THE DUTIES AND LIABILITIES OWED BY AN AGENT TO THIRD PARTIES, AN OVERVIEW

THE DUTIES AND LIABILITIES OWED BY AN AGENT TO THIRD PARTIES, AN OVERVIEW

1. Warranty of Authority

If an agent acts in the name of the agent's principal with authority given by the principal, the principal is bound
by the agent's act. When the agent acts without authority or in excess of the agent's authority, the agent may be
held liable for resulting damages for having breached the agent's implied warranty of authority. While the agent
warrants the agents own authority, the agent does not impliedly guarantee the principal's capacity to contract.
The agent is not liable therefore if the principal is incapable of contracting through infancy or incompetency
unless the agent has expressly warranted capacity or fraudulently concealed the fact of incapacity.

To protect himself or herself against liability for breach of an implied warranty of authority, the agent should
clearly indicate to the third party that he or she is not sure of the authority granted by the principal and does not
warrant it or, on the alternative, that the authority granted by the principal is limited to that which has been
clearly defined by the principal and disclosed by the agent to the third party.

2. On Contracts

When a contract is negotiated and executed by an agent in the name of the principal, the agent will not
ordinarily be held liable for the performance of the contract. If, however, there is a lack of authority on the part
of the agent and a lack of a good faith belief on the agent's part that the agent possesses the authority, the agent
is liable for the performance of the contract as a principal. The agent is also personally liable for the
performance of the contract if the agent fails to reveal the name of the principal, or the fact that the agent is
acting in an agency capacity. If the fact of agency is disclosed in the contract, but the name of the principal is
not, the rule in California appears to be that the agent is personally liable for the performance of the contract.
To avoid the possibility of personal liability of the agent, the name of the principal for whom the agent is acting
must appear on the face of the contract.

The failure to disclose the name of the principal by an agent who is known to be acting as an agent is
distinguishable from the fact situation where the agent fails to disclose to a principal that there is a principal
distinguishable from the agent for whom the agent is acting. In a real property secured transaction, the court
held that the loan was rescindable by the borrower since the borrower never knew the identity of the actual
lender. For a contract to exist between two principals, it is essential that the principals are able to identify each
other. (Civil Code § 1558 and Jackson v. Grant (1989) 876 F. 2d 764, 766).

The manner in which an agent signs a contract with a third party on behalf of the agent's principal may be
significant in determining whether the agent has any personal liability to the third party. Ordinarily an agent
should enter the name of the principal as the contracting party and should then sign the instrument "by" himself
or herself as agent for that principal. By signing the contract in this manner, the agent is virtually assured that
he or she will not be held liable for the performance of the contract since the fact of agency and the name of the
principal are disclosed. There are other ways in which this double disclosure can be effected, but the method
described has the advantage of being time tested.

3. On Torts

Torts are private wrongs committed upon the person or property of another and arising from a breach of duty
created by law rather than by contract. An agent is liable to third parties for the agent's own torts whether the
principal is liable or not, and in spite of the fact that the agent acts in accordance with the principal's directions.
Where a person misrepresents his or her authority to act as agent for another, such person may be liable in tort
to the third party who relies on the representation to the third party's detriment.

Real estate brokers and their salespersons and broker associates by the very nature of their business are
constantly making representations to prospects concerning the property being offered for sale. A representation
may be merely an expression of opinion or "puffing" on the part of the broker but, on the other hand, it may be
reasonably understood by both the broker and prospective buyer to be a representation of fact and thus a part of
the contract if agreement is reached.

Material representations purporting to be fact which are false or misleading may result in liability of the real
estate broker. The same may be said with respect to a failure on the part of the broker to disclose material facts
about the property to the prospective buyer. In addition to incurring liability for damages to the buyer, a broker
may also be subject to disciplinary action by the Department of Real Estate against the broker's license for overt
misrepresentations or for failure to disclose material facts. (Business and Professions Cade § 10176(a) and
Pintor v. Ong (1989) 211 Cal. App 3rd 837).

4. Misrepresentations

A misrepresentation by the broker who is the exclusive agent of the seller to a prospective buyer of the lowest
price acceptable to a seller is not usually actionable by the buyer, because it is not a representation of a material
fact. The seller has a right to obtain the best price available and has hired the agent to achieve that end.
Therefore, the seller's agent should not make representations to the buyer about price except with the seller's
knowledge and consent. Representations about price to the buyer absent the seller's knowledge and consent
may be actionable by the seller. Equally, a misrepresentation about price to the buyer by the real estate broker
or his or her salesperson or broker associate who is acting as an agent of the buyer will usually be actionable by
the buyer. Practitioners who issue BPOs must be particularly careful. For instance, a licensee who issues a BPO
at the request of a seller should provide a copy of the BPO to the buyer when acting as a dual agent. Consent of
the seller should be obtained. Prudent practitioners should also notify the seller of the prospect that the buyer
(in a dual agency situation) may have the right to receive the BPO although it was initially prepared only for the
Seller.

Statements incorporated into the purchase contract are often in the form of promises comprising part of the
consideration extending from the seller to the buyer. If such a representation is made in good faith, the fact that
it is untrue will ordinarily not render the seller or seller's agent liable in tort. An untrue representation which is
a material ingredient of the purchase contract may, however, be the basis for an action for rescission and/or
damages by the buyer. The same holds true with respect to mutual mistakes of fact resulting from
representations made by the seller's agent. The mutual mistake may be the basis for a rescission of the purchase
contract, but neither the seller's agent nor the seller would ordinarily be liable in tort to the buyer.

5. Fraud v. Negligence

Misrepresentation may be either fraudulent or negligent. In either case the agent may be liable civilly for
damages incurred by the buyer on account of the misrepresentation or the agent may be subject to disciplinary
action against the broker's license. The principal may be vicariously liable in damages for the broker's
misrepresentations even where the principal was not the source of the erroneous information conveyed by the
broker acting as the principal's agent.

Certain misrepresentations, even though made by an agent with no evil intent, are defined by law as actual fraud
if they are positive assertions of that which is not true made in a manner not warranted by the information of the
person making the representation notwithstanding that such person believes it to be true. Constructive fraud as
defined in the California Civil Code includes any breach of duty which, without an actually fraudulent intent,
gains an advantage to the person in fault, or anyone claiming under him or her, by misleading another to his or
her prejudice, or to the prejudice of anyone claiming under him or her. (Carl Michel et al. v. Moore and
Associates, Inc. (2007) 156 Cal App. 4th 756 and Field v. Century 21 Klowden-Forness Realty (1998) 63
Cal.App.4th 18).

Thus, in the area of misrepresentations, the dividing line between fraud and negligence is often blurred and yet
there may be a significant difference in the agent's exposure in damages depending upon whether the
misrepresentation is found to be negligent or fraudulent. If found by a court or jury to be fraudulent, punitive
damages can be awarded against the person making the misrepresentation. Remember, a real estate broker
acting as a special agent in a real property or real property secured transaction may make no representation
without a reasonable basis for believing the representation is true, may assert no half-truths, and may not assert
a series of independent truths which when interconnected are expressly or inferentially misleading.

Furthermore, if a fraud judgment is entered against a real estate broker based upon the broker's performance of
acts for which a real estate license is required, disciplinary action may be taken against the broker based solely

upon the civil judgment. (California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th 1575. If on the
other hand, the broker's misrepresentation is found to be no more than negligent, a case against the broker for
negligence would have to be retried at the administrative level where the standard of proof required in order to
discipline is convincing proof to a reasonable certainty as opposed to the preponderance-of-evidence standard in
a civil negligence action.

6. Nondisclosures and Constructive Fraud

Civil liability of a real estate broker for misrepresentation and the possibility of disciplinary action against the
licensee may arise from the broker's failure to disclose as well as from overt misstatements. Liability for failure
to disclose may result where the broker has knowledge of facts materially affecting the value, desirability, or
intended use of the property, and which facts the broker does not convey to the prospective buyer knowing that
the buyer does not have the same information.

Cases imposing a duty of disclosure usually involve the concealment by the seller of latent defects in the
property. These cases have held that the real estate broker acting as an agent of the seller and the seller have a
duty to disclose facts materially affecting the value, desirability, or intended use of property, if the broker
knows that the buyer is unaware of these facts and they are not within the buyer's diligent attention including
the inspection of the property. The courts have sometimes referred to such non-disclosure as negative fraud.
(Easton v. Strassburger (1984) 152 Cal.App.3d 9099).

In addition, a fiduciary may be liable to its principal for constructive fraud even if his or her conduct is not
actually fraudulent. (Salahutdin v Valley of Cal., Inc. (1994) 24 Cal. 4th 555). In Salahutdin, a real estate agent
made affirmative statements about the size and subdivision prospects to the buyer but failed to disclose that he
did not investigate accuracy of these statements. Constructive fraud comprises any act, omission, or
concealment involving a breach of legal or equitable duty, trust, or confidence that results in damage to another
even if the conduct is not otherwise fraudulent. (Salahutdin v Valley of Cal., Inc., supra.).

7. “Puffing”

Even in some situations where a licensee honestly believes that representations to the prospective buyer are
nothing more than "puffing" or ''sales talk", a problem may develop if the impression made upon the buyer is
that the representation is one of fact. Statements by a real estate broker that the property being offered is the
"best on the street", or that the buyer "will receive handsome profits from the buyer's investment", were at one
time almost universally considered to be mere expressions of opinion. In more recent years, there appears to be
a growing tendency on the part of the courts to treat such statements as representations of material fact, because
persons of limited expertise and sophistication tend to rely upon such statements and to purchase property as a
result of such reliance.

A statement by a real estate broker, salesperson or broker associate that a house was "in perfect shape," while
obviously not literally true, has been described as a representation of a material fact by an appellate court
considering the question.

8. Gratuitous Agent

In addition to negotiating the "meeting of the minds" of seller and buyer in a real estate transaction, brokers do a
multitude of other things in order to consummate sales. For example, they order preliminary reports, complete
forms, process loan applications, arrange for pest control inspections, and assist in the preparation of escrow
instructions. In a sense, the broker performs many of these functions gratuitously since he or she has earned a
commission when he or she has produced an offer from a person who is ready, willing and able to purchase.
The standard of the industry, however, is that the broker does not deem the commission to be due and payable
until the close of escrow.

If the real estate broker acting in a sales transaction undertakes to aid the buyer in processing a loan application
and does not charge the buyer for that service, the broker is a gratuitous agent of the buyer for the purpose of
arranging the loan. The broker's failure to use reasonable care while acting in the capacity of a gratuitous agent
can result in the liability of the broker, if the buyer sustains an injury as a result of this negligence.