Oral Profit Sharing Agreement Held Enforceable

Virginia’s statute of frauds provides that “[u]nless a …contract…is in writing and signed by the party to be charged or his agent, no action shall be brought…[u]pon any agreement that is not to be performed within a year.” Va. Code Ann. § 11-2(8). A party wishing to assert the statute of frauds as an affirmative defense to a breach of contract action must show that the parties’ oral agreement was within the statute of frauds. The issue is whether the contract as a whole can be fully performed on one side within a year, even through the occurrence of some improbable event. If a court can conjure up some contingency, no matter how unlikely, that would allow either party to completely perform all of its contractual obligations within one year, the statute of frauds will not apply. The United States District Court for the Eastern District of Virginia recently examined this issue in Blue Sky Travel v. Al Tayyar.

Blue Sky purchased airline tickets that Al Tayyar Group (“ATG”) then resold to the Saudi Arabian Ministry of Higher Education (the “Ministry”). The parties orally agreed to share the profits that ATG realized from the re-sales. When Blue Sky sued ATG for breach of contract, ATG asserted the statute of frauds as an affirmative defense arguing that since Blue Sky’s share of the profits could not be calculated until after the end of the calendar year, an oral contract for profit sharing could not have been performed within a year and therefore fell within the statute of frauds.

The court found that the parties’ agreement was premised on ATG receiving orders for tickets from the Ministry and that without an order, Blue Sky would not purchase tickets and the parties would not share any profits. The contract did not obligate the Ministry to order tickets, so it was possible that the Ministry could have decided not to order any tickets in a year or stopped ordering tickets at any time such that neither Blue Sky nor ATG would be required to perform. Also, the Ministry contract could have been terminated within a year of the parties’ agreement. Therefore, either or both parties could have completed their performance under the oral agreement within a year without breaching or terminating the agreement. The court held that ATG failed to carry its burden of establishing that the parties’ oral agreement could not have been fully performed by either party within a year, and that the oral contract was therefore outside the statute of frauds.

The court also addressed damages. ATG’s failure to comply with discovery resulted in rulings restricting it from producing evidence or arguing that it made only a 5% markup and a presumption that the profits the parties were to share totaled 20 million dollars. ATG attempted to proffer evidence at a supplemental evidentiary hearing on damages that (1) it made only 5% profit on the resale of tickets to the Ministry; (2) it only billed the Ministry for $800,000 worth of tickets and received only $840,000 or a 5% commission; and (3) the oral agreement for profit sharing was to be on profits derived from a year’s worth of ticket sales such that Blue Sky should only be entitled to a pro rata amount of the year’s profits. The court held that all of the proffered evidence had either already been presented at trial or would be inadmissible because of the pre-trial orders or because the supporting documents and witnesses were never produced or identified as required. The court awarded Blue Sky $10 million in damages as a result of ATG’s breach of the oral profit sharing agreement.