Brokerage—Arbitration Award Denying A Brokerage Commission Vacated—Award Was Arbitrary and Violative of Public Policy –Wife Signed Agreement—Husband Owned the Apartment—A Failure to Understand, Focus On, Or Recall Commission Agreement Is Not A Defense

A petitioner broker (broker) had moved to vacate an arbitration award which was in favor of the husband and wife respondents. The husband respondent owned the subject apartment. The owners retained the broker to find a tenant. The broker and the respondent wife had entered into an agreement that provided that the broker was entitled to a six percent commission if a tenant found by the broker purchased the apartment within six months after the lease expired, or within six months after the expiration of any extension of the lease (agreement).

The broker found tenants for the apartment. The tenants' lease expired on July 14, 2013. The tenants continued to live in the apartment pursuant to an oral arrangement with the respondents until July 10, 2014, when they purchased the apartment for $3.05 million. The respondents refused to pay the broker a commission on the sale. The parties went to arbitration. After the arbitrator denied the broker's claim for a commission, the broker commenced the subject proceeding to vacate the arbitrator's decision and to recover its commission.

The broker argued that the terms of the agreement were “clear and…the arbitrator violated public policy by denying [broker's] claim for a commission.” Since the broker had obtained the buyers of the apartment, it asserted that it was irrelevant that it did not play an active role in the sale negotiations.

The respondents contended that the agreement had only been signed by the wife yet the husband was the sole owner of the apartment, and that the broker had not procured the tenants and the tenants had “contacted respondents without [broker's] involvement.” The respondents further claimed that “the sale occurred a year after the expiration of the lease term” and the tenants had never signed an extension of the lease. The parties had agreed to the amount of rent, but not to a term for the extension. The tenants lived in the apartment pursuant to such oral agreement until they purchased the apartment.

Arbitration awards may only be vacated on the grounds stated in CPLR 7511(b). The court noted that a “claim that an arbitrator exceeded his or her power 'occurs only where the arbitrator's award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator's power'” and “courts are obligated to give deference to the decision of the arbitrator.”

The agreement provided:

During the Term of this Agreement you agree to refer to Broker all inquiries,…and offers received by you…and you agree to conduct all such negotiations solely…through Broker. Nothing in this Agreement shall preclude you from leasing the Premises on your own, provided,…, you may not utilize the services of [any other broker].… You agree that when and if a lease of the property is…executed, we will…be paid our commission…for services rendered only from the tenant,…, provided that we are the procuring Broker for the deal.

If the premises is sold during the Term of this Agreement,…to a tenant procured by Broker,…within 6 months after the expiration of the lease term or extension thereof you agree to pay Broker a commission of 6 percent….

The arbitrator had expressed surprise that the respondents had not attempted “to challenge the validity of the [agreement]” as others might have done. “Even counsel for [broker] stated that he believed that the [respondents] were honest people….” and “the arbitrator acknowledged that less honest people might try to invalidate the [agreement]” claiming the wife lacked authority to sign it, “but the [respondents] did not make such a claim.”

The arbitrator concluded that when the wife signed the agreement, “she did not understand, focus on, or later remember the issue of the 6 percent sales commission.” The husband was not present when the agreement was signed and reportedly was unaware of “the sales brokerage commission issue.” The arbitrator opined that “[t]he amount of the claim would be a steep price to pay for such a failure to understand and the lack of any meeting of the minds on this issue; particularly when the precise terms…in the [agreement] were not met” in the subject situation and “no value was provided by the claimant during the sales process.” The arbitrator had recommended that the broker “revise its brokerage agreement to include the specific situation present here.”

The court vacated the arbitrator's award on the ground that it was “irrational and violates a strong public policy.” The court found that the wife's failure to “understand, focus on, or remember the sales commission component of the [agreement]” was “not a valid basis to void a clear and obvious written provision….” The arbitrator had not found that the wife was “incapable of understanding the provisions in the contract,” the agreement had been obtained by fraud or that the wife “lacked authority to enter the contract.”

The arbitrator noted that the husband had not been present when the agreement was signed. The court asked “[s]o what if he was not present?” “No one challenged [the wife's] authority to sign” the agreement or whether she had the “capacity to understand it when she signed this two and a half page [agreement], in which the key provision…is clear.” This case did not involve “a signatory” who “is bound by an obscure provision buried in an endless stack of a paperwork.”

The court found that after the lease expired, the parties had entered into “a month-to-month lease” and “the purpose of the [agreement] is clear—if petitioner found the tenants and those tenants ended up buying the home within six months of the termination of the lease (and any extension of said lease), then petitioner would be entitled to a commission….” The arbitrator had not explained why “a month-to-month lease should not be considered an extension of the initial lease.” The tenants were procured by the broker, continued to live in the apartment and the agreement did not require that the extension had to be in writing for a particular term. “It encompasses any extension.”

The court opined that the arbitrator's suggestion that the broker had not “provided anything of value in connection with the sale of the apartment misses the point.” If the parties had not wanted “to alert petitioner of the sale, then it makes perfect sense that petitioner would have no active role in the negotiations.” Moreover, the agreement did not require the petitioner “to provide any services to receive a commission…as long as the tenants procured by petitioner buy the premises within six months after the expiration of the lease. That happened here….” The broker had procured the tenants and received a “commission from the initial lease.”

The court held that the arbitrator's determination was “wholly irrational because it ignores a clear and obvious agreement.” The court explained that parties may not avoid their contractual obligations “because they claim that they forget about them or think the other party does not deserve compensation. If such reasons could be the basis to ignore a contract, then there would be little significance to written agreements.” The court stated that to require that brokers “include every possible type of lease extension in its [agreement],” is inappropriate. Such suggestion may cause agreements to become “needlessly lengthy and confusing.”

The court further reasoned that regardless of whether the wife “understood the agreement or not,” she signed the agreement and “neither of the [respondents] claimed she lacked the authority to sign it.” The court believed that the arbitrator's view that “paying a $183,000 commission is too 'steep' a consequence for respondents…misses a crucial point—petitioner is losing out on a significant commission to which it is entitled.” Moreover, the court did not believe that the wife did not “understand” or that the husband was “unaware of the [agreement].” The court stated that such position “makes no sense” and ignores the facts. Finally, the court opined that the arbitrator's “decision…ignores the law that you are deemed to have read what you signed…, and what [the wife] signed, was short and simple.” Thus, the court granted the petition and directed the broker to submit a proposed order and judgment.

NRT New York LLC v. Spell, Sup. Ct., N.Y. Co., Index No. 652641/2017, decided Jan. 29, 2018, Bluth, J.

Scott E. Mollen is a partner at Herrick, Feinstein.