‘Effective cause’

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For an agent to receive a commission payment under an agency contract, the agent may need to demonstrate that they were the ‘effective cause’ of the completed transaction. Arguments about agents’ commission payments typically arise when a transaction is dealt with by several agents but only one of whom was the effective cause of the transaction, say the purchase of a property, ie that agent’s actions was the reason for the eventual purchaser of the property completing its purchase.

As a starting point, there must be a contract between the agent and the vendor or purchaser. Quite simply, if there is no contract there can be no payment to the agent. A contract does, of course, not necessarily have to be in writing, it can be an oral agreement or an agreement by conduct. In the context of property agents in Hong Kong, it is of paramount importance that an agent has a written agreement in place otherwise it has no (enforceable) entitlement to any commission payment. This is because under Section 45(2) (a) of the Estate Agents Ordinance (Cap. 511) the agent shall be entitled to recover from, or to require the payment by any other person of, any amount in respect of any outgoing paid or payable by the agent as regards any acquisition or disposition of any property to which the proposal or undertaking relates if, and only if, among other things, an estate agency agreement between the agent and the client has been executed.

Where a written contract exists, as is usually the case, subject to any special terms or other indications in the contract of agency, where the remuneration of an agent is a commission on a transaction, the agent is not entitled to such commission unless their services were the ‘effective cause’ of the transaction.

A body of law exists concerning the notion of ‘effective cause’. Typically, agents are employed on terms that require that if a certain transaction is brought about, the agent will be entitled to a commission payment, which may be a percentage of the purchase price of the property (for instance, typically 1% from the vendor and purchaser for residential properties in Hong Kong) or for a stated fee.

Sometimes, one agent may only play a small or limited part in a transaction, which is then dealt with by another agent or by the principal. In those circumstances is the agent entitled to any commission payment? The answer to such a question lies primarily in the express or implied terms of the agency contract. As outlined above, many of these contracts turn upon whether the agent was the effective cause of (in the context of an estate agent) the completion of a sale or purchase of a property.

Therefore, where the ultimate transaction is different from and carried out in substitution from the contract under which the agent was engaged, the court will ask whether the agent was the effective cause of the particular transaction which the principal entered into.

The requirement of ‘effective cause’ may be implied into contracts depending upon the facts of the case. In MSM Consulting Limited -v- United Republic of Tanzania, Justice Christopher Clarke asked in respect of whether MSM was entitled to any commission payment whether, firstly, MSM’s terms and conditions of contract expressly or impliedly required MSM to be the effective cause of the purchase of the property in question; and, if so, was MSM the effective cause? In MSM’s contract it stated that:

“The Client will be liable to pay the Commission Fee if, at any time, the Client completes the purchase of a property which we [MSM] introduce to the Client or his/her representative and/or which we assisted the Client in viewing and/or negotiating.”

A similar wording appeared in the case of Foxtons Ltd -v- Pelkley Bicknell. This case involved the competing interests of two estate agents, one who was paid by the vendor, and Foxtons who were not. The vendor, Mrs Bicknell, agreed to terms with Foxtons, which entitled Foxtons to a commission of 2.25% of the sale price achieved on the basis of a sole agency agreement, payable if at any time unconditional contracts were exchanged with a purchaser introduced by Foxtons or with whom Foxtons had negotiations about the property or with a purchaser introduced by or offering by another agent during the period that Foxtons was sole agent.

Foxtons showed the property in question to Mr Low. He was initially interested in the property but then lost interest in it. The sole agency arrangement came to an end and Foxtons and Mrs Bicknell agreed a multiple agency agreement. Mrs Bicknell also agreed a multiple agency agreement with another agent, Hamptons. Several months later, Mr and Mrs Low visited the property and, ultimately, Mrs Low purchased it. Mrs Bicknell paid Hamptons its commission. Foxtons then claimed their commission on the basis that contracts were exchanged with a purchaser introduced by them.

The matter of commission payment to Foxtons reached the English Court of Appeal. In respect of agents’ commission payments under agency contracts, Lord Neuberger summarised five propositions established by a number of cases.

Firstly, Lord Neuberger stated that the court will readily imply a term that the agent is not entitled to commission on a contract unless his services were the effective cause of the transaction being brought about, particularly in the context of a residential property sale, unless the contract expressly states otherwise.

Secondly, the main reason for implying such a term (ie effective cause) is to minimise the risk of the seller having to pay two commissions. Thirdly, it is not entirely clear whether the test is ‘an effective cause’ or ‘the effective cause’. Fourthly, whether an agent was the effective cause is a question whose resolution turns very much on the facts of a particular case. Fifthly, where the term is implied, the burden is on the agent to establish that they were the effective cause.

Further, Lord Neuberger observed that the expression “a purchaser” in the phrase “a purchaser introduced by us”, could mean a purchaser who at some point in the future becomes a purchaser regardless of whether the purchase or the interest which gave rise to it owed anything to Foxtons.

The second possibility was that it meant a person who becomes a purchaser as a result of Foxtons’ introduction. Lord Neuberger preferred the latter interpretation and gave four reasons for that preference. Firstly, that this (latter) interpretation accorded better with the principles to be extracted from the cases, in particular, the usual notion that an agent can only recover their commission payment if they introduce someone who becomes a purchaser as a result of their introduction.

Secondly, the consequences of the (alternative) interpretation would be somewhat surprising because that would mean that Foxtons would be entitled to commission from a sale made years later if the purchaser had originally been introduced by them, even if that person was uninterested in the property when they introduced them.

Thirdly, the former interpretation accorded better with the expression “introduction” with the previously decided case of John D Wood & Co -v- Dantata. In that case Nourse LJ concluded that the word in the context of the phrase “introduction of a purchaser” could only mean the “introduction of the person who ultimately purchases, not to the property, but to the purchase…”.

Fourthly, the commission became due once “unconditional contracts are exchanged with a purchaser introduced by us”. The use of the word “purchaser” in this context was intended to indicate that the person concerned must have been introduced by Foxtons in his (eventual) capacity as a purchaser. Fifthly, the terms were Foxtons’ standard terms and the court should lean in favour of a construction which benefits the client.

However, and in any event, Justice Christopher Clarke pointed out that there was an important distinction between MSM’s terms and Foxtons’. That essential and important difference was that, in MSM’s case, commission is payable upon the completion of the purchase of a property which MSM introduced to the client. What was to have been introduced was the property to the client purchaser not the purchaser to the purchase.

Implying terms into agency contracts in the Hong Kong context has been recently discussed in the Court of Final Appeal in Eminent Investments (Asia Pacific) Limited -v- Dio Corporation. This case concerned payment of commission to a financial adviser, Eminent. DIO engaged Eminent to advise it upon how it could raise capital and thereby to expand its business. The parties signed a financial advisory agreement that ultimately included a ‘tail gunner’ clause which provides that if a transaction completes within a given time after termination of a corporate finance adviser’s agreement, the success fee is payable to the adviser exactly as if termination had not occurred. Therefore, this clause provided that DIO would pay Eminent a transaction fee if completion of the transaction took place within two years from termination of the agreement.

The Court, citing Bowstead & Reynolds on Agency, emphasised that, where an agent is entitled to remuneration upon the happening of a future event, the entitlement does not arise until the event has occurred and, importantly, the event upon which the agent’s entitlement to remuneration arises is to be ascertained from the terms of the agency contract. There is no special approach to the construction of contractual terms governing post-termination payments to financial advisers – it all depends upon the established rules of contract interpretation applied to the particular case.

In respect of the ‘tail gunner’ clause, the Court stated that where such clauses were incorporated into agreements, they run the risk of creating ‘grey’ areas, which may give rise to controversy. In that regard, the financial adviser may have gone beyond merely introducing the client to the potential investor and done a significant amount of work in promoting the transaction which is eventually completed after termination of the agency agreement, but within the run-off period.

However, where the client or a replacement financial adviser have made substantial contributions to actually sealing the transaction, this may give rise to an argument as to whether the (original) financial adviser has done enough to be entitled to the fee. In such circumstances, the Court suggested that a possible approach may be to construe the contract as recognising an entitlement to a success fee where the financial adviser’s advice and assistance is found to be an ‘effective cause’ of the transaction’s completion.

The Court though was keen to stress that all will depend upon the interpretation of the agreement. In the case before it, the Court stated that the financial advisory agreement was clear and there was therefore no need to imply any term (such as ‘effective cause’) into the agreement. Accordingly, Eminent’s entitlement to the fee required it to have introduced DIO to the completed transaction which was announced on 9 December 2010 – Eminent had not done so.

The simple message from the cases concerning agency agreements (as with agreements generally) is that clear wording is required to minimise the potential for argument as to who is entitled to an agency fee or commission. The mechanism triggering payment must also be clear and unambiguous.

Where the wording is unclear, there is more scope for the court to imply the term of ‘effective cause’. Where in financial advisers agreements there is a ‘tail gunner’ clause that may also give rise to uncertainty and result in terms being implied to the agreement, including that of ‘effective cause’.

Estate agents in Hong Kong should ensure that, firstly, they have an executed estate agents agreement in accordance with the Ordinance and, secondly, that the point at which commission is payable is clear and certain.

This article was authored by Richard Lyons and KM Lam.

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