August 2020

Agency Agreements – getting it right, the first time

In commercial life, certainty makes for good business, and a fundamental element of running a successful business is getting it right, the first time.

The same goes for all types of legal transactions. Certainty of the bargain should be front of mind when entering into any agreement. You want to make sure that the agreement you are entering, or that you are asking a stakeholder to enter, is a correct reflection of the bargain that has been struck, legally binding, fair and, most importantly, enforceable.

This article, which is the first of two on this topic, outlines a few issues to consider when entering into an agency agreement that will maximise the agent’s prospects of being paid commission for the work done.

Importance of the agreement

As tempting as it might be, and no doubt cost effective, not all circumstances call for the same form of agreement.

We find in our practice that, for good reason, organisations seek to use pro forma documents wherever possible in order to streamline business practices and save costs. However, if you don’t turn your mind to tailoring legal documents to the circumstances of each new engagement then issues can arise that may require more costs to be spent to fix the problem, and consequent distraction and time away from productive activities for the business.

Agency agreements are just one legal document that you should aim to get right, the first time. If an agreement is not drafted in contemplation of the specific circumstances of the new engagement, trying to meet the criteria for payment of commission after the work is done can be complicated and costly, especially with larger transactions that might involve multiple parties and complex ownership structures. Whilst there are alternative avenues available to an agent seeking commission in circumstances where the agency agreement is unenforceable, these should be considered very much ‘last resort’ arguments to be fallen back on in exceptional circumstances, rather than the standard fail-safe to ensure payment.

Legislative intervention

In NSW, the Property and Stock Agents Act 2002 at section 55 provides the requirements for an entitlement to commission or expenses that an agency agreement needs to comply with to be enforceable[1].

In summary, the legislative requirements for an enforceable agency agreement are:

  1. in writing;

  2. signed by the principal and the agent;

  3. complies with any applicable requirements of the regulations; and

  4. a copy of the agreement served by the agent on the principal within 48 hours after the agreement was signed.

Often in our practice we have clients come to us in circumstances where the agency agreement was not served in compliance with section 55 and there is a question of entitlement to commission, because the agreement is technically unenforceable.

Agents and principals need to be aware of section 55A that stipulates the circumstances in which a court or tribunal may be able to grant relief from disentitlement to commission and expenses. The circumstances are many and act as a safeguard to agent disentitlement to commission in circumstances where disentitlement would be unjust, unfair or unreasonable.

Section 55A[2] says that a court or tribunal may order commission or expenses to be wholly or partly recoverable in circumstances where an agent would otherwise be entitled to commission, but for:

  1. a failure to comply with the requirement in section 55 that the agency agreement be served on the principal; or

  2. a failure of the agency agreement to comply with the requirements of the regulations.

To persuade a court or tribunal to award payment of commission or expenses in the first circumstance the failure must be occasioned by inadvertence or other cause beyond the control of the agent. Additionally, payment of the commission or expenses in this case will only be made if it is fair and reasonable in all the circumstances to do so, and failure to make the order would be unjust.

The court or tribunal might order relief from disentitlement in the second circumstance if it is satisfied that:

  1. the failure to comply with the regulations is a minor failure;

  2. no loss has been suffered by the principal; and

  3. failure to make the order would be unjust.

Providing enough evidentiary material to meet the requirements set out in section 55A is often a costly and time-consuming process. Being required to do so of course introduces an element of uncertainty into the agent’s pursuit of the commission amount, which can lead to long and drawn out disputes that contain risk and commercial uncertainty for both sides.

Hence, whilst section 55A can to some extent protect parties from the ramifications of poorly drafted agency agreements, it is by far and away preferable to get the agency agreement right, the first time. 

Effective cause of sale

If an agency agreement is unenforceable (and cannot be ameliorated by section 55A) or does not sufficiently contemplate the circumstances that the agent finds themselves in, resulting in no entitlement to the commission, there might be an alternative.

One possible alternative is a claim in quantum meruit.

Quantum meruit is an expression which means “the amount he [sic] deserves” or “what the job is worth”. Essentially, quantum meruit is an action for payment of the reasonable value of services performed.

A quantum meruit claim is awarded at the court’s discretion when the value of the services cannot be easily quantified or a dispute about the quantum or contract exists such that the party suffering the detriment could be compensated for the services rendered.

In LJ Hooker v WJ Adams Estate[3], the court found that if an agent introduces a person who ultimately becomes the purchaser, the agent has been an effective cause of the sale and any intervention of the seller, or another person, is irrelevant. The agent must show that the introduction was the effective cause of the sale. 

This decision, and many others that have followed it[4], highlights the importance of good record keeping. To sufficiently prove to a court, on the balance of probabilities, that your work or introduction was the effective cause of the sale, you will need comprehensive contemporaneous documentary evidencing your claim.

A later decision of the High Court in Pavey & Matthews Pty Ltd v Paul[5] decided that an action could be brought on a quantum meruit basis to recover the reasonable remuneration for work done under an unenforceable contract. Deane J held that a quantum meruit action did not rely on an implied contract but rather on a claim to restitution or a claim based on unjust enrichment. 

Conclusion

In this article we have considered the most commonly contemplated remedies available to manage the effects of a non-compliant or unenforceable agency agreement. There are other avenues of attack available if you find yourself in these circumstances, such as common law or equitable rectification and misleading or deceptive conduct claims, which we will cover in a second bulletin at a later time.

The better option though is to make sure that the agency agreement being entered is prepared in contemplation of all circumstances of the agency and the legislative requirements are adhered to. Often, having a lawyer cast their eye over agency agreements before they are executed, or the work is performed, saves much expense and frustration at the back end when you’ve completed the work and are looking for payment.

If you find yourself in a situation that might require remedying, the commercial disputes team at Bartier Perry is available to assist.

Authors: Gavin Stuart & Emma Boyce

 

[1] Similar provisions exist nationally. See s49A Estate Agents Act 1980 (VIC), s 135 Property Agents and Motor Dealers Act 2000 (QLD), s 100 Agents Act 2003 (ACT), s 20 Land and Business (Sale and Conveyancing) Act 1994 (SA), s 44 Property Agents and Land Transactions Act 2016 (TAS), s 60 Real Estate and Business Agents Act 1978 (WA).

[2] Some of the other state and territory acts referred to in footnote one also have sections that operate in a similar way to s 55A and their application should be considered on a case by case basis.

[3] [1977] HCA 13.

[4] There have been some cases that disagree with this decision including Investmentsource Corporation Pty Ltd v Knox Street Apartments Pty Ltd [2002] NSWSC 710 but no decision has resulted in a binding position that a quantum meruit claim cannot be pursued in every circumstance.

[5] (1987) 162 CLR 221.