Daily Decisions: Contractual Release of Real Estate Broker Violates Public Policy, Is Therefore Invalid

In Hanks v. Grace (Division 1, April 2, 2012), the Court of Appeals held that an exculpatory clause in a rescission contract between a real estate broker and a seller, which purported to release the seller’s claims against the broker, was void for violation of public policy. While the wording of the holding limits it to the circumstances of this case, the opinion will certainly be cited as precedent to invalidate other similar releases.

The facts: Sharon Hanks was trying to sell her house back in March 2008, so she hired James Grace. A potential purchaser made an oral offer to Grace in March, but Grace never passed that along to Hanks. Other potential purchasers — the Grimeses — also made an offer conditioned on an inspection and the ability to obtain financing. Hanks accepted. Grace took the house off the market.

However, “unbeknownst to Hanks,” the Grimeses’ offer was not just conditioned on their ability to obtain financing — it was conditioned on their ability to sell their previous house. When they could not sell their house the sale fell through. Grace then offered to buy Hanks’s house himself. (I can’t imagine it’s common for a broker to offer to buy his client’s house, right?) As part of that offer, Grace prepared a rescission agreement to undo the deal with the Grimeses. The rescission agreement contained an exculpatory clause for Grace, which purported to release Grace “from any and all present or future liability.”

As you can imagine, the Grace purchase fell through as well. Hanks then fired Grace, got a new agent, and eventually sold her house in September 2009 for $158,000 less than the original price. Hanks sued Grace for negligence, malpractice, fraud, breach of contract, and CPA violations. The case went to trial, where there were significant factual disputes. The jury returned a verdict in favor of Hanks for $195,000 in economic damages and $170,000 in non-economic damages.

The first issue on appeal was the validity of the release. The trial court had invalidated it for (1) lack of consideration and (2) violation of public policy. The Court of Appeals rejected the consideration argument, noting that “a contractual waiver can be unilateral and without consideration.”*** But the Court of Appeals agreed with the trial court that the release violated public policy.

To determine whether a release violates public policy, the Court of Appeals turned to the factors set forth by the Supreme Court in Wagenblast v. Odessa School District,110 Wn.2d 845 (1988).

1. The general area is suitable for public regulation.

2. The party seeking to enforce the release is engaged in an important public service.

3. The party provides that service to the general public.

4. The party has control over the person or property of the party seeking the service.

5. There is an inequality of bargaining power between the parties.

6. The release is a standard contract of adhesion.

This list is not a checklist or a set of requirements.  Rather, the “more of these characteristics present in a case, the more likely we are to declare the agreement invalid on public policy grounds.”

Here, based on the Wagenblast factors, the Court of Appeals determined that the release was invalid.

1. Real estate brokers are already regulated in their dealings with the public.

2. Brokers offer an important public service with expertise.

3. Brokers offer their services to the general public.

4. Once the broker relationship is established, the broker controls the operation of the sale.

5. Generally, agents have more expertise and bargaining power, while the individual lacks the necessary sophistication.

6. The release here at issue was a standard form contract.

The Court of Appeals concluded that the factors “are present in this case” and so “under these circumstances” the release violated public policy.

A few thoughts on that conclusion: Factors 1-4 are all stated generally and would apply to all brokers. Factor 5 is stated generally, but one could easily imagine a situation where the individual was sophisticated and had bargaining power — perhaps in a different real estate market. The Court, however, did not seem to inquire into the actual sophistication or bargaining power in this case. Factor 6 is specifically set forth on these facts. So more individually negotiated releases may turn out differently. It will be interesting to see how this plays out in future cases with slightly different facts.

Lastly, some procedural loose ends. Grace appealed the denial of his motion for summary judgment. But the Court of Appeals does not review denials of summary judgment based on issues of fact where the case eventually goes to trial. The trial sorts out those fact issues.

Grace also appealed the denial of his CR 50 post-trial motion. Remember last week, when Division 1 held in Washburn v. City of Federal Way (Division 1, March 26, 2012), that you need to make a CR 50(b) motion to preserve your ability to appeal the denial of your CR 50(a) motion? Well, Grace made a CR 50(b) motion after the jury returned its verdict, but he never made a CR 50(a) motion prior to the submission of the case to the jury. That’s no good.

The rule makes clear that a party must move for judgment as a matter of law before the trial court submits the case to the jury to preserve any opportunity to renew its motion after the case is submitted.

Because Grace only moved under CR 50(b) after the verdict, but never moved under CR 50(a) before the submission, his CR 50 motion was improper and the trial court rightly denied it.

So remember everyone: If you want to do it right and preserve everything, you need to make a CR 50(a) motion prior to the case going to the jury and then you need to renew that motion under CR 50(b) after the jury comes back with a verdict you don’t like. Belt and suspenders!

***On the consideration argument, I’m not sure why consideration is even an issue. I imagine the rescission contract as a whole was supported by consideration: Hanks no longer had to sell the house to the Grimeses, while the Grimeses no longer had to buy the house and they got their money back. By looking at consideration for the release, the Court seems to imply that there would need to be separate/independent consideration for the specific release provision. Normally, contracts are not analyzed to determine if each individual clause is independently supported by consideration. I am not sure why that would be different in this case. Perhaps the Court viewed Grace as a third-party beneficiary in a contract between the Grimeses and Hanks? That might affect the analysis, but the Court doesn’t get into that at all. In any event, it certainly doesn’t matter in this case, where no consideration was required.

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One thought on “Daily Decisions: Contractual Release of Real Estate Broker Violates Public Policy, Is Therefore Invalid

  1. Pingback: Monday Morning Mash-up: April 9, 2012 | Ziff Blog

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