As Reported by the NAR (National Association of Realtors), Duty to Arbitrate Upheld; Punitive Damanges Also Possible

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As a member of the NAR (National Association of Realtors) Barron and Posternock would like to provide you an update on a New Jersey Appellate Court that has considered whether a lawsuit involving a commission dispute between members of a REALTOR® association should be sent to arbitration when the lawsuit also sought punitive damages.

Last month, a New Jersey Appellate Court (Realty v. Caton, No. A-1171-09T2 (N.J. Super. Ct. App. Div. Aug. 31, 2010)) has considered whether a lawsuit involving a commission dispute between members of a REALTOR® association should be sent to arbitration when the lawsuit also sought punitive damages. As a member of the NAR (National Association of Realtors) Barron and Posternock would like to provide you an update on a New Jersey Appellate Court that has considered whether a lawsuit involving a commission dispute between members of a REALTOR® association should be sent to arbitration when the lawsuit also sought punitive damages.

The dispute involves an Ocean County Agency ("Brokerage") and its agent ("Salesperson") who was formerly associated with the Brokerage. During his time at the brokerage, the Salesperson obtained an offer on one of his listings. Following his departure, the buyer and seller entered into a purchase contract for this listing. The transaction eventually closed and the Brokerage claimed half of the commission that the Salesperson received.

The Salesperson had signed a "Termination Agreement" ("Agreement") with the Brokerage. The Agreement provided that the Salesperson would not receive a portion of any commissions if the purchase agreement was executed while the Salesperson was associated with the Brokerage but closed after the Salesperson left the Brokerage. The Agreement did not address the situation where the purchase agreement was executed after the Salesperson left the Brokerage.

The Brokerage filed a lawsuit seeking half of the commission. The Brokerage claimed that the Salesperson had improperly taken the listing with him when he moved to a new brokerage. The Brokerage also brought allegations against the Salesperson's new broker. These allegations also claimed a contractual right to the commission, tortuous inference with a contract by both the Salesperson and new broker, and punitive damages.

The Salesperson filed a motion to compel arbitration and stay the lawsuit. The Salesperson and the Brokerage are members of the Ocean County Board of REALTORS® ("Association"). Pursuant to their membership in the Association, both parties had agreed to abide by Article 17 of the NAR Code of Ethics and arbitrate all disputes "arising out of their relationship as REALTORS®". The trial court denied the motion to compel arbitration, ruling that the REALTOR® arbitration process did not allow for the arbitration of punitive damage claims and so these claims were outside of the duty to arbitrate. The Brokerage appealed this ruling.

The Superior Court of New Jersey, Appellate Division, reversed the trial court and sent the matter to the Association for arbitration. First, the court considered a REALTOR®'s duty to arbitrate disputes. The Brokerage argued that it only had a duty to arbitrate contractual disputes and/or a specific type of noncontractual dispute, and so this dispute should not be arbitrated by the Association because it contained the tort claims.

The court rejected this argument, finding that the duty of REALTORS® to arbitrate includes disputes "arising out of their relationship as REALTORS®" and so is much broader than simply contractual disputes. New Jersey courts have allowed the arbitration of noncontractual claims, so long as the basis for the dispute arises out of a contract, and courts in the state also employ the "presumption of arbitrability" when the parties have a contractual agreement to arbitrate all disputes.

The court found that the Association should arbitrate the dispute because each of the allegations against the Salesperson and new broker arise out of the contractual relationship between the Brokerage and the Salesperson. All of the allegations revolve around whether the Brokerage had a contractual right to receive a portion of the commission, or whether the new broker had interfered with the Brokerage's right to receive the commission. The court even found that the Association's arbitration panel could award the Brokerage punitive damages because the NAR Code of Ethics and Arbitration Manual does not contain a limit on the amount of the type of damages it can award for disputes between members "arising out of their relationship as REALTORS®" (awards of commissions are limited to the actual commission amount). Therefore, the court ruled that the Association could arbitrate the dispute and so reversed the trial court, sending the matter to the Association for arbitration and staying the lawsuit.

This opinion is provided by the NAR. It is not published in an official reporter and therefore should not be cited as authority. Please consult legal counsel before relying on this opinion.

-Dan Posternock, Barron & Posternock, Attorneys at Law

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