California's Statute of Frauds-Get It In Writing

In California, the Statute of Frauds in Civil Code § 1624(a) requires many types of contracts to be in writing and signed by the party to be charged, or the contracts are invalid. 

Such contracts can include:

1. An agreement that by its terms is not to be performed within one year from the making thereof.

2. A special promise to answer for the debt, default or miscarriage of another.

3. An agreement for a lease for a longer period than one year, or for the sale of real property or an interest therein.

4. An agreement authorizing or employing an agent, broker or any other person to purchase or sell real estate or to lease real estate for a longer period than one year.

5. An agreement that by its terms is not to be performed during the lifetime of the promisor.

6. An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property purchased.

7. A contract, promise, undertaking or commitment to loan money or extend credit in an amount greater than $100,000, not primarily for personal, family or household purposes, made by a person engaged in the business of lending or arranging for the lending of money or extending credit.

In the case of Westside Estate Agency, Inc. v. Randall, the broker lost a commission of $925,000 because he agreed to help a friend buy a $5 million Bel Air estate, but the deal was closed by another broker on different terms.  When the first broker sued his friend for the commission, the trial court dismissed the lawsuit for noncompliance with the statute of frauds because he did not have an agreement in writing, and the court of appeal affirmed.

If the statute applies, its bar against relief is absolute, and applies no matter how the unhappy broker styles his claim to recover compensation or a commission, and generally no recovery will be allowed on a theory of quantum meruit, unjust enrichment, or equitable estoppel.

However, the statute does not apply to all actions involving brokers, including:

1. An action to recover for a broker's performance of services other than and not incidental to the sale or purchase of real estate or procuring, introducing or finding a purchaser or seller of real estate;

2. An action by a principal against his broker to disgorge a commission already paid on the ground that the broker breached his fiduciary duty and obtained a secret profit; and

3. An action between brokers to divide a jointly earned commission.

There are three narrow exceptions in which the statute will not be deemed a bar to a broker's action to recover compensation or a commission if there is no written agreement:

1. A broker has a limited right to estop his principal from asserting the statute to "prevent either unconscionable injury or unjust enrichment", and a broker offering to buy or sell real estate may assert estoppel only if the principal has engaged in "actual fraud".

2. The broker's principal and the other party have executed a written and binding agreement for the purchase of real estate, the written agreement specifies that the broker will receive a commission, and the broker's principal cancels the written agreement.  In this case, the broker may sue because either (a) the principal breached an implied promise to complete the transaction so the broker could recover the commission, or (b) the broker is a third party beneficiary of the written agreement between the principal and the third party to the transaction.

3. The principal subsequently ratifies the agreement, presumably an alleged oral one, in a writing.

Performance of an oral contract may estop the assertion of the statute of frauds because the performance provides confirmation of the agreement, and to avoid an unconscionable injury or unjust enrichment.

It is the policy in California courts to construe the statute of frauds restrictively, and unless the statute clearly requires an agreement or authority to be in writing, the statute is not to be applied.

Lessons:

1. If an agreement relates to money, get it in writing, because it is likely that the person owing the money will dispute the debt, and

2. If you do not follow Lesson 1, and the debtor refuses to pay based on the statute of frauds, consult an attorney to see if you can fashion a winning argument that supports enforcement of the oral agreement or an award of the commission or compensation despite the statute of frauds.