Court of Appeal Refuses to Imply Term Where Contract Incomplete

The Court of Appeal has held that no binding agreement was reached between the seller of several flats and an estate agent, as the parties had failed to agree the circumstances in which the agreed rate of commission would fall due. This was a critical term which, the court said, could not be decided by reference to the standard of reasonableness. That meant the agent was not entitled to commission when the flats were sold to a purchaser he had introduced: Wells v Devani [2016] EWCA Civ 1106.

The Court of Appeal in this case expressed the view that the courts cannot imply terms into an agreement where to do so would transform an incomplete bargain into a legally binding contract. There are however many cases in which the courts have held that a failure to agree essential terms was not fatal to the formation of a binding contract, where it was clear that the parties intended to form a binding contract and the court could fill in the missing term for example by reference to a reasonable price or reasonable time of performance.

There may be room for some debate as to precisely how these authorities should be reconciled. As a practical matter, however, what is clear is that parties should expressly agree all essential terms if they want to be certain they will be able to enforce the contract against the counterparty.

Background

The dispute arose out of the sale of flats in Hackney, which had been developed by a joint venture partly owned by Mr Wells. Mr Wells had sold half of the fourteen flats in the development, but had been unable to sell the remaining seven. A neighbour introduced Mr Wells to Mr Devani, an estate agent based in London.

Mr Devani and Mr Wells spoke on the telephone on 29 January 2008. During this call Mr Wells asked Mr Devani about his fees and Mr Devani replied that his standard terms were 2% plus VAT. No discussions were held regarding the circumstances in which that commission would fall due.

There were two issues before the Court of Appeal: (i) whether the discussion between Mr Devani and Mr Wells gave rise to a legally binding contract; (ii) whether Mr Devani had failed to comply with certain obligations under the Estate Agents Act 1979. We deal only with the first issue below.

The High Court held that there was a contract between Mr Devani and Mr Wells. Although the parties did not discuss or agree the event which would trigger payment of commission, the judge implied a term that the commission would be due ‘on the introduction of a buyer who actually completes the purchase’.  This was, the judge said, the ‘minimum term necessary to give business efficacy to the parties' intentions…the term least onerous to the client, and the one which nobody would dispute if an officious bystander were to suggest it.'

Decision

The Court of Appeal held 2:1 that there was no legally binding contract.

Lewison LJ, with whom McCombe LJ agreed, found that the trial judge's approach was flawed. He recognised that the court may imply terms into a concluded contract, but said that assumes there is a concluded contract into which terms can be implied. He added: "It is not legitimate, under the guise of implying terms, to make a contract for the parties. That is to put the cart before the horse". Lewison LJ referred to the Privy Council decision in Scancarriers A/S v Aotearoa International Ltd [1985] 2 Lloyd's Rep 419, in which Lord Roskill stated that it is not correct in principle, in determining whether there is a binding contract, to combine express and implied terms in order to create what would not otherwise be a legally binding bargain.

In the majority's judgment, the judge fell into that trap in this case. The event giving rise to an estate agent's entitlement to commission was, the court said, of critical importance and there was no one rubric which all estate agency contracts followed. Without an agreement on when and whether any commission would be due, the parties' relations had not been sufficiently particularised for there to be a legally binding agreement. This was a term which was essential for the formation of legally binding relations. It could not, Lewison LJ said, be decided by reference to the standard of reasonableness nor was it a case where the law provided a default rule.

Interestingly, McCombe LJ expressly confirmed that he did not disagree with the judge's finding of fact that the parties intended to make an agreement then and there for Mr Devani to act as Mr Wells's agent on the sale of the flats. However, what they had agreed did not amount to a binding contract and, for the reasons identified by Lewison LJ by reference to Scancarriers, the omission could not be cured by implying a term.

Arden LJ gave a dissenting judgment. In her judgment, the trial judge had made a finding of fact that it was agreed that Mr Devani should be entitled to commission of 2% plus VAT if he found a purchaser for Mr Wells. That contract should be interpreted to mean that the agreed commission should be payable on completion of the purchase by a purchaser Mr Devani had introduced; it was not necessary to imply a term.

In any event, in Arden LJ's opinion, Scancarriers was not a bar to the implication of a term in this case. In Scancarriers, a shipper gave a "quote" for freight rates that would apply for the carriage of the customer's goods. The Court of Appeal of New Zealand implied a term imposing a contractual obligation on the shipper so that a contract came into existence between the parties. The Privy Council held that was tantamount to writing a contract for the parties. That was not, in Arden LJ's view, what happened in this case.

This post comes to us from Herbert Smith Freehills and it is based on a piece originally published on the firm’s Litigation Notes blog.  It has been authored by Chris Bushell and Tom Brown.