Court of Appeal rules that omission in oral contract cannot be cured by implication of a term where contract is incomplete

The dispute concerned an oral agreement between Mr Wells, a property developer, and Mr Devani, an estate agent.  Several exchanges, including a telephone conversation, took place between Mr Wells and Mr Devani in relation to property developed by Mr Wells which had not been sold.  Following the exchanges, Mr Devani found a purchaser for Mr Wells' property and a sale was completed.  Mr Devani claimed a commission of 2% plus VAT from Mr Wells.

At first instance, the judge considered the main issue of fact to be whether, during the telephone conversation, Mr Devani had informed Mr Wells that he was an estate agent and that his commission would be 2% plus VAT.  The judge found that it was more likely than not that Mr Devani had done so but there had been a failure by the parties to define the commission-entitling event.  The judge concluded that the parties had nevertheless made a binding contract during their telephone conversation and he implied a term that payment of commission was due on the introduction of a purchaser who actually completed the purchase.  He found Mr Wells liable to pay commission to Mr Devani on this basis.

Mr Wells appealed the judge's finding that he was liable to Mr Devani for commission.  The principal question for the Court of Appeal was whether a term providing the trigger for payment of commission could be implied in circumstances where it had been omitted by the parties.

In addition to this issue – which is the focus of this article – the first instance and appeal proceedings also concerned Mr Devani's obligations under the Estate Agents Act 1979 and the applicability of a reduction in the amount of commission due in the circumstances, which are not dealt with here.

No term can be implied where no binding contract

The Court of Appeal allowed Mr Wells' appeal, overturning the judge's decision implying a term triggering payment of a commission by a majority of two to one.  It was held that such a term could not be implied in circumstances where there was no binding contract between the parties.  Lord Justice Lewison, with whom Lord Justice McCombe agreed, gave the leading judgment.  Lady Justice Arden dissented on this issue.

Lord Justice Lewison, citing Scancarriers A/S v Aotearog International Ltd [1985] 2 Lloyd’s Rep 419, held that terms cannot be implied by the courts unless there is a binding contract into which to imply them. 

Lord Justice Lewison emphasised that in order to be binding a contract must be complete.  In this case, the identification of the trigger event upon which commission was to become payable was essential for the formation of a binding contract.  Lord Justice Lewison referred to the House of Lords' decision in Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, and confirmed that the event giving rise to an estate agent's entitlement to commission is of critical importance and a variety of events could be specified.  Unless the parties themselves specify the event, the bargain is incomplete.  On the facts as found at first instance, the parties did not reach agreement on the circumstances in which Mr Devani would be entitled to commission.  In these circumstances, the contract was incomplete and the trigger event could not be determined by the courts by reference to the standard of reasonableness.

Lord Justice Lewison commented that had he been of the view that Mr Wells and Mr Devani had entered into a binding contract during their telephone conversation, he would have dismissed Mr Wells' appeal.  His decision to allow the appeal rested on his conclusion that there was no binding contract.

Dissenting opinion

Lady Justice Arden, dissenting, found that there was a binding contract between the parties under which Mr Devani would act as agent and would be entitled to commission.  The contract became binding at the latest when the contract for the sale of the property to the purchaser was completed.

According to Lady Justice Arden, resolving the question of the trigger for the agreed commission was a matter of interpretation.  In the case of an oral contract, the courts are not restricted to interpreting the express words exchanged by the parties; rather, what matters is what the parties actually agreed.  Adopting this approach, Lady Justice Arden found that when the parties agreed (as the judge found) that Mr Devani should be the estate agent for the sale of the property, it followed that he became entitled to commission if he succeeded in finding a purchaser who bought the property.  The trigger for commission was, at the latest, the completion of the sale of the property to the purchaser found by Mr Devani.  Lady Justice Arden concluded that although the judge at first instance should have interpreted the agreement in this way rather than implying a term, the outcome would have been the same.

Implication or interpretation?

Mr Devani argued that the question of whether the judge's finding was reached by implication or interpretation was a matter of indifference.  Lady Justice Arden's decision was made on interpretation, but she expressed the view that both interpretation and implication reached the same outcome. 

On the question of convergence of interpretation and implication, Lord Justice Lewison confirmed that although at one point the two were viewed as an indivisible process, the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] UKSC 72, [2016] AC 742 found that "construing the words used and implying additional words are different processes governed by different rules."  In the case before him, Lord Justice Lewison concluded that the judge had not interpreted what the parties had said, as he had made a clear finding of fact that the parties had said nothing about the trigger event.  Instead, the judge had implied the term providing the trigger event for payment of commission, contrary to the law on implication.

Comment

The Court of Appeal's decision confirms that the courts can only imply terms which are necessary and reasonable to make a bargain work in circumstances where the bargain amounts to a complete, legally binding contract.  This case serves as a reminder that parties should not leave essential elements of their agreements, such as triggering events for the performance of payment obligations, to chance.  As was the case here, the court may well find that the contract is incomplete and non-binding, resulting in one or both of the parties losing out in respect of the obligations they expected the other to perform.  In addition, given the reversal and dissenting opinion in this case, we should anticipate further litigation and developments in the case law on interpretation and implication of terms in relation to contracts lacking certainty.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Amy Edwards at amy.edwards@allenovery.com. 

See also Compact Contract, an Allen & Overy blog which covers topical issues in contract law.