Appeals Court Rules on Unwritten Business Contract

As a general rule, you want to make sure your contracts are written and signed. States such as Colorado may allow for the enforcement of unwritten contracts, but it’s typically harder for anyone claiming a breach of those contracts to make their case.

This point was recently reinforced by an opinion from the United States District Court for the District of Colorado. In an almost embarrassingly brief six-page statement, the court affirmed a summary judgement against the business claiming a breach of its unwritten, verbal contract.

Magnum Feedyard Co., LLC v. Agri Sales USA, Inc.

As the appellate court noted, this case began when Magnum Feedyard sued Agri Sales for a breach of contract. Magnum claimed that Agri Sales had agreed to sell 5000 tons of alfalfa hay but then failed to deliver the full, promised amount. Magnum said that because Agri Sales did not deliver the full 5000 tons, it suffered by having to pay a higher rate to other vendors. Accordingly, Magnum sued for both breach of contract and promissory estoppel.

Agri Sales filed for summary judgment, which the district court granted. On review, the circuit court upheld the district court’s decision.

Two Issues for Consideration

The Court of Appeals considered and affirmed two different parts of the district court’s ruling:

• The decision to grant summary judgment for breach of contract
• The decision to grant summary judgment for promissory estoppel

The Court of Appeals noted that it is sometimes possible to enforce oral contracts. In Colorado, contracts “must ordinarily be in writing,” but “an exception exists for oral contracts between merchants.” Here, the court cites Colorado Section 4-2-201.

That section of Colorado law provides an exception for merchants that create a record to confirm their contract within a reasonable time after they make it. However, the Court of Appeals noted that the only records of the two parties’ agreement were invoices and bills of lading that said “nothing about a promise to sell 5000 tons” of alfalfa. The amount of alfalfa was the key matter in dispute, but there was no record pointing to the amount of 5000 tons.

So, even though the Court allowed that the invoices and bills of lading could confirm the existence of a contract, they failed to make an unwritten term enforceable.

Notably, the district court had taken the rare step of dismissing the promissory estoppel based on buyer’s failure to show detrimental reliance. This was rare because, as Magnum noted, Agri Sales had not even requested summary judgment based on detrimental reliance.

The Court of Appeals clarified that district courts cannot ordinarily make their own decisions to grant summary judgement without “providing notice and an opportunity to respond.” However, it also pointed out that the court did not “inject” the issue of detrimental reliance into the proceedings. That issue came into play when Magnum admitted, during arguments about promissory estoppel, that it had not changed its position “at all” toward its alleged contract with Agri Sales.

The Court of Appeals further noted that although the discussion of detrimental reliance was brief, it was all that Agri Sales needed to win summary judgment. And it was Magnum’s admission that it didn’t do “anything differently” after entering into the alleged contract that undercut its president’s affidavit saying the company needed to pay higher prices after Agri Sales did not deliver 5000 tons.

Documentation Is Crucial

Obviously, it’s far more likely a company can enforce a contract when that contract is written and signed. However, this recent case reminds us that contract law can bind parties who make only verbal agreements.

At the same time, documentation remains crucial even in these circumstances. Business owners want to be able to show evidence of the terms they agreed upon, and they do not want to undercut their arguments with ill-considered statements.