Oral Agreement to Pay Employee's Legal Fees Barred by Statute of Frauds to the Extent it Related to Future Litigation

On August 28, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Cohen v. Trump Org. LLC, 2019 NY Slip Op. 32565(U), holding that an employer's alleged oral agreement to pay legal fees was barred by the statute of frauds to the extent it related to future litigation, explaining:

The Agreement as to Future Matters is void under the Statute of Frauds because it could not by its terms be performed within one year. Indeed, it could not ever be fully performed because the Trump Organization's obligations under such an agreement would be triggered by any new action or investigation occurring at any time in the future. The only way to terminate this open-ended obligation within one year would be to breach it. But the possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.

Cases involving open-ended agreements to pay sales commissions are instructive. The typical fact pattern in those cases involves an agreement by an employer to give an employee a share of future sales generated by customers whom the employee procured. Courts have held that because this kind of promise impermissibly extends indefinitely, dependent solely on the acts of a third party and beyond the control of the defendant, it is within the statute and must be in writing. In Apostolos, the court voided a portion of an oral sales commission agreement that would have obligated the defendant to pay plaintiff one half of any commissions it received on renewals of insurance policies that had originally been placed through defendant by plaintiff. Because there was no allegation that defendant could decline to accept these renewals nor any allegation that defendant was only liable for commissions for renewals that were made during the pendency of the agreement, this portion of the agreement was within the statute of frauds and, in the absence of a writing, was unenforceable. Similarly, the alleged Agreement to cover Cohen's legal expenses for all other matters would continue indefinitely, dependent on the actions of third-parties such as prosecutors, law enforcement agencies, aggrieved private litigants, and an unknowable number of others.

Cases involving open-ended distributorship agreements further illustrate the point. In D&N Boening, Inc. v. Kirsch Beverage, 63 N.Y.2d 449 (1984), the Court of Appeals voided under the Statute of Frauds an oral distributorship arrangement that provided for no expiration and there was no contemplation of any completion or final discharge. By contrast, in North Shore Bottling, the Court held that the indefinite distributorship arrangement there fell outside the bar of the Statute of Frauds. Although the oral agreement in North Shore Bottling set no fixed end date, and the parties may have expected the agreement to last over a long period, the agreement could have terminated within one year if the defendant chose to discontinue its beer sales in the New York area. Had that occurred within a year, the parties' contractual obligations would have then terminated without a breach.

Cohen's rationale for enforcing the Agreement with respect to Future Matters (including the amorphous "other matters") is not persuasive. He argues, correctly, that the determination of whether an oral agreement can possibly be performed within one year looks forward from the day the parties entered into the agreement. But to determine whether subsequent matters come under the agreement alleged in this case, the parties must look backwards to work out whether those matters are potentially related to Cohen's employment. This calculation cannot be done at the time of contract formation in this case because Future Matters by definition are matters that the parties did not know about at the time, such as the criminal case against Cohen related to his alleged misleading congressional investigators. Therefore, looking forward from the day the parties entered into the agreement, the agreement as to Future Matters was incapable of performance within one year.

(Internal quotations and citations omitted).

Contract law--usually straightforward--has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, sometimes there are ways to escape from those traps, but the exceptions are narrow and, as shown here, difficult to meet. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.