A Guarantee or Not a Guarantee, That Is the Question

As a general rule in Massachusetts, an action may not be brought against a person on a promise to answer for (that is, to guarantee) the debt of another unless “the promise, contract or agreement upon which [the] action is brought . . . is in writing and signed by the party to be charged therewith.” Mass. Gen. Laws Chapter 259, Section 1.

This statute, known as the Statute of Frauds, also applies to alleged contracts involving the sale of real estate, an agreement upon consideration of marriage, and an agreement that is not to be performed within one year. The Statute of Frauds reflects the intent and policy of preventing misunderstandings based upon unrealized expectations or surmise and avoiding the often considerable problem of proving the actual terms of an oral agreement, with the attendant potential for fraud and perjury. The parties should always know and understand the terms of the deal and the extent of their binding obligations, especially with the type of agreements covered by the Statute of Frauds, which if not embodied in a sufficient writing, will generally not be enforceable.

But what if a person relies to his or her detriment on an oral promise made by another? In such a situation, it may be appropriate to pierce the Statute of Frauds shield. Such was the situation presented to the Massachusetts Appeals Court in Barrie-Chivian v. Lepler, 87 Mass. App. Ct. 683 (2015), a case involving an oral agreement to guarantee a loan that was held enforceable under the doctrine of promissory estoppel.

In Barrie-Chivian, the defendant approached his in-laws shortly after marrying their daughter about investing in his real estate company. Over the next year or so, the defendant solicited a number of loans from his in-laws, who eventually loaned the real estate company up to $300,000.00 or more. During the years that followed, no payments were made on the loans and the plaintiffs, then former in-laws as it appears their daughter and the defendant divorced, brought suit against the defendant to collect on the loans. At trial, the defendant admitted that he had orally agreed to guarantee the loans and the plaintiffs testified that they would not have agreed to make the loans if the defendant had not promised to provide a written guaranty. Apparently, the plaintiffs repeatedly asked the defendant to execute a written guaranty, but he never did despite having agreed so to do.

To overcome the lack of a written guaranty and the Statute of Frauds defense, the plaintiffs asserted that the defendant was liable for the loans on a theory of promissory estoppel, that is, an “estoppel” occasioned by detrimental reliance. Estoppel prevents a person from showing the truth contrary to a representation of fact made by the person after another has relied on the representation, and so-called promissory estoppel extends that concept to promises. There was some question about the scope of promissory estoppel in Massachusetts and the defendant argued that for the plaintiffs to prevail upon such theory there had to be either a partial writing or evidence of fraud—evidence that at the time the defendant made the promise relied upon, he did not intend to perform it. The Appeals Court disagreed and found that the plaintiffs had established the elements of promissory estoppel and that the defendant’s oral guaranty was enforceable.

Accordingly, a promise which a person should reasonably expect to induce conduct of another and which does induce such conduct is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. Significant factors in making such determination include the strength of the evidence of the promise, the reasonableness of the conduct and the reliance upon the promise, and the extent to which the conduct was foreseeable by the promisor.