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“Obvious Contracts”

25th February 2019

“Obvious Contracts”

The Supreme Court recently handed down a long-awaited judgment in Wells v Devani [2019] UKSC 4. The case was an opportunity for the court to add to the increasing body of authority on the modern interpretation of contracts. It adopts a contextual and common-sense approach to a minimal oral agreement.

Facts

In 2007 Mr. Wells completed the development of a block of flats. By January 2008, seven flats remained unsold.

At that time Mr. Wells was contacted by the Appellant, Mr Devani, a real estate agent based in Kilburn. The parties discussed the flats by telephone.  At trial, they gave ‘strikingly different accounts’ as to what was said during this call. Mr Devani claimed that he told Mr Wells that he was an estate agent and would charge commission at 2% plus VAT.  Mr Wells maintained that Mr Devani gave the impression that he was an investor buying on his own account and had not mentioned any commission. The trial judge preferred the evidence of Mr Devani and found that the parties had intended to create legal relations on the basis of agent and principal, on Mr Devani’s terms.

Mr Devani then made contact with a potential buyer who subsequently met with Mr Wells. A purchase price of £2.1 million was agreed, and Mr Wells informed Mr Devani of the sale.

Mr Devani responded by email.   Making reference to his commission fee, he requested that the relevant solicitors’ details be provided so that an invoice could be prepared.  Mr Devani’s terms of business were also attached, confirming the 2% commission, said to be due on exchange of contracts.

The transaction proceeded to completion. Mr Devani then claimed commission, which Mr Wells refused to pay. Mr Devani therefore issued proceedings in the County Court.

The Trial

Mr Wells disputed Mr Devani’s right to commission on two bases: (i) there was no binding contract to engage Mr Devani as an agent because the terms of the agreement between them were too uncertain; (ii) Mr Devani had failed to comply with s 18 of the Estate Agents Act 1979, which rendered any agreement unenforceable or justified a reduction to the commission fee in light of the prejudice suffered by Mr Wells. The focus of this article is the on the contract law aspects of the case.

The trial judge, HH Moloney QC, accepted that the claim depended on what had been agreed in the telephone conversation of 29th January 2008.  He found that although the parties had agreed that Mr Devani would act as an agent, there was no express agreement as to the precise event which would trigger Mr Devani’s entitlement to commission.  However, he held that the law could imply the minimum term necessary to give business efficacy to the parties’ intentions.  Thus, the judge found that the least onerous term for Mr Wells, and which no bystander would dispute, was that commission became payable on the completion of the purchase.

The Court of Appeal

By a majority, the Court of Appeal allowed Mr Wells’ appeal on the issue of whether there was a binding contract. Lewison LJ, with whom McCoombe LJ agreed, found that the judge’s approach could not be justified on three grounds:

(i) although the law can imply terms in to a contract, this assumes there is a complete contract into which the terms can be implied. Where there is no such contract, it is not legitimate under the guise of implying terms to make a contract for the parties;

(ii) a number of different events could be the trigger for an estate agent’s entitlement to commission. Identifying the trigger event is therefore essential to the formation of legally binding relations;

(iii) it followed that unless the parties specified the event, the bargain remained incomplete and it would be wrong in principle to turn an incomplete bargain into a legally binding contract by adding expressly agreed terms and implied terms together.

The Supreme Court

Lord Kitchin, with whom the Court unanimously agreed, reversed the decision of the Court of Appeal, and came to the same conclusion as the trial judge. Although Lord Kitchin did so through a process of contractual interpretation, his Lordship made clear that if he had not, he would have upheld the trial judge’s reasoning, based on the existence of implied terms.

The distinction between the two processes were set out by Lord Kitchin by reference to Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72:

(i) construing the words the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract; but construing the words used and implying additional words are different processes governed by different rules. In most cases, it is only after the process of construing the express words of an agreement is complete that the issue of whether a term is to be implied falls to be considered.

Lord Kitchin began with the question of whether there was a binding contract. RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH [2010] UKSC 14 held that this question requires:

consideration of what was communicated between [the parties] by their words and their conduct and whether, objectively assessed, that led to the conclusion that they intended to create a legally binding relationship and that they had agreed all the terms that the law requires as essential for that purpose.

It was accepted that there may be times when the words and conduct used are too vague by reference to G Scammel & Nephew Ltd v HC and JG Ouston [1941] AC 251, 268. That outcome, however, was to be avoided where possible and it would be a rare case in which the parties intentions could not be ascertained by interpretation or implied terms.

In the present case, Lord Kitchin found that although the trigger event was not specified, the parties clearly had intended to create legal relations on the basis of agent-principal with commission at 2% plus VAT. On this basis, the only sensible interpretation of the conversation on 29th January 2008 would be that commission would be payable upon completion and from the proceeds of sale, as is usual in transactions of this kind.  This interpretation was found to be amply supported by the authorities on commission payable to estate agents.

Lord Briggs, making the same point, gave the following example:

…the simple case of the door to door seller of (say) brooms. He rings the doorbell, proffers one of his brooms to the householder, and says “one pound 50”. The householder takes the broom, nods and reaches for his wallet. Plainly the parties have concluded a contract for the sale of the proffered broom, at a price of £1.50, immediately payable. But the subject matter of the sale, and the date of time at which payment is to be made, are not subject to terms expressed in words. All the essential terms other than price have been agreed by conduct, in the context of the encounter between the parties at the householder’s front door.

Thus, the Supreme Court found that the contract was complete as a matter of interpretation.

In the alternative, Lord Kitchin confirmed that if there had been no express term providing for payment on completion, a term to that effect must be implied to give it practical and commercial coherence.

Lord Kitchin disagreed with the Court of Appeal that there is any general rule that it is not possible to imply a term into an incomplete agreement, thereby rendering it a complete and binding contract. Rather:

…indeed, it seems to me that it is possible to imply something that is so obvious that it goes without saying into anything, including something the law regards as no more than an offer. If the offer is accepted, the contract is made on the terms of the words used and what those words imply. Moreover, where it is apparent the parties intended to be bound and to create legal relations, it may be permissible to imply a term to give the contract such business efficacy as the parties must have intended. For example, an agreement may be enforceable despite calling for some further agreement between the parties, say as to price, for it may be appropriate to imply a term that, in default of agreement, a reasonable price must be paid.

The Supreme Court’s judgment is an interesting one insofar as it perhaps represents a reinforcement of the contextual, as opposed to literal, construction of contracts. Although this judgment does not cite the recent decisions of Wood v Capita Insurance Services Ltd [2017] UKSC 24 and Arnold v Britton [2015] UKSC 36, it might be seen as a further development of the modern approach to contractual interpretation which requires the court to examine the commercial common sense and surrounding circumstances of an agreement when determining the meaning of contractual words.

The present case seems to test the limits of that approach by encouraging the examination of context so as to complete and round out an otherwise bare agreement. Whereas the previous cases were concerned with the meaning of words the parties had actually used, this present case comes very close to using the context to add words in altogether – so as to provide the circumstances in which payment of commission becomes due. It is easy to see how the first instance judge came to the conclusion that it was necessary to imply a term to reach that result.

The case presents an invitation to practitioners to be creative in pleading and arguing contract cases, particularly in circumstances where at first glance a contract appears incomplete. It may also be further ammunition for those who wish to persuade a court to take a more contextual ‘common sense’ approach to interpretation.

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Sally Wollaston
Sally Wollaston
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