The Court of Appeal has held that gaps in contracts cannot be filled by implied terms, where a contract would otherwise be unenforceable because of a failure between the parties to agree an essential term.

A binding contract is formed when an offer has been accepted, the parties reach agreement on the essential contractual terms, they intend to create legal relations between themselves and there is consideration (usually some form of payment). Unless all essential terms are agreed, there is no binding contract.

When deciding whether or not essential terms have been agreed between the parties, the court will look at whether a reasonable and honest business person would have concluded from the parties' communications and conduct that they had agreed all the terms which they needed to as a precondition to create a legally binding contract between them.

Implied terms

A term can be implied into a contract to plug a gap in the contract drafting provided it is reasonable and necessary in order to make the contract work and to reflect what the parties intended at the time they entered into the contract.

Wells v Devani [2016] EWCA Civ 1106

In the recent case of Wells v Devani, the Court of Appeal considered whether a trigger event regarding payment of commission could be implied into a contract.

Mr Wells wanted to sell seven flats in a block which he had developed. A neighbour introduced estate agent, Mr Devani to Mr Wells.

Mr Devani telephoned Mr Wells and a discussion took place about the flats. During that discussion Mr Wells was told how Mr Devani's commission was calculated but was not told what event would trigger the payment of commission.

Mr Devani found a buyer for the flats. Once the buyer's offer had been accepted by Mr Wells, Mr Devani sent Mr Wells his terms of business which stated that his commission was to be paid on exchange of contracts. On completion of the sale, Mr Wells refused to pay the commission.

The High Court held that there was an implied term that commission was payable on completion of the sale. However, by a majority, the Court of Appeal overturned that decision. It held that implied terms could only be implied into a binding contract with a clear bargain between the parties. In this case the contract was not binding because the essential term regarding the trigger event for payment of commission had not been agreed between the parties. As a result, there was no clear bargain, the contract was not binding and was unenforceable. The trigger event could not be implied by interpreting an oral contract formed during a conversation between the parties or by reference to a standard of reasonableness.

What does this mean for business?

In order to make a contract enforceable, parties must agree all essential terms of the contract at the time they enter into it. In particular, they should remember to agree key performance obligations, such as timing of payment.

While Wells v Devani involved an estate agent, the principles from this case have wider application to other agreements in different sectors where introductions are being made. Agency contracts should be checked with care to ensure trigger events are covered.

If there is a gap in the contract because an essential term is missing from it, the court will look to resolve the issue by interpreting the parties' words and conduct. A term will not be implied by the court.

Gaps in contracts could result in:

  • parties missing out on payments or obligations which they expect one another to make or perform.
  • Courts refusing to enforce the contract because the contract is non-binding and incomplete

If you enter into a contract check all essential terms are agreed and are clear, including trigger events.