Why it's important to make sure that all of the key terms are agreed
In the real world, commercial agreements take many forms. Some deals are entered into after months of detailed negotiation and documentation. Others are entered into less formally.
To have a legally binding contract there are four key components:
- An intention to create legal relations;
- Offer and acceptance;
- Certainty of essential contractual terms.
But what is an "essential term"? In some cases it is easy to identify an essential term. For example, if I agree to sell my car to a friend, but there is no agreement as to what the price should be then an "essential term" is missing and there won't be a valid contract.
But in other instances the position is less clear cut and confuses even the country's top judges. For example, let's assume that you're a developer and you instruct an agent to market your property and find a buyer. You agree that you'll pay commission of 2% plus VAT. But you don't agree when that commission is payable. Does the fact that you haven't identified a trigger for payment mean that there isn't a contract, because you've omitted an essential term?
No. Fortunately, common sense prevails. Payment of the commission will be due at completion, out of the proceeds of sale, as, in that context, that is the only sensible interpretation of what the parties had agreed to do.
Whilst that might sound like an obvious answer, that very question was at the heart of the recent case of Wells v Devani. That case went all the way to the Supreme Court, which had to overturn the Court of Appeal to reach what feels like a just result. In reaching their conclusion the court had to enter into a detailed evaluation of the words and conduct that had led to the agreement, the facts and circumstances surrounding the case and what a reasonable person would have concluded they meant. All well and good, but expensive and protracted; could things have been done differently?
Yes. Even a very simple written agreement could have avoided the problems that arose in this case.
The two core morals are:
- Oral contracts are fraught with danger. Don't leave it to chance – record your agreement in writing to avoid misunderstanding and disputes.
- Make sure that agreements, at the very least, set out who must do what and when. Yes, it may be possible for a court to interpret a contract in such a way that a missing term can be filled in to give that contract "business efficacy" or to imply a term. But why rely on that, when it can give rise to substantial and unnecessary uncertainty and legal costs? Far better to clearly spell out the terms of your agreement and avoid the uncertainty in the first place.