Case Name: Ralph G. Monty et al, Respondents, v. Ward W. Peterson et al, Defendants, Lewis W. Shurtleff et al, Petitioners
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1975-10-16
Citations: 85 Wash. 2d 956
Docket Number: No. 43629
Parties: Ralph G. Monty et al, Respondents, v. Ward W. Peterson et al, Defendants, Lewis W. Shurtleff et al, Petitioners.
Judges: Stafford, C.J., Finley, Hunter, Hamilton, and Brachtenbach, JJ., and Cochran, J. Pro Tern., concur.
Reporter: Washington Reports
Volume: 85
Pages: 956–965

Head Matter:
[No. 43629.
En Banc.
October 16, 1975.]
Ralph G. Monty et al, Respondents, v. Ward W. Peterson et al, Defendants, Lewis W. Shurtleff et al, Petitioners.
Charles E. Hunter, for petitioners.
Sam B. Franklin (of Lund, Franklin & DeLong), for respondents.

Opinion:
Utter, J.
This is an appeal from a judgment entered in a nonjury trial in favor of the plaintiffs (respondents), Ralph and Karin Monty, in a suit for the amount of a real estate broker's commission paid by them to defendants (petitioners) Lewis W. Shurtleff and Shurtleff, Inc. The trial court found for the Montys, who claimed that the defendants had negligently failed to inform them of restrictive covenants materially affecting the value of a parcel of land they received in a real estate transaction in which they employed the defendants. It held that defendants' nondisclosure rendered them liable for the full amount of the commission they received, regardless of the actual damages respondents incurred.
The Court of Appeals did not reach the merits of petitioners' argument due to the improper form of their brief. Review was granted by this court, however, to reach the issue of the proper amount of damages for negligent nondisclosure by a real estate broker. We reverse the judgment of the trial court and hold that, where a broker acts in good faith but negligently fails to disclose to his client a fact material to the transaction and no question of divided loyalty is involved, the proper measure of damages is the actual harm caused to the client by the broker's negligent omission.
The series of transactions that gave rise to this lawsuit began when respondents retained petitioners as their agent in listing an apartment house they owned for sale. Shortly after he had been retained by respondents, petitioner Shurtleff was retained by another couple, Ward and Viola Peterson, who wished to sell a small parcel of property (called the "Monson lot") and invest in some more extensive real estate. Mr. Shurtleff informed the Petersons of the availability of the respondents' property and obtained from them an earnest money offer to purchase it which he presented to respondents. After lengthy negotiations, they accepted it. The purchase price of the respondents' property was $55,000, $5,650 of which was paid by transferring the Monson lot to them.
The Monson lot .was zoned for duplex construction, and at all times all the parties were aware that this fact was material to respondents' valuation of it. It was also, however, subject to private covenants that restricted its use to single-family dwellings. Neither petitioners nor respondents were aware of these restrictions until they received the preliminary title report on the property. At that .time petitioner Shurtleff mentioned the restrictions to respondents, but did so in a manner that (according to the findings of the trial court) did not adequately call to their attention the effect the covenants might have on their valuation of or plans for the property.
When, after the transactions were completed, the- respondents became aware of the covenants and their import, they discussed the matter with petitioner and obtained a $680 rebate from the Petersons. They apparently were not satisfied with this partial settlement, and although the covenants diminished the value of the lot to them by only $850 and they had received $680, they filed this action against' petitioners for the full amount of the broker's commission they had paid them, $3,300. The trial court awarded them this full amount, holding that under Mersky v. Multiple Listing Bureau of Olympia, Inc., 73 Wn.2d 225, 437 P.2d 897 (1968), the measure of damages for negligent nondisclosure by a broker is the full amount of his or her commission, regardless of good faith and the fact that the damage caused by the nondisclosure was considerably less than that amount.
Petitioners' liability for failing to adequately' advise their clients of the significance of the covenants on the-land they purchased is not in issue here. Agents have a duty to exercise care in dealing with their principals and are liable for any damage caused by a breach of that duty. Restatement (Second) of Agency § 379 (1958); see Merkley v. MacPherson's, Inc., 69 Wn.2d 776, 420 P.2d 205 (1966); Ferris & Hardgrove v. Buff, 20 Wn.2d 161, 146 P.2d 331 (1944). The only question before us is what the measure of damages for breach of that duty should be in the circumstances of the instant case.
In most situations, an agent's negligence renders him or her liable only for the actual damages it causes the principal. Merkley v. MacPherson's, Inc., supra at 780; Western Bakeries, Inc. v. John Davis & Co., 110 Wash. 463, 188 P. 406 (1920); Green v. Bouton, 101 Wash. 454, 172 P. 576 (1918). In Mersky v. Multiple Listing Bureau of Olympia, Inc., supra, however, we recognized a limited exception to this rule in cases where agents negligently or intentionally fail to disclose to their principals facts bearing on their interests in the matters in which they are employed and their ability to maintain undivided loyalty to the principal. We held in Mersky, at page 233, that nondisclosure of a familial relationship between an agent and the person with whom he was dealing on the principal's behalf rendered him liable for the full amount of the commission he received "[hjowever inadvertently this failure [to disclose] occurred."
Mersky was viewed as controlling by the trial court on the question of measure of damages in any case of nondisclosure by an agent, and its rule was applied to the facts here even though there was no potential conflict of interest by the agent involved. In so doing, the court misinterpreted Mersky's holding. There we heavily emphasized that what was involved was nondisclosure of a fact that impugned the agent's ability to exercise undivided loyalty in representing his principal's interests.
It is of no consequence, in this regard, that the broker may be able to show that the breach of his duty of full disclosure and undivided loyalty did not involve intentional or deliberate fraud, or did not result in injury to the principal, or did not materially affect the principal's ultimate decision in the transaction. The rule and the available remedies, instead, are designed as much to prevent fraud as to redress it, and follow directly upon the heels of the broker's deliberate or innocent failure to timely and fully disclose to his principal the fact of the interdicted relationship, for the reason that the very existence of the relationship may have corroded the broker's obligation of undivided loyalty, may have been a material circumstance to the principal, or may have affected his actions or decisions in the course of the transaction involved.
Mersky v. Multiple Listing Bureau of Olympia, Inc., supra at 231. The nondisclosure there violated two duties the agent owed to his principal: the duty to exercise care and the duty of loyalty and corollary responsibility to disclose any facts which might bear on his ability to keep that loyalty undivided. Here no question of loyalty was involved. The trial court held specifically that petitioners acted in good faith, but did not adequately emphasize the significance of the restrictive covenants to respondents. In such circumstances the special rules of Mersky are not applicable.
In Tackett v. Croonquist, 244 Cal. App. 2d 572, 53 Cal. Rptr. 388 (4th Dist. 1966), the court specifically held that damages for negligent nondisclosure were limited to the actual harm caused to the principal where no question of the undivided loyalty was involved. Although apparently no other courts have directly addressed the issue, the rule of Tackett has been assumed by the court and parties to fix the proper measure of damages in a number of similar nondisclosure cases. See, e.g., James Wood Gen. Trading Establishment v. Coe, 191 F. Supp. 330 (S.D.N.Y. 1961); Witt v. John Blomquist, Inc., 249 Minn. 32, 81 N.W.2d 265, 59 A.L.R.2d 1451 (1957). We find it consistent with our previous cases involving negligence by agents in other aspects of their employment. We see no reason to expand the rule of Mersky to cases where the only duty breached is nondisclosure of a material fact. Failure to convey information, where that information is not pertinent to the agent's loyalty to his or her principal, is simply one specie of negligence, the penalty for which should be no greater than that for any other form of unintentional misfeasance by an agent.
We therefore hold that petitioners were liable only for the actual damages caused by their negligent failure to inform respondents of the covenants and their significance. It appears to be undisputed that, after they received the $680 settlement from the Petersons, respondents' net loss due to their ignorance of the covenants was $170. The award in their favor should have been limited to that amount, and the judgment in favor of respondents for the full amount of the broker's commission paid petitioners was therefore excessive.
The decision of the trial court is reversed.
Stafford, C.J., Finley, Hunter, Hamilton, and Brachtenbach, JJ., and Cochran, J. Pro Tern., concur.
Respondents argue in their briei that, since there is nothing in the record indicating that petitioners disclosed the fact of this dual agency to them, the trial court's award to them of the broker's commission should be upheld under Investment Exch. Realty, Inc. v. Hillcrest Bowl, Inc., 82 Wn.2d 714, 513 P.2d 282 (1973). It is true that the Investment Exchange case does put the burden on the broker to show that the fact of any dual agency relationship was disclosed to his or her clients, but that burden can be imposed only where nondisclosure of a dual agency is made a basis for an aggrieved client's suit for damages. Here respondents' complaint did not clearly allege any wrongful nondisclosure of the dual agency, and the issue was not explored by either side at trial. At oral argument in this court, petitioners' counsel stated that both respondents and the Petersons were well aware of petitioners' dual employment, and respondents' counsel did not dispute'-this contention. We thus do not - believe that petitioners' duty under Investment Exchange is properly at- issue-in this case.