Jeffrey S. Feldman, Esquire

Litigating any form of unwritten promise is always a challenge.  In an age of ubiquitous electronic communications, judges and juries have more reason than ever to be skeptical of alleged oral agreements. 

Attorneys representing a potential plaintiff faced with this situation may believe that their client's claim based on the third party's verbal promise is precluded by the statute of frauds, which, in some states, bans the enforcement of unwritten agreements to "answer for the debt or default of another."  Fortunately, however, that is often not the case.  Several states have developed an exception to the statute of frauds that permits promisees to pursue a guaranty or surety claim in some circumstances.  This exception, known as the "leading object" or "main purpose" rule, states that whenever the main purpose and object of the promisor was not to answer for the debt of another, but rather to serve some pecuniary or business purpose of his, her or its own, the promise is not barred by the statute of frauds, even though it may be in the form of a provision to pay the debt of another.  

Thus, in order to effectively represent a client making a claim on a verbal guaranty or surety agreement under the "leading object" rule, business litigators must plead and prove facts that demonstrate that the primary motivation of the promisor was to further its own interests. The intent of the promisor must be shown through the economics of the relevant transactions, that is, by analyzing "the complex of objective manifestations surrounding the making of the promises."  See J. Murray, Murray on Contracts § 316 (2d ed. 1974). In addition, in some states, the existence of the oral promise itself must be demonstrated by clear and convincing evidence.

Courts reviewing "leading object" claims have recognized that some fact patterns, if sufficiently proven, generally serve as evidence of a primary intent by the promisor to further its own interests.  Examples of such situations include: (1) a promise made by the owner of 100% of the outstanding equity of a company to pay a trade debt of the company in exchange for the trade creditor agreeing not to pursue the debt or force the company into bankruptcy, and (2) a promise made to a subcontractor by a construction project owner or architectural firm to honor the debts of a general contractor if the subcontractor completes its work on the project, where the promisor would reap an economic benefit if the work is completed (or completed sooner).

Most cases, however, involve closer calls.  For example, the mere fact that a promisor has some ownership interest in the entity that incurred the debt that is being guaranteed does not, in and of itself, establish that his or her main purpose is to advance his or her personal interests.  Instead, courts generally construe the promisor's intent by tracing the economic relationships involved.  If  the promise was made to secure some special, direct or immediate benefit to the promisor, it is generally found to be enforceable.  If it was made simply to protect the value of the promisor's equity interest in the entity, it is generally found to be unenforceable.

State laws on this issue vary significantly.  Parties with potential claims or defenses related to the "leading object" or "main purpose" exception to the statute of frauds should seek the advice of legal counsel in the applicable jurisdiction.