Omission becomes deceit

Many brokers erroneously believe they are legally compelled to use forms published by their trade union. However, the Department of Real Estate (DRE) clearly states and enforces the policy that seller’s agents, under their fiduciary duty owed to the sellers they represent, need to present all offers received regardless of the form on which the offer is written. [See “Being an agent means never having to say you’re sorry,” DRE Real Estate Bulletin, Fall 2001, Page 12]

Failure to present an offer denies the seller the opportunity to weigh all offers their agent receives and to better understand buyer demand.

This failure to present an offer – written on any form – is essentially an affirmative representation to the seller the offer does not exist. Here, omission becomes deceit, an offense punishable by the DRE.

Consider a buyer’s agent who locates a property satisfying the buyer’s requirements. The buyer’s agent prepares an offer for the buyer to sign and deliver to the seller’s agent. The offer is written on a form with provisions in compliance with California law, but is not published by the seller’s agent’s trade union, the California Association of Realtors® (CAR).

The seller’s agent, generally unfamiliar with the form the offer is written on and unwilling to read and review it, does not submit the offer to the seller. The seller’s agent advises the buyer’s agent that if they want the offer submitted it needs to be written up on the trade union’s “standard” form.

In the interim, the seller’s agent receives an offer from another equally qualified buyer. The offer, written on a form published by the trade union and prepared by a fellow union member, contains terms of purchase which are different than the terms of the first offer the seller’s agent did not submit to the seller. The offer written on the trade union form is submitted to the seller, who accepts.

Later, the seller discovers the existence of the prior offer that was deliberately withheld  by the seller’s agent. The seller had no idea a competing offer existed.

Here, the seller’s agent breached their fiduciary duty owed to their client since they failed to advise their client, the seller, of the existence of an offer. The offer was never submitted to the seller for acceptance or rejection, fundamental to the very basic function of real estate practice and integral to the seller’s agent’s representation of the seller. Furthermore, the conduct of the seller’s agent is an offense reportable to the DRE who may take disciplinary action against the seller’s agent – and the seller’s agent’s broker, if warranted.

A broker or agent may not exercise personal discretion in determining whether to submit an offer, oral or written (or be concerned about the form it is written on), to the seller they have undertaken to represent.

Failure to present all offers, when received, is comparable to an affirmative representation to the seller that the offer to purchase does not exist. The failure denies the seller the opportunity to consider and weigh all offers the agent has received, and better understand buyer demand in the market. [Simone v. McKee (1956) 142 CA2d 307]

As stated succinctly in the oft-cited real estate digest, Miller and Starr, “The [seller’s] broker must disclose to his principal-seller all offers that have been made by any person, whether the offer is only oral or in writing, and even though the seller has accepted another offer.” [Miller and Starr §3:27]

Loss reduction protection

As a policy of the publisher to provide users of RPI (Realty Publications, Inc.) forms with maximum loss reduction protection, the RPI purchase agreement does not contain clauses which tend to increase the risk of litigation or are generally felt to work against the best interests of the buyer, seller and broker.

Excluded provisions include:

  • an attorney fee provision, which tends to promote litigation and inhibit normal contracting;
  • a time-essence clause, since future performance (closing) dates are, at best, estimates by the broker and their agents of the time needed to close and are too often improperly used by sellers in rising markets to cancel the transaction before the buyer or broker can reasonably comply with the terms of the purchase agreement; and
  • a liquidated damages provision, since they create wrongful expectations of windfall profits for sellers and are nearly always forfeitures and unenforceable.

The arbitration provision in purchase agreements

Many pre-printed brokerage and purchase agreements, such as those published by the California Association of Realtors (CAR), perfunctorily include a boilerplate arbitration provision.

The arbitration provision included in a purchase agreement, listing or lease agreement forms a  separate contract between the parties who initial the provision and remains enforceable despite any defects in the underlying agreement containing the provision.

Thus, the arbitration provision in a real estate purchase agreement or listing:

  • forms a separate arbitration agreement between the parties who agree to be bound by the provision [Calif. Code of Civil Procedure §1297.71; Prima Paint Corporation Flood & Conklin Mfg. Co. (1967) 388 US 395]; and
  • defines the arbitrator’s powers and the limitations on those powers.

The rights of the person agreeing to arbitration are established by the incorporation in the provision of arbitration statutes, applicable law limitations and discovery policies. Also controlling are the rules adopted by the arbitrator named in the provision, such as the American Arbitration Association.

Unless the arbitration provision states an arbitration award is “subject to judicial review,” the award resulting from arbitration brought under the clause is binding and final, with limited exceptions.

Without judicial review of an award in an arbitration action, the parties have no assurance the award will be either fair or correct — it is arbitrary by name.

Editor’s note — RPI purchase agreements and addenda do not contain either an arbitration provision or an attorney fee provision as a matter of policy to reduce the risk of litigation to brokers and agents by making litigation less economically feasible for sellers and buyers — and their attorneys. 

Limited grounds for correction

Any defect in an arbitrator’s award resulting from an error of fact or law, no matter how flagrant, is neither reviewable nor correctable, unless:

  • the arbitrator exceeded their authorized powers;
  • the arbitrator acted with fraud or corruption;
  • the arbitrator failed to disclose grounds for their disqualification of a dispute;
  • the award was procured by corruption, fraud or other misconduct; or
  • the refusal of the arbitrators to postpone the hearing substantially prejudiced the rights of the party. [CCP §1286.2]

An arbitrator, unlike a judge in a court of law, is not bound by the rules of law controlling conduct when arbitrating a dispute. Even when the arbitrator agrees to follow applicable California law, their erroneous award, unlike an award of a court, cannot be corrected by any judicial review.

The arbitrator’s award is final and binding on all parties, unless:

  • the parties have agreed the arbitrator’s award is subject to “judicial review”; or
  • the arbitrator exceeded their powers set by the arbitration provision.

Otherwise, no judicial oversight exists — by petition or appeal — to correct an arbitrator’s erroneous award.

Binding arbitration as a loose noose

Consider a seller who contacts a brokerage office to list their property for sale. The seller and seller’s agent sign a listing agreement containing a provision calling for disputes to be submitted to binding arbitration — no judicial oversight permitted.

A buyer is located by a buyer’s agent employed by the same broker. The broker and both agents are aware the buyer is financially unstable and may encounter difficulties closing the transaction. However, confirmation of the buyer’s creditworthiness and net worth are not made the subject of a contingency provision by the buyer’s agent who prepares the offer for the buyer. If included, a contingency provision authorizes the seller to cancel the purchase agreement if the seller determines the buyer’s credit is unsatisfactory.

The buyer’s financial status is not disclosed to the seller when the seller’s agent, alone, submits the buyer’s offer. The supervising broker fails to catch or correct the oversight.

The seller accepts the purchase agreement offer which provides for payment of a fee to the broker. Each agent is to receive a share of any fee their broker receives on the sale based on formulas agreed to in their separate written employment agreements with the broker.

Later, the buyer fails to close the transaction due to their financial condition. The seller discovers that the seller’s agent, broker and buyer’s agent all knew of the buyer’s financial condition. The seller makes a demand on the broker and both agents for the seller’s losses on the failed transaction, claiming the buyer’s financial condition was a material fact the agents and broker knew about and failed to disclose.

The dispute is submitted to binding arbitration. The arbitrator awards money losses to the seller based on the professional misconduct of the seller’s agent and employing broker for failure to disclose their knowledge of the buyer’s unstable financial status — the broker being vicariously liable as the employer of the seller’s agent who failed to make the disclosure.

Further, the arbitrator issues the seller a money award against the buyer’s agent. The arbitrator erroneously rules the buyer’s agent and the seller’s agent were “partners” and equally liable for the seller’s losses since they shared the fee the broker received on the transaction. Thus, the buyer’s agent is improperly held liable as a business partner of the seller’s agent for the seller’s money losses resulting from the misconduct of the seller’s agent.

The buyer’s agent seeks to vacate the portion of the arbitration award holding them liable as a “partner” of the seller’s agent, claiming the arbitrator incorrectly applied partnership law to a real estate agency and employment relationship controlled by other laws. May a court correct the award against the buyer’s agent when an arbitrator wrongfully applies partnership and agency law?

No! An arbitrator’s award, based on an erroneous application of law, is not subject to judicial review. A judicial review of an arbitrator’s award was not included as a condition of an award in the purchase agreement arbitration provision. Thus, the arbitrator acted within their powers granted by the arbitration provision, even though they applied the wrong law and produced an erroneous result.

A court of law confronted with a binding arbitration agreement is unable to review the arbitrator’s award for errors of fact or law even if the error is obvious and causes substantial injustice. [Hall v. Superior Court (1993) 18 CA4th 427]

Attorney’s fees as a power

Now consider a buyer and seller who enter into a purchase agreement containing both an arbitration provision, which they all initial, and an attorney fee provision. The attorney fee provision entitles the party who prevails in an action to be awarded attorney fees.

The buyer terminates the purchase agreement and seeks to recover all their transactional costs, claiming the seller breached the agreement. As agreed, the dispute is submitted to binding arbitration. The arbitrator rules in favor of the seller, but denies the seller’s request for attorney fees as called for under the attorney fee provision.

The seller seeks a correction of the arbitration award in a court of law, claiming the arbitrator exceeded their powers by denying an award of attorney fees as agreed in the purchase agreement.

Here, the arbitrator exceeded their powers by failing to award attorney fees. The seller, as the prevailing party, was entitled to an award of attorney fees by a provision in the purchase agreement which was the subject of the arbitration. If the agreement underlying the dispute contains an attorney fee provision, the arbitrator is to award attorney fees to the prevailing party. [DiMarco v. Chaney (1995) 31 CA4th 1809]

However, the attorney fee dilemma has a flip side. Not only will the arbitrator award attorney fees to the winner if the recovery of fees is called for in the purchase agreement, the arbitrator also determines the amount of attorney fees to be awarded — an amount which is not subject to court review. [DiMarco, supra]