Daily Development for Friday, October 20, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

ALTERNATIVE DISPUTE RESOLUTION; ARBITRATION; AGREEMENTS TO ARBITRATE:  An arbitration clause in a real estate sales agreement compels arbitration of a contract dispute despite the fact that the contract was negotiated by an unlicensed agent of the buyers.  

Shotkoski v. Denver Investment Group, Inc., 2006 WL 408313 (Colo. App.)

An incorporated group of investors had an agreement whereby they compensated one of their principles as a representative to negotiate contracts to purchase real estate.  This representative was neither an attorney nor a broker.  The group of investors and their representative became defendants in this case after purchasing a home in distress from plaintiffs (a married couple).  The parties closed under the contract, and defendants acquired title to the home. 

After the closing and transfer of title, but before final payment, the sellers divorced, and one of them filed a lis pendens.  The defendants argued that this created a cloud on title, making the home impossible to sell, and withheld final payment.  The sellers sought to rescind the agreement on the ground that it was wholly unenforceable because of the fact that it had been negotiated by an unlicensed representative of the buyers.

The buyers, relying on an arbitration clause in the sale agreement, made a motion to compel arbitration.   Sellers claimed that the customer agreement was illegal and unenforceable, including the arbitration clause.  The trial court agreed.

The appellate court reversed.  It  found that the validity of the agreement was separate from the question of defendants’ failure to obtain a license.  It followed authority in Maine and Florida, reasoning that the fact that an agreement was negotiated by an unlicensed party might be an undisclosed defect in title for subsequent purchases of the property.

The court acknowledged that sellers might nevertheless have the right to rescind the contract as a potential remedy for buyers’ breach of contract, but concluded that the issue of whether buyers were in breach was one that first had to be resolved through the arbitration process. 

The court also reversed the trial court’s secondary finding that the negotiation of the sale contract was an unfair consumer practice under Colorado statute and could be declared void on that basis.  It indicated that the statute does not apply to real estate purchases, but rather to the performance of services and the sale of real property.  It did not make clear what the difference is between a “real estate purchase” and a “sale of property.”  Presumably Colorado lawyers will delve into the statute to find the answer to this one.  The court went on to find that, in any event, questions of whether there was a deceptive trade practice were themselves arbitrable. 

Comment 1: The editor has no quarrel with the result on these facts, but the court’s reasoning, based upon precedent elsewhere, strikes the editor as sour note.  Normally, any equities that might render a contract unenforceable will not affect the validity of title passing under that contract in the hands of a third party BFP unless the defect is sufficient to render the delivery of the deed itself void, rather than voidable.  There is not indication here that any defect with regard to the contract was sufficient to render the completed deed delivery totally void. 

Consequently, the reasoning that the fact that the contract could not be avoided because the consequences might be troublesome for third party BFP’s doesn’t really make sense.  There were no such BFP’s here.  The buyers, one assumes, knew or should have known that their own representative was not licensed, and did not deserve protection. 

Comment 2:  If deceptive practices lead one to execute a contract that one might not otherwise have executed, then perhaps such victims also deserve protection from an arbitration clause contained in such a contract.  The editor doesn’t conclude that one should assume that the presence of an unlicensed agent necessarily renders a contract so fraudulent as to disable the arbitration clause, but he certainly can imagine that circumstances might exist that would be sufficient for such disability, and he’d hate to see this case read to prevent a court from denying arbitration in such cases.  Even though many states now have policies favoring arbitration, this does not mean that parties should have it stuffed down their throats as a consequence of fraud or sharp dealing.

Readers are encouraged to respond to or criticize this posting.

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