] judge. Plaintiff made no attempt to explain or qualify the discrepancies, nor did he provide any particularized facts that corroborate and/or supplement the documents in the record. Consequently, plaintiff’s conclusory and self-serving statements were appropriately disregarded.”

As for Lee’s efforts to undo the written contract documents, the Court relied in part on the Statute of Frauds (yes, law students, sometimes the Statute of Frauds does come up in real life). The Statute, of course, provides that an agreement to transfer an interest in real estate or to hold an interest in real estate for the benefit of another is not enforceable unless contained in a writing, subject to certain exceptions. The Court wrote: “The fact that plaintiff allegedly had conversations with [defendants] regarding the deposit and the contours of an oral agreement in no way...effaces the obligations and liabilities [of the parties] under the contract. Plaintiff’s argument that his oral discussions with anyone somehow dissolve his contractual obligations runs afoul of the Statute of Frauds and therefore is without merit.”    

Maybe Lee was being less than truthful about the discussions he supposedly had.  Or maybe he really did have discussions with the defendants, but was sloppy about making sure the contract terms were sufficiently described in writing. Either way, the case provides a reminder for all businesspeople. If it’s not in writing, it doesn’t exist. And if it IS in writing, you better make sure you understand what the writing says.

You can read the full case here.

-        Gene Killian