Third-Party Recommendations and REALTOR® Liability #504
Could a licensee be held liable for the poor performance or negligence of another professional such as a home inspector, contractor, or notary public, whom the licensee referred to his or her client?
It depends. Factors to be considered include: whether the licensee conducted any due diligence into the competence or reputation of the referred professional; whether the licensee is in a conflict of interest because of some relationship with the referred professional; and whether the licensee expects to receive a fee or benefit from the referred professional.
There are not many Canadian cases considering this issue, but it has been considered by courts in the United States on many occasions. Interestingly, one factor considered by some courts in the US is whether, when making a referral, the licensee verified that the referred professional had their own insurance coverage under a professional liability insurance policy, to protect the client against any negligence of the referred professional. This factor may not be as important in BC, where a strong consumer protection legislative regime requires most licensed professionals to maintain adequate insurance against liability.
A general duty to exercise reasonable, prudent, diligent care applies. The safest course of action is to allow the client to find his or her own home inspector, contractor, notary public, or other professional. The second safest course of action is to provide the client with a referral service, such as the BC Notaries directory on the BC Notaries website, or the Lawyer Referral Service telephone number, etc.
In smaller communities where there may not be a wide range of such professionals available, licensees may wish to provide the client with a list of local professionals. The Real Estate Council of British Columbia recommends providing at least three names. When providing specific names of professionals, licensees must disclose any conflicts of interest, and should refrain from directly retaining any professionals on behalf of their clients.
In a 2014 Quebec case, the beneficiaries of an estate sued the estate's lawyer for having recommended an estate administrator who turned out to be a fraudster and stole the assets of the estate. The Court found the lawyer not negligent as there was no evidence that he could have discovered the administrator was a fraudster at the time he made the recommendation. The lawyer had heard only positive comments about the administrator from others who had used his services. The Court held the lawyer had given no guarantees with respect to the quality of the administrator's work.1
Similar reasoning was applied in an older BC case concerning the referral by a licensee of a contractor to conduct an inspection of a home for structural soundness on behalf of the buyer. The Court found that the licensee was not negligent as he had no reason to doubt the competence of the contractor, although it turned out the contractor missed patent evidence of rot in the basement foundations. The contractor was found liable even though the buyer had not paid anything for his services.2
Remember that failing to recommend retaining another professional in a situation requiring advice beyond the area of competence of a licensee may also amount to negligence. For example, failing to recommend a septic inspection when a client is considering purchasing a property on a septic system, or failing to recommend that a client seek legal and accounting advice on the best way to structure the purchase of a business, may be negligent. If a licensee suggests retaining the services of another professional and the client declines, licensees should document the client's refusal to do so in writing.
Also remember that if a referral fee is paid to a licensee by anyone, including, for example, a home inspector, mortgage broker, notary public, lawyer, savings institution, or another person providing real estate services, such arrangement must be disclosed in writing to the client pursuant to Real Estate Council Rule 5-11.
The Licensee Practice Manual sets out additional information on paying or receiving referral fees that licensees should be familiar with. With the new Rules restricting dual agency in BC, licensees may be dealing with more referrals than they have in the past and are well advised to be familiar with Council guidelines and Rules.Oana Hyatt
|1.||Lands v. Solomon, 2014 QCCS 207, aff'd 2016 QCCA 50.|
|2.||Edstrand v. Crest Realty Ltd.,  3 W.W.R. 310 (B.C.S.C.).|
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