Articles

COMPENSATION TIP: GET IT IN WRITING OR ELSE!

Marshall H. Tanick
(email)
Mansfield, Tanick & Cohen, P.A.
1700 U. S. Bank Plaza South
Minneapolis, MN 55402
Tel: 800-401-6194
FAX: 612.339.3161

An oral contract isn't worth the paper it is written on.
Samuel Goldwyn, founder of
Metro-Goldwyn-Mayer (MGM) Movie Studio.

The movie mogul who dominated Hollywood during its salad days was noted for his fractional phrases. But his observation about the value of oral agreements, especially those relating to compensation, was well put.

Although oral contracts generally are legally binding, they are fraught with frailties. The practical problems of proving the existence and terms of such arrangements often are daunting. The legal hurdles that must be overcome to establish an oral contract can be even more formidable, including the Statute of Frauds for some agreements, the parole evidence rule barring oral terms that are inconsistent with written documentation, and other restrictions.

The limitations inherent in oral arrangements separate from or as part of written contracts, were reflected in several recent rulings. Claimants in a pair of rulings of the Minnesota Court of Appeals probably felt that Goldwyn's observation was awkward but accurate, while federal oral contract advocates encountered mixed results in the 8th Circuit.

Costly Commission Case

A real estate agent suffered a costly defeat when seeking a commission after an agreement to sell 420 acres of undeveloped property in Sherburne County expired. In Douglas v. Schuette, 2000 WL 274884 (Minn. App. Feb. 29, 2000), an agent entered into a listing agreement with a couple to sell the land. The agent obtained a buyer, who signed a purchase agreement with a closing for later in the year. Meantime, the real estate agent's license expired and was not renewed. The prospective buyer, who intended to develop the land with the agent, questioned the agent's business practices and backed away from the deal, canceling the purchase agreement. Then the owners of the property entered into a listing agreement with another real estate agency. The recalcitrant buyer re-emerged, singed a new purchase agreement through the new real estate agent, and the property was closed and sold to her under the successor purchase agreement.

The first agent then sued for the commission for the sale. The Sherburne County District Court disagreed, granted summary judgment to the sellers of the property and kicked the case out of court, and imposed a litigation sanction upon the claimant real estate agency for $18,500 to boot.

The Court of Appeals affirmed dismissal of the lawsuit and the sanctions. The original listing agreement entitled the agent to a commission if the property was sold to a buyer to whom the agent showed the property during the listing period or, after the listing expired, a person whose name was placed on a "protected list" or override clause. Since the buyer procured by the first agent never closed under his auspices, the agent was not entitled to a commission unless the buyer was identified in the override clause, which protects real estate agents from sales to buyers they procure if the sale is made after the listing agreement expires.

The agent did not identify the buyer in writing on a protected list, contrary to Minn. Stat. sec. 82.195 subd. 4, which requires that the identity of persons on a protected list be furnished within three days, "after the expiration of the listing agreement" in order to enforce an override clause. The court rejected the contention that the signed purchase agreement itself was a substitute for the protected list. It also rejected the "procuring-clause doctrine," reasoning that the terms of the purchase agreement were controlling. Since the agreement had expired and no protected list existed the original agent was not entitled to a commission, even though he was the one who actually attracted the individual who ultimately bought the property.

The commission claim also was defective because the agent's license had expired. Under Minn. Stat. Sec 82.33 subd. 1, a person must be "duly licensed" in order to be entitled to the collection of compensation" resulting from the sale of real estate. The expiration of the agent's license before the closing was fatal to his commission claim.

The court also upheld the sanction award under Minn. Stat. sec. 549.21, noting that the record clearly showed that the claimant "did not satisfy the terms of the listing agreement" or the override clause and was not exempt from the licensing requirement, coupled with the claimant having "inaccurately represented the law to the trial court." As a result, the agent not only was denied compensation for the sale that he helped bring about, but he had to foot the legal expenses for the owners in defending against the lawsuit.

Bonus Brouhaha

The manager of a restaurant in Marshall is not entitled to a bonus based upon profit from the sale of the business under the terms of the manager's employment agreement. In Noerenberg v. Carr, 2000 WL 249293 (Minn. App. March 7, 2000), the Court of Appeals upheld the determination of the Lyon County District Court of a nebulous term of the manager's employment contract with the restaurant.

The claimant, a manager of a Perkins restaurant in Marshall, signed an employment agreement that said she should receive a bonus based upon "net profits" of the business. After the restaurant was sold for $1,650,000, the new owner fired the manager, who then sued, claiming that she was entitled to a bonus from the proceeds of the sale of the restaurant. The former owner contended that the "net profits" clause was restricted to revenue "from the operation of the restaurant," and not from any sale of it.

Agreeing with the trial court, the Court of Appeals held that the bonus provision is restricted to income from normal operation of the business, not from the sale of the restaurant. Although the term "net profits" was ambiguous in isolation, the balance of the agreement reflected that the calculation of the bonus was to be based upon "the operation of the business and not with gains realized upon the sale of the business." This determination was based upon the nature of the relationship in which the manager was hired for a "staff position" and did not have any "equity interest" in the business. Additionally, the contract was framed in terms of yearly profits, a concept that does not contemplate the sale of a business. These circumstances led to the conclusion that the bonus was "based on operational profits," not the unanticipated sale of the facility.

Oral Arrangements

Meanwhile, the 8th Circuit Court of Appeals concurrently ruled upon a pair of oral employment arrangements, holding one enforceable and the other not binding. In Lindsey v. Jewels by Park Lane, Inc., 2000 WL 254336 (8th Cir. March 8, 2000), a prior employer sued sales representatives who left a jewelry company and began working for a competitor. Their new employer and its attorneys told the sales reps on several occasions that, "we'll take care of you," meaning their legal expenses would be paid and any judgment would be paid by their new company of they cooperated with the company's attorneys in the lawsuit. The former employer prevailed, prompting the sales reps to sue the subsequent employer for reimbursement of their legal expenses and indemnification of the judgment against them.

The 8th Circuit held that the oral agreement was enforceable, rejecting the contention that the sales reps did not give sufficient consideration. The court deemed their cooperation with their employer's defense, including gathering more than 100 affidavits, sufficient consideration to be legally enforceable, even though not in writing.

But an oral agreement by a group of seasonal employees against their employer for failing to abide by a repeated promise to hire them for "permanent" positions was held unenforceable in Clark v. Kellogg Co., 2000 WL 254332 (8th Cir. March 8, 2000). The employees claimed that they were repeatedly told that they would be hired on a "permanent" basis if they kept "their nose clean" and continued to work for an indefinite number of summer seasons. Affirming the District Court, the 8th Circuit held that the claimed offer of permanent employment was "far too indefinite" to be legally binding.

These cases reflect the accuracy of Goldwyn's awkward aphorism. They also reinforce the admonition that, when seeking compensation, the best advice is "get it in writing!"

Marshall H. Tanick is an attorney with the Twin Cities law firm of Mansfield, Tanick & Cohen, P.A. He is certified as a civil trial specialist by the Minnesota State Bar Association and represents employees and employers in a wide variety of workplace-related matters.

© 2000 Mansfield, Tanick & Cohen, P.A.