The Importance of Following the Rules

June 11, 2013

Contracts are usually governed by the laws of the state that it was created in. Parties to a contract may create a contract that go against some aspects applicable laws but there are limitations. Laws and regulations are created to protect people, therefore, if you plan to create an agreement that goes against a law it is important that it is clear that the party who loses protection from the law understands that they are losing a protection and agree to it. This often means that such a contract needs to be in writing and signed at least by the party waiving his or her rights.

Take for example the case of Phillippe v. Shapell Industries. In this case, David Phillippe (Phillippe) is a real estate broker licensed by the State of California and Shapell Industries, Inc. (Shapell) is a corporation engaged in the construction of residential housing tracts and periodically purchases land for such construction. Shapell is also a licensed California real estate broker. Shapell reached out to Phillippe for his help in finding suitable plots of land. They had an oral agreement that Shapell would pay him a broker's commission for any land submitted by Phillippe and purchased by Shapell and that this commission would be stated in any written offer made by Shapell to a seller. Phillippe found multiple plots of land that ultimately were not acquired by Shapell because they did not fit Shapell's needs. One piece of property,known as the Great Lakes property, was of interest to Shapell but due to the zoning restrictions Shapell could not use the property when it was shown to it by Phillippe. Later the property was rezoned and Shapell and the property's owner entered direct negotiations for the sale of the property. Shapell ultimately purchased the property but refused to pay Phillippe his commission and this led Phillippe to bring this suit against Shapell.

The issue in is case is whether a broker may be paid for services acquired under an unenforceable contract. In California, at the time of this case, most real estate agreement, including broker commission had to be in writing to be a valid, enforceable contract. The agreement between Shapell and Phillippe was orally agreed to and never memorialized in writing, therefore the court found the agreement to be unenforceable. Phillippe tried to argue that because he did work, finding the Great Lakes property, because of the oral agreement he should still be compensated the agreed amount for his services. The court, however, disagreed. The court decided that based on the current laws and past cases, that because Shapell and Phillippe were both brokers, there is an expectation that they are aware of laws that effect their profession. Commission contracts had long been required to be in writing. The court found Phillippe did nothing more than perform services pursuant to an invalid agreement. Phillippe's reliance on the oral contract was not reasonable, and he therefore suffered no injury or which he should be compensated.

Phillippe knew that the contract should have been written down but chose to continue with an oral agreement anyway and ultimately this decision cost him time and money. When making an agreement with others, a written agreement is usually best because it gives each person something to reference if things go wrong. If you have questions about the validity of a contract an attorney can review your circumstances and discuss your options with you. If you are in the Sacramento area, please contact our office.