How to Determine Effective Cause

By Liad Hadar – Director

This article first appeared in Asset Magazine’s March 2022 edition

Few terms evoke stronger feelings than “effective cause” when it comes to transactional property disputes. In a fairly unemotional industry, nothing gets the blood boiling like being denied what one (believes one) is fairly owed, particularly when the precursory work was completed on risk.

Despite being one of property law’s more fiery topics, effective cause – the identification of the catalyst for a successful property transaction – is rooted in a sound legal formula. This article will help you to ensure your interests are protected in the effective cause realm, whether you’re a Seller, Agent or Broker.

The effective cause formula

The question of effective cause has been simplified by the Courts to a simple formula, which reads as follows:

1. Did the Agent or Broker introduce the ultimate Purchaser to the property?

2. Was the Agent or Broker mandated to do so at the time of the introduction?

If the answer to both questions is positive, then the Agent or Broker is the effective cause and thus entitled to commission from the Seller.

But it’s not always that simple.

In Wakefields Real Estate (Pty) Ltd v Attree and Others 2011 (6) SA 557 (SCA), the Supreme Court of Appeal was faced with a situation whereby Agent A introduced a Purchaser to the Seller but subsequently had their mandate terminated. Agent B thereafter completed the transaction.

The Court had to determine which Agent was responsible for introducing the Purchaser to the property and if that introduction was an effective cause of the sale. Interestingly, in determining this, the Court used a “but-for” test. The Court ultimately found that but for the initial introduction, the property would not have been sold to the Purchaser through Agent B and that despite his later intervention, Agent A’s introduction was the effective cause of the deal.

Personally speaking

Let’s look at two cases in Hadar Inc’s recent history that demonstrate the effective cause formula.

In the first case, Agent A concluded an exclusive sole mandate agreement with a Seller to market her home and put up a “For Sale” sign outside the property. Mrs X, a neighbour, drove past the property on her way to dropping her children at school and noticed the sign. Knowing the Seller personally, she reached out to her directly and informed the Seller of her interest in purchasing the property. Together they agreed that there was no need for an Agent’s involvement (nor the commission expense!) and concluded a private arrangement for the purchase of the property.

The Agent found out about the arrangement and instructed us to claim commission on his behalf.

Let’s apply the formula

Given that Mrs X found out that the property was for sale as a result of the Agent’s “For Sale” sign and because the Agent was mandated at the time, there is no doubt that the Agent was the effective cause of the transaction. The Agent was not even required to actually show the property to Mrs X; the introduction by way of the sign was sufficient.

Outcome: Agent commission was payable and the Seller had to pay commission to the Agent.

What about in a commercial context?

In a second example, Broker A introduced an office block to a prospective Purchaser and provided an initial information pack, having been mandated to do so by the Seller. The Purchaser made a lowball offer which resulted in negotiations breaking down. A few months later, Broker B, who was made aware of the initial introduction, successfully negotiated a deal between the same Purchaser and Seller.

Broker A became aware of the transaction when the registration of the transfer was imminent. Broker B was paid commission post-transfer but Broker A claimed he was, in fact, owed commission.

It is clear that Broker A introduced the Purchaser to the Seller and to the property, but Broker B was responsible for getting the eventual deal over the line. So who was the effective cause, and thus entitled to the commission?

Outcome: Without Broker A’s introduction of the Purchaser to the property and Seller, the eventual sale would not have taken place. Commission is therefore unequivocally owed to Broker A. The Seller should have been aware of the risk of engaging with the same Purchaser via a second broker (or no broker – the same principle applies). In the end, the Seller paid both Broker A and Broker B commission, an expense that could have been avoided through proper adherence to the effective cause principle, or guidance from a property law specialist.

Protect Yourself

As a Seller, Agent or Broker, you need to ensure that you fully grasp the principle and application of effective cause, and protect yourself with a carefully drafted mandate.

As a Seller, make certain that you are indemnified against a legitimate claim by another Agent, who may be the effective cause in a transaction. This will guarantee you are never in a position of having to pay double commission.

As an Agent or Broker, a well-worded mandate can potentially remove any technical points of dispute and protect your interests and claim for commission due to you.

Having assisted in many of these matters, I believe that this emotional rollercoaster can be easily avoided through meticulous crafting of tight-knit agreements. Our team at Hadar Incorporated are experts in both this type of drafting, as well as the application of the effective cause formula in pursuing or defending commission claims. If you find yourself in a fiery spot, don’t hesitate to reach out for some specialist property law guidance.