Estate Agents' Fees: Court of Appeal holds missing terms cannot be implied in incomplete contrac

Wells v Devani [2016] EWCA Civ 1106

The Court of Appeal has held that, in circumstances where a contract would otherwise be deemed unenforceable due to the parties’ failure to agree an essential term, the court cannot imply missing terms into the said contract: Wells v Devani [2016] EWCA Civ 1106. The court has decided that there was no binding agreement reached between the seller of flats and the estate agent. In fact, it was an incomplete bargain, as the parties had not agreed on an event that would trigger payment of the estate agent’s commission, which constituted an essential term to that contract. It is crucial to analyse this decision as it might now be more difficult for estate agents to claim for payment for their services, highlighting how subjective contract formation cases can be.

Facts

Mr Wells had developed a block of fourteen flats in Hackney. Mr Wells had sold half of the flats in the development, but he had not been able to sell the remaining seven. Following being introduced to Mr Devani, an estate agent based in London, Mr Wells and Mr Devani spoke on the telephone. The conversation concerned the relevant flats and Mr Wells was informed about how Mr Devani’s commission was calculated (standard terms were 2% plus VAT). There were no discussions held regarding the event which would trigger the payment of the said commission.

Subsequently, Mr Devani found a buyer for the remaining seven flats. Once Mr Wells had accepted the offer put forward by the buyer, Mr Devani sent him his terms of business which stipulated that the commission was to be paid on exchange of contracts. After the purchase had been completed, Mr Wells refused to pay the commission.

Contract formation and implied terms

For a legally binding contract to be created there must be:

• An offer which has been accepted.

• An agreement between the parties on all contractual terms which the parties, or the law, regard as essential.

• An intention to create legal relations.

• A valid consideration.

According to the case of Foley v Classique Coaches Ltd [1934] 2 KB 1, all essential terms must be agreed on by the parties in order for a legally binding contract to be created. If there is no agreement reached on the material terms there will be no binding obligation imposed on the parties to the contract. In order to determine whether the parties have agreed on all the essential terms, it is necessary to evaluate the parties’ communication and conduct by the standard of an honest and reasonable businessman.

Interestingly, in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Company KG (UK Production) [2010] UKSC 14, one of the leading cases on contract formation, the High Court, the Court of Appeal and the Supreme Court all reached different decisions on whether a contract had been formed. This case, among many others, has demonstrated that contract formation cases are highly dependent on the adjudicating court and are mostly overturned on questions of fact.

In the circumstances where there is a gap in the contract’s drafting, a court might imply a term into such contract to fill this gap. The mechanism of implying terms is there to reflect the parties’ intention at the time the contract was made, which would otherwise be missing. Nonetheless, if a contract lacks certainty, such mechanism might be of little assistance to courts in determining essential performance criteria.

Decision at first instance

The High Court, at first instance, held that a legally binding contract was made in the course of the telephone conversation between Mr Wells and Mr Devani and found Mr Wells liable to pay the commission to Mr Devani. Although a trigger event for the payment of fees had not been agreed, the judge implied a term that the commission would be due "on the introduction of a buyer who actually completes the purchase". This term was deemed by the judge the "minimum term necessary to give business efficacy to the parties’ intentions". The court did go on to reduce the fee recoverable by Mr Devani by a third, due to the fact that he had been in breach of his obligations under section 18 of the Estate Agents Act 1979 to provide prescribed information before a contact is concluded.

The judgment

The Court of Appeal overturned the decision of the High Court, and found (by a majority of 2-1) that there was no enforceable contract for the payment of the commission.

In reaching the decision, the Court found that, because the parties had failed to agree on an event triggering the commission, the contract was unenforceable. Having analysed Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, Lewison LJ held that identifying an event triggering an estate agent’s entitlement to commission is of critical importance in estate agency contracts. It is crucial to agree on when and whether any commission would be due, as it confirms the basis for the parties’ relations. The term was held essential for the formation of legally binding contract and it could not be decided by reference to the standard of reasonableness, nor was it a case where the law provided a default rule.

Lewison LJ also recognised that the court may imply terms into a concluded contract. It is not legitimate, however, to create a contract for the parties by implying terms (Scancarriers A/S v Aotearoa International Ltd [1985] UKPC 26). Lewison LJ referred to the reasoning in Scancarriers and confirmed that, in establishing whether there is in fact an enforceable contract, it is wrong to combine express and implied terms to create what would otherwise not be a legally binding agreement. The judge also disagreed that contract interpretation and implication are part of the same process, alluding to Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, and it was confirmed that terms can only be implied if the express words have been construed.

Implications of the decision

This decision has demonstrated that when an essential term of a contract is missing, rather than implying the missing terms, it is necessary to analyse and carry out an interpretation of the parties’ communication and conduct to fill the gap. It has also clarified that the trigger event for payment of the commission constitutes an essential term in an estate agency contract. Notably, such conclusion may also be applicable in other types of agreements involving payment of commission, for instance agreements for introducing new clients to a business.

The case, therefore, serves as a reminder for the parties’ to expressly agree on all essential terms if they want to have certainty of being able to enforce the contract.