Does an agency relationship continue, even after a listing agreement expires?
An Illinois appellate court has held that an independent contractor agreement between a brokerage firm and a sales agent does not shield the listing broker from vicarious liability for an agent's breach of fiduciary duty to a seller for actions performed after the expiration of a listing agreement between the brokerage firm and a seller.
The seller owned rental property and listed it for sale with a brokerage firm. A particular agent in the firm was principally responsible for the marketing effort. Over the span of one and one–half years, the agent's marketing efforts pursuant to successive listing agreements were unsuccessful. After the last listing agreement expired, the agent suggested to the seller that he (the agent) buy the property himself. Shortly thereafter, the agent and the seller entered into a sales contract in which the seller agreed to sell the property to the agent for $37,000 less than the last listing price. Before the agent closed on the sale from the seller, the agent contracted to resell the property to another buyer at a $23,000 profit.
At the closing of the sale to the agent, the agent's brokerage firm received a commission. Likewise, upon the closing of the sale from the agent to the second buyer, the agent's brokerage firm earned another commission. When the seller eventually learned of the sale by the agent to the second buyer, he brought suit against the agent and the brokerage firm for breach of fiduciary duty, and sought to recover the agent's profit and the commission paid to the brokerage firm, plus punitive damages.
Both the brokerage firm and the agent argued that they did not owe any duty to the seller because, at the time the agent and the seller entered into the sales contract, there was not any listing agreement in force, and, therefore, a fiduciary duty did not exist. The brokerage firm further argued that it could not be held liable for the agent's contractual dealings with the seller because the agent was an independent contractor of the brokerage firm.
The Illinois appellate court rejected all of the defendants' arguments. The court held, first, that an agency relationship between the seller and both defendants continued after the expiration of the last listing agreement. The court noted that the agent continued to market the seller's property after the listing agreement expired, and that an agency relationship can arise from the conduct of the parties. But more important to the court was the fact that the brokerage firm was named in the sales contract as the listing broker for the seller, and the firm received a commission at the closing on the sale to the agent. The court expressly rejected the brokerage firm's contention that the only reason it (as opposed to the agent) received a commission was because of obligations between the firm and the agent in the agent's independent contractor agreement.
The court next considered and rejected the defendants' argument that the agent did not breach any fiduciary duty to the seller by reselling the property because the second contract was negotiated after the seller and the agent signed their purchase contract. According to the defendants, once the seller and the agent signed their sales contract, any duty on the agent's part to make disclosures to the seller ended.
The court observed that agents have duties to disclose all material facts to their principals. The court also stated that this fiduciary duty to disclose material facts continues even if the agent and the principal have entered into a contract. The court noted that when a fiduciary duty exists between the parties at the time they form a contract, the contract is presumptively invalid, and that this presumption of invalidity may be rebutted only by clear and convincing evidence of full disclosure before the contract was formed, and that the consideration paid was fair and reasonable.
The court further concluded that in this case the defendants' fiduciary duty certainly continued after the agent and the seller signed their sales contract because the brokerage firm was named as the seller's listing broker in that contract. For this reason, the brokerage firm's fiduciary duty to the seller continued until the transaction closed. The court then noted that the agent signed his contract with the second buyer before the agent's contract with the seller closed.
The court also rejected the brokerage firm's contention that it was not liable for the agent's conduct because the agent was an independent contractor. Under normal rules, one who retains an independent contractor is not liable for any damage the independent contractor causes to third parties. But here the court held that the independent contractor agreement between the firm and the agent could be disregarded because the agent acted as the "apparent agent" of the brokerage firm. The court noted that "apparent agency" exists when a principal holds another out as his agent by consenting to, or knowingly acquiescing in the person's exercise of authority, and a third person reasonably and justifiably relies upon the appearance of the agency relationship.
The court found all elements of apparent agency to be present. The agent used the broker's office, telephone, supplies, and listing agreements; therefore, any third person could reasonably presume the agent was a lawful agent or employee of the broker without regard to the actual relationship that existed between them. As a result, the brokerage firm was vicariously liable to the seller for the agent's conduct.
Since there was evidence that the agent willfully failed to disclose before closing that he found a buyer willing to pay $23,000 more for the property, the court held that the brokerage firm could be vicariously liable for the agent's misconduct because the brokerage firm placed the agent in a position to commit his illegal acts. Consequently, the brokerage firm and agent could both be liable to pay to the seller the $23,000 profit on the sale to the second buyer, and to return all commissions paid by the seller.
This case contains many lessons for brokerage firms, their agents, and even their franchisers. First, when agents buy property for their own account, it is usually for investment or resale at a profit. When these purchases are of property listed with the agent's firm, the seller will almost always be able to successfully recover the agent's profit on a theory of fraud or breach of fiduciary duty.
Second, a broker's and agent's fiduciary duty to a seller (or buyer) will continue at least until any commission called for in a listing agreement or sales contract is actually paid at closing. Courts will conclude that fiduciary duties continue after listing agreements expire or contracts are signed if the broker continues to claim an entitlement to be paid upon the consummation of any future transaction.
Third, a broker's independent contractor agreements with salespeople will typically be worthless in avoiding vicarious liability to third parties for the actions of independent contractor salespeople. The injured third party will almost always be able to argue successfully that the agent is an "apparent agent" of the brokerage firm because the agent uses the broker's office and standard forms, and uses business cards and stationery containing the broker's logo.
Finally, the "apparent agency" theory can also permit an injured customer or client to seek to hold the broker's franchiser vicariously liable for the agent's or broker's conduct. Most franchises spend significant sums on the promotion of logos and color schemes to build national name and image recognition for their franchisees. To the extent these national promotion campaigns lead consumers to believe that when they deal with a local franchisee they are in fact dealing with the national franchiser, the franchiser is exposed to the potential of a judge or jury concluding that a local sales agent or broker is the "apparent agent" of the franchiser. The theory has already been tested in other professions and has resulted in hospital emergency rooms being liable for malpractice by independent contractor physicians, and fast food franchisers being exposed to liability for accidents occurring on the premises of local franchisees. This court's use of the "apparent agency" theory suggests that real estate brokerage franchisers could become victims of their own success in promoting their brand names to consumers. 675 N.E.2d 217 (Ill.App.1996).
Please note that the comments and opinions contained herein are not to be construed to be legal advice by the author, Victor O. Schinnerer & Company, Inc., or the CNA/Schinnerer errors and omissions insurance program.
This information is made available to you for your risk management program. No action should be based on this information without appropriate advice from legal counsel and a review of currently applicable statutory and case law.
This article from The Risk Management Reporter, July 1998, was written by Robert D. Butters of the law firm of Arnstein & Lehr, which concentrates in the representation and defense of real estate brokers and agents.