Boat Brokers have a special relationship to buyers and sellers coupled with onerous “fiduciary duties” that can be breached in various ways leading to financial headaches. However, these costly mistakes may be avoided.
There are three main relationships a broker can have to a buyer or seller:
- The first being where the broker is an agent for the buyer or seller; this is where the broker owes duties to one party but not the other;
- The second relationship is where the broker is a messenger, where the broker passes information back and forth but does not act for any of the parties and does not owe any serious duties to them;
- And unusually, the final relationship is where the broker is acting for both parties in an agent capacity; this rarely happens and is fraught with danger.
Ninety-nine per cent of all brokers are in one of these three relationships and it’s crucial to know and be clear as to what relationship has been created. This determines whether or not and to whom the broker owes their fiduciary or simply put personal duties. The starting point to determining the relationship is always the contract.
The importance of contracts
If the contract gives the broker any authority to enter into agreements on behalf of a party, or requires the broker to give advice, there’s a good chance the broker is an agent to that party. If they are an agent, the broker will owe fiduciary duties to the party. However, if a broker acts as if they have authority and the contract does not give them authority, they can be liable for damages. This is true, even if the broker is “reasonably mistaken” highlighting the importance of a well-drafted contract. This contract limits any argument as to whether the broker had authority or not and more importantly informs the broker as to whether they have the power to enter into an agreement and thus avoid the embarrassment and financial pain that may follow.
The fiduciary relationship imposes heavy duties on people in a situation of responsibility. It’s based on the idea that people are self-serving and if you place trust and responsibility in someone, that person is likely to take advantage “unless they are legally obligated not to”. A large amount of trust is put on a broker, to give advice, trusted with sensitive information and trusted with authority to act on behalf of a client. To balance this trust, brokers as agents, are subject to a vertical fiduciary relationship. The “vertical” means that the obligations only flow in one direction (from the broker to the client) imposing several broad duties.
Firstly, a fiduciary must not be in a position where there is a potential for their duty and their interests to conflict. A leading case on this involved a lawyer investing the money of one client in the venture of another client. This was a breach because it was held to be impossible for the lawyer to fulfil his duties to both clients, and so there was a conflict of interest. Applying these principles to the marine broker who has a partner building boats, in this case you should not advise a client to build with you partner, or even present it as an option. The reason is you may be inclined to omit facts in order to get your partner some work resulting in legal ramifications.
The conflict rule is also why it is advisable for a broker to act for both parties (seller and buyer) in an agent capacity. If they are acting for both sides, obviously there is the potential for a conflict of interests. The only times it’s possible to act for both sides in an agent capacity is if both parties give fully informed consent. It should be noted that fully informed consent is a defence to all these breaches. If the broker explains all the relevant facts, discloses any interests they may have, and the clients consent, it will not be a breach.
Secondly, a fiduciary is under an obligation not to make a profit. This is an odd duty when relating to brokers, as profit is the reason they are doing the work. However, the case law explains what this duty is about. In Australia, the leading case involved a real estate agent (a similar type of relationship) who, when an old widow wanted to sell her farm, bought it off her (and sold it for a profit) and sold her his flat at 25 per cent over market value. In our context, breach would occur where a broker sells a boat they actually own or advise a client not to buy a vessel because they want to buy it them self.
The other part of this obligation is that brokers are not allowed to take a secret commission, otherwise called a bribe. If they do, the client may be entitled to an account of profits, that is, the broker may end up having to pay the client the amount of the bribe.
Thirdly, a broker is obligated to perform their services in good-faith and with due skill. This duty is broad and flexible. Good faith means that a broker must genuinely attempt to perform the services they are contracted to do. Due skill usually means they must exercise the amount of skill that a reasonable broker would exercise in that situation. Again, the exact services they should provide are defined by the contract.
Fourthly, there is the issue of payment. This is not strictly speaking a breach, but it does cause a few problems. As we have seen, the broker cannot make a secret profit. However, usually there is some commission. If the contract provides for payment, that is what takes precedence.
However, if there is no agreement, the broker will be entitled to a commission if he or she is an “effective cause” of the transaction. All the broker has to do to be an effective cause of a transaction is to introduce the purchaser to the buyer or vice versa. Even when the boat is sold years later, if a broker has made the introduction, the broker will be entitled to a commission.
Another issue with payment is the actual mechanism for payment. If a broker is to take a five per cent commission on the purchase price, does the purchaser pay the full amount, and the seller take out the five per cent? Or is it five per cent on top of the purchase price, and so on? These little issues can become big problems. Therefore, this should be worked-out in detail before the sale of the vessel.
So what is the take home message? Have a well-drafted contract contract. Read the contract. Understand the contract. That document becomes extremely important if there are any problems down the line. Make sure the contract covers what the broker is to do, how much the broker is to be paid, who is going to pay the money and where that money comes from. Also remember that a broker, if acting as an agent, is under a fiduciary relationship. So if a broker acts in a less-than-honest way, he or she may have liabilities.
Finally as with all legal issues, it is best to be ahead of any problems before they happen: get a contract, know your rights and responsibilities, and seek help as soon as something happens. Do not wait until the court is banging on your door!