Out of commission: dealing with disputes on oral contracts

Most commercial agreements relating to building works are thought through and usually, but not always, in writing; often based upon tried and tested standard forms drafted by experienced lawyers. If a dispute arises, it will usually concern the interpretation of terms and what they mean in practice. In some instances, however, particularly where the contractual arrangements are less prescribed, there may be arguments about whether an entire agreement between the parties is binding, if it is a complete and enforceable contract and what, if anything, can be done to resolve the problem, or even to retrospectively fill in the gaps.

One such matter recently ended up before the Supreme Court. In Devani v Wells, the court was asked to decide a dispute concerning an oral contract for the payment of an estate agent’s commission. The decision is noteworthy for the construction industry even though building works were not the main subject of the case, as many construction projects will encompass less formal ancillary agreements which touch upon areas such as sales, lettings, advertising or logistics. These have the potential to become legal traps for the unprepared.

The case concerned a claim by an estate agent, Mr Devani for an unpaid commission fee by a building owner/developer which was due for the introduction of a purchaser for a number of flats forming part of a redeveloped block in Hackney, London. Mr Devani gave evidence in court that during an initial telephone conversation with the owner/developer, Mr Wells, he informed Mr Wells that he was an estate agent and that his commission terms would be 2% plus VAT. Not surprisingly, Mr Wells disagreed with this recollection, maintaining that he thought that Mr Devani was himself a purchaser, not an agent. The first trial judge decided on the evidence that the substance of the call was as recounted by Mr Devani, and this was the version of events adopted by the Supreme Court.

Following his introduction of the purchaser for the flats, Mr Devani emailed Mr Wells asking for payment of the commission. Mr Wells refused on the basis that he had never entered into a binding contract with Mr Devani. The trial judge found in Mr Devani’s favour, but this verdict was reversed by the Court of Appeal, which declared that there was no binding contract and that the agreement was incomplete because the parties had not specified the actual event which triggered the obligation to pay the commission.

When the proceedings finally reached the Supreme Court, one of the questions it had to consider was whether the telephone conversation amounted to a complete and enforceable contract, despite there being no express identification of the event which would trigger the obligation to pay the commission referred to by Mr Devani. The Court looked at the parties’ words and conduct and concluded that they had intended to create a legally binding relationship. Furthermore, the absence of an agreed trigger event did not mean that the bargain was incomplete and that a reasonable person would have understood that the parties had intended that commission would be payable on completion of the sale of the flats.

The Supreme Court recognised that there could be cases where an agreement is so vague that it cannot be enforced, but did not accept that there is any general rule that it is not possible to imply a term in an agreement to complete a legally binding contract, provided that it was so obvious that “it goes without saying”. In some circumstances, therefore, a court may be persuaded to intervene to perfect an agreement which might otherwise be unenforceable.

Aside from the proposition that it seems that the courts will try very hard to ensure that a party is unable to wriggle out of payment or other obligation when, from a reasonable point of view, the other party should benefit from it, what are the take away lessons from this Supreme Court decision? The first is that whilst the law may, in certain circumstances, step in to fix incomplete contracts by implying missing terms be wary of informal agreements). According to Lord Briggs in Devani v Wells “… the common law will recognise an enforceable liability to pay as arising from the briefest and most informal exchange…” It is also advisable if at all possible, to reach express agreement on all essential terms at the very beginning of the parties’ commercial relationship and to consider the benefits of taking expert advice. As illustrated in this case, failures in the early stages can turn out to be costly long term.

Stephanie Canham is national head of projects and construction at Trowers & Hamlins