Court Opinion

ID: 9944316
Source: CourtListenerOpinion
Date Created: 2024-02-26 16:39:10.202718+00
Date Added: 2024-06-11T13:54:15.849245
License: Public Domain

I dissent. The majority never reach the question whether the "commission-on-withdrawal" clause in the instant case was an invalid penalty clause or an enforceable liquidated damages clause. (See Civ. Code, §§ 1670, 1671.) Instead, the majority neatly sidestep this issue by labelling the brokerage contract as one contemplating an "alternative performance" by the owner in the event he exercises his "true option" to withdraw the property from sale. To the contrary, the issue in this case cannot be avoided by the facile use of labels — otherwise any illegal penalty could be disguised as a "true option" by the promisor to pay a substantial sum for the privilege of breaking his contract. When we examine the essential nature of the exclusive brokerage contract, it becomes patently obvious that defendant promised
to afford plaintiff broker the exclusive and irrevocable right to sell the property during a specified period, that defendantbreached that promise by withdrawing the property from sale, that the contract itself specifies the damages for that breach, and that accordingly we must determine whether or not the damage provision was a penalty or liquidated damages provision.
By the express terms of the brokerage contract, defendant gave to plaintiff "the exclusive and irrevocable right to sell or exchange" the subject property for the period from April 26, 1970, to November 25, 1970. (Italics added.) The proposed sales price was $85,000, and defendant agreed to pay plaintiff the following "compensation"; "Six % of the selling price if the property is sold during the term hereof, or any extension thereof, by Agent, on the terms herein set forth or any other price and terms I may accept, or through any other person, or by me, or six % of the price shown in 3(a) [the $85,000 sales price], if said property is withdrawn from sale, transferred, conveyed, leased without consent of Agent, or made unmarketable by my voluntary act during the term hereof or any extension thereof." (Italics added.)
Nowhere in the contract is any mention made of any "option" given to defendant to withdraw the property from sale. Instead, the language of the contract makes it apparent that a withdrawal of the property without the broker's consent would constitute a breach of the owner's promise to grant an irrevocable right to sell the property during the specified period.1 *Page 975 
Indeed, it seems wholly naive to assume, as the majority do, that a property owner would have bargained for the "option" of withdrawing the property from sale, given the consequences of exercising that option, namely, the payment of the full
commission which would have been payable to the broker had he sold the property for the original $85,000 asking price.
The majority suggest that defendant was given a "realistic and rational choice" under the contract to withdraw the property from sale, and that the contract was "freely negotiated" at "arm's length." Yet as the majority acknowledge in the first sentence of their opinion, the "commission-on-withdrawal" provision is a "familiar" one; in fact, the provision probably is contained in every exclusive brokerage contract in this state.2 In other words, no "true option" or "rational choice" is involved in this case — owners seeking to sell their property under an exclusive contract have no practical alternative but to agree to the "commission-on-withdrawal" provision.
It is true that in 1892 this court held, in a brief, one paragraph analysis of the issue, that the "commission-on-withdrawal" provision is not a damages provision but instead merely specifies the amount to be paid the broker in the event the owner exercises his "right" to withdraw the property from sale. (Maze v. Gordon, 96 Cal. 61, 66-67 [30 P. 962].) Moreover, subsequent Court of Appeal cases have followed the Maze rule, albeit reluctantly. Thus, in Baumgartner v.Meek, 126 Cal.App.2d 505, 512 [272 P.2d 552], the court noted that "It is not for this court at this stage to defend or attack the [Maze] rationale. . . ." And in Never v. King, 276 Cal.App.2d 461, 478 [81 Cal.Rptr. 161], the court openly criticized the Maze and Baumgartner rationale, concluding, however, that it was "unnecessary to reexamine Baumgartner" since under the facts in Never the owner made no express promise to pay a commission on withdrawal. Certainly, this court should not hesitate to reexamine Maze in view of the hesitancy of the Court of Appeal to apply its holding.
Both the court in Baumgartner, and the majority herein fail to discuss another line of cases holding that an agreement to pay a broker a specified sum as "liquidated damages" in the event of a withdrawal of the *Page 976 
property from sale, or other prevention of the broker's performance, is void as constituting an unlawful penalty under section 1670, at least in the absence of pleading and proof that the transaction fell within the exception contained in section1671 (See Robert Marsh Co., Inc. v. Tremper, 210 Cal. 572
[292 P. 950]; Mclnerney v. Mack, 34 Cal.App. 153
[166 P. 867]; Glazer v. Hanson, 98 Cal.App. 53 [276 P. 607]; see also Sweet, Liquidated Damages in California, 60 Cal.L.Rev. 84, 110-111.) The foregoing cases have never been overruled or disapproved and, I submit, their rationale is irreconcilable with the holding in Baumgartner and the instant case.
Thus, in Tremper, supra, a broker was employed to complete an exchange transaction between two principals; he was to be paid $1,000 for his services or, if the parties failed to carry out the exchange, the same amount "as liquidated damages for time, trouble and expense incurred" by the broker. The exchange fell through and the broker sought to recover $1,000 as "liquidated damages" due under the contract. The court refused such recovery, stating its rationale as follows (pp. 575-576): "The law is that the `liquidated damage' clause is void unless it is made to appear that the case comes within the exception provided by section 1671, supra. The burden rests upon the person who seeks to bring himself within the exception. Upon the face of the complaint and agreement itself the provision which provides for the payment of liquidated damages is void. [¶] The items which respondent [broker] specifically names as constituting the basis of its damages, to wit, `time, trouble and expenses incurred' in bringing about the exchange are commonplace items which enter into every contract for services and they have never been held to be impracticable or extremely difficult of determination, but, on the contrary, have been held by numerous decisions to be readily computable. [Citation.]"
The contract in Tremper called for the payment of "liquidated damages," whereas the contracts in Maze, Baumgartner and the instant case refer to payment of a "commission" or "compensation" upon the owner's withdrawal of the property from sale. Moreover, both Maze and Baumgartner assumed that since defendant-owner had a "right" to withdraw the property on payment of the specified sum, the broker's claim to that sum was not based upon breach of contract. The cases uniformly hold, however, that in determining the application of section 1670 to a particular contractual arrangement we must look beyond the form of the transaction and the stipulations of the parties. As we recently stated in Garrett v. Coast Southern Fed. Sav. Loan Assn.,9 Cal.3d 731, 737 [108 Cal.Rptr. 845, 511 P.2d 1197], "We have consistently ignored form and sought *Page 977 
out the substance of arrangements which purport to legitimate penalties and forfeitures. [Citations.]" (See also Robert Marsh Co., Inc. v. Tremper, supra, 210 Cal. 572, 576 [the "mere stipulations" of the contract, such as use of the phrase "liquidated damages," are not controlling].)
In Garrett, a case involving late charges under installment loan contracts, we analyzed and rejected a similar argument to the effect that the stipulated payment was merely part of a contract for alternative performance. We stated (pp. 737-738) inGarrett that "The mere fact that an agreement may be construed . . . to vest in one party an option to perform in a manner which, if it were not so construed, would result in a penalty does not validate the agreement. [Fn. omitted.] To so hold would be to condone a result which, although directly prohibited by the Legislature, may nevertheless be indirectly accomplished through the imagination of inventive minds. . . . [¶] We recognize, of course, the validity of provisions varying the acceptable performance under a contract upon the happening of a contingency.We cannot, however, so subvert the substance of a contract toform that we lose sight of the bargained-for performance. Thus, when it is manifest that a contract expressed to be performed in the alternative is in fact a contract contemplating but a single, definite performance with an additional charge contingent on the breach of that performance, the provision cannot escape examination in light of pertinent rules relative to the liquidation of damages. [Citations.]" (Italics added.) InGarrett, we concluded that the only reasonable interpretation of the late charge clause was that it was intended to provide for damages for breach in failing to make timely loan payments. Accordingly, we held that the provisions of sections 1670 and 1671 applied.3
As in Garrett, I would conclude that the only reasonable interpretation of the instant "commission upon withdrawal" clause is that it was intended to compensate the broker for damages arising from the owner's breach of the exclusive brokerage contract. Obviously, the primary purpose underlying such a contract is to afford the broker an exclusive and temporarily irrevocable right to sell the property for a specified period, unhampered by competition from other brokers and unhindered by interference from the owner. The owner's unauthorized act of withdrawing the property from sale totally defeats the foregoing purpose and, unquestionably, constitutes a breach of contract for which appropriate damages may *Page 978 
be recovered. Any attempt, however, to specify the amount of those damages in advance of that breach, whether termed a "commission," "liquidated damages" or otherwise, must meet the requirements of sections 1670 and 1671.
I turn, therefore, to the question whether the instant provision is a "penalty" or a "liquidated damages" provision. As we indicated in Garrett, supra, a penalty provision usually operates to compel the performance of an act and becomes effective only in the event of a default in that performance, upon which a forfeiture is compelled without regard to the damages which may actually flow from the failure to perform. ( 9 Cal. 3d at p. 739.) On the other hand, a liquidated damages provision must represent a reasonable endeavor by the parties to assess the fair average compensation for a loss resulting from breach; the fixing of actual damages for a breach must have been "impracticable" or "extremely difficult." (Id., at pp. 738-739.) In determining the issue, we must do so from the position of the parties at the time the contract was entered into; the party seeking to rely upon a liquidated damages provision bears the burden of pleading and proving the validity thereof under section 1671 (Id., at p. 738; accord, BetterFood Mkts. v. Amer. Dist. Teleg. Co., 40 Cal.2d 179, 185 [253 P.2d 10, 42 A.L.R.2d 580].)
Judged on the basis of the foregoing rules, the "commission-upon-withdrawal" clause bears close resemblance to an ordinary penalty provision. As we have seen, in practical effect that clause operates to enforce the owner's primary promise to afford the broker an exclusive and irrevocable right to sell the subject property during the specified period; the clause only becomes effective upon the owner's breach of that promise. Moreover, the specified damages (namely, a percentage of the original asking price for the property) may bear little or no relation to the actual damages suffered by the broker upon prevention of his performance by the owner.
The specified damages could, of course, approximate actual damages in a situation in which the broker had negotiated a sale of the property at the original asking price, for in that situation the broker's actual loss would be the commission he otherwise would have earned.4 But the "commission-upon-withdrawal" clause purports to require payment of the full commission whether or not a sale had been arranged. In that regard, the clause *Page 979 
seemingly could not represent a reasonable effort to estimate the fair average compensation as required in Garrett. Moreover, as indicated in prior cases, ordinarily valuation of a broker's services is not so impracticable or extremely difficult as to justify use of a specified damages provision. (Robert Marsh Co., Inc. v. Tremper, supra, 210 Cal. 572, 576; McInerney v.Mack, supra, 34 Cal.App. 153, 157-158; Glazer v. Hanson,supra, 98 Cal.App. 53, 60.)
However, I would leave open the question whether a "commission-upon-withdrawal" clause can ever be sustained as a valid liquidated damages provision under section 1671 (We adopted a similar approach in Garrett, supra, 9 Cal.3d at p. 741.) It is possible that on a proper showing we might conclude that a particular clause represents a reasonable effort by the parties to fix a fair compensation to the broker in the event the owner withdraws the property from sale. In the instant case, however, plaintiff failed to plead or prove facts which would show the applicability of section 1671, despite defendant's reliance in her answer upon the defense of unlawful penalty. Since the burden of proof was upon plaintiff in this regard, the trial court erred in awarding to him the damages specified in the brokerage contract.
Although I would hold that the contractual provision is, therefore, unenforceable in this case, plaintiff had the opportunity to establish actual damages arising from defendant's breach, namely, the reasonable value of plaintiff's services performed to the date the property was withdrawn from sale.5 At trial, however, plaintiff described the nature of his services, but he made no attempt to prove by expert testimony or otherwise, the reasonable value thereof, and the trial court made no finding on that issue.
I would reverse the judgment.
Tobriner, J., concurred.
1 The trial court found that plaintiff had made diligent efforts to sell the property and that defendant without justification withdrew the property from sale, "in directviolation of said exclusive sales contract." (Italics added.) Accordingly, the trial court awarded plaintiff as his "commission" the sum of $5,100, representing 6 percent of the proposed sales price of $85,000, "as provided for in said contract in the event of a breach of said exclusive sales contract. . . . As a result of the foregoing, plaintiff has been damaged in the sum of $5,100.00. . . ." (Italics added.)
2 "The standard forms of exclusive right to sell listingsin common use provide . . . that the seller's withdrawal of the property from the market entitles the broker to his full commission immediately, regardless of whether he has procured a buyer before the time of the removal." (Italics added; Cal. Real Estate Transactions (Cont. Ed.Bar) § 5.18, p. 137.) As the majority herein point out, "The agreement . . . [was] a printed form contract drafted by the California Real Estate Association. . . ." (Ante. p. 966.)
3 See also Restatement of Contracts, section 339, comment f, to the effect that attempts to disguise a penalty provision in the form of a provision for alternative performance will not be enforced if it is clear that the promise under scrutiny was exacted solely to stimulate performance of a promise to do something else.
4 See Never v. King, supra, 276 Cal.App.2d 461, 478, and footnote 3, ante; see also McInerney v. Mack, supra,34 Cal.App. 153, 157-158, and Glazer v. Hanson, supra, 98 Cal.App. 53, 60, suggesting that if the property is actually sold or exchanged, the broker's ordinary commission may properly represent the measure of his damages.
5 As stated in Garrett, supra, "We do not hold herein that merely because the late charge provision is void and thus cannot be used in determining the lender's damages, the borrower remains unscathed. He remains liable for the actual damages resulting from his default." (9 Cal.3d at pp. 740-741.)
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