The Ohio Supreme Court, in Olympic Holding Co., L.L.C. v. ACE Ltd. (May 7, 2009), Slip Opinion No. 2009-Ohio-2057, departed from 185 years of precedent by holding that a party seeking to enforce an unsigned contract, in this case a joint venture agreement, could not rely on the other party's promise to sign the agreement to overcome the statute of frauds -- a law barring enforcement of contracts not to be performed within one year unless the agreement is in writing and signed by the other party. Instead of allowing recovery for breach of contract, the Court held that a separate claim of promissory estoppel was an adequate remedy for any damages incurred in relying on a false promise to sign an agreement. This decision has implications for legal liability arising in contract negotiations, failed transactions, and situations where parties perform in the absence of a signed, written contract.
The parties in Olympic Holding Co., a group of title agencies ("Olympic Group") and a title reinsurance company ("ACE"), engaged in extended negotiations to form a joint venture for issuing an integrated system of title insurance and reinsurance. Both parties took actions to finalize the agreement -- Olympic Group acquired a title company and ACE applied to the Ohio Department of Insurance to sell title insurance. The parties exchanged nine drafts of an agreement that would define their obligations for a five year period. Each draft contained contract-disclaimer language ("This document is intended for discussion purposes only.") and a provision stating that the contract would not be effective until it was signed by each party. After the last draft was exchanged, ACE's COO assured Olympic Group that ACE would sign the agreement after Olympic Group acquired the title company and that the agreement was "just awaiting signature" by ACE's Board. One week after Olympic Group closed on the title company acquisition, ACE announced that it would not proceed with the joint venture. Olympic Group immediately signed the latest version of the agreement and submitted it to ACE, but ACE would not sign. Baker Hostetler Commercial Litigation
Olympic Group filed a complaint against ACE, which included claims for breach of contract, breach of fiduciary duty, and promissory estoppel, and asked that ACE be ordered to perform its obligations under the joint venture agreement. ACE filed a motion for summary judgment arguing that enforcement of the unsigned agreement was barred by the statute of frauds. Olympic Group argued that ACE's promise to execute the agreement prohibited ACE's statute of frauds defense. The trial court agreed with ACE and dismissed Olympic Group's breach of contract and fiduciary duty claims, allowing the promissory estoppel claim seeking reliance damages to proceed. The appellate court reversed the trial court's decision, holding that ACE was estopped from using the statute of frauds as a defense to the breach of contract claim because of ACE's misrepresentation that it would sign the agreement. The appellate court also found that "joint venturers may incur fiduciary obligations to each other" even in the absence of a signed contract under the right circumstances.
The Ohio Supreme Court reversed the appellate court's decision despite acknowledging that a majority of states recognize promissory estoppel as an exception to the statute of frauds. The Court reasoned that such an exception was unnecessary and undermined the requirement of a signed writing as evidence of an enforceable contract when the statute of frauds applied. Even if a promise to sign an agreement was fraudulent or misleading, the Court said it would still not recognize the exception because a promissory estoppel claim allows for recovery of damages incurred by relying on a false promise. As part of its analysis, the Court stated that it was unreasonable for a party to a complex business transaction to rely on a promise of future intent made during negotiations. The Court also noted that joint venture agreements are contracts that must comply with the statute of frauds. Thus, because the joint venture agreement was not enforceable, the Court held that Olympic Group and ACE did not owe each other fiduciary duties as joint venturers.
Two dissenting justices argued that not recognizing promissory estoppel as an exception to the statute of frauds -- like 28 other states do and Ohio has since 1824 -- would adversely affect business in Ohio because complex transactions "must of necessity be taken on a step-by-step and handshake basis."
It may be preferable and even necessary to do business on a handshake basis, but the Olympic Holding Co. decision highlights the risk of doing so. Indeed, a party taking action in reliance on another party's "word" without a signed, written contract now faces a greater risk of being limited to reliance damages as the primary and possibly only remedy. This development, however, may be a welcome change for parties engaged in negotiations who desire limited liability before a definitive agreement is signed. Notwithstanding the protections of the statute of frauds, it is still advisable that parties include contract-disclaimer language when they exchange drafts and a provision requiring the contract to be signed by both parties before it will become effective.