Our Real Estate Solutions Group has tried and litigated dozens of cases where real estate brokers were accused of not disclosing dual agency, and so clients have often asked us if there are some common “take away” points.  Indeed there are, and here are the top five lessons that we have learned from our courtroom experience.

1. To Avoid Civil Liability in a Commercial Transaction Case, Must the Disclosure Be in Writing?  

For the purpose of documenting proof of actual disclosure, as well as to comply with the standards of responsibility of many professional organizations, it is a prudent policy for dual agency to be disclosed in writing.  That’s why some commercial contract forms are patterned after residential forms such as C.A.R. Form AD (containing a specific paragraph on dual agency which is to be separately signed and initialed).  But, more often than one might expect, it seems that all of the required initials are not secured, usually by oversight.  Also, commercial brokers also commonly find their transactions governed by contracts drafted by counsel for the buyers and sellers who tailor their own agreements and don’t address such broker issues. So, if either of these situations occurs, is there liability for a failure to make the disclosure in writing?  Probably not, for several reasons.

First, there are no reported decisions in California holding that in a commercial transaction the disclosure must be in writing to avoid civil liability.[1]  If there is solid proof that the disclosure was actually made, the absence of a writing can be overcome.  Juries are asked to determine whether there was a material fact omitted and, in our experience, to them the issue of whether or not that fact was communicated in writing is often secondary.  Indeed, a plaintiff can even lose credibility if he or she contends that their decision to proceed with the transaction would truly have been different if an admittedly disclosed fact had been put in writing.

Second, in actual practice there are functional substitutes for a contract disclosure.  One of them is the execution by a party of a closing statement that shows a broker receiving both sides of the commission.  Another is a buyer’s history of approving dual agency situations in other transactions.  With such a history, a genuine issue is thus raised as to whether a written disclosure of dual agency would have altered the buyer’s customary decision to proceed.

2. Disclosure to Whom? 

In commercial transactions, disclosures are often made to the managing member or other designated representative of a purchasing LLC.  Sometimes, however, a question arises as to whether or not that is sufficient for purposes of a disclosure to the other members.  While most Operating Agreements (and California case law as well) provide that disclosure to a manager is effective as to other members, that process may not be fair or effective if there is either apparent self-dealing or potential conflicts of interest between a managing member and others holding an interest in the LLC.  Some examples we have litigated recently are where the broker privately loaned the managing member his capital contribution, or where the managing member had solicited a kickback from the broker, suggesting that it might not be reasonable to trust the manager to pass along material information to his co-members.[2]

3. What If a Broker Is Wearing the Additional Hat of a Party as Well? 

California law permits a broker to act as a dual agent and at the same time to act as a principal, provided that there is full disclosure[3] but the wording of the disclosure can be critical.  We determined in one of our recent cases that a broker may well face an uphill battle if the wording is merely “one of the principals or the seller is a licensed real estate agent,” without disclosing that his license is being used in that very transaction.

4. If There Is Liability, Is the Commission Forfeited? 

Damages in California are those proximately caused by broker misconduct, but case law suggests that forfeiture of the commission is not necessarily such an item of damage.[4]  This determination could be particularly important where an insurance policy is involved, because many carriers refuse to cover such a loss in commercial transactions where the commission amount could be very substantial.

5. One Common Sense Test Seems To Be Whether the Broker Could Functionally Carry Out Its Duties.

Where the broker represents both sides of the deal and is also a seller, full disclosure is one thing but whether the broker can actually perform the tasks required is a wholly different question.  That is, even if there is full written disclosure, the conflicting duties may render adequate representation practically impossible and, hence, spell civil liability. Precisely with this concern in mind, many of our broker clients delegate the competing representations to separate individual sales agents to allow the respective agents to each carry out their duties for respective clients.  But where the broker is the same sales person representing both parties, and especially where that agent is also a principal, the situation may well not permit client joint representation consistent with the duties of loyalty.  For example, how can the agent who is himself the seller properly advise the buyer on responding to a counter-offer, or press vigorously as needed to extend an escrow, or even counsel a buyer on contingency removal tactics?

In sum, dual agency is a common factor in many commercial transactions, and it is usually managed very professionally.  But when deals go awry, especially where the buyer client is less sophisticated, then serious questions arise as to conflicting loyalties.  In our experience, they predictably become key features of ensuing litigation.

For further information, please feel free to contact William H. G. Norman @ wnorman@cwclaw.com.

[1] Some other states do seem to require a written disclosure, but substantial open questions remain as to whether a failure to supply one triggers civil liability.  Furthermore, a failure to disclose in writing may not cause any damages where there is actual knowledge of dual agency on the part of the complaining party.

[2] Restatement (Third) Of Agency § 5.04 (2006) provides that an agent’s knowledge will not be imputed to the principal if:  (1) the agent and the third party act in collusion against the principal; or (2) the third party knows that the agent will not convey the information to the principal.  A third party who deals with a principal through an agent, knowing or having reason to know that the agent acts adversely to the principal, may not be dealing in good faith for this purpose.

[3] “It is not illegal per se  for an agent to serve in a dual capacity as long as both principals have full knowledge and give knowing consent to the relationship.  An agent cannot act in a representative capacity for more than one party to the transaction without the full knowledge and knowing consent of all parties.” 2 Miller & Starr, Cal. Real Estate (3d), Agency 3.13.  California Business & Professions Code Section 10176 permits the suspension or revocation of a real estate license when a licensee is found guilty of “acting for more than one party in a transaction without the knowledge or consent of all parties thereto.”  Bus. & Prof. Code,  §10176(d).

[4] Specifically, Section 3333 of the California Civil Code states that the measure of damages for fiduciary fraud “is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”  In one appellate decision, the court limited the defrauded principal’s recover the extent of the actual financial injury and not the benefit of his bargain.  Overgaard v. Johnson. (1977) 68 Cal. App. 3d 821, 823-24.  On the other hand, some cases appear to measure damages based on the the plaintiff’s expected “benefit of the bargain.” Pepitone v. Russo (1976) 64 Cal. App. 3d 685, 689.