By implication

If contracting parties fail to agree a key term, making the contract unenforceable, can the courts imply a term to make their incomplete bargain into a binding contract?

The Court of Appeal recently held that missing terms can only be implied once it is established that a binding contract exists. Parties should ensure they cover every key term in their contract at the outset. The essential elements needed to form a binding contract are: an offer; acceptance of that offer; consideration; certainty of terms and an intention to create legal relations.

The contract itself does not need to be in any particular form and can be made orally. However, the simplest of exchanges can result in a significant loss if a key term is not specified.

Wells v. Devani [2016] is an example of a party caught out by not agreeing all the necessary terms. Wells was a developer trying to sell seven flats through a local estate agency. A neighbour referred him to Devani, another estate agent. On 29 January 2008, Wells and Devani exchanged details and agreed Devani’s commission rate of 2%. Crucially, they did not discuss the trigger date for payment of that commission, nor did they record their agreement in writing until after Devani had found and introduced a buyer for the flats to Wells. Only then did Devani send his terms of business to Wells. When the sale was completed, Devani claimed his commission but Wells refused to pay and the matter went to court.

The trial judge found there was a binding contract between the two men. In the absence of express agreement on the trigger for payment, the judge held that the law could imply the minimum term necessary to give business efficacy to the parties’ intentions. He found that Devani’s commission was payable on completion of the sale.

Wells appealed, arguing that there was no contract. Two of the three Court of Appeal judges upheld his appeal, deciding the contract was incomplete and could not, in this case, be rectified by an implied term.

At the appeal, Lord Justice Lewison (supported by Lord Justice McCombe) relied on a legal principle set out in Scancarriers A/S v. Aotearoa International Limited (New Zealand) [1985] that, in cases such as these, the first question must always be whether a legally binding contract has been made. Until that is decided a court cannot go on to properly decide which extra terms, if any, it is necessary and reasonable to imply to make the bargain work. When deciding if there was a legally binding bargain, the trial judge was wrong to take the express terms and add some implied terms to make a contract that otherwise would not be binding.

Lord Justice Lewison also relied on Luxor (Eastbourne) Ltd v. Cooper [1941] which highlighted the variety of different triggers there could be for the payment of an estate agent’s commission, including the introduction of a buyer or contract exchange. There is no general rule to determine agents’ or buyers’ rights and the court therefore considered it even more important that an estate agent’s contract should specify exactly what the parties intended. Without a mention of the triggering event, Wells’ and Devani’s bargain was incomplete.

The court’s decision boiled down to what the parties had agreed orally on 29 January. The trial judge had made a clear finding of fact that there was no mention of the trigger event: as Devani had said in cross-examination, the details of the trigger were, at best, “in his head”. The trigger event was, however, essential in this case for the formation of legally binding relations.

The court could not determine an appropriate trigger event by reference to a standard of reasonableness and, as the law provides no default for this situation, the court held there was no concluded contract either before Devani introduced the buyer to Wells or before the purchase offer.

The court’s decision denied Devani his commission - a significant sum when you weigh up his likely legal costs. While the requirement for an agreed payment trigger is specific to estate agency contracts, the contractual principles of the Wells case hold good for all those involved in contracting. If you do not agree on all the key terms, you cannot expect the court to imply terms to mend your inadequate bargain. If, like Devani, you keep key terms “in your head” when negotiating, they are unlikely to form part of your contract.

There are some exceptions - for example, if you have had a history of dealing with the other party and, in some cases, where there is intent to be legally bound, the court will complete the contract by adding a term, for example, for a reasonable price. But why risk falling within an exception - especially when even senior Court of Appeal judges disagree about the legal issues? Oral contracts are a recipe for disputes. Avoid them. Deal with all the key terms and get your agreement in writing. If you do agree something orally, confirm the details in writing as soon as possible.