Blank v. Borden
115 Cal. Rptr. 31, 11 Cal. 3d 963, 524 P.2d 127 (2014)
Rule of Law:
A withdrawal-from-sale clause in an exclusive-right-to-sell real estate contract is not an unlawful penalty but rather a valid, enforceable provision for alternative performance, entitling the broker to the agreed-upon compensation if the owner removes the property from the market.
Facts:
- On April 26, 1970, Erica Borden entered into a written 'Exclusive Authorization and Right to Sell' agreement with real estate broker Ben Blank to sell her home for $85,000.
- The contract granted Blank the exclusive right to sell the property for a seven-month period.
- The agreement provided for a 6% commission to Blank if the property was sold.
- The contract also contained a 'withdrawal-from-sale' clause stipulating that if Borden withdrew the property from sale during the contract's term, Blank would be entitled to 6% of the listed price.
- Blank began diligent efforts to sell the property, including advertising it in newspapers and contacting potential buyers.
- On June 26, 1970, about two months into the contract period, Borden orally notified Blank that the property was no longer for sale and his services were terminated.
Procedural Posture:
- Ben Blank sued Erica Borden in a California trial court, seeking to recover the commission specified in the withdrawal-from-sale clause of their contract.
- The trial court found in favor of Blank, concluding that Borden had withdrawn the property from sale in violation of the contract.
- The trial court awarded Blank a judgment of $5,100, representing 6% of the $85,000 listing price, plus interest.
- Borden, the defendant, appealed the judgment to the California Supreme Court.
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Issue:
Does a clause in an exclusive-right-to-sell real estate contract, which requires the property owner to pay the broker a full commission if the property is withdrawn from sale during the contract term, constitute an unlawful penalty under California Civil Code sections 1670 and 1671?
Opinions:
Majority - Sullivan, J.
No. A withdrawal-from-sale clause in an exclusive brokerage contract is not a penalty but a provision for alternative performance. The court reasoned that the contract presents the owner with a 'true option' or a 'rational choice' rather than contemplating a breach of a single obligation. The owner can choose to allow the broker to continue efforts to sell the property or can terminate the broker's exclusive right by paying a specified sum. This arrangement is distinguished from an invalid penalty, where a charge is imposed to compel performance of a single promise and is triggered by a default. The court also held that calculating a broker's actual damages for a lost opportunity to sell would be highly speculative, making enforcement of the contract's terms more appropriate. Finally, the court declined to extend the rule from Fracasse v. Brent, which limits discharged attorneys to quantum meruit recovery, because the unique public policy considerations of the attorney-client relationship are not present in the broker-owner context.
Dissenting - Burke, J.
Yes. The withdrawal-from-sale clause is an unlawful penalty provision disguised as an 'alternative performance' contract. The dissent argues that the majority elevates form over substance, as the contract grants an 'irrevocable' right to sell, making the owner's withdrawal a breach of promise, not the exercise of an option. The clause is a standard, non-negotiated term in form contracts, meaning owners have no practical choice but to accept it. The dissent contends the provision is designed to specify damages for a breach, and as such, it must be evaluated under the rules for liquidated damages. Since the specified amount—the full commission—may bear no relation to the broker's actual damages suffered, it functions as a penalty intended to compel the owner's performance. The broker failed to plead and prove that the clause represented a reasonable estimate of potential damages, so it should be unenforceable.
Analysis:
This decision solidifies the enforceability of withdrawal-from-sale clauses, a standard feature of exclusive real estate listing agreements in California. By classifying the owner's withdrawal as the exercise of a 'true option' for alternative performance, the court sidestepped the strict requirements for validating a liquidated damages clause. This ruling provides significant financial protection for real estate brokers against sellers who change their minds, ensuring compensation for their lost opportunity. It firmly distinguishes brokerage contracts from attorney contingent fee agreements and other contracts where penalty clauses are scrutinized more harshly, thereby creating a durable precedent that favors upholding the express terms of such agreements.
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