Unfortunately, many sellers do not closely read their brokerage listing agreements. However, there are hidden terms in all agreements that vessel owners should understand. One such term involves the legal obligation to pay a commission after a listing agreement has expired or been terminated.
Procuring Cause Doctrine
The procuring cause doctrine is a legal theory based on the principle of good faith and specifies that a broker deserves a commission if he initiates negotiations between a buyer and seller through some affirmative act, even if the sale occurs after a listing agreement is terminated. Most listing contracts used today are “exclusive right to sell agreements.” In other words, the owner gives the exclusive right and authority to one brokerage to manage the sale of their vessel. Under such an agreement, the procuring cause doctrine is typically inapplicable and normal rules of contract interpretation apply. Hence, the terms of the listing agreement govern, including when a commission is owed.
Look for the Language
Through most listing agreements, a commission must be paid to the broker even after the contract is terminated if the vessel is subsequently sold to an individual to whom the vessel was previously shown during the term of the contract. Normally, the paragraph is not clearly labeled. Sometimes it will be titled “Other Situations,” and other times it may not be identified at all. To be fair, this type of language is not restricted to yacht brokerage, and the public policy behind it makes sense. Owners should not be able to terminate a listing agreement and immediately sell a vessel to someone a broker brought to them without paying a commission.
The Terms Should Be Clear
Unfortunately, the language in most listing agreements lacks specificity and oftentimes favors the brokerage. The relative time frames should be clear, what affirmative action the broker must take to trigger that particular clause should be unambiguous, and the burden to share relevant information should be logical and fair. For example, should a broker be owed a commission if he spoke to a potential buyer one time when the boat was listed but the owner sold it to that same person six months after the listing expired without ever knowing the broker showed it to that individual in the first place? It probably depends on who you ask. That can be a tricky situation if the language is vague.
A Few Pointers
Some small adjustments in the language can make a big difference. To begin with, a seller should ensure the broker is required to “physically show” and/or “substantially present” the vessel during the term of the listing. Many agreements simply require a boat to be “submitted” or “introduced” by the brokerage. Those words are too ambiguous in this context. Secondly, the time frame should be clear and reasonable. Most listing agreements allow for six to 12 months after the listing has expired or been terminated, but anything longer is probably unfair to the owner.
Thirdly, and perhaps most important, the burden should be on the broker to provide a list of names to the owner after the contract has expired. Most listing agreements will either fail to require a list of persons to whom the vessel was physically shown or put the burden on the owner to request such a list. Ideally, the broker is required to provide the owner a list within 10 to 15 days after termination of the listing agreement. Hence, the owner should not be obligated to pay a commission to that broker on a subsequent sale if such a list is not provided. In my opinion, this is a more logical way to handle the process, and fairer to the owner and any subsequent brokers.
What Can Happen
I have personally seen situations where an owner has been caught owing a commission to two different listing brokerages. The first broker initially showed the buyer the vessel, but the listing agreement was terminated shortly thereafter. The owner listed the boat with another brokerage, which began negotiations with the same buyer a few months later and eventually sold the boat. The second broker assumed it was fine to proceed as normal because the owner never requested or provided a list of persons from the previous broker in accordance with the initial listing agreement. Of course, there is certainly blame to go around in that scenario, but the owner signed the contract and the terms were not in his favor.
To be clear, brokers are extremely important tools for sellers. Regardless, I strongly recommend every owner to read their listing agreement and hire a maritime transaction attorney to review the terms if it makes them feel more comfortable. It is crucial the owner and brokers understand the relevant terms so all parties are protected.
Raleigh P. Watson is a contributing author, and a Partner at Miller Watson Maritime Attorneys.