In a fiercely-competitive market for listings, this can often happen:
- A vendor signs an exclusive agency agreement with one agent (the first agent), who introduces a buyer to the property;
- No immediate offer and acceptance between the buyer and seller happens;
- The vendor terminates the exclusive agency agreement with the first agent and relists with another agent (the second agent);
- The second agent sells the property to the buyer introduced by the first agent; and
- The first agent threatens to sue the vendor for commission.
Often there’s an important additional element:
- The vendor threatens to sue the buyer for not informing them that they had been introduced to the property by the first agent, per a standard warranty usually given under the contract for sale.
Can a vendor really be liable for double commission?
The short answer is ‘yes’ it is entirely possible and the Courts have in fact acknowledged this in the case of LJ Hooker Ltd v WJ Adams Estate Pty Ltd (1977) 138 CLR 5 (the ‘LJ Hooker case‘).
However, the LJ Hooker case also made clear that the threshold for entitling an agent to commission in these instances is quite high. In short, they must have been the ‘effective cause’ of the sale.
Such a term is implied into the contractual arrangements by the Courts where it is not express. So where the REI standard form agency agreement refers to an ‘effective introduction’ in fact this is to be read as ‘effective cause’.
What does ‘effective cause’ mean?
In the LJ Hooker case, one of the judges attempted to explain it as follows:
The phrase that is time honoured in this context is ‘effective cause’ or ‘efficient cause’, that the agent was an effective cause or the effective cause. See Anderson v Densley (1953) 90 CLR 460 at 467. The inquiry is a factual one … ‘Effective cause’ means more than simply ‘cause’. The inquiry is whether the actions of the agent really brought about the relation of buyer and seller and it is seldom conclusive that there were other events which could each be described as a cause of the ensuing sale. The factual inquiry is whether a sale is really brought about by the act of the agent: Green v Bartlett [(1863) 14 CB (NS) 681 at 685] quoted in Burchell’s Case [supra, at 624].
While that may not necessarily make things a lot clearer, it might be helpful to look at another case of Moran v Hull  1 NSWR 723 to see how ‘effective cause’ is applied in practice.
In that case, an agent was retained to sell a building and took a prospective purchaser to inspect it in January 1964. That prospective purchaser expressed no interest in it. In May 1964, the prospective purchaser and his partner put an offer on the property which was refused. The vendor then put forward a counter offer with certain financing arrangements arranged by the vendor, which was accepted. The Court found that the initial agent was not the effective cause of the sale. The judgment by Asprey JA included as follows:
“…the agent must adduce evidence from which it can be inferred that his intervention brought about the sale in the sense that businessmen would understand it. In my opinion commercial people, whilst conceding that purchasers would never have heard of the property but for the agent, would nevertheless not regard the agent as having been the effective cause of this sale. Months had passed by since the [agent] had taken [the prospective purchaser] to the property without any interest exhibited by [the prospective purchaser] in the property. Negotiations between [the prospective purchaser] and the [agent] in relation to a proposed purchase by the [prospective purchaser] of the property had never taken place thereafter. In my opinion upon the evidence the only finding open was that the effective cause of the sale was [the arrangements by the vendor of financing arrangements].”
While it is possible for a vendor to be sued for ‘double commission’ the threshold for a former agent proving they are entitled to commission is quite high and it almost certainly requires more than a ‘mere introduction’.
While it would be quite rare for a former agent to be able to establish this claim, the mere existence of the possibility does mean parties have to be on alert. The real risk in most transactions is probably with the buyer since it is customary for contracts to include a warranty that they were not introduced to the property by any agent other than the most current one. There is also usually an indemnity included in this clause.
Given the nature of ‘indemnities’ a former agent would not necessarily need to establish it was an effective cause to the sale in order for the indemnity to be activated. For example, the buyer might have to compensate the vendor for any legal fees that it incurs in responding to a former agent’s claim for commission.
If you wish to discuss any of the above with one of our lawyers, please don’t hesitate to get in contact with us on (02) 8315 3118.