Brokers’ Broken Relationships

When I was an apprentice shipwright, one of the old-hats around the slipway was always spouting gems of wisdom with one such gem being, that the only people who make any money out of boats are brokers. However, this is not entirely true as I found changing careers and starting a legal practice that specialises in all things marine I’ve found that lawyers do all right as well, at least in terms of life style. Nevertheless, brokers have a special relationship to buyers and sellers, and there are various ways that relationship can go wrong.

Most people don’t know their broker from a bar of soap. However, legally brokers tend to only come in three varieties: They can be your broker acting on your behalf; They can be a messenger, passing information back and forth; Or finally, they could be the other party’s broker.

A rule of thumb for telling what species of broker you are dealing with is to ask who is the contract between? If it is between you and the broker, they are probably your broker. If it is between both parties and the broker, they are probably a messenger. And of it is between the other party and the broker, they are probably the other party’s.

What species of broker you are dealing with is very important because if the broker belongs to the other party or they are a mere messenger, they do not have serious duties owed to you. But if they are your broker, then things become interesting (in the special way law is interesting).

If they are your broker, they probably are in a fiduciary relationship with you. The fiduciary relationship is a creation of Equity, Equity being more or less the same as Common Law, but historically it used to be run by clergymen in a separate court system. The fiduciary relationship is often said to require “the punctilio of an honor the most sensitive.” You may have guessed from the spelling of the word “honor”, that the quote comes from our friends in North America, specifically it is a quote from Justice Cardozo. That being said, the quote is so esoteric that if you don’t already know what the fiduciary relationship is, it doesn’t really help. But it is the most often quoted passage regarding fiduciary relationships.

For now, it is sufficient to think of a fiduciary relationship as the duties people owe when they are in a situation of responsibility. It is 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 of you unless they are legally obligated not to. When you engage a broker, you trust them to give you advice on your expensive purchase. You trust them with sensitive information such as how much you are willing to pay. And perhaps most importantly, you trust them with the legal power to bind you to a contract (in most cases, if they say you are going to pay a million dollars for a dingy, you will be legally obligated to do so). So a broker, if they are your broker, is your agent and as such owes you a heavy duty.

How can they fail in that duty?

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, so there was a conflict of interest.
So let’s say a broker’s partner builds yachts, you want a yacht built and you engage this broker to find you a yacht builder. The broker’s duty, indeed principal function, is to provide you with accurate advice. However, it is also in that broker’s interest to drum-up work for their partner. If they advise you to build with their partner, even if they present you with it as an option, there is a potential conflict. This is because they may be inclined to lie or omit facts about their partner’s business, perhaps even unconsciously. And so usually, they should not direct you towards their partner.

Often in the marine environment brokers 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 interest. The only time this should occur is if both parties give fully informed consent. It should also be noted that fully informed consent is a defence to all these breaches. If the broker explains all the relevant facts, tells you of any interests they may have, and all parties 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 that is the reason they are doing the work. However, the case law demonstrates 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 (sold it for a profit for himself) and sold her his flat at 25% over market value. So in our context, breach occurs where a broker sells you a boat they actually own or they advise you not to buy a vessel because they want to buy it. The other part of this obligation is that brokers are not allowed to take a secret commission, otherwise called a bribe. If they do, you are entitled to an account of profits, that is, they may end up having to pay you 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. It provides that they must genuinely try to perform their services and they must perform them to a reasonable standard. What services they should provide is defined by the contract between you and them.

Fourthly, there is the issue of payment. This is not strictly speaking a breach, but it does cause a few problems. Usually there is some commission and as with most commercial transactions, contract is king. If the contract provides for payment, that is what takes precedence.

However, if there is no contract, or it does not provide for payment, the broker will be entitled to a commission if he or she is the or a “effective cause” of the transaction. All the broker has to do to be the effective cause is introduce the purchaser. So if you are a seller and they introduce you to a buyer, than they are entitled to a commission and vice versa, even if the vessel is brought years later.

Another issue with payment is the actual mechanism for payment. If a broker is going to take a five precent commission on the purchase price, does the purchaser pay the full amount, and the seller take out the five precent? Or is it five precent on top of the purchase price that the purchaser pays? And so on. These little issues can become big problems. This should be worked out before the sale of the vessel.

So what is the take home message? Have a contract. Read the contract. Understand the contract. That document becomes extremely important if there are any problems with the sale down the line. Make sure the contract covers what work 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. If there is an issue, have a think about if the broker behaved totally honestly because they owe you an onerous duty don’t sign anything and see a lawyer or more importantly use the lawyer to check all contracts from the start to avoid the fowling of what should be an enjoyable process.