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NY Commercial Litigators

NY Appellate Court: 15-Year Oral Loan Agreement is Enforceable

January 13, 2016
By: Marc Rapaport

The statute of frauds was enacted more than 300 years ago. Among other provisions, it offers a set of six basic rules that dictate when a contract must be reduced to a signed writing. At first glance, these rules appear to be straightforward. However, the application and interpretation of these rules in the “real world” of commercial transactions leads to a surprising number of questions that are not subject to simple answers. In addition, there are exceptions to the rules that are also subject to differing interpretations.

The statute of frauds provides that contracts which cannot be performed in one year must be reduced to writing. This is known as the “one year” rule. In a decision issued on January 13, 2015, in the case JNG Construction v. Roussopoulos, the Appellate Court for New York’s Second Department reiterated that the one year rule is subject to the narrowest possible interpretation. Only an agreement that has “absolutely no possibility” of being performed within one year needs to be in writing. Even if it is improbable or unlikely that the agreement will be performed in one year, the agreement need not be in writing.

In the Roussopoulos case, the parties entered into a loan agreement in 1998, pursuant to which the plaintiff loaned the defendant $71,500 at 9% annual interest. Under the terms of the parties’ agreement, the loan did not mature (i.e., payment in full would not be due) until 15 years later, on December 31, 2013. At first glance, it might seem obvious that a 15-year loan would be covered by the statute of frauds’ one-year rule. However, as noted above, the statute of frauds is deceptively complex. The appellate court held that despite the loan’s 15-year term, the agreement “was capable of being performed within one year of its making” because it was possible (albeit improbable) for the borrower to pay the entire balance within the first year.

The decision by the Second Department in Roussopoulos is noteworthy in at least two respects. First, it shows that courts in New York continue to give the narrowest possible interpretation to the one-year rule. Second, it demonstrates that courts generally try to avoid results that are manifestly unfair. If the court had held that the loan agreement was unenforceable, the plaintiff would likely have been left without a legal remedy – a result that would have been exceedingly punitive to the plaintiff.
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