Contract terms: how certain does certain have to be?

In the dispute in Wells v Devani, the courts had to consider whether a contract was sufficiently certain and capable of being enforced in circumstances where a key term had not been expressly agreed by the parties ([2019] UKSC 4). The case saw an interesting divergence of views between the first instance court and the Supreme Court on the one hand, and a majority decision of the Court of Appeal on the other.

The Supreme Court’s conclusion was that the parties’ conduct could only sensibly be construed as reflecting an agreement that a commission owing to an estate agent would become due on completion of the sale of certain properties and would be paid out of the proceeds of sale, even though this had not been explicitly addressed. As a fallback, the court found that a term could equally have been implied to the same effect in order to reach the same result.

Although not strictly a contractual interpretation case in the pendulum swing between the literalist and contextual interpretation of contracts, in the nature of Wood v Capita Insurance Services, the decision reflects the court’s willingness to look at the broader context of the agreement and conduct of the parties, not simply the language that they may, or may not, have used ([2017] UKSC 24; see News brief “Contract interpretation: the Supreme Court’s last word (for now)?”). In its particular commercial context, Wells reflects a commonsense approach based on an objective assessment of the parties’ conduct with which any occupant of the Clapham omnibus would have readily agreed.

Wells concerned an oral agreement between an estate agent, Mr Devani, and a property seller, Mr Wells, under which Mr Devani agreed to find a buyer for Mr Wells’ properties. The parties discussed the subject in a telephone conversation in which Mr Devani communicated his standard commission of 2% plus VAT to Mr Wells, but the parties did not expressly agree what would trigger the obligation for Mr Wells to make payment.

Mr Devani subsequently introduced a buyer who completed the purchase of the properties. Relying on the oral contract made during the telephone conversation, Mr Devani sought payment of his commission. Mr Wells, however, refused to pay.

The key issue in the dispute was whether the parties had entered into a binding contract, given that the trigger event for Mr Devani’s commission payment was not expressly specified.

First instance. The Central London County Court found in favour of Mr Devani, holding that the parties had created a binding oral contract. In order to give business efficacy to that contract, it implied a term that Mr Devani’s commission would become payable when Mr Devani introduced a buyer who completed a purchase of the property from Mr Wells. However, the court reduced Mr Devani’s commission by one-third because he had failed to give Mr Wells written details of the agreement at the time specified by section 18 of the Estate Agents Act 1979 (section 18).

Court of Appeal. The Court of Appeal upheld Mr Wells’ appeal, holding that there was no binding contract ([2016] EWCA Civ 1106). It concluded that the oral agreement was incomplete as it did not specify the event which would trigger the obligation to pay commission. The court also found, contrary to Mr Wells’ argument, that had there been a binding contract, Mr Devani’s failure to comply with section 18 would not have rendered it unenforceable. Mr Devani appealed and Mr Wells cross-appealed.

Supreme Court. Unwilling to find an agreement too uncertain to be enforced where the parties intended to be contractually bound and had acted on that intended agreement, the Supreme Court held that the oral agreement would naturally be understood to mean that the commission payment would become due on completion and would be paid out of the proceeds of sale. The court found this to be the only sensible interpretation of what the parties had said to each other during the telephone conversation, even if they had not expressly identified a trigger event for the payment.

In reaching this decision, the court had regard to the words used by the parties, their conduct and the context in which they dealt with one another. This decision builds on the contextual approach set out in Wood, which emphasised the need to interpret contracts in light of the surrounding circumstances.

The court also said that, if necessary to do so, it would have been prepared to imply a term into the contract that Mr Devani’s commission was to be paid on completion of the sale in order to give the agreement practical and commercial coherence. The court made it clear that to leave Mr Wells without any obligation to make payment would be completely inconsistent with the nature of the parties’ relationship.

The Court of Appeal had relied on Scancarriers A/S v Aotearoa International Ltd as support for the contention that the court must first ascertain the existence of a contract before it can consider whether or not a term may be implied into that contract ([1985] 2 Lloyd’s Rep 419). However, the Supreme Court considered Scancarriers to be an unusual case and that it did not support the “far-reaching proposition” reached by the Court of Appeal. It added that it did not accept that there is any general rule that it is impossible to imply a term into an agreement to render it sufficiently certain or complete to constitute a binding contract.

The court said that where parties have intended to create legal relations and have acted on that basis, a term can be implied into the agreement where it is necessary to do so to give the agreement business efficacy or where the term is so obvious that it “goes without saying” and where, without the term, the agreement would be incomplete or too uncertain to be enforceable. Therefore, a term may be implied into what would otherwise be considered an incomplete agreement if that term is necessary to make the contract work as the parties intended.

In Foley v Classique Coaches Ltd, the Court of Appeal stated that, unless all the material terms of a contract are agreed, there is no binding obligation ([1934] 2 KB 1). The Supreme Court’s decision in Wells may, on its face, appear to be a departure from this fundamental principle of contractual certainty, given that the court indicated that it would be prepared to imply a term into an otherwise incomplete agreement to render it workable.

As the court admittedly recognised the relevant agreement as being incomplete, it may also be questioned whether Wells is consistent with the key principles of contractual certainty set out in Pagnan SPA v Feed Products Ltd ([1987] 2 Lloyd’s Rep 601) (see box “Key principles of contractual certainty”). Pagnan notably indicated that contractual certainty requires parties to be agreed on the essential terms of the contract. The question then arises as to what are essential or key terms.

Even the Court of Appeal in Pagnan acknowledged that there is no legal obstacle which stands in the way of parties agreeing to be bound while deferring important matters to be agreed at a later point in time. Therefore, the fact that the trigger event in Wells was not expressly specified as part of the parties’ oral agreement should not necessarily negate the parties’ intention to be legally bound.

The Supreme Court in Wells also concluded that implying the trigger event as a term of the agreement between Mr Wells and Mr Devani would be consistent with Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd in which the Supreme Court, while emphasising that there had been no dilution of the conditions for a term to implied, reiterated that a term will be implied where it is necessary to make the contract operate effectively or it would be so obvious that it goes without saying ([2015] UKSC 72; see News brief “The modern law on implied terms: no rescue from uncommercial terms”).

Ultimately, the Supreme Court in Wells took a broad view of the parties’ words, conduct and the wider context. While recognising that there is obviously a range of circumstances in which agreements may be too vague or too uncertain to enforce, the court held that the agreement in Wells was not an agreement of this kind. In light of the parties’ intention to be legally bound and the actions taken by the parties in reliance on this intention, the court found it appropriate that an implied term could be read into the contract to give it business efficacy. The court noted that implied terms such as this are not novel, referring to James v Smith, where a similar term was implied into an agreement between an estate agent and the owner of a hotel ([1931] 2 KB 317).

On this last point, and in the context of the run of estate agent or recruitment agent commission cases with widely recognised and well-established expectations on both sides of an arrangement, the Supreme Court’s decision in Wells may be considered to be unexceptional. The question for another day is whether, and if so to what extent, the courts would be quite so willing to complete the contractual picture against the backdrop of a more complex and less conventional contractual matrix.