Daily Development for Thursday, September 8, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BROKERS; ARBITRATION: Real estate broker that did not sign real property purchase agreement containing arbitration provision was entitled, as both signatories' agent, to enforce arbitration agreement against party to agreement. 

Westra v Marcus & Millichap Real Estate Inv. Brokerage Co, 28 Cal. Rptr. 3d 752 (Cal. App.  2005)

In 1999, the Westras purchased a gas station from Skyline. Both the Westras and Skyline were represented in the purchase transaction by Marcus & Millichap Real Estate Investment Brokerage (MM). The gas station was occupied by tenant Paul Tran, who at some point declared bankruptcy and disappeared. The Westras sued MM, alleging fraud and other claims related to Skyline's and MM's failure to disclose their purported knowledge of Tran's financial problems. Skyline and MM moved to compel arbitration of the claims, based on an arbitration provision in the purchase agreement that had been initialed by Skyline and the Westras, both of whom had also signed the agreement - but not by MM, which was not a signatory to the agreement. The trial court ordered that the Westras' claims against Skyline be arbitrated, but found that the arbitration provision did not apply to the Westras' claims against MM.

The court of appeal affirmed the arbitration order as to Skyline, but reversed the trial court's denial of arbitration as to MM, and remanded. Ordinarily, an arbitration provision in an agreement is only enforceable by the parties to that agreement. The court acknowledged that CCP §1298, as the Westras argued, requires that a real estate agent initial the arbitration provision of a contract between that agent and its client in order to create a binding arbitration agreement. However, the court held that the Federal Arbitration Act (9 USC §§1-16) preempts state arbitration laws and, thus, §1298 was inapplicable to this case. See Hedges v Carrigan 117 CA4th 578, 583, 11 CR3d 787 (2004).

The court agreed with MM that although it was not a signatory to the arbitration agreement, it was entitled, under the exception to the parties - only enforcement rule, to enforce the arbitration agreement as the agent for the parties to the arbitration agreement. The court rejected the Westras' claims that MM was not the signatories' agent, pointing to the Westras' pleadings that MM owed them the fiduciary duties of an agent, precluding the Westras' later protestations that MM was not its agent or that of Skyline.’

Reporter’s Comment:   The Marcus & Millichap brokerage was able to demand arbitration as agent of the litigants even though the deposit receipt recited that the brokerage had no fiduciary relationship to them. Thus, that clause did not hurt the broker-but I wonder whether it would help when it matters. Can an agent really make itself a nonfiduciary by including a clause in a contract of sale between vendor and purchaser, that was not intended to apply to it anyway, and which the principals might not have been able to eliminate even had they wanted to? For resolution of that much more interesting issue, we will just have to wait and see.

Editor’s Comment: If the instrument that the parties executed was a broker-supplied instrument, as is often the case even in commercial deals in California (sigh), then wouldn’t any broker using such an instrument, at least in the future, be obligated to note that even where the broker does not execute the arbitration agreement, the broker can benefit from it?  If the broker fails to do so, isn’t it liable for providing an instrument that is misleading and ambiguous when it knows or should know of the problem? 

It would be ironic if the language of the instrument was so problematic that a duty imposed by federal law would not be obvious - but isn’t that the situation here?  If the brokers don’t like the duty, then get out of the business of supplying forms so the parties can avoid attornies.

The Reporter for this case was Professor Roger Bernhardt of the Golden Gate University School of Law in San Francisco. 

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