Contract not void under statute of frauds

A federal court has rejected a public housing authority’s argument that an unsigned contract for security services was void due to the statute of frauds and the Virginia Public Procurement Act, or VPPA.

Because there was no dispute about the existence of the contract, the court found that parties’ past performance exempted the document from the statute of frauds.

The court also noted that the purpose of the statute of frauds is “‘to provide reliable evidence of the existence and terms of certain types of contracts and to reduce the likelihood that contracts within the scope of th[e] statute can be created or altered by acts of perjury or fraud.’ … That purpose is clearly inapplicable in this case where [the defendant] admits the contract existed.”

The April 28 opinion from Judge Norman K. Moon of the Western District of Virginia is Ocean 10 Security LLC v. Lynchburg Redevelopment and Housing Authority (VLW 022-3-184).

Surveillance contracts

Plaintiff Ocean 10 Security is a provider of security cameras and security services. The Lynchburg Redevelopment and Housing Authority, or LRHA, is the public housing authority for the City of Lynchburg and a political subdivision of the commonwealth.

In 2019, LHRA contracted with Ocean 10 to install and service 12 TSUNAMI surveillance systems. According to Ocean 10, the three-year subscription contract was approved or ratified by LRHA’s executive director and board of commissioners, and LRHA made payments.

Due to the success of the TSUNAMI systems, LRHA ordered 12 more. Ocean 10 alleged the second contract was ratified like the first and that both parties performed under it.

In 2021, LRHA stopped making payments, but made a partial payment in February 2021 after receiving several notices. Shortly after receiving a final notice of nonpayment in April 2021, LRHA unilaterally declared the contract void and the board voted that the contract was not in the public interest.

Breach of contract claim

Ocean 10 filed a complaint for breach of contract and an appeal of LRHA’s decision to void the contract under the VPPA. Alternatively, Ocean 10 alleged that even if LRHA lawfully voided the contract, it was entitled to its costs for performance up to the time that it was voided.

LRHA moved to dismiss the complaint and attached what it claimed was a final but unsigned version of the contract. Because the contract was never executed and could not have been performed within one year, LRHA argued it was barred by the statute of frauds.

It also sought to dismiss the alternative claims because it claimed that it lawfully voided the contract under the VPPA because it was “in the best interest of the public” to do so. Further, it argued that Ocean 10 could not recover anticipated profits, because under the VPPA a contractor is expressly prohibited from recovering lost profits if the contract was lawfully voided.

Statute of frauds

As a threshold matter, Moon stated that Virginia’s Uniform Commercial Code statute of frauds did not apply because the purported contract was primarily for services. Instead, Virginia’s general contract dispute statute of frauds would apply.

Moon found the unsigned document contained all the key elements of a contract. Absent an actual dispute about the existence of a contract, he held that even if the statute of frauds governed, “the exception for part performance clearly applies.” The judge credited Ocean 10’s allegations that it performed under the contract and that LRHA made subscription payments for more than a year.

“Obviously Ocean 10 would only have done those things if it had a contract with LRHA to do so,” Moon concluded.

Public procurement act

The VPPA permits local governments to void existing contracts as being against the public interest if it is first “determined that an award of a contract was arbitrary or capricious,” the judge said.

Ocean 10 argued that LRHA never made the requisite preliminary finding that the award was arbitrary and capricious which, according to Moon, the VPPA “does clearly require.”

Given the limited case law on the VPPA, Moon said that this issue would be best resolved at summary judgment. He concluded that, at this stage, Ocean 10 had stated plausible claims based on its allegations that LRHA did not make the requisite preliminary finding before voiding the contract and, therefore, did not have the authority to do so under the VPPA.

Answer and defenses

On May 10, 2022, LRHA filed its answer and defenses to Ocean 10’s amended complaint. It alleges that on April 15, 2021, LRHA’s counsel notified Ocean 10 that its board had declared the contract with Ocean 10 void as being not in the public interest.

LRHA reasserted its statute of frauds and VPPA affirmative defenses and added that Ocean 10 had failed to mitigate its damages.