In the Spotlight: Evidence in Broker's Actions for Commissions

In the litigation of an action brought to recover real-estate brokerage commissions, evidence that is ordinarily excluded is nevertheless admitted because of the necessities attendant in such actions for the claimant to establish the elements of a cause of action.

Specifically, in New York, hearsay testimony of conversations between a broker and a prospect not in the presence of a seller is allowed, as is proof of a seller's motive in refusing to sell after a meeting of minds has been procured. Proof of the acceptance by a seller of a prospect identified by a broker may be received in lieu of the requirement that a broker must prove the financial capacity of a prospect in a transaction that failed to close.

On the other hand, other proffered proof, which on the surface would seem admissible, is excluded as irrelevant to a specific brokerage claim. These exclusions include a recounting of a broker's efforts to procure prospects other than the one who has agreed to a seller's terms, as well as a mere indemnity between principals (as distinguished from actionable misrepresentations as to the alleged lack of dealings with a claimant broker).

Broker's Conversations

The courts have established as a hearsay exception the right of a broker and that of his prospect to testify to conversations that took place between them not in the presence of the employing principal ' usually a seller or lessor of property. Lockhart v. Hamlin, 190 NY 132 (1907); Pomerantz v. Sussman, 279 App.Div. 1019 (2nd Dept. 1952).

The exception is necessary to permit a broker to establish that he has fulfilled his part of the unilateral contract between himself and his employer (see, e.g., Burr v. Anta, 103 NYS2d 589, aff'd 278 App. Div 905 (1st Dept. 1951)), by procuring a meeting of minds and to establish the readiness, willingness and ability of the prospect to make the deal. Unless such testimony is admitted, there would be no means available to the broker to show the completion of his performance where the acquiescence of the prospect to the terms of the transaction occurred out of the presence of the employing principal.

The reason for the exception was supplied by the Appellate Division, First Department in Melkon v. Kirk, 232 App. Div. 134 (1951), and has remained valid thereafter (See, e.g., Hardy v. Primex Equities Inc., 33 AD2d 648, 4th Dept. (1969), modified and aff'd 26 NY2d 645 (1970).

The court in Melkon held:

[I]n the case before us, we are of the opinion that the conversation excluded would be competent not only with respect to the work done by the plaintiff to show that he was the procuring cause of a sale, but also to show that in fact a sale had been made and that the purchaser was ready and willing to meet defendant's terms; and that as a matter of fact, by reason of such acceptance, there had been effected a meeting of minds between him and the defendant as disclosed in the statements made by such purchaser to defendant's agent, the plaintiff herein (232 App. Div. at 135, 136).

Admissibility of Motive

Proof of motive is admissible in an unconsummated transaction to enable the broker to establish that the transaction at hand did not close because of any failure of the minds to meet, but due to other reasons, usually the receipt by the principal of more advantageous terms from another prospect, after consensus had been reached on the essential provision of the first deal.

A broker may, therefore, introduce testimony as to why his principal did not complete the transaction with his prospect.

In Carnegie v. Abrams, 37 AD2d 327 (1st Dept. 1971), the court explained:

The question is always whether there is a genuine lack of consensus or a deliberate attempt to escape liability by attributing the failure of negotiation to such cause. In many cases this lack of good faith has been established by the fact that the owner later sold the property to a higher bidder.

This ruling accords with two earlier pronouncements of the First Department: Payne v. Williams, 83 App. Div. 388 (1903), affirming 178 NY 589 (1904), where the court pointed out that it is proper to show that a defendant had a motive for refusing to proceed with a transaction; and Douglas L. Elliman & Co. v. Sterling Garage Inc., 277 App. Div. 979 (1st Dept., 1950), where the court held that “plaintiff may of course, introduce evidence that defendant leased to another as proof of its breach of contract,” i.e., there was inducement (motive) to reject a deal already agreed upon.

Furthermore, a broker may also introduce proof of a non-monetary motive, such as deep-seated religious prejudice, to establish full performance of the essential terms of a transaction where a seller has “capriciously refused to discuss missing terms such as contract deposit and closing date, the natural progress of the transaction to a successful conclusion was thwarted by the defendant's sudden and wrongful refusal to proceed.” It was so held by the First Department in the seminal case of Mengel v. Lawrence, 276 App. Div. 180 (1949), which agreed that the broker was entitled to recover because of the defendant's arbitrary and capricious termination.

The court noted that the broker “might have treated the defendant's conduct as a breach of contract and proceeded on quantum meruit,” but allowed recovery on the theory of performance of the basic contract between the principal and the broker.

Acceptance, Proof of  'Ability'

In an unclosed transaction, the broker's requirement of proving the financial capacity of a prospect may be satisfied by showing that the prospect has been accepted by the other principal. Rosenblatt v. Bergen, 237 NY 88 (1923); Goldmann v. Goldmann Realty Corp., 227 App.Div. 28 (2nd Dept. 1929).

Such acceptance may be established by an executed contract of sale with a named buyer. Capano v. Sostillo, 75 AD2d 759 (1st Dept. 1980). It has been held that acceptance of the buyer may also be established by the seller's oral agreement to enter into a contract with an identified buyer, unless the seller's subsequent refusal to sell is based on the buyer's alleged financial incapacity (Door Knob Realty Inc. v. Northrop, 186 Misc2d 675, Sup. Suffolk, 1976).

Proof of Financial Ability in Absence of Acceptance

In general, it is not necessary for a broker to show that on the date of the meeting of minds, a purchaser had the necessary funds to satisfy all of the cash components of the deal, but merely that he was able to tender the down payment at the contract date and was in a position to command the required balance on closing.

The courts have ruled that no formula need be followed to establish financial ability, so long as the purchaser's assets were sufficiently liquid or that he had binding commitments from third parties to enable him to close. Gleberman v. Lederer, 281 App. Div. 39 (1st Dept. 1952).

Among other acceptable evidence is an open line of credit at a bank or from another lender, uncollateralized, on the prospect's own signature, showing a then-present borrowing power.

Proof of a purchase made subsequent to the proposed closing date by the prospect, utilizing funds at least in the amount required in the prior deal is also admissible. Mengel v. Lawrence, 276 App. Div 180 (1st Dept. 1949).

Claimant Broker's Testimony

A real estate broker is regarded as an expert in all phases of real estate transactions. As such, he may testify to the reasonable value of his own services, even though he is suing for commission where the action is based on quantum meruit. Phoenix Auto & Raincoat Co. Inc. v. Joseph, 122 Misc. 465 (1924).

Prior Efforts to Sell

A broker suing for commissions earned for procuring a purchaser to whom his employer sold may not offer evidence of his unsuccessful prior efforts to sell to others. His action is based upon his performance of his unilateral contract with the principal, consideration for which is furnished by securing a meeting of minds between the principals. Hecht v. Meller, 23 NY2d 301 (1968). Since the other prospects did not reach that juncture, evidence of the broker's efforts to interest them is immaterial and may tend to prejudice a jury. Sibbald v. Bethlehem Iron Co., 83 NY 378 (1881).

Moreover, testimony may not be introduced to corroborate the broker's evidence as to the price he claims the vendor authorized him to offer to an earlier prospect; the focus of the then-present litigation being upon the offer-counter-offer and final mutual consensus on the transaction that did actually materialize. Cohen v. City Bank Farmers Trust Co., 276 App. Div. 195 (1st Dept. 1949).

Similarly, evidence of such prior negotiations may not be received as bearing on the vendor's credibility, as testimony of prior unsuccessful efforts concerns a collateral effort.

Nonadmissibility of Oral Agreement to Compensate a Broker Made After Broker Rendered Services

Past Consideration

Customarily, a broker is paid for services rendered after his employment for procuring an acceptable and competent prospect. Id.

However, it may happen that the employment is restricted in certain respects such as limiting the broker to dealing only with prospects for whom he is acting as managing agent and it is not until later ' after the broker has unsuccessfully performed his limited function but has disclosed the identity of the prospect ' that the vendor removes the limitation and agrees to pay compensation for such services previously rendered.

Or in other words, the consideration for the later promise is past and the promise is not supported by present consideration. The new promise is “nudam pactum.” Such newly given promise, if oral, is inadmissible as violative of General Obligations Law '5-1105 since “past consideration is no consideration,” unless in writing.

Representations, Warranties

Indemnities

A bare provision in a sales contract that one principal indemnifies the other against a brokerage claim does not give a broker third-party beneficiary rights, since it is intended for the benefit of the indemnitee and not for a third party (Warsawer v. Burghard, 234 App. Div. 346, 1st Dept. 1932, Ficor v. National Kinney Corp., 67 AD2d 659 (1st Dept. 1979). Evidence of such indemnity by a broker is inadmissible. Hersh v. Notre Dame Residency Club Inc., NYLJ Feb. 18, 1973 (App. Term, 1st Dept.).

Contractual Provision to Pay Commissions

A provision in a contract of sale that recognizes a named broker in connection with a sale and states that the “seller agrees to pay the commissions and other compensation due” to the broker permits the broker to offer the provision as a third-party creditor beneficiary. Ficor v. National Kinney Corp., supra.

Representations and Warranties

Representations and warranties made by principals with respect to brokers are to be distinguished from indemnities. They are admissible in tort actions by the broker against the prospect, if such representations/warranties are false and interfered with, or induced the breach of a contractual relationship between the broker and the principal. Goodman v. Kirkeby, 282 App. Div. 86 (1st Dept. 1953). A broker may offer them, even though he is not a party to the contract containing such material. Cohen, supra.

Of course, to be actionable, such representations must be shown to be false in fact, and known to be false when made, that the principal (employer) relied on the representation and was induced thereby to breach his agreement with the broker and in consequence did not pay the broker the commission it had theretofore agreed to pay. Bryce v. Wilde, 39 AD2d 291 (3rd Dept., 1972), aff'd 31 NY2d 882.

In enumerating the requirements for such action for tortious interference with the broker's contract with his principal, the Cohen court held:

[T]here must exist a valid contract between a plaintiff and another, defendant's knowledge of that contract; defendant's intentional interference or intentional procuring of a breach of that contract without justification and damages.

Conclusion

The courts have carefully distinguished between admissible and nonadmissible testimony in brokerage litigation, providing the rationale for the distinctions that have been made. Although these doctrines appear to be in contradiction to the symmetry of established practice, the judicial balance that has been achieved has permitted fair and equitable evidentiary presentations in this sometimes puzzling legal field.

Clarence S. Barasch is a member of the Law Firm of Clarence S. Barasch & Lionel A. Barasch. This article originally appeared in the New York Law Journal, an Incisive Media sister publication of this newsletter.

In the litigation of an action brought to recover real-estate brokerage commissions, evidence that is ordinarily excluded is nevertheless admitted because of the necessities attendant in such actions for the claimant to establish the elements of a cause of action.

Specifically, in New York, hearsay testimony of conversations between a broker and a prospect not in the presence of a seller is allowed, as is proof of a seller's motive in refusing to sell after a meeting of minds has been procured. Proof of the acceptance by a seller of a prospect identified by a broker may be received in lieu of the requirement that a broker must prove the financial capacity of a prospect in a transaction that failed to close.

On the other hand, other proffered proof, which on the surface would seem admissible, is excluded as irrelevant to a specific brokerage claim. These exclusions include a recounting of a broker's efforts to procure prospects other than the one who has agreed to a seller's terms, as well as a mere indemnity between principals (as distinguished from actionable misrepresentations as to the alleged lack of dealings with a claimant broker).

Broker's Conversations

The courts have established as a hearsay exception the right of a broker and that of his prospect to testify to conversations that took place between them not in the presence of the employing principal ' usually a seller or lessor of property. Lockhart v. Hamlin , 190 NY 132 (1907); Pomerantz v. Sussman , 279 App.Div. 1019 (2nd Dept. 1952).

The exception is necessary to permit a broker to establish that he has fulfilled his part of the unilateral contract between himself and his employer ( see , e.g., Burr v. Anta , 103 NYS2d 589, aff'd 278 App. Div 905 (1st Dept. 1951)), by procuring a meeting of minds and to establish the readiness, willingness and ability of the prospect to make the deal. Unless such testimony is admitted, there would be no means available to the broker to show the completion of his performance where the acquiescence of the prospect to the terms of the transaction occurred out of the presence of the employing principal.

The reason for the exception was supplied by the Appellate Division, First Department in Melkon v. Kirk , 232 App. Div. 134 (1951), and has remained valid thereafter (S ee, e.g., Hardy v. Primex Equities Inc. , 33 AD2d 648, 4th Dept. (1969), modified and aff'd 26 NY2d 645 (1970).

The court in Melkon held:

[I]n the case before us, we are of the opinion that the conversation excluded would be competent not only with respect to the work done by the plaintiff to show that he was the procuring cause of a sale, but also to show that in fact a sale had been made and that the purchaser was ready and willing to meet defendant's terms; and that as a matter of fact, by reason of such acceptance, there had been effected a meeting of minds between him and the defendant as disclosed in the statements made by such purchaser to defendant's agent, the plaintiff herein (232 App. Div. at 135, 136).

Admissibility of Motive

Proof of motive is admissible in an unconsummated transaction to enable the broker to establish that the transaction at hand did not close because of any failure of the minds to meet, but due to other reasons, usually the receipt by the principal of more advantageous terms from another prospect, after consensus had been reached on the essential provision of the first deal.

A broker may, therefore, introduce testimony as to why his principal did not complete the transaction with his prospect.

In Carnegie v. Abrams , 37 AD2d 327 (1st Dept. 1971), the court explained:

The question is always whether there is a genuine lack of consensus or a deliberate attempt to escape liability by attributing the failure of negotiation to such cause. In many cases this lack of good faith has been established by the fact that the owner later sold the property to a higher bidder.

This ruling accords with two earlier pronouncements of the First Department: Payne v. Williams , 83 App. Div. 388 (1903), affirming 178 NY 589 (1904), where the court pointed out that it is proper to show that a defendant had a motive for refusing to proceed with a transaction; and Douglas L. Elliman & Co. v. Sterling Garage Inc. , 277 App. Div. 979 (1st Dept., 1950), where the court held that “plaintiff may of course, introduce evidence that defendant leased to another as proof of its breach of contract,” i.e. , there was inducement (motive) to reject a deal already agreed upon.

Furthermore, a broker may also introduce proof of a non-monetary motive, such as deep-seated religious prejudice, to establish full performance of the essential terms of a transaction where a seller has “capriciously refused to discuss missing terms such as contract deposit and closing date, the natural progress of the transaction to a successful conclusion was thwarted by the defendant's sudden and wrongful refusal to proceed.” It was so held by the First Department in the seminal case of Mengel v. Lawrence , 276 App. Div. 180 (1949), which agreed that the broker was entitled to recover because of the defendant's arbitrary and capricious termination.

The court noted that the broker “might have treated the defendant's conduct as a breach of contract and proceeded on quantum meruit,” but allowed recovery on the theory of performance of the basic contract between the principal and the broker.

Acceptance, Proof of  'Ability'

In an unclosed transaction, the broker's requirement of proving the financial capacity of a prospect may be satisfied by showing that the prospect has been accepted by the other principal. Rosenblatt v. Bergen , 237 NY 88 (1923); Goldmann v. Goldmann Realty Corp. , 227 App.Div. 28 (2nd Dept. 1929).

Such acceptance may be established by an executed contract of sale with a named buyer. Capano v. Sostillo , 75 AD2d 759 (1st Dept. 1980). It has been held that acceptance of the buyer may also be established by the seller's oral agreement to enter into a contract with an identified buyer, unless the seller's subsequent refusal to sell is based on the buyer's alleged financial incapacity ( Door Knob Realty Inc. v. Northrop , 186 Misc2d 675, Sup. Suffolk, 1976).

Proof of Financial Ability in Absence of Acceptance

In general, it is not necessary for a broker to show that on the date of the meeting of minds, a purchaser had the necessary funds to satisfy all of the cash components of the deal, but merely that he was able to tender the down payment at the contract date and was in a position to command the required balance on closing.

The courts have ruled that no formula need be followed to establish financial ability, so long as the purchaser's assets were sufficiently liquid or that he had binding commitments from third parties to enable him to close. Gleberman v. Lederer , 281 App. Div. 39 (1st Dept. 1952).

Among other acceptable evidence is an open line of credit at a bank or from another lender, uncollateralized, on the prospect's own signature, showing a then-present borrowing power.

Proof of a purchase made subsequent to the proposed closing date by the prospect, utilizing funds at least in the amount required in the prior deal is also admissible. Mengel v. Lawrence , 276 App. Div 180 (1st Dept. 1949).

Claimant Broker's Testimony

A real estate broker is regarded as an expert in all phases of real estate transactions. As such, he may testify to the reasonable value of his own services, even though he is suing for commission where the action is based on quantum meruit. Phoenix Auto & Raincoat Co. Inc. v. Joseph , 122 Misc. 465 (1924).

Prior Efforts to Sell

A broker suing for commissions earned for procuring a purchaser to whom his employer sold may not offer evidence of his unsuccessful prior efforts to sell to others. His action is based upon his performance of his unilateral contract with the principal, consideration for which is furnished by securing a meeting of minds between the principals. Hecht v. Meller , 23 NY2d 301 (1968). Since the other prospects did not reach that juncture, evidence of the broker's efforts to interest them is immaterial and may tend to prejudice a jury. Sibbald v. Bethlehem Iron Co. , 83 NY 378 (1881).

Moreover, testimony may not be introduced to corroborate the broker's evidence as to the price he claims the vendor authorized him to offer to an earlier prospect; the focus of the then-present litigation being upon the offer-counter-offer and final mutual consensus on the transaction that did actually materialize. Cohen v. City Bank Farmers Trust Co. , 276 App. Div. 195 (1st Dept. 1949).

Similarly, evidence of such prior negotiations may not be received as bearing on the vendor's credibility, as testimony of prior unsuccessful efforts concerns a collateral effort.

Nonadmissibility of Oral Agreement to Compensate a Broker Made After Broker Rendered Services

Past Consideration

Customarily, a broker is paid for services rendered after his employment for procuring an acceptable and competent prospect. Id.

However, it may happen that the employment is restricted in certain respects such as limiting the broker to dealing only with prospects for whom he is acting as managing agent and it is not until later ' after the broker has unsuccessfully performed his limited function but has disclosed the identity of the prospect ' that the vendor removes the limitation and agrees to pay compensation for such services previously rendered.

Or in other words, the consideration for the later promise is past and the promise is not supported by present consideration. The new promise is “nudam pactum.” Such newly given promise, if oral, is inadmissible as violative of General Obligations Law '5-1105 since “past consideration is no consideration,” unless in writing.

Representations, Warranties

Indemnities

A bare provision in a sales contract that one principal indemnifies the other against a brokerage claim does not give a broker third-party beneficiary rights, since it is intended for the benefit of the indemnitee and not for a third party ( Warsawer v. Burghard , 234 App. Div. 346, 1st Dept. 1932, Ficor v. National Kinney Corp. , 67 AD2d 659 (1st Dept. 1979). Evidence of such indemnity by a broker is inadmissible. Hersh v. Notre Dame Residency Club Inc., NYLJ Feb. 18, 1973 (App. Term, 1st Dept.).

Contractual Provision to Pay Commissions

A provision in a contract of sale that recognizes a named broker in connection with a sale and states that the “seller agrees to pay the commissions and other compensation due” to the broker permits the broker to offer the provision as a third-party creditor beneficiary. Ficor v. National Kinney Corp., supra.

Representations and Warranties

Representations and warranties made by principals with respect to brokers are to be distinguished from indemnities. They are admissible in tort actions by the broker against the prospect, if such representations/warranties are false and interfered with, or induced the breach of a contractual relationship between the broker and the principal. Goodman v. Kirkeby , 282 App. Div. 86 (1st Dept. 1953). A broker may offer them, even though he is not a party to the contract containing such material. Cohen, supra.

Of course, to be actionable, such representations must be shown to be false in fact, and known to be false when made, that the principal (employer) relied on the representation and was induced thereby to breach his agreement with the broker and in consequence did not pay the broker the commission it had theretofore agreed to pay. Bryce v. Wilde , 39 AD2d 291 (3rd Dept., 1972), aff'd 31 NY2d 882.

In enumerating the requirements for such action for tortious interference with the broker's contract with his principal, the Cohen court held:

[T]here must exist a valid contract between a plaintiff and another, defendant's knowledge of that contract; defendant's intentional interference or intentional procuring of a breach of that contract without justification and damages.

Conclusion

The courts have carefully distinguished between admissible and nonadmissible testimony in brokerage litigation, providing the rationale for the distinctions that have been made. Although these doctrines appear to be in contradiction to the symmetry of established practice, the judicial balance that has been achieved has permitted fair and equitable evidentiary presentations in this sometimes puzzling legal field.

Clarence S. Barasch is a member of the Law Firm of Clarence S. Barasch & Lionel A. Barasch. This article originally appeared in the New York Law Journal, an Incisive Media sister publication of this newsletter.