Are You Acting as a Duel Agent?
Hey Brokers…do you think you are acting as a “dual agent” in your transaction? You may have heard of it before, but what should you know about it? The term “dual agency” might lead you to think about double commissions, something perhaps to be happy about. But if you aren’t aware of the pitfalls of dual agency, it might cost you all your commissions, or more.
When a buyer or seller uses a yacht broker in a sales transaction, an agency relationship exists between the yacht broker and either the buyer or the seller. In some situations, the yacht broker intentionally represents both the buyer and seller, creating a dual agency that imposes certain additional duties on the yacht broker. The unappreciated risk for yacht brokers, however, is the inadvertent and unintentional creation of a dual agency that arises out of the yacht broker’s conduct.
(1) an overview of agency principles; (2) how an agency relationship arises between a principal and an agent; (3) the duties an agent owes their principal; (4) an explanation of what dual agency is; and (5) the remedies a principal might have if an agent runs afoul of the agency relationship. There are several recommendations to yacht brokers at the end of this article.
What is an Agency Relationship?
The legal definition of an agency relationship is the:
fiduciary relationship that arises when one person (principal) manifests assent to another person (agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
The basic premise is that the agent serves as the principal’s representative rather than simply someone performing a service.
Other typical agency relationships include real estate brokers, stock brokers, officers of legal entities, trustees, and lawyers. The relationship may be created through a written or oral agreement, but no express agreement is needed for an agency relationship to arise. Agency can arise simply by implication, i.e., by the conduct of the parties even without any writing. Being aware of and understanding the implications of an agency relationship can help you avoid potentially unexpected and unpleasant results.
How is an Agency Relationship Created?
In determining whether an agency relationship exists, courts consider the following factors: (1) the agent’s power to alter the legal relations of the principal; (2) the agent’s duty to act primarily for the benefit of the principal; and (3) the principal’s right to control the agent. Although important, these factors are not conclusive in and of themselves. Where a party asserts that an agency relationship arises by inference (through the parties’ words or conduct) that party has the burden to prove the agency. Whether an agency relationship exists in any particular situation is highly fact specific.
There is no single list of actions that can lead to formation. Actions that may demonstrate an agency has been formed include negotiating the sale or purchase of property on another’s behalf, holding escrow funds to be disposed as directed, preparation and explanation of forms and documents for a party involved in a transaction, and offering specific advice or assurances of facts in connection with a transaction. An agency relationship does not necessarily exist where these facts exist, but they are indicative.
What Duties are Owed by an Agent to the Principal?
When an agency relationship exists, the agent owes “fiduciary duties” to the principal. Among the most important fiduciary duties owed by an agent to the principal are:
- the duty of utmost loyalty and to avoid any conflict of interest;
- the duty to devote all of the agent’s skill and ability to securing the greatest legitimate advantage for the principal;
- the duty to account for all profits arising from the transaction;
- the duty not to disclose the principal’s confidential information to another;
- the duty of disclosure of all material or significant information to the principal; and
- the duty to disclose any conflict of interest.
As a result of these duties, various actions or conduct by the agent could be a breach of the duties owed to the principal. In Green v. H&R Block, the issue was whether undisclosed fees collected by H&R Block in connection with its Refund Anticipation Loan program violated H&R Block’s duty to disclose. The following situations demonstrate that it is often unclear whether a potential conflict exists: (1) the seller’s real estate broker’s failure to disclose that he loaned the money for the downpayment to the buyer where the seller was financing the buyer’s purchase; (2) an agent’s failure to recognize the termination date of its contract with the principal; (3) where an agent representing both sides to a land deal failed to disclose the purchaser’s recent fraud conviction or that the agent had advanced the purchase price to the purchaser; (4) where an agent failed to disclose the promise of a third party (who bet on the race) to pay the agent $5,000 if the horse the agent was hired to ride won and where the agent won and the third party paid the agent as agreed.
What is Dual Agency?
Here is where it could get interesting. Dual agency is when one agent (broker) represents two principals, i.e., the seller and the buyer. The general rule is that dual agency is not permitted because of the inherent conflict between the interests of the two principals. The inherent conflict is perhaps most obvious when considering how duty to maintain the confidentiality of each principals’ information conflicts with the duty to advise each principal of all material information.
Dual agency, however, is permitted when there is full and fair disclosure of the fact that the agent represents the interests of two adverse parties. A principal can consent to dual agency or other conduct by the agent that would, without disclosure and consent, breach the agent’s duties. An agent must fully disclose material information to the principal when obtaining the principal’s consent. But even a principal’s advance, open-ended consent cannot justify disloyal conduct. The agent must always act in good faith.
A dual agency relationship is not automatically formed every time a broker is in contact with both a seller and a buyer of a boat. As noted by the court in Proctor v. Holden, “good salesmanship and fondness do not an agency make.” In that case, the court held that although there was some relationship between the broker and the buyers, the broker represented only the seller and, as a matter of law, there was no agency relationship between the broker and the buyers. Whether an agency relationship has been created is dependent on the specific facts and circumstances in a given situation.
It is often the case, in the yacht brokerage industry, that one brokerage, or even one person, interacts with both parties to a transaction. Exercise caution in these situations and make sure it is clear to all parties whose interests you actually represent. In a situation where a dual agency exists, you must fully and fairly disclose the dual agency and obtain express consent from both principals.
Remedies for Breach of an Agent’s Duties.
Here is the rub. If you run aground on the shoals of agency, you risk losing your commission and/or having to defend a lawsuit.
If an agent breaches her duties to the principal, the principal can avoid paying the agent a commission otherwise due or can recover a commission already paid. Agents cannot recover a commission owed by a principal where the agent breached their fiduciary duties. In some jurisdictions, the principal may avoid the payment of a commission without having to demonstrate that the breach of the duty by the agent caused harm to the principal. If a dual agency exists, and is “not consented to by both principals, [an agent] cannot recover a commission from either party to the transaction.” 
A principal is also entitled to any undisclosed profit made by an agent in the course of the agency. The principal may also be able to recover other damages arising from the agent’s breach of fiduciary duties. For example, a principal could argue that she purchased a boat for more than it was worth because the agent failed to disclose a material defect. In this situation, the principal could seek to recover the difference between the purchase price and the fair market value of the boat with the defect. In a reported court decision, a principal recovered the agent’s secret profit, the expenses of his suit against the sellers to rescind his purchase of the business, and the costs of operating the business before the rescission.
- Understand who you represent. Know what duties you owe that person.
- If you intend to act as a dual agent, say so to both principals, disclose material information, and obtain written consent from both the buyer and seller.
- Know your fiduciary duties and fulfill them.
- Avoid taking actions that could create an unintended dual agency.
In real estate, the Maryland legislature has expressly allowed brokers to act as dual agents under specific circumstances. The basic requirements include: (1) In any real estate transaction, an agent must disclose in writing who they represent. (2) In order to act as a dual agent, the agent must obtain written informed consent of all parties to the transaction. (3) A single agent working for the broker may not act as the agent for both the seller and the buyer; two different agents must be involved, one for each party to the transaction.
A yacht broker is well advised to make a similar disclosure in a situation where a dual agency may exist. A written consent form could be used. Because it may be impractical for a yacht brokerage to assign two different agents to represent the seller and the buyer, the consent form could be supplemented to make the scope of the agent’s duties to each principal clear. Following these recommendations will help a yacht broker (agent) fulfill their fiduciary obligations to their principal and reduce the risk that a dual agency will inadvertently be created.
* The information offered in this column is summary in nature and should not be considered a legal opinion.
**Danielle J. Butler is the Managing Partner of Luxury Law Group. She may be contacted at 954-745-0799 or [email protected].
About Luxury Law Group
Luxury Law Group is a full-service law firm focusing on transaction and litigation matters related to luxury assets including yachts, aircraft, real estate, custom automobiles, art collections and fine antiquities. Serving clients around the world, Luxury Law Group is strategically positioned, with offices in Fort Lauderdale, Stuart, Washington, D.C., and The Hamptons, to provide concierge law service expected by our diverse list of clients.