Wright v. Schutt Const. Co.

• Decision Date: 08 September 1972
• Citation: 262 Or. 619,500 P.2d 1045
• Parties: , 69 A.L.R.3d 1260 Dillard E. WRIGHT, dba Dillard Wright and Associates, Real Estate, Appellant, v. SCHUTT CONSTRUCTION CO., Inc., Respondent.
• Court: Oregon Supreme Court

Page 1045

500 P.2d 1045

262 Or. 619, 69 A.L.R.3d 1260

Dillard E. WRIGHT, dba Dillard Wright and Associates, Real Estate, Appellant, v. SCHUTT CONSTRUCTION CO., Inc., Respondent.

Supreme Court of Oregon, In Banc.

Argued and Submitted June 6, 1972.

Decided Sept. 8, 1972.

Ralph D. Barrett, Springfield, argued the cause for appellant. With him on the briefs were Harms & Harold, Springfield.

Max S. Taggart, II, Springfield, argued the cause for respondent. With him on the brief were Sanders, Lively & Wiswall, Springfield.

An amicus curiae brief was submitted by Norman F. Webb, Salem, on behalf of Oregon Assn. of Realtors.

TONGUE, Justice.

This is an action by a real estate broker 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 you the said commission just the same as if a sale had actually been consummated by you.'

The listing agreement authorized plaintiff to sell defendant's property for the price of $200,000, 'net to owner.' Defendant terminated the agreement prior to its expiration date. Plaintiff's complaint demanded payment of $20,000 as a commission.

The trial court held that the provision for payment of a full commission on withdrawal of authority to sell was a penalty and refused to enforce it, based upon finding that plaintiff did not prove that he would have been able to sell the property for $200,000 'net to owner' so as to earn his commission, but for defendant's breach of the agreement, and that 'to use a prospective commission as a measure of damages would indulge in pure speculation.' Because of the breach of the agreement, however, and because plaintiff offered no proof of actual damages, the trial court awarded nominal damages of $1, plus $4,330 in attorney fees.

Plaintiff appeals, contending that the trial court erred in holding the 'stipulated sum' to be a penalty, and also erred in denying recovery for a 'debt due and owing.' We affirm because we agree with the finding and conclusion of the trial court that the provision of the listing agreement for payment of a full commission on wrongful termination of the agreement was a penalty under the facts and circumstances of this case, although not for the precise reasons given by the trial court.

While the courts cannot create new contract obligations, the courts can, in the interest of public policy, excuse the performance of contractual obligations which are contrary to the public interests. 5 Williston, Contracts (3d ed.) 639, § 769. See also 5 Corbin, Contracts 320, 334, §§ 1055, 1057. Thus, as stated in 1 Restatement 552, Contracts § 339, comment a:

'Punishment of a promisor for breach, without regard to the extent of the harm that he has caused, is an unjust and unnecessary remedy. Therefore, the power of parties to make an enforceable contract for the determination of damages in advance is limited as stated in this Section.'

One reason for this result, as stated in 5 Williston, Supra, 703, § 780, is that:

'* * * experience has shown that dangerous advantage is likely to be taken of a party to a contract if he is allowed to stipulate in advance as a part of the contract that he will pay damages of any amount which the agreement may name, if he breaches the contract.'

On the other hand, much of the hostility formerly expressed by courts to provisions for liquidated damages has moderated in recent years as the courts have come to recognize that contract provisions for liquidated damages, under proper limitations, can save the time of the courts, as well as the parties, and also reduce the expense of litigation. Cf. Secord v. Portland Shopping News et al., 126 Or. 218, 225, 269 P. 228 (1928); and Medak v. Hekimian, 241 Or. 38, 45, 404 P.2d 203 (1965).

Perhaps the most widely accepted modern statement of the requirements which must be satisfied for a valid and enforceable contract provision for liquidated damages is set forth in 1 Restatement, Supra, 552, § 339(1), as follows:

'An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless '(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and

'(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.'

In Medak v. Hekimian, Supra at 44, 404 P.2d 203, this court cited § 339 with approval, although stating these two requirements in somewhat different terms. See also Harty v. Bye, 258 Or. 398, 483 P.2d 458 (1971).

In applying the first of these requirements the primary consideration is one of 'just compensation.' ¹ See 1 Restatement, Supra, § 339, comments a and b. See also 5 Williston, Supra, 689, § 778. In deciding whether 'the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach,' there is considerable conflict among the authorities as to whether, and, if so, how, the intention of the parties can have any importance. According to 1 Restatement, Supra, 553, § 339, comment b, 'neither the intention of the parties nor their expression of intention is the governing consideration.' Indeed, most modern authorities appear to agree that whether the parties intend a contract provision to be one for liquidated damages, rather than a penalty is not controlling. See 5 Williston, Supra, 682, § 777, and 5 Corbin, Supra, 340, § 1058, and cases cited therein. But see Krausse v. Greenfield, 61 Or. 502, 512, 123 P. 392 (1912); Strode v. Smith, 66 Or. 163, 175, 131 P. 1032 (1913); Alvord v. Banfield, 85 Or. 49, 57, 166 P. 549 (1917). Cf. Medak v. Hekimian, Supra, 241 Or. at 44, 404 P.2d 203.

It may be, however, as stated in 5 Williston, Supra, 693, § 778, that:

'The only sense in which the intention of the parties can have any meaning * * * is * * * to name a sum that is fixed in good faith as the equivalent of the injury which will probably be caused by the breach of the contract, rather than an attempt to secure performance by a provision for an excessive payment.'

This is consistent with the statement in 5 Corbin, Supra, 345--346, § 1059, that there must be a 'genuine pre-estimate of injury' as of the time when the contract was made, and that it is sufficient if at that time parties in an equal bargaining position make an honest and good faith effort to arrive at such an estimate. This is also consistent with the requirement of 1 Restatement, Supra, 552, § 339(1)(a) that there must be a 'reasonable forecast of just compensation for the harm that is caused by the breach.' See also McCormick, Damages 607, § 149 (1935).

The authorities also are not in complete accord on the question of the effect of evidence that despite such a good faith 'pre-estimate' or 'forecast' of such damages, the parties were mistaken in that no actual damages resulted from the breach, or the amount of the actual damages was much less than the amount of the liquidated damages. There is general agreement, however, with the proposition that a contract provision for liquidated damages will not be declared to be a penalty because the stipulated amount to be paid as damages is more than the amount of the actual damages unless the stipulated amount is 'grossly disproportionate,' or has no 'reasonable relation' to the probable loss, as anticipated at the time of the contract. McCormick, Supra, 606, 623, §§ 149, 157; 5 Williston, Supra, 703, § 780; 5 Corbin, Supra, 362, § 1063. See also Hull v. Angus, 60 Or. 95, 107, 118 P. 284 (1911); Learned v. Holbrook, 87 Or. 576, 585, 170 P. 530, 171 P. 222 (1918); Secord v. Portland Shopping News et al., Supra, 126 Or. at 223--224, 269 P. 228; Elec. Prod. Corp. v. Ziegler Stores, 141 Or. 117, 125, 10 P.2d 910, 15 P.2d 1078 (1932); Dairy Coop. Ass'n. v. Brandes Cry., 147 Or. 488, 500--501, 30 P.2d 338 (1934); and Medak v. Hekimian, Supra, 241 Or., at 45--46, 404 P.2d 203. In such an event the courts will refuse to enforce the contract provision because 'the amount so fixed was not a reasonable forecast of just compensation,' and will thus leave the plaintiff to proof of his actual damages, to paraphrase 1 Restatement, Supra, 552, § 339(1)(a). See also 5 Williston, Supra, 668, § 776.

However, as stated in 5 Corbin, Supra, 347, § 1059, although the reasonableness of the 'forecast' or 'pre-estimate' is to be determined as of the date of the contract, '(h)indsight sometimes demonstrates the error in foresight.' Another reason given for this same result is that the excessive size of the sum agreed upon, in relation to the actual damages, may tend to show that the parties did not make the required bona fide effort to arrive at a reasonable forecast or pre-estimate of the expected possible damages. 5 Williston, Supra, 725--26 § 783. For these reasons, it is held in some jurisdictions, including Oregon, that the defendant may offer evidence that plaintiff suffered no actual damages or that the amount of the liquidated damages would be 'grossly disproportionate' or without 'reasonable relation' to the amount of the actual damages. See 5 Corbin, Supra, 364--367, § 1063. See also 1 Restatement, Supra, 553 § 339, comment c, and Sweet, Liquidated Damages in California, 60 Calif.L.Rev. 84, 138 (1972).

Thus, in Harty v. Bye, Supra, we refused to enforce a contract provision for liquidated damages for delay in the drilling of a well beyond a date specified in the contract because of evidence that no actual damages were suffered as a result of that breach of the contract. See also Hull v. Angus, Supra, 60 Or. at 104--107, 118 P. 284. ² In such an event, however, the defendant ordinarily has the burden of proof to establish that contention. McCormick, Supra, 623, § 157. See also Learned v. Holbrook, Supra, 87 Or. at 588, 170 P. 530, 171 P. 222. But see Alvord v. Banfield, Supra...