Oral contracts have been the subject of much debate in the legal community recently. The Supreme Court has just passed judgment in the case of Wells v Devani  UKSC 1106 which clarifies the law in this area, and the result is not what you might expect.
The facts of the case are relatively straight forward. Mr Wells developed 14 flats in Hackney as a joint venture with a builder. Six of the flats were sold by a local estate agency (acting on a sole agency contract), one was under offer, and the others remained on the market when a mutual contact put Mr Wells in touch with Mr Devani on 29 January 2008. During a telephone call on that day, Mr Devani informed Mr Wells that he could help find a buyer for the remaining flats. The contents of that telephone call were disputed, but the court found that Mr Devani did tell Mr Wells that he was an estate agent, and that his commission for the transaction would be 2% plus VAT. Crucially, Mr Devani did not specify what the ‘commission triggering event’ would be.
On 5 February 2008, Mr Devani emailed Mr Wells his terms and conditions (as required by section 18 Estate Agents Act 1979) which defined the commission triggering event. The eventual purchaser viewed the flats on 1 February 2008 and made an offer on 5 February 2008 (but before Mr Devani sent his terms and conditions email to Mr Wells). Mr Devani needed to show the court that the verbal agreement reached during the telephone conversation of 29 January 2008 was binding.
In order for there to be a valid contract under the law of England and Wales, there must be:
- an offer;
- an intention to create legal relations; and
- certainty of terms.
This is a long standing legal principal. The case of Wells v Devani started at the County Court for Central London, which essentially found that a term regarding the commission triggering event should be implied to make the verbal agreement into a contract, and that there was therefore a contract between the two parties and Mr Wells needed to pay Mr Devani commission (albeit at a reduced rate). Mr Wells appealed this decision and was successful, as the Court of Appeal overturned the first judge’s decision on the basis that the court can only imply a term into a contract which already exists, and that the court does not have the power to construct an enforceable contract by implying terms into verbal agreements. Mr Devani appealed the decision, and the Supreme Court has now passed its judgment.
The Supreme Court overturned the Court of Appeal’s decision. This is a highly significant judgment, and the upshot is that the court can imply terms into an agreement where the parties intend to be bound and to create legal relations, and where such a term is necessary to give the agreement business efficacy or where the term would be so obvious that it ‘goes without saying’, and where without that term the agreement would be regarded as incomplete or too uncertain to be enforceable. Lord Kitchin stated that ‘there is no general rule that it is not possible to imply a term into an agreement to render it sufficiently certain or complete to constitute a binding contract’.
This decision was unanimous. Lord Briggs went on to add that ‘the context in which words are used, and the conduct of the parties at the time when the contract was made, tells you as much, or even more, about the essential terms of the bargain than do the words themselves’. In this case, the court found that ‘to leave Mr Wells without any obligation to pay Mr Devani would have been completely inconsistent with the nature of their relationship’. The Supreme Court decided that there was a binding contract between Mr Wells and Mr Devani, and that Mr Wells was liable to pay Mr Devani commission.
However, just as the County Court reduced the commission payable to Mr Devani, so too did the Supreme Court. It was found that Mr Devani did not expressly inform Mr Wells of the commission triggering event immediately after their verbal contract was made, nor did he inform Mr Wells of the same as soon as reasonably practicable. This was found to be contrary to the rules outlined in the Estate Agents Act 1979 and The Estate Agents (Provision of Information) Regulations 1991. Mr Devani’s failure to inform Mr Wells of the full terms and conditions in the proper time was found to have prejudiced Mr Wells and his commission was accordingly reduced by the court by one third. Lord Briggs made clear that although the court can recognise an enforceable liability to pay even from ‘the briefest and most informal exchange between the parties’, the statutes in place seek to protect consumers by making estate agents clearly communicate a client’s liabilities to them.
In practical terms, this case shows that where there is an agreement and an intention to create legal relations by both parties, but there are obvious terms missing from that agreement, then the court can imply such terms to give the agreement business efficacy and create a binding contract. This is good news for estate agents who want to enforce the liability of a client to pay commission. However, it is crucial that where that estate agent does not confirm to their client in writing of their exact obligations, that agent may be heavily penalised when it comes to collecting that commission.
As an estate agent, the best thing to do is to always make sure that all verbal agreements are distilled in writing and relayed to the client as soon as possible. Failure to do so could result in a hefty penalty, and see commission significantly reduced for what essentially comes down to a seemingly minor administrative oversight which can be easily avoided.