Who is Liable in Business Transactions?

In real estate and other business transactions, information is typically conveyed to the buyer from the seller, broker and consultants.  If the information turns out to be incorrect, and the buyer had relied on it and suffered damages as a result, the parties may end up in litigation.  The big question becomes, who is liable to the buyer, if anyone? 

The Supreme Judicial Court recently ruled that a real estate broker may be liable for conveying incorrect information from a seller to a buyer.  In that case, the SJC ruled that a broker, like any person engaged “in the course of business,” may be liable for failing to exercise reasonable care in conveying information and making representations to a buyer.

In the case titled, DeWolfe vs. Hingham Centre, LTD., the seller incorrectly informed its broker that the property was zoned for business use when it was actually zoned “residential”.  The broker prepared a multiple listing service (MLS) listing for the property stating that it was zoned for business use and had written that “business” was the applicable zoning district.  After acquiring the property, the buyer learned that the property was zoned “residential” and that its planned business was not a permitted use. 

The buyer sued the broker and her real estate agency, alleging “negligent misrepresentation” and other claims.  The broker attempted to defend by asserting that she had merely conveyed zoning information that her client had provided to her, and that she was under no duty to confirm the zoning status of a property.

The SJC rejected the broker’s arguments, ruling that a broker has a duty to investigate before making representations as to the zoning classification of a property.  The broker has a duty to exercise “reasonable care” in making such representations.  If the broker’s misrepresentations were based on information provided by the seller or third-party, the fact-finder (a jury or judge) will determine whether it was reasonable under the circumstances to rely upon the seller’s information.

Stated another way, if it is reasonable under the circumstances for a broker to rely on information provided by the seller, the broker should not be liable for conveying such information to a buyer without conducting further investigation.  In contrast, if it is unreasonable under the circumstances for a broker to rely on information provided by the seller, the broker has a duty to investigate further before conveying such information to a buyer.

In the DeWolfe case, the SJC indicated that the broker’s reliance on the seller’s information was not reasonable:  the broker was experienced in selling properties in the town, the broker was not aware of any prior business use of the property, and the broker observed only houses and not businesses adjoining the property on either side.

The broker also attempted to defend on the basis of the “exculpatory clause” in the standard form Purchase and Sale Agreement.  That clause provided that the buyer had not relied on any representations not incorporated in the Agreement “or previously made in writing.”

The SJC ruled that the exculpatory clause did not immunize the broker because the buyer had relied on prior written representations of the broker (e.g., the MLS listing and the broker’s handwritten designation of the “business” zoning classification).

Although the DeWolfe case concerned a commercial real estate transaction, the SJC’s decision indicates that the doctrine of “negligent misrepresentation” applies to any person engaged “in the course of business”.  Thus, any business person who “failed to exercise reasonable care or competence in obtaining or communicating the information” conveyed to others may be liable if that information was false, justifiably relied upon, and resulted in economic loss to the other person.

Please contact me if you or a colleague has any questions regarding real estate or business transactions.