Ditommaso Realty, Inc. v. Moak Motorcycles, Inc.

• Jurisdiction: Oregon
• Parties: DITOMMASO REALTY, INC., dba Century 21/Ditommaso Realty, an Oregon corporation, Respondent on review, v. MOAK MOTORCYCLES, INC., an Oregon corporation, Petitioner on review. * CC 8
• Citation: 309 Or. 190,785 P.2d 343
• Court: Oregon Supreme Court
• Decision Date: 06 June 1984

Page 343

785 P.2d 343

309 Or. 190

DITOMMASO REALTY, INC., dba Century 21/Ditommaso Realty, an Oregon corporation, Respondent on review, v. MOAK MOTORCYCLES, INC., an Oregon corporation, Petitioner on review. ^*

CC 86-6-84; CA A45797; SC S36225.

Supreme Court of Oregon In Banc.

Argued and Submitted Oct. 31, 1989.

Decided Jan. 11, 1990.

David W. Dardano, Portland, argued the cause and filed the petition for petitioner on review.

Tony Pizzuti, Canby, argued the cause and filed a response to the petition for respondent on review.

Ray W. Shaw of Heltzel, Upjohn, Shaw, Williams & Yandell, Salem, filed a brief on behalf of amicus curiae, Oregon Ass'n of Realtors.

Gile R. Downes of Schulte, Anderson, DeFrancq, Downes & Carter, P.C., Portland, filed a brief on behalf of amicus curiae, Multiple Brokers, Inc.

JONES, Justice.

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 P.2d 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 question ¹ 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 P.2d 469, 544 P.2d 146, reh den 273 Or. 820, 544 P.2d 146 (1975), involved an exclusive listing agreement which provided in part:

" 'In the event said property is sold, leased or exchanged during 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, 541 P.2d 469. 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, 541 P.2d 469 (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 P.2d 1096 (1978) (questioned in Illingworth v. Bushong, 297 Or. 675, 688 P.2d 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, 574 P.2d 1096. 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 P.2d 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 P.2d 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 P.2d 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, 404 P.2d 203. 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 P.2d 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, 688 P.2d 379. 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, 688 P.2d 379. 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, 500 P.2d 1045.

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...