Effective Cause of Sale, the Test - Break in Continuity of Negotiations #271

By Gerry Neely
B.A. LL.B

The conclusion of a judge, concerning the test for determining the effective cause of sale in a case where an agent sued for a commission, may have some application to the arbitration of a commission dispute between two agents of a board/association.

The agent took a listing at a price of $3.85 million, a listing which, with several renewals, continued from March, 1991, to October, 1992. In the latter month, a couple who had viewed the property approximately seven times over the preceding two or three months, and had obtained an appraisal which valued the property at $2.8 million, made an offer of $2.75 million. The sellers' counter offer of $3.65 million was rejected and the prospective buyers then turned their attention to other properties which might be suitable for their new home.

The sellers listed the property with another agent, a listing which excluded a commission if a sale subsequently took place to the prospective buyers. They were now anxious to sell because of their purchase in 1992 of another house. A mutual friend first advised the sellers that he thought their asking price was too high and then told the prospective buyers that the sellers might be prepared to consider a more realistic offer. In June of 1993 the property sold for $2.9 million.

The argument for payment of commission made on behalf of the agent was that it did not matter that there had been a break in the continuity of negotiations. Instead, if the ultimate sale was on, essentially the same terms as the offer that was made before negotiations ended, then the test for continuity had been met and the agent was entitled to a commission.

The sellers' argument was that the similarity between the original unsuccessful offer and the ultimate sale was irrelevant. The commission could only have been earned if the agent could establish that there had been a continuity in negotiations, or a continuing interest in the negotiations.

The judge's decision was that the proper test to be applied was whether the continuity of negotiations had been broken. Even though the agent had introduced the eventual buyers, and had used his best efforts to market the property, the agent's claim for commission was lost because negotiations between the parties were at an end in October, 1992 when it was apparent that they were so far apart in price.

In reaching this decision the judge referred to a decision of the Supreme Court of British Columbia, where an agent had a contract which entitled him to commission if a sale of the shares of a company took place to a named party introduced by the agent, or if a binding contract was entered into at any time and the agent's efforts were the effective cause of sale.

An agreement was reached, which was subject to financing, which could not be arranged. The parties agreed that the contract was at an end and the agent returned the buyer's deposit.

Within a matter of a month the Company's Act was changed to allow the assets of a company to be mortgaged to assist a buyer in the purchase of shares of a company. The seller, but not the agent, became aware of this and as a result of direct negotiations by the seller with the buyer and the financial institution, the seller was able to arrange for the sale of his shares.

The agent's claim for commission was rejected because the relations between the parties were not merely postponed but broken. The contract was reopened because of the change in the law, but not through any actions of the agent.¹

In arbitrations involving a commission dispute between members of a board/association, one of the factors referred to in determining effective cause is whether the agent who introduced the buyer to the property, followed that introduction up by maintaining the buyer's interest in the property. Failing to do that, in general, means that the agent has abandoned the buyer and broken the causal connection.

The relationship can be re-established through some fresh initiative. If, for example, the agent in the preceding case had become aware of the change in the law and had advised the seller of it, it is probable that the original introduction, together with this fresh initiative, would have led the court to declare that the agent was the effective cause of the sale.

In cases involving commission disputes between agencies, the question of whether this relationship was re-established before the other agency became involved with the same buyers will be important.²

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