Effective cause: a case of contract, commission and implied terms
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In a case about the wording of an agency agreement between a finance company, EMFC, and a corporate property developer, TRG, I look at whether the agreement contained an implied term that EMFC was only entitled to commission if it was an effective cause of the loan facilities in question.
EMFC argued against implying an effective cause term. Despite playing no part in assisting TRG to obtain a loan, EMFC insisted it should obtain its commission anyway.
The High Court held that an effective cause term could be “relatively easily” implied into the agreement. It was “commercially unreasonable” for EMFC to obtain a commission despite playing no part in obtaining the loan. EMFC therefore had no right to commission.
The Court of Appeal disagreed. It drew a distinction between the cases about estate agency contracts where the term could be relatively easily implied, and the agreement EMFC had signed. Moreover the test for implying a term is not one of reasonableness and fairness.
Though it might be strange that no effective cause term was agreed, it did not immediately follow that one should be implied:
- EMFC had been employed to assist with, not deliver, the loan facilities;
- another agent was engaged, as well as EMFC, with a different skill set and, in the court's view, it was envisaged (or at least plausible) that two commissions would be paid; and
- there were express clauses in the agreement that were inconsistent with the implication of an effective cause term.
The effective cause term was not necessary to give the contract commercial or practical coherence, nor did an effective cause requirement arise as a matter of obviousness.