Should Brokers Face Unlimited Liability?

Peter G. Miller
OurBroker®

Pick virtually any profession and you can find an assortment of rules which limit damages and make lawsuits difficult -- except, of course, for real estate brokers.

This curious and unfortunate oversight is being addressed in a creative and intelligent manner by the good folks in Georgia, and their example is something which brokers nationwide should study with great care -- and then copy.

The issue is this: How much liability should a broker face in the event of a dispute with a buyer or seller?

If damages are unlimited, if there are no caps, then every dispute offers the potential to become a multi-million dollar lawsuit. There's an enormous pressure to settle such claims because of the legal costs they represent, even when the core issues are unfounded or minimal.

Alternatively, if you agree with Gilbert and Sullivan -- the song writers, not the law firm -- and believe that the punishment should fit the crime, then it's clear that brokers should have a reasoned level of responsibility when they're at fault for a misdeed, but not unlimited liability.

The marketplace reality is that professions and manufacturers routinely seek to limit their liability. The issue here is not whether this reality is somehow "good" or "bad," however one measures such things, but rather that the need to limit liability has evolved into a commercial necessity given the lottery-like nature of our civil court system and the absurd increase in legal fees. In Maryland, as one example, an effort has been made to cap legal fees by private attorneys who do contract work for the state to a mere $1,000 per hour -- significantly less than the $30,000 per hour sought by some lawyers who represented the state in suits against the tobacco industry.

Realty Times Interacitve Post your questions and/or comments about this article. Click Here

To protect themselves, doctors have capped their malpractice liability in many states. Movers can limit their liability to 60¢ per pound under federal rules, even when transporting fine crystal, china, or art. At this moment software companies are seeking passage in all states of the Uniform Computer Information Transactions Act (UCITA), a measure that would limit if not effectively end the ability to sue software manufacturers who produce defective products.

Another effort to limit liability is the path chosen by Georgia home inspectors. According to Bob Hamilton, executive vice president of the Georgia Association of Realtors, inspectors in that state routinely limit their liability to the value of the work they perform -- say $300 for a typical home inspection.

The Georgia inspectors have used such wording for a number of years and when the matter was recently challenged in court the limitation was upheld.

Okay, if home inspectors can cap their liability, and if a range of professionals and manufacturers can do the same, why not brokers?

Georgia's real estate law requires written agreements between brokers and their clients. The written contracts developed by the state association and its legal counsel specifically limit broker liability to the value of the commission, except in the case of fraud. The result is that most listing agreements and buyer brokerage contracts in the state today contain these classic words: "No Broker in this transaction shall owe any duty to Buyer or Seller greater than what is set forth in their brokerage engagements and the Brokerage Relationships in Real Estate Transactions Act, O.C.G.A. paragraph 10-6a-1 et. seq."

In effect, the Georgia wording is a sensible effort to provide relief to those who are wronged and yet not bankrupt brokers who commit minor infractions.

In a perfect world, I would probably take the Georgia approach a little further and add three caveats.

First, rather than going to court, all conflicts must be resolved through binding arbitration under the authority of a neutral third-party such as the American Arbitration Association. This assures that a system is in place to quickly resolve any dispute.

Second, each party should be required to pay its own attorney fees in the event of legal combat. This is the fastest and most effective way to end nuisance suits.

Third, damages for fraud should also be capped, perhaps at a level not to exceed three times the commission amount.

Won't most claims against Georgia brokers now rely on allegations of "fraud" to avoid the cap on claims? Probably. And that's another reason to include arbitration clauses, cap damages, and require that each party pay its own legal fees.

Considering a living trust? There are a variety of issues to review, and also an absolute need to assure that your trustee is, well, trusty. A good place to start is with the Federal Trade Commission's guide to living trusts.