Talk This Out!

By Sonia M. Younglove

In 2003, the Nguyens purchased real property from the Yehs. Several years later, the Nguyens sued the Yehs as well as their own broker and the listing broker for failing to disclose that the guest house on the property was not built with the necessary permits.

The buyers' broker petitioned the trial court to compel arbitration based on the language in the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) purchase contract, the RPA-CA: "BROKERS: Buyer and Seller agree to mediate and arbitrate disputes or claims involving either or both Brokers ... provided either or both Brokers shall have agreed to such mediation or arbitration prior to, or within a reasonable time after, the dispute or claim is presented to Brokers." Real estate brokers are not parties to the RPA-CA and, thus, do not initial the arbitration provision; however, in this case, both the buyers and the sellers initialed this provision.

The buyers opposed the petition to compel arbitration arguing that the buyers' brokers were not parties to the agreement, and only parties to an arbitration contract may enforce it or be required to arbitrate. The listing brokers also opposed the petition to compel arbitration on the basis that not only were they not parties to the agreement but also they had never agreed to arbitrate. The trial court denied the petition and the buyers' broker appealed.

The 4th District Court of Appeal in Nguyen v. Tran summarized the law on arbitration: "Public policy favors arbitration as an expedient and economical method of resolving disputes. ... However, arbitration assumes that the parties have elected to use it as an alternative to the judicial process."

Although typically only parties to an arbitration contract may enforce it or be required to arbitrate, an exception exists for a third-party beneficiary of an arbitration contract and when a nonsignatory and one of the parties to the agreement have a pre-existing agency relationship that makes it equitable to impose the duty to arbitrate on either of them.

When the buyers and sellers initialed the arbitration provision, they also agreed to the language that they would arbitrate any dispute involving either or both brokers if either or both brokers agreed to arbitrate the dispute.

Thus, the buyers' broker could compel the buyers to arbitrate the dispute. However, the appellate court held that the buyers' broker could not compel the listing broker to arbitrate. There is no legal authority that supports the proposition that one nonsignatory party has the right to invoke an arbitration clause against another nonsignatory party based on an agreement signed only by the principals.

Buyer's Broker Liable for "Constructive Fraud"

In 1998, the case, Field v. Century 21 Klowden-Forness, dealt a blow to real estate agents representing buyers by holding that buyer's brokers have a fiduciary duty to the buyer that is greater than the negligence standard of due care under Section 2079. In the recent case, Michel v. Palos Verdes Network Group, the 2nd District Court of Appeal not only affirmed but expanded the Field rule.

Kirkpatrick was a real estate agent working for real estate broker Moore. In the hopes of obtaining the listing of a home owned by his friend's parents, Kirkpatrick inspected the home and took notes of the property's defects, including possible water leaks, cracked interior walls, and damage to the pool. A Fred Sands office obtained the listing but another agent from Kirkpatrick's office, Lagudis, represented the buyers. Kirkpatrick's role in the deal was that of transaction coordinator. At no time did Kirkpatrickshare his notes with the buyers or the buyers' agent. At trial, the jury found no violation of the duty under Section 2079 and no intent to defraud the buyers.

At issue on appeal was the cause of action for negligent nondisclosure, which had been dismissed by the trial court. The appellate court held that a fiduciary's failure to share material information with the principal constitutes negligent nondisclosure-also known as "constructive fraud." The broker's fiduciary duty to his or her client is greater than the standard of care under Section 2079. Thus, a broker can be professionally competent under Section 2079 without satisfying the greater duty of a fiduciary. Furthermore, with constructive fraud, there is no burdento prove intent to defraud as there is with fraudulent concealment. Thus, it is easier for a buyer to prevail against the buyer's broker.

Sonia M. Younglove, Esq., is C.A.R. senior counsel.

Q&A

Ask an Attorney

Q. If the C.A.R. Counter Offer form (CO) is signed by both buyer and seller but the purchase contract (for example, the RPA-CA) is not signed by the seller, is there a binding purchase contract?

A. In general, yes. Paragraph 1 of the CO contains the following language: "The terms and conditions of the above-referenced document are accepted subject to the following: ..." This language incorporates the RPA. Thus, by signing the CO, the seller is accepting the terms and conditions of the purchase contract except for anyitems listed in subsection 1C of the CO form that changes any term or condition in the RPA. However, 1A states that any paragraph in the purchase agreement that requires initials by all parties, but is not initialed by all parties, is excluded from the final agreement (e.g., arbitration and liquidated damages). Thus, there will be a binding contract but it may not include arbitration or liquidated damages.