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Agency commission claims and the doctrine of effective cause

publication date: Aug 18, 2008
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author/source: Tony Cockayne
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feeThis has become referred to as the “effective cause doctrine”. In particular, in estate agency cases the courts will readily imply a term into the contract, or construe the contract, so that the agent’s commission is not payable unless the services provided by the agent are an effective cause of the house sale. Such a term will not be implied, however, if it is inconsistent with the express terms of the contract. 

Lawyers acting for agents have now become more sophisticated in their drafting of agency commission contracts and in particular have designed the contracts so that their clients need not prove that they were the effective cause of the transaction. Those contracts have been tested by the courts in two recent cases in the Court of Appeal. 

The County Homesearch Co (Thames & Chilterns) Ltd v David Cowham [2008] EWCA Civ 26 
In County Homesearch v Cowham the claimant company issued proceedings against the defendant for unpaid commission in relation to home finding services provided by the claimant to the defendant prior to the purchase by the defendant of a £2.3m residential property. Clause 3 of the claimant’s standard terms and conditions provided that “…For the purposes of our Agreement, we shall be deemed to have introduced a property to you, if you have either received the particulars of a property from ourselves directly or indirectly, or from any of the firms of estate agents with whom we have regular contact, or through agents or individuals whom you have instructed us to negotiate with on your behalf...”. 

The claimant had provided the defendant with details of Hunter’s Legal update Agency commission claims and Moon along with other properties, but that information was not acted on by the defendant at the time. The defendant gave evidence to the effect that Hunter’s Moon was only pursued by the defendant when a third party surveyor suggested it as a possibility for the defendant and introduced the sellers to the defendant. That evidence was accepted by the Judge at first instance, Mr Recorder Hollander QC. 

The central question, therefore, was whether or not there was any scope for an implied term that the claimant should only be entitled to its fees if it was an effective cause of the purchase. The Recorder concluded that there was no need for such an implied term on the facts of the case, which was not the usual seller/agency contract, but was a home finders contract which only contemplated the instruction of one agent and where that agent was required to take specific steps to discharge its contractual obligations. He concluded that any implied term based on the effective cause doctrine would be inconsistent with clause 3 of the standard terms and conditions, which provided for a deemed introduction of the property, whether or not such there was in fact an introduction. 

In the course of his judgment the Recorder set out a useful statement of the applicable principles: 
1 The starting point must always be a consideration of the contract in question. The effective cause doctrine must be subject to the express terms; 
2 The express terms may be inconsistent with the implication of the effective cause doctrine, or may render its implication unnecessary; 
3 The court will start from the principle that a vendor who may instruct more than one agent is unlikely to intend to have to pay more than one and the contract will be construed to avoid such a result. The effective cause doctrine assists in preventing such a result; 
4 The usual contract between vendor and selling agent does not oblige the agent to take any specific steps to carry out any specific work. Such a scenario militates in favour of the effective cause doctrine where commission is linked with cause; 
5 The doctrine is less likely to apply and the implication less likely to be necessary, where the agency contract is outside the norm, either because there is not a conventional seller/agent contract, or because the wording of the contract as to the circumstances when payment is due renders such doctrine unnecessary. 

A notable omission from the arguments raised on behalf of Mr Cowham at first instance was the absence of any reliance on other parts of the 1999 Regulations which would have enabled him to argue that the term relied on was unfair.

Mr Cowham was not satisfied with that decision and appealed the decision. 

The Court of Appeal dismissed the appeal. Longmore LJ gave the leading judgment and took the opportunity to analyse the rationale for the effective cause doctrine. He concluded that the main rationale was the need for the client to avoid the risk of having to pay two commissions. Whilst sellers might often engage more than one agent, buyers were much less likely to do so, especially on the terms of the present contract, which included a requirement for an initial down payment. 

The Court also upheld the Recorder’s decision that an implied term incorporating the effective cause doctrine would be inconsistent with the express terms of the contract and the concept of the “deemed” introduction. Finally, the Court also dismissed a novel argument based on regulation 7(2) of the Unfair Terms in Consumer Contract Regulations 1999. 

That regulation provides that where there is doubt as to the meaning of a written term, the meaning most favourable to the consumer is to be preferred (and as such is distinct from the “unfairness” provisions of the 1999 Regulations). Longmore LJ held that this only applied where there was doubt about the meaning of a written term and not where it was arguable that a term should be implied. 

The House of Lords refused Mr Cowham permission to appeal. 

Foxtons v Pelkey Bicknell & Anr [2008] EWCA Civ 419 
The County Homesearch v Cowham decision was swiftly followed by the decision of the Court of Appeal in Foxtons. Interestingly, Lord Neuberger sat in the Court of Appeal for this case and gave the leading judgment (perhaps the House of Lords is insufficiently taxing for him). In Foxtons the agents were selling agents and were seeking to recover commission in accordance with the standard wording contained in the Schedule to the 1991 Estate Agents (Provision of Information).
Regulations (made pursuant to section 18 of the Estate Agents Act 1979) in relation to sole agency rights. 

Before turning to consider Foxtons further it is worth briefly considering the earlier decision in Dashwood v Fleurets Ltd [2007] EWHC 1610 (QB). In Dashwood v Fleurets the standard wording for sole selling rights fell for consideration. The material parts of the Schedule to the 1991 Regulations state as follows in relation to sole selling rights: 

  • “You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, in each of the following circumstances - if [unconditional contracts for the sale of the property are exchanged] in the period during which we have sole selling rights, even if the purchaser was not found by us but by another agent or by any other person, including yourself;
  • If [unconditional contracts for the sale of the property are exchanged] after the expiry of the period during which we have sole selling rights but to a purchaser who was introduced to you during that period or with whom we had negotiations about the property during that period.” 

Nelson J, hearing an appeal, concluded that the wording meant there was no room for implying the “effective cause doctrine” into the contract. All the estate agent needed to show was that he had introduced a person who turned out eventually to be the purchaser during the currency of the agreement, even if that person became the purchaser by another route unconnected with the original agent. 

One might have thought that the case of Dashwood v Fleurets Ltd would be the first and last word on the issue in this case, it being consistent with the interpretation favoured by leading practitioner’s texts (such as Bowstead & Reynolds). However in Foxtons the meaning of the standard wording used for “sole agency” agreements in the 1991 Regulations fell for consideration (the difference being, in sole agency cases is that the seller is not precluded from selling the property themselves). That wording was in the following terms:

  • “You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, if at any time [unconditional contracts for the sale of the property are exchanged]
  • With a purchaser introduced by us during the period of our sole agency or with whom we had negotiations about the property during that period; or
  • With a purchaser introduced by another agent during that period.” 

As such the material wording is very similar (though not identical) to that in the sole selling rights case, yet Lord Neuberger, without apparently considering Dashwood v Fleurets Ltd, concluded that the words

 “with a purchaser introduced by us” should be interpreted to mean “a purchaser who becomes a purchaser as a result of our introduction”, in effect re-introducing the doctrine of effective cause, rather than “a person introduced by us who at some time in the future becomes a purchaser”, which requires no such introduction. 

The correctness of the decision in Dashwood v Fleurets Ltd must now be in issue. 

Lord Neuberger set out a useful list of the general principles to apply in paragraph 20 of his judgement, in the following terms: 
1 The effective cause doctrine, or term, is very readily implied, especially in a residential consumer context, unless the provisions of the particular contract or the facts of the particular case negative it; 
2 The main reason for implying the term is to minimise the risk of the consumer having to pay two commissions; 
3 It remains unclear as to whether the test is “the” or “an” effective cause; 
4 Whether an agent was the effective cause very much turns on the facts of each case; 
5 While two commissions are to be avoided, there will be some cases where the contract terms and the facts compel such a result; 
6 Where the term is to be implied, the burden of proving effective cause rests with the agent. 

Case notes written by Tony Cockayne, Michelmores LLP, London and Bristol email: tjc@michelmores.com