Bairstow Eves v Smith & another [2004]

This case concerns the applicability of the Unfair Contract Terms Regulations1999 to agency contracts, and more particularly, to commission rates.
There has been substantial enforcement activity of the unfair terms regulations by the OFT in recent years but little actual case law which clarifies the true legal position.  This case is, therefore, significant for letting agents as it examines the legality of price escalation clauses and similar 'penalty clauses' in agency agreements.

Owners of a flat in London wished to sell it, and entered into a ‘Confirmation of Marketing Agency Agreement’ with Bairstow estate agency. The written agreement contained a clause that the clients would pay the standard commission rate of 3% of the final sale price of the property (plus VAT), but that the discounted commission rate for early payment was 1.5% (plus VAT).
On the other side of the agreement were the terms and conditions, stating that Bairstow would charge a ‘commission fee’ in relation its marketing of the property. This fee would be earned if, during the period of the agreement, Bairstow introduced a buyer to the property or entered negotiations with the person who later contracted to purchase the property. The discounted fee was available only if payment was made within 10 days of the completion date; if it was not then the standard rate would be applicable and interest (at 3% above the base rate) would accrue.

Bairstow introduced a buyer, and the sale was completed. The fee was indisputably payable, but the clients’ solicitors did not pay the full 1.5% commission within 10 days. There was nearly £400 unpaid when 10 days expired, despite that the funds were in place and the solicitors had authority to make the full payment.
Bairstow was quite tolerant of this, but three months later claimed the entirety of the 3% standard rate fee (minus the amount already paid). However, they did make it clear that if the outstanding £387 due under the discounted rate was paid, they would not seek to recover the extra under the standard rate. (This extra under the 3% standard rate amounted to almost £3,000.) No payment was made, and Bairstow took action against the clients. Before the proceedings the £387 was paid, but they continued to the court.

The judge concluded that the provisions requiring the payment of a 3% commission fell within the UTCCR 1999 and were not binding on the clients as they were unfair. As the £387 had already been paid, the claim against the clients was dismissed.
The judge granted permission to appeal against this decision, and then held that if Bairstows’ appeal was successful and the clients were actually obliged to pay the 3% commission, the  clients’ solicitors would be liable to indemnify the clients.

On appeal:
HELD:
The Court of Appeal dismissed the appeal.

Bairstow unsuccessfully argued that the UTCCR 1999 were not binding on the terms in question (the price escalation terms), because the terms related to the adequacy of the price or remuneration of the service supplied which was the main subject matter of the contract (Reg 6(2)).
The Court looked at the clause, and decided that the UTCCR 1999 did apply.

It decided that it should adopt a wide interpretation of the price escalation provisions of the agreement as the object of the UTCCR 1999 was to protect consumers from the inclusion of unfair and prejudicial terms in standard form contracts. This would be frustrated if all provisions relating to price were given a broad interpretation and excluded from the protection of the regulations, as the majority of terms of such contracts are in some way related to the price or remuneration.

The Court held that the price escalation clause was unenforceable as it was contrary to the requirement of good faith and caused a significant imbalance in the parties' rights. It was therefore unfair. The clause operated as a trap for consumers (as is common, the client had not read the small print). The parties had effectively negotiated a 1.5% commission rate and this was the only principle rate or price agreed.  It had not be envisaged that a 3% default rate would be payable.

Citation: Bairstow Eves v Smith & another [2004] EWHC 263