Don't Bet the Business

Michigan’s version of the statute of frauds, MCL 566.132(1), provides that “an agreement, contract, or promise is void unless that agreement, contract, or promise, or a note or memorandum of the agreement, contract, or promise is in writing and signed with an authorized signature by the party to be charged.”  

In particular, a promise to pay a debt owed by someone else must be made by a signed writing to be legally enforceable as set forth under MCL 566.132(1)(b). The statute of frauds, when applicable, is a powerful defense that can end a lawsuit quickly and relatively inexpensively.  Section 132 does, however, have its limitations.

The statute of frauds notwithstanding, Michigan law also respects and enforces certain oral promises under the promissory estoppel doctrine. To succeed on a claim for promissory estoppel one must be able to prove: (1) a promise was made, (2) that the promisor should reasonably have expected to induce action of a definite and substantial character on the part of the promisee, and (3) that the promise, in fact, produced reliance or forbearance of that nature in circumstances such that the promise must be enforced if injustice is to be avoided.

Sometimes the statute of frauds and promissory estoppel intersect; sometimes they collide. It is important to know and understand the scope of each rule, because a mistake can result in wholly unintended and costly consequences.

Consider a hypothetical dispute in which the plaintiff is in business and hoped to expand. The defendant, a close friend, encouraged the expansion and, according to the plaintiff, the defendant supposedly promised to pay all business obligations if the plaintiff could not. However, once the expansion was underway, and after the business debts began piling up, the defendant refused to pay, resulting in the business failure and considerable damages. 

It is undisputed that the defendant’s alleged promise was not made in a signed writing, at least none that the plaintiff could find. Accordingly, the plaintiff sued the defendant under a promissory estoppel theory. The defendant insists that no such promise was made.

Regardless, the defendant contends, any such promise to pay the business debts would be barred by the statute of frauds because the plaintiff cannot produce a writing the defendant signed. So who is right? Well, they may both be right, at least in part.

The Michigan version of the statute of frauds has been interpreted to differentiate between so-called “original promises” and “collateral promises.”  Consider a promise to pay for goods or services furnished to a third person. If the promise was to pay for goods or services to be provided in the future, the promise would be treated as an “original promise.” If, however, the promise was to pay for goods or services that previously were provided, the promise would be deemed a “collateral promise.” This distinction can be critical.

An original promise does not fall within the statute of frauds as a promise to pay the debt of another. As such, an original promise it is not one that needs to be made by a signed writing to be enforceable. On the other hand, a collateral promise, one to pay for goods and services that were already provided, falls squarely within MCL 566.132(1). A collateral promise must be supported by a signed writing to be enforceable under §132(1).

In the hypothetical above, any portion of the business debt that was owed when the defendant’s promise was made will be considered to be a collateral promise under MCL 566.132(1). The defendant’s promise to pay an existing debt would be unenforceable without a signed writing to show that the promise was made. However, if the plaintiff can prove all of the elements of promissory estoppel, the defendant’s promise to pay future debts will be considered to be an original promise and outside the scope of §132.

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