A recent Colorado Court of Appeals decision held that the real estate brokers were not a party to the purchase and sale contract between the sellers and the buyers and therefore were not jointly and severally liable for the award of attorney fees. Broderick v. McElroy and McCoy, Inc.
In this case, William and Karen Eberhart (the "Buyers") approached the real estate brokers and requested their assistance in finding a certain type of property that they wanted to purchase. According to the court decision, no written or oral agreement existed between the Buyers and the brokers. The brokers approached James and Karen Broderick (the "Sellers") and asked if they would be interested in selling certain property which at the time was not for sale. According to the decision, when the brokers approached the Sellers, it was not clear whether the brokers were representing the Buyers or the Sellers, and there was no listing agreement between the brokers and the Sellers. In September, 1995, the Buyers and Sellers entered into a contract for the sale of the property (the "Contract"). The Contract stated that the brokers represented the Sellers and exclusively owed them the "duties of trust, loyalty and confidence."
According to the Contract, the Buyers were to apply for financing within five days of its execution, and their application was to be approved by October 15, 1995, otherwise the Contract would terminate. The Buyers applied for financing, learned that the property appraised for under the Contract price, and anticipated that their financing request would be denied. On October 14th, the brokers told the Buyers about another property and prepared a contract for them. That transaction closed in late October. The Sellers filed suit against the Buyers claiming breach of contract in connection with the first property and seeking costs and attorney fees. They soon amended their complaint to include a claim of breach of fiduciary duty against the brokers.
The trial court ruled that the Buyers had breached the Contract. And, finding that the brokers had abandoned their efforts on the Sellers’ behalf and transferred their loyalty to the Buyers, the court also ruled that the brokers had breached their fiduciary duty to the Sellers. The court held that the brokers and the Buyers were jointly and severally liable for actual damages of $14,437, for costs, which were approximately $3,500, and for attorney fees in the amount of $22,500. In reaching its conclusion that the brokers also were liable for attorney fees, the court relied on the Contract provision stating that the brokers represented the Sellers and owed them their allegiance.
The brokers appealed, arguing that they were not liable for attorney fees. They claimed that the trial court had been mistaken in determining that they were parties to the Contract. As the court pointed out, usually the prevailing party in a lawsuit cannot recover attorney fees unless they specifically are provided for by contract, statute or rule. Of course contract provisions cannot be enforced against persons who are not parties to the contract in question.
The Colorado Court of Appeals concluded that a real estate broker is not a party to the contract between the property seller and the property buyer, and therefore, in Broderick, that the Contract provision awarding attorney fees to the prevailing party does not apply to the brokers. The Contract provision which the lower court relied upon to conclude that the brokers were parties to the Contract was agency disclosure language mandated by Colorado statute and the Colorado Real Estate Commission which require written disclosure to a buyer of a broker’s agency relationship with the seller. The court stated that "A broker’s fiduciary duties exist independently and irrespective of this contract. Brokers are not made a party to a contract simply by reciting language disclosing their agency relationship to sellers." The court also observed that merely because a broker has signed the portion of the document memorializing the commission agreement with the seller, that does not make the broker a party to the contract between the buyer and the seller and subject to an attorney fee provision.
Broderick v. McElroy and McCoy, Inc. , 961 P.2d 504 (Colo. Ct. App. 1997).