Verbal contracts, carts, horses, chickens and eggs

19 March 2019

Rating system:
Reading time (1-10 minutes): about  3
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 6

Background

Following on from my last Legal Briefing’s theme, about when a contract comes into existence, and what its terms might be, here is another case which looks at the position when all the discussions were oral only, and nothing was put in writing.

There are a number of legal principles which might apply:

• One of them says that the standard test for interpretation of contracts is this: What would a reasonable person in the position of the parties at the time their contract was concluded have understood their words and conduct, taken together, to mean?
• Another says that where there is a contract, but one element of it hasn’t been discussed or agreed, a court is allowed to imply the minimum term necessary into the contract to make business sense out of what the parties intended.
• Another says that certain critical terms must be agreed in order for a contract to come into existence – such as, if someone might have to pay someone something in return for doing something, what needs to happen to trigger it?

Recent case

An estate agent, Mr Devani, was put in touch with Mr Wells, who wanted to sell some flats. They had a short chat on the phone, where Mr Devani confirmed he was an estate agent and that he charged 2% commission. They didn’t discuss what might trigger the commission (eg when a buyer was introduced, when a flat sale contract was agreed, or when a buyer paid on completion).

Mr Devani introduced Mr Wells to someone who subsequently entered a contract to buy the flats, which was completed and the buyer paid Mr Wells the purchase price. Mr Devani asked for 2% commission, but Mr Wells refused, saying they hadn’t agreed a binding contract. He argued that although they had sort of agreed that as Mr Devani was an estate agent he might expect to be paid a commission if he introduced a buyer, they hadn’t agreed a binding contract because not all the terms needed to make it a binding contract had been agreed – in this case, what precise event should trigger the commission payment. Mr Devani thought the whole thing should have been blindingly obvious, and so he took Mr Wells to court.

What did the court say?

Well, as this case went all the way on appeal to the Supreme Court, a number of courts were involved.

All the courts accepted that the parties had agreed that Mr Devani would act as Mr Wells’ agent for selling the flats and that a 2% commission would be payable. They also all accepted that no oral agreement had been reached as to what precise event should trigger that commission.

But the courts all then approached the principles mentioned above in different ways:

• The first court said that there was an agreement in place, but that as the trigger event for the commission hadn’t been discussed then using the second of the principles mentioned above the judge would imply a term to the effect that the commission would be payable on the actual completion of the purchase of the flats (i.e. when the money actually changed hands), and not before. The judge commented that this would have been the least onerous term for Mr. Wells, and one that would have been obvious to any reasonable bystander (ie I bet that’s what the reasonable ones amongst you would have thought!). All pretty obvious you might have thought?

Well, Mr Wells didn’t like it and appealed to the Court of Appeal…

• …which ALLOWED Mr Wells’ appeal! The Court of Appeal (by a majority vote only – 1 of the 3 judges didn’t agree with the majority 2) said that using the third of the principles mentioned above the need for agreement on a trigger event was a critical requirement for the contract to exist in the first place. The first instance court wasn’t allowed to use the second principle mentioned above to imply a term into a ‘contract’ where a contract doesn’t exist in the first place. They said they thought that would be ‘putting the cart before the horse’.

Well, Mr Devani thought this was terribly unfair and appealed to the Supreme Court…

• …which agreed with him and allowed HIS appeal. But their reasons were different from those applied by the first instance court. Instead, they applied the first of the principles mentioned above: They said it was clear to a reasonable person from a combination of the parties’ words and conduct on the relevant telephone call that they intended to create a legal contract, and that a contract had been created which included the term that commission would become payable when any sale actually completed and the purchase price was paid.

Although the appeal was allowed on those different grounds, the Supreme Court also mentioned that they disagreed with the Court of Appeal’s reasoning. With a bit of chicken and egg reasoning, they said that they would have been prepared using a combination of the second and third principles mentioned above to imply a critical term into an otherwise incomplete or uncertain contract in order to make it complete or certain. They said they did not consider approaching matters in that way to be ‘putting the cart before the horse’.

Conclusion

A recurring conclusion in many of my Legal Briefings is that judges are clever and will usually find a way to apply the different legal principles available to them to come to what they think is the fairest result. I guess in this case the two majority Court of Appeal judges just didn’t like estate agents!

And once again, although it is perfectly possible to have a verbal contract (and indeed one created simply by a course of conduct) it is safer to try to put things clearly and thoroughly in writing.

Case: Wells v Devani [2019] UKSC 4