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Service Areas: Contracts

The importance of establishing (and recording) contractual terms

Richard Bailey
(Director)

The Court of Appeal has, by a majority decision with Lady Justice Arden dissenting, held that an implied term cannot fill a gap in an otherwise incomplete contract.


Mr Wells was selling 14 newly developed flats, seven of which he was struggling to find buyers for. A friend put him in touch with Mr Devani and they spoke by phone organising the sale of the seven flats.

Mr Devani claimed that during their call he told Mr Wells that his fees for arranging the sale were 2% plus VAT on the sale price. Mr Wells alleged that Mr Devani remained silent on the topic of fees. However, the issue of when the commission payment would be triggered was not discussed.

Nevertheless, Mr Devani found a buyer and once the sale had been agreed (but before exchange of contracts) Mr Devani sent Mr Wells an email which included his terms and conditions, stating that his fees were to be paid on exchange of contracts. On completion of the sale of the flats, Mr Devani sent Mr Wells an invoice for £42,000 plus VAT, which Mr Wells refused to pay.

The judge at first instance found that it was more likely than not that the amount of fees had been discussed and so held a valid contract existed. The judge held that the issue of when commission was to be paid could be dealt with by implying a term into the contract. However, the judge also held that Mr Devani’s failure to clearly inform Mr Wells of the point at which payment was due amounted to a culpable failure under the Estate Agents Act 1979. As a result, the amount due to Mr Devani was reduced by one third.

Mr Wells appealed against the finding of liability to pay Mr Devani, and Mr Devani cross-appealed the decision to reduce the money owed to him.  The question for the Court of Appeal was whether or not a legally binding contract existed between Mr Wells and Mr Devani that required Mr Wells to pay Mr Devani any commission.

It is a well-established principle that for a binding contract to be found to exist, the Court must be satisfied that an honest and reasonable businessman would conclude from the communications between the parties and their conduct, that all material terms of the contract had been agreed. In this case, the parties had not agreed on the event which would trigger Mr Devani’s right to payment. The question then became whether a term could be implied about when payment would fall due in order to make an enforceable contract.

After much discussion, Lord Justice Lewison and Lord Justice McCombe allowed Mr Well’s appeal and dismissed Mr Devani’s cross-appeal.

Lord Justice Lewison, giving the lead judgment, stated that it is not possible to use implied terms in order to overcome a failure to agree a the relevant terms and make the contract for the parties. Instead, terms can only be implied into a contract which has already been made. In this case, a term about when payment of commission to Mr Devani was due, was of such fundamental importance that without it, the contract in this case was not complete.

Lord Justice Lewison also agreed with the decision at first instance that Mr Devani had committed a culpable failure under the Estate Agents Act 1979 and so would not have been entitled to full amount of pay in any event. Lord Justice McCombe agreed on all points made by Lord Justice Lewison.

However, the dissenting judgment of Lady Justice Arden highlights the subjective nature of contract formation cases as, on the facts, she agreed with the judge at first instance. The differences in these judgments highlight how subjective the area of contract formation can be. Therefore, the Court of Appeal’s decision highlights the importance of establishing and recording key contractual terms.

If you want to know more about the impact this decision could have on your business or have any contractual issues you wish to discuss, get in touch.

This article is for general guidance only. It is not to be relied upon and professional advice should always be taken on specific circumstances.

 

Published: 3 February 2017
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