Filling gaps: Implied terms in contracts
The Court of Appeal has held that where a contract would, on its face, be unenforceable because the parties failed to agree an essential term, the missing term cannot be implied.
In Wells v Dewani, the Court of Appeal has held that, where a contract would on its face be unenforceable because the parties failed to agree an essential term, the missing term cannot be implied. The dispute arose when an estate agent failed to mention what event would trigger payment of his commission until after a sale he introduced had been agreed.
At first instance, the judge implied a term that commission would be payable upon completion of the sale (as is customary with estate agent fees). However, the Court of Appeal held that terms may only be implied into a concluded contract and, for an estate agency contract, the trigger event for commission payments was an essential term which had to be agreed in order to render the contract enforceable.
In 2007, Mr Wells developed a block of 14 flats in Hackney. Following problems selling the development, Mr Wells was introduced to Mr Devani, an estate agent, who was confident that he knew of a property management company that would be interested in purchasing the flats. During the course of a telephone conversation Mr Devani told Mr Wells that his commission for the transaction would be 2% plus VAT. He did not however, mention the event which would trigger payment of commission.
Mr Devani subsequently found a buyer for the flats. After Mr Wells had accepted the buyer's offer, Mr Devani sent an email attaching his terms of business which stated:
"I am required by section 18 of the Estate Agents Act 1979, as amended, to set out our terms of business prior to you formerly [sic] instructing our company.
1. A commission of 2% + VAT (Multiple Agency) of the eventual sale price of the property.
2. The commission will be due on exchange of contracts with a purchaser…"
The sale to the property management company was completed in due course and Mr Devani claimed a commission of £42,000 plus VAT. Mr Wells refused to pay the commission.
The judge at first instance considered the crucial question to be whether, in the course of the initial telephone conversation, Mr Wells and Mr Devani reached an agreement that amounted to a legally binding contract. The judge found that a legally binding contract had been formed and that Mr Wells was therefore liable to pay commission to Mr Devani. This was despite the judge having accepted that the parties did not discuss or agree on the trigger event that would entitle Mr Devani to be paid.
The judge at first instance held that, in the absence of express agreement on such an issue, the law would imply the minimum term necessary to give business efficacy to the parties' intentions.
However, in the Court of Appeal, the decision was overturned. Both Lewison and McCombe LJJ considered that the question was whether the parties had reached a completed agreement capable of constituting a binding contract. Both judges did not consider this to be the case.
The Court of Appeal considered the case of Luxor (Eastbourne) Ltd v Cooper and found that the acceptance of an offer must be in accordance with its terms. Therefore, if the offer did not specify what would amount to acceptance, the offer is not capable of acceptance so as to create a binding contract. The Court went on to consider the conversation that was held between Mr Dewani and Mr Wells and found that the judge of first instance made a clear finding of fact that nothing was said about the trigger event. It was therefore impossible for the Court of Appeal to consider the parties' intentions as it would require an interpretation of words that were, in reality, never spoken.
The Court of Appeal held that unless the parties themselves specify the event triggering commission, their bargain remains incomplete. The trigger events cannot be decided by reference to the standard of reasonableness and this was not a case in which the law provides a default rule.
The Court of Appeal also considered the case of Scancarriers A/S v Aotearoa International Ltd as authority that implied terms cannot be used to create a contract for the parties. The Court described this as to "put the cart before the horses". The Court considered the following quote from the Scancarriers decision as pertinent:
"…the first question must always be whether any legally binding contract has been made, for until that issue is decided a court cannot properly decide what extra terms, if any, must be implied into what is ex hypothesi a legally binding bargain, as being both necessary and reasonable to make that bargain work. It is not correct in principle"
The Court of Appeal disagreed with counsel for Mr Devani who stated that there was no need to imply a term to establish the trigger event. Instead, the trigger event could be established by interpretation.
CommentsThe case confirms that a lack of certainty cannot be remedied by implying the missing terms. The very fact that the High Court decision was overruled indicates how subjective the formation of contracts remains. It also stresses the importance of agreeing what will trigger payment of commission in an estate agency contract. It may be that the courts would also view agreement on the trigger event for commission as essential in a broader category of contracts but this remains to be seen. There is no reason not to suppose that this decision will apply to other commission contracts, especially as it is the common position on estate agents contracts for commission to be paid on exchange.