DiTommaso Realty, Inc. v. Moak Motorcycles, Inc. , 309 Or. 190 ( 1990 )

JONES, J.

The issue in this case is whether a contractual clause, providing that a real estate broker shall receive 10 percent of the selling price no matter who actually sells the property, was an unenforceable liquidated damages provision. We hold that the provision was not for liquidated damages but was an independent, valid contractual promise.

Plaintiff sought recovery for a contract debt, not for liquidated damages. Defendant claimed that the clause in dispute in the real estate contract was for liquidated damages. Defendant appealed a judgment awarding plaintiff, a real estate broker, damages pursuant to the clause in an exclusive listing agreement that provided for payment of a broker’s fee if defendant sold the property. The Court of Appeals read the clause as an enforceable liquidated damages provision and affirmed the judgment of the trial court. DiTommaso Realty, Inc. v. Moak Motorcycles, Inc., 96 Or App 431, 773 P2d 391 (1989). We affirm the decision of the Court of Appeals, but for different reasons.

Simply stated, the parties agreed

(1) to an exclusive real estate listing;

(2) for a specific period of time;

(3) for a specific price; and

(4) if anyone sold the property within that period of time, the payment of 10 percent of the selling price to the broker.

The provision in question¹ calls for a sales commission of 10 percent of the sales price, inter alia, “in the event of any sale, contract to sell or exchange or conveyance of said property by [seller] during the life of this contract or renewal or extension thereof.” We conclude that this contract involves an exclusive sales agreement between the real estate broker and the seller and that the clause in dispute is not a liquidated damages clause, but rather a clause which is enforceable in an action for a debt owed under the contract.

Some prior opinions have treated clauses similar to the one at issue here as liquidated damages provisions. In Dean Vincent v. Chef Joe’s, 273 Or 814, 816, 541 P2d 469, 544 P2d 146, reh den 273 Or 820, 544 P2d 146 (1975), involved an exclusive listing agreement which provided in part:

“ ‘In the event said property is sold, leased or exchanged dining the period of this contract, or [Broker] procures a purchaser ready, able and willing to purchase at the terms above specified, or places the Owner in touch with a purchaser to whom at any time within 180 days from the termination of the exclusive character of this contract the Owner sells or conveys said property, or if the Owner during the period of this contract withdraws the authority hereby given, the Owner shall pay [Broker] the same fee as hereinabove specified ***.’”

During the listing period, the seller entered into an earnest money agreement with a party procured by another broker. The broker claimed he was entitled to “a commission because of the terms of the exclusive listing agreement.” 273 Or at 816. This court addressed whether “the clause requiring the [broker] to be paid its commission if the property is sold during the exclusive period constitutes a penalty [or] a valid provision for liquidated damages.” 273 Or at 819 (emphasis added). The court, however, proceeded with this analysis without first determining whether in fact the exclusive listing agreement constituted a liquidated damages provision.

Dean Vincent, Inc. v. McDonough, 281 Or 239, 574 P2d 1096 (1978) (questioned in Illingworth v. Bushong, 297 Or 675, 688 P2d 379 (1984)), involved the identical provision quoted from Dean Vincent v. Chef Joe’s, supra. The broker brought an action “for damages for breach of a listing agreement by the owners of business property * * * who withdrew [the broker’s] authority to sell that property, in violation of the terms of that agreement.”² 281 Or at 241. This court, without first analyzing whether the contractual language at issue was a liquidated damages provision, determined whether a jury could have properly found that the clause at issue was a valid liquidated damages provision. Similarly, in Dean Vincent, Inc. v. Krimm, 285 Or 439, 591 P2d 740 (1979) (questioned in Illingworth v. Bushong, supra), the court did not address whether the contract clause at issue constituted a liquidated damages provision. In the case before us, the owner did not withdraw the authority of the broker to sell the property and there is no clause in the contract covering such an action.

In Wright v. Schutt Construction, 262 Or 619, 620, 500 P2d 1045 (1972) (questioned in Illingworth v. Bushong, supra), the seller terminated an exclusive listing agreement prior to its expiration. The broker sought

“to enforce a provision in an exclusive listing agreement to the effect that in the event the owner of the listed property withdrew the authority of the broker to sell the property the owner agreed ‘to pay [the broker] the said commission just the same as if a sale had actually been consummated by [the broker].’ ”

This court held that the provision was a penalty, again without addressing whether the clause at issue was a liquidated damages provision.

Two other liquidated damages cases are worth mentioning. Medak v. Hekimian, 241 Or 38, 404 P2d 203 (1965) (questioned in Illingworth v. Bushong, supra), involved a construction/rental contract. The contract “provided that in the event defendants did not construct the building defendants would pay plaintiffs $5,000 as liquidated damages for their failure to perform.” 241 Or at 41. Defendants failed to erect the building as agreed, and plaintiffs brought suit “to recover the $5,000 provided as liquidated damages for the contract’s breach.” Id. This court analyzed whether the contract clause at issue was a penalty or a valid liquidated damages provision. This court, however, did not address whether, despite any labels used in the contract, the provision constituted a liquidated damages provision.

The Court of Appeals relied on the case of Illingworth v. Bushong, 297 Or 675, 688 P2d 379 (1984), in reaching its decision on the basis of liquidated damages. In Illingworth, the purchaser brought an action to recover his earnest money deposit which the seller had retained pursuant to a forfeiture clause in an earnest money agreement. This court reviewed a number of prior cases which addressed the distinction between a valid liquidated damages provision and a penalty. This court then announced the rules for future cases for “analyzing the validity of provisions for liquidated damages in contracts in general.” 297 Or at 692. This court also described in general terms what constitutes a liquidated damages provision — “words of a contract that set the amount of damages to be recovered by one party from another in case of the latter’s failure to perform as agreed.” 297 Or at 681. Although this court affirmed the trial court’s ruling that the contract provision at issue was a penalty, this court did not address whether the contract clause was in fact a liquidated damages provision.

The foregoing cases made the mistake of putting the cart before the horse. Before determining whether a contract clause is a valid liquidated damages provision, a preliminary question must be resolved — whether the clause is in fact a liquidated damages provision. There is no need to reach the former question if the latter question is answered negatively.

Wright v. Schutt Construction, supra, merits further discussion because it is particularly relevant to the disposition of the instant case. In Wright the broker specifically argued, inter alia, that

“the trial court erred ‘in denying recovery for a debt due and owing,’ upon the ground that ‘this action was plead and tried as an action on a debt’ and citing Baumgartner v. Meek, 126 Cal App 2d 505, 272 P2d 552 (1954), among other cases, in which recovery of a realtor’s commission was affirmed without regard to the question whether it was a valid provision for liquidated damages or an invalid provision for a penalty.” 262 Or at 632 n 6.

The court answered this contention:

“As stated in Corbin, [Contracts] 337 § 1058, the terms used in the drafting of a contract may be of little significance in determining whether a contract provision is one for liquidated damages or for a penalty. In this case, we agree with the finding of the trial court that, in actual effect, this contract provision imposed a penalty. We therefore decline to follow such cases as Baumgartner v. Meek, supra” Id.

This statement is unresponsive to the broker’s argument. Concluding that the “contract provision imposed a penalty” simply does not answer the broker’s assertion that he was entitled to recover “without regard to the question whether [the clause] was a valid provision for liquidated damages or an invalid provision for a penalty.” Id.

The Wright court erred because it failed to distinguish between two independent theories of recovery — (1) that an amount is due because a contract term has been satisfied, and (2) that liquidated damages are due because a breach has occurred. In the instant case, the lower courts repeated the error made in Wright.

Here, as mentioned, the real estate broker (plaintiff) pleaded the claim as a straight-out action on a debt — failure to pay in accordance with terms of the contract. The seller contended that the provision was a liquidated damages provision and constituted an illegal forfeiture penalty. The trial court held for the plaintiff but appeared to treat the provision as a liquidated damages clause. The majority of the Court of Appeals affirmed on the basis that the 10 percent commission was a valid liquidated damages provision. Judge Buttler dissented, stating that it was not a valid liquidated damages provision; but, if he were not bound by our decision in Illingworth v. Bushong, supra, he

“would hold that the provision is a straightforward one that provides that plaintiff will be paid a commission if the property is sold during the stated period, regardless of whether plaintiff is instrumental in the sale. The provision does not even purport to provide for damages in the event of a breach, and there has been no breach to which a liquidated damage provision could apply. As I view it, plaintiff is entitled to its commission because the property was sold during the exclusive listing period, not because defendant breached the agreement to plaintiff’s damage.” 96 Or App at 436 (Buttler, P. J., dissenting) (emphasis in original; citations omitted).

We agree with Judge Buttler’s analysis that the provision is not for liquidated damages, but for an action on a debt owed under the contract.

It is worth taking a moment to discuss Torrey & Dean v. Coyle, 138 Or 509, 7 P2d 561 (1932). In that case the contract provided in relevant part:

“ ‘I hereby give you the exclusive right to sell the two homes I am about to erect on parts of lots 2, 3 & 4, Block 3, Ardmore, City for the period from date hereof up to and including sixty days after completion of said houses, at prices to be fixed by me on or before 30 days from date hereof. And I agree to pay you a commission on such sales of 5% of amount of actual purchase prices of said property.

“ ‘It is understood that you will so soon as said houses are advanced far enough to show, keep them advertised and work on them and will put up conspicuous signs in front of said properties.

“ ‘It is understood that the terms of purchase are to be satisfactory to me.’ ” 138 Or at 510.

Defendant building contractors themselves sold one of the houses subject to the contract, and the plaintiff real estate broker brought an action “to recover a real estate broker’s commission.” 138 Or at 509. The building contractors prevailed at the trial level, and the broker appealed arguing, inter alia, that the trial court erred by refusing to direct a verdict in its favor.

The court noted that “the better rule precludes the owner from selling the property within the contract period where an ‘exclusive right [to sell]’ * * * has been conferred upon another person.” 138 Or at 511. The real controversy in the case, however, was the date of completion of the house. The court stated that if “when the defendants sold the house, 60 days had not elapsed after its completion, then the contract of agency was breached and plaintiffs would be entitled to damages’'’ 138 Or at 511 (emphasis added). The court held for the building contractors, stating that the record clearly showed that plaintiff would not be entitled to a directed verdict. 138 Or at 513.

Torrey & Dean is consistent with the instant case. Unlike the contract in this case, the contract in Torrey & Dean did not expressly provide that if the seller sold the house during the life of the contract, the broker would receive a fee. Thus, if the sale of the house at issue in Torrey & Dean had occurred when the contract was in effect, the sale would have been in breach of the broker’s “exclusive right to sell.” In the instant case, however, defendant did not breach the contract by selling the property without plaintiffs assistance because the contract recognizes that right. The only breach is defendant’s failure to pay the promised fee pursuant to the terms of the contract.

The Court of Appeals erred when it interpreted the 10 percent provision as a liquidated damages provision. Its analysis of cases such as Illingworth v. Bushong, supra, was unnecessary but did not lead to an erroneous conclusion. To the extent that prior opinions are inconsistent with this opinion, they are disapproved.

The decision of the Court of Appeals and the judgment of the circuit court are affirmed on different grounds.

1 “For value received, you are hereby employed and given the exclusive right to sell or exchange the above described property at the price and terms stated above. * * * In the event that you, or any other broker cooperating with you, find a buyer ready and willing to purchase said property for said sale and terms or such other price and terms as I may accept, or in the event of any sale, contract to sell or exchange or conveyance of said property by me during the life of this contract or any renewal or extension thereof, or that you place me in touch with a buyer to whom at any time within ninety days after the termination of this contract or renewal or extension thereof I may sell, contract to sell or exchange or convey said property, or if you are the procuring cause of said sale, exchange or conveyance, I hereby agree to pay you in cash for your services in connection with this contract a fee equal in amount to TEN % of the selling price of the property, but in no case less than $ N/A (Emphasis added.)

2 Plaintiff pleaded the cause in two counts, the first to enforce the liquidated damages clause of $17,500, and the second to recover actual damages, also alleged to be $17,500.