Lawyer: Err on the side of disclosurePosted on Written by Jim Flannery
“The times are changing,” said Miami attorney Michael Pennekamp, during a seminar to help yacht brokers stay out of legal trouble.
Specifically, he was talking about how to avoid misrepresenting pertinent facts to buyers and sellers during yacht sales transactions – and stay out of court. “The numbers [in court awards] are bigger now and a lot of people you represent made their money through litigation,” he says. “It doesn’t take much … for someone to go off on a jag and pursue a principle to the ends of the earth.”
Pennekamp, a lawyer with Fowler White Burnett, is representing HMY Yacht Sales Inc. and broker Jim Barboni in their request for a retrial in the $1.8 million judgment against them for negligent misrepresentation.
Though not speaking directly to the HMY case, Pennekamp and Miami attorney Michael Moore addressed a packed house of 300 June 17 at a Florida Yacht Brokers Association seminar on closings and the law about issues related to negligent and fraudulent misrepresentation.
Moore says a broker has a fiduciary duty to both parties – buyer and seller – in an escrow transaction. That duty is similar to that of a lawyer or banker, exacting the “highest degree” of trust, confidence, good faith and loyalty. It includes a duty to disclose “known and suspected material facts” about a yacht, including defects and deficiencies, Pennekamp says. “Failure to disclose in a listing or the sales process exposes you to legal liability and/or expense,” he says.
According to Pennekamp, negligent misrepresentation may occur when:
- A broker makes a statement about a material fact that the broker believes to be true but is in fact false.
- The broker is negligent in making that statement because he or she should have known it was false. The broker failed to use “reasonable care.”
- The broker intended for the buyer to rely on that statement to make a decision.
- The buyer “justifiably relied” on the false statement.
- The buyer suffered loss or damage as a result of it.
Fraud differs from negligence in that it involves intentional misrepresentation and/or a “reckless disregard” for the truth.
A “material fact” is, in general, one that you would want to know about before making your decision if you were a buyer, Pennekamp says. Material facts could include failure to maintain a boat, engine rebuilds, engine hours, warranties, damage to running gear, fiberglass work, sinkings, collisions, hard groundings, repetitive repair of the same parts, spider cracking in fiberglass or gelcoat, and design deficiencies. Typically the jury decides whether a fact is material, Pennekamp says.
“The judge is the finder of law; the jury is the finder of facts,” Moore says.
And juries often are not well-educated about boats, so they might not always be right on the mark about what is material and what is not. “Err on the side of disclosure,” Pennekamp says. “Use your gut.”
Pennekamp advises brokers to properly execute listing, sale, and purchase and acceptance agreements, and to include in all of them an “as-is” clause and other relevant “disclaimers, indemnifications, hold harmless and defense clauses.”
The “as-is” clause essentially says the broker believes all the information he has presented about the vessel is accurate, that the broker has disclosed all known defects and deficiencies that would affect a buyer’s decision, and once the sale has been consummated the buyer accepts the boat “as is” without any warranties. The clause also says no representation by an owner or broker about the boat’s condition is binding on the owner or broker, so the buyer is advised to get a good surveyor and go over the boat with a fine-tooth comb.
However, Pennekamp says, under Florida law brokers cannot limit their liability for fraud, negligent misrepresentation or unfair acts or trade practices by putting an “as-is” clause in the contract. Proof of fraud, negligent misrepresentation or unfair acts or trade practices overrides the “as-is” clause. It is no longer a defense.
Pennekamp maintains that “puffing” – exaggerating the qualities of a boat in an ad – is opinion and not a factual claim, should not be relied on by a buyer and cannot be the basis for a claim of negligent misrepresentation. He maintains, too, that a buyer cannot claim negligent misrepresentation if a sales contract explicitly states the seller and broker have disclosed what they know about the boat in good faith and are not bound by any inaccurate and inadvertent representations that they might have made. Rather, the buyer, per the contract, should get a surveyor to go over the boat, take it on sea trials and rely on these investigations rather than the broker’s or seller’s say-so.
Pennekamp advises brokers to make sure information and photographs in their yacht listings and on their websites are “accurate, current and updated regularly,” and include the same disclaimers that are in the contracts so buyers can’t claim they were sucked in by misleading advertising. He recommends keeping copies of yacht listings and any correspondence regarding a particular boat, and keeping a file of memos of conversations with anyone about the boat.
Finally, brokers should always recommend that a buyer hire a surveyor to go over the boat before buying it. Even if a broker does all these things, he or she isn’t “100 percent protected,” says Pennekamp.
“But you’re a lot more protected than if you don’t,” he says.
This article originally appeared in the August 2010 issue.