Brokerage Agreement Held to Create an Exclusive Agency, not an Exclusive Right to Sell

On June 10, 2014, the Court of Appeals issued a decision in Morpheus Capital Advisors LLC v UBS AG, 2014 NY Slip Op. 04112, interpreting a contract as creating "a standard exclusive agency, not an exclusive right to sell."

In Morpheus Capital Advisors, the plaintiff contracted with defendant UBSRE to serve as "financial advisor and investment banker in the proposed sale" of student loan assets owned by UBSRE. The plaintiff ultimately sued UBSRE and its parent for failing to pay it a commission when UBSRE sold "assets to a fund created by the Swiss National Bank as part of a 2008 bailout." The trial court granted the defendants' motion to dismiss "on the ground that the 2008 financial crisis and the bailout by the SNB constituted an unforeseeable event which undermined the basic assumption and purpose of the agreement, i.e., the introduction of UBSRE by Morpheus to a third party buyer." The First Department reversed, holding that while "UBSRE had not established its frustration of purpose defense," the agreement only "confer[ed] an exclusive agency to plaintiff insofar as it does not expressly prohibit UBSRE from finding a buyer for its toxic assets and thereafter engaging in a self-brokered sales transaction." However, the First Department also held that the plaintiff had adequately pleaded a cause of action even under that interpretation. The Court of Appeals granted leave to appeal and reversed the First Department, explaining:

The distinction between an exclusive agency and an exclusive right to sell is well established in a body of Appellate Division case law. As stated nearly a century ago,

The general rule is that where an exclusive right of sale is given a broker, the principal cannot make a sale herself without becoming liable for the commissions. But where the contract is merely to make the broker the sole agent, the principal may make a sale herself without the broker's aid, if such sale is made in good faith and to some purchaser not procured by the broker.

Put differently, a broker is entitled to a commission upon the sale of the property by the owner only where the broker has been given the exclusive right to sell; an exclusive agency merely precludes the owner from retaining another broker in the making of the sale. We have endorsed this dichotomy implicitly in the past, and now do so explicitly.

Furthermore, we agree with the case law of the lower courts holding that a contract giving rise to an exclusive right of sale must clearly and expressly provide that a commission is due upon sale by the owner or exclude the owner from independently negotiating a sale. Requiring an affirmative and unequivocal statement to establish a broker's exclusive right to sell is consistent with the general principle that an owner's freedom to dispose of her own property should not be infringed upon by mere implication.

(Internal quotations and citations omitted) (emphasis added). The Court of Appeals went on to hold that the agreement was an exclusive agency agreement and under that agreement, USBRE was not obligated to give the plaintiff "a chance to seek a buyer before UBSRE consummated an independent sale," and thus the plaintiff failed to state a claim.

This decision highlights the importance of using clear and unequivocal language in defining a broker's rights with respect to the subject of the brokerage agreement.