Contractual certainty/ implied terms

Was a binding agreement reached between a vendor and an estate agent, despite the parties not having specified the circumstances in which the agreed rate of commission would fall due?

The background

Mr Wells developed a block of flats in Hackney.  By the beginning of 2008 six of the flats had been sold, one was under offer and seven were still on the market.

Mr Devani was an estate agent who contacted Mr Wells by telephone on 29 January 2008 in relation to the seven unsold flats.  The trial judge found that during this telephone call Mr Wells asked Mr Devani about his fees.  Mr Devani replied that his standard terms were 2% plus VAT.  There was no discussion of the circumstances in which that commission would fall due.

Mr Devani introduced a buyer who completed the purchase of the unsold flats, and he claimed his commission, relying on an oral contract made during the telephone conversation.  Mr Wells refused to pay.  Mr Devani issued proceedings.

The High Court held that there was a binding contract between Mr Wells and Mr Devani, implying a term that the commission would be due to Mr Devani on the introduction of a buyer who actually completed the purchase.

The Court of Appeal overturned the High Court’s decision, holding that the trigger event giving rise to an estate agent’s entitlement to commission is of critical importance to a contract between a seller and estate agent.  The Court of Appeal held that agreement over this term was essential for the formation of legally binding relations.  As there was no contract, the courts could not make an agreement between the parties by implying terms.

The decision

The key question in dispute was whether, objectively assessed, the parties by their words and their conduct intended to create a legally binding relationship. 

The words and conduct relied on in a particular case may be so vague that the court is unable to identify the terms on which the parties have reached agreement or to attribute to the parties any contractual intention.  However, the courts are reluctant to find an agreement is too vague or uncertain to be enforced where it is found that the parties had the intention to be contractually bound and have acted on their agreement.

In the present case there was no need to imply a term into the agreement reached between Mr Wells and Mr Devani.  Whilst there was no discussion of the precise event which would give rise to the payment of commission, it would naturally be understood that payment would become due on completion and made from the proceeds of sale.  This was the only sensible interpretation of their telephone call and the circumstances in which it took place.

If it had been necessary to imply a term into the agreement, the Supreme Court would have done so.  The Supreme Court disagreed with the Court of Appeal’s suggestion that there is a general rule preventing the court implying a term where that will render an agreement sufficiently certain or complete to constitute a binding contract. 

Why is this important?

The decision emphasises the court’s reluctance to find that an agreement is too vague or uncertain to be enforced where the parties intended to be bound and have acted on their agreement.  The decision demonstrates a pragmatic, business-oriented approach to contractual construction, with the court treating the parties’ intentions and the way they have acted as key considerations in determining whether an agreement has been reached.

Any practical tips?

Although this pragmatic approach is to be welcomed, to avoid the risk that the courts will find a bargain unenforceable – or imply a term that is contrary to what they in fact intended – parties should take care to ensure all essential terms are expressly agreed.