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The bad faith termination of the broker.

The bad faith termination of the broker

Brokerage Law

Generally, to be entitled to commissions a broker must be the procuring cause in bringing about a meeting of the minds between the parties to a transaction. This requires the broker not only to introduce the parties, but also to participate in the negotiations or at least to instigate a proper attitude between the parties so that they they are able to negotiate without the broker's aid.

A major exception to this rule is that a broker will be entitled to commissions if he is not the procuring cause because of the bad faith termination of his employment.

The classic example of bad faith termination occurs when the broker's authority is terminated in the midst of negotiations which are approaching success. More than one hundred years ago in the leading case on brokerage law, the highest Court in New York stated that such a termination is improper:

"The right of the principal to terminate [a broker's] authority is absolute and unrestricted, except only that he may not do it in bad faith, and as a mere device to escape the payment of the broker's commissions. Thus, if in the midst of negotiations instituted by the broker, and which were plainly and evidently approaching success, the seller should revoke the authority of the broker, with the view of concluding the bargain without his aid, and avoiding the payment of commissions about to be earned, it might well be said that the due performance of his obligation by the broker was purposely prevented by the principal."

Numerous cases have recognized that a broker will be entitled to commissions if he has been terminated under such circumstances.

Our Courts will analyze each such case on its specificfacts to determine if the broker was terminated in bad faith. Unfortunately, however, the results of such analysis do not always appear to be consistent. Because the acts constituting the bad faith are usually secret, the broker often has no direct proof to support such a claim and must rely on inferences. Courts recognize the broker's dilemma and frequently. the absence of direct proof alone is not enough to defeat a claim of bad faith.

Courts, however, will differ in their willingness to accept inferences of bad faith. At a minimum, they will require that the inference be reasonable in light of the facts of the case. If the claim of bad faith is logically inconsistent with the facts or relies heavily on unsupported speculation, the Court will dismiss the claim. As a general rule, it will be more difficult for the broker to prove that he was terminated in bad faith if the termination occurs early in the transaction and the broker has had minimal involvement.

A review of some of the cases provides further insight into our Courts' interpretation of what constitutes bad faith. In a leading case, the Court awarded a commission to the broker where the evidence indicated that a purchaser and seller conspired to deprive the broker of his commissions. The Court held that the defendants accepted the fruits of the broker's labors and stopped dealing with him after virtually all of the terms had been agreed to. The Court noted that there was extensive evidence from which it could be inferred (i) that plaintiff was terminated to avoid the payment of commisions, and (ii) that a second broker, who received a minimum commission, was installed merely as a dummy to give the appearance that a broker remained in the transaction.

In another case alleging bad faith, the Court awarded the broker a commission when the facts revealed that the owner simulated an interruption in negotiations and misrepresented the broker's role in the transaction. The Court also noted the significance of the fact that defendants profited from the transaction by eliminating all brokerage commissions.

In another case, the Court dismissed the broker's bad faith claim finding that it was entirely premised upon the most speculative inferences which were contradicted at every point by a common sense interpretation of the relevant events. The broker claimed that a tenant which it introduced to the Property improperly substituted another broker before making its initial offer for the space. The Court considered it important that negotiations for the space had not even begun at the time of the termination and that there was no evidence that the tenant terminated the broker to avoid paying commissions.

In a decision which appears to be unusually generous to the broker, the highest Court in New York refused to dismiss a broker's claim that defendants acted in bad faith by prematurely terminating a syndication plan and refusing to recognize the participants to the plan secured by the broker. Inexplicably, the Court was willing to reach this conclusion without addressing the reasons why the plan was terminated or the facts which supported the bad faith claim.

In another case the Court held that the facts did not support a claim of bad faith where the seller sold property to a purchaser introduced by the broker. The Court dismissed the charge of bad faith noting that (i) there was no evidence indicating that the broker could have succeeded or that the broker was prevented from selling the property by the acts of the defendant, (ii) the price paid was significantly higher than any procured by the plaintiff-broker and (iii) commissions were paid to another broker. It is significant to note that the parties entered into a contract a mere six weeks after the broker's services were terminated. This Court apparently did not consider such a short time period to be significant.

Another Court found it highly significant that a closing occurred within two months after the broker's termination. In that case the Court held that bad faith could reasonably be inferred from the abrupt termination of the broker's listing, direct contact between the seller and purchaser a few weeks after the termination, and a closing less than two months after the termination.

There must be a reasonable period between termination and closing. One Court found that the broker failed to establish that he was terminated in bad faith where the property was sold to the broker's customer two and one-half years after termination. The Court noted that it was highly unrealistic to suggest that the seller would delay a sale for over $100 million for two and one-half years in order to circumvent its obligation to pay the broker commissions of only three-eighths of one percent.

A review of case law on this subject enables us to suggest certain factors that must be considered before instituting a bad faith claim: (1) How far had the negotiations reached and were they approaching success at the time of the termination? (2) Did the transaction close without the payment of any brokerage commissions? (3) Was there a short period of time between the broker's termination and the agreement between the principals? (4) Was there any reasonable explanation for the broker's termination? (5) Was there any prior relationship between seller and the broker?

Jay J. Gurfein is senior partner of Gurfein & Graubard. He is a frequent lecturer at brokerage seminars and is on the faculty of New York University School of Continuing Education.

Ian L. Blant is an associate at Gurfein & Graubard.
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Title Annotation:Brokerage Law
Author:Gurfein, Jay J.
Publication:Real Estate Weekly
Date:Jan 22, 1992
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