Did you exchange contracts or a handshake?
Legal technicalities – Ignore Them At Your Peril!
A recent case vividly illustrates how the simplest problem can easily mushroom into time-consuming and costly litigation. In Wells v. Devani, it required a trip all the way to the Supreme Court to resolve a relatively simple dispute over an estate agent’s entitlement to his commission. The case shows the kind of problem that can arise even in the simplest of cases if the parties to a contract fail to ensure that they are in complete agreement as to the terms of the contract and that those terms are been properly recorded.
Wells completed the development of a block of flats with a builder. A neighbour put Wells in touch with Devani, an estate agent, with a view to marketing some of the flats. Wells and Devani reached an agreement over the phone. In court, Devani claimed that he told Wells that he was an estate agent and that his commission terms would be 2% plus VAT. Wells denied that Devani had mentioned the payment of commission and claimed that Devani gave him the impression he was an investor looking to buy on his own account. Shortly afterwards, a housing association agreed to purchase the flats for £2.1m.
When Devani emailed Wells claiming his commission, Wells refused to pay. Devani issued proceedings in the County Court. The case raised two issues. Firstly, given that the parties had not expressly agreed on the event that would trigger the payment of commission, had the parties made an agreement sufficiently certain for it to be a legally enforceable contract? Secondly, even if they had, should the Court refuse to enforce that contract because Devani had failed to comply with the requirements of the Estate Agents Act 1979 – namely, before the agreement Devani had not expressly informed Wells of the circumstances under which he would be entitled to commission? In such cases, the estate agent cannot enforce the agreement without first obtaining a Court Order.
In the County Court, the Judge preferred Wells’ version of events and ruled that the parties had intended to create legal relations. Therefore there was a binding contract between the parties. Although a trigger event had not been expressly agreed, the law would imply a term that the commission was payable on the completion of the sale of the flats by any purchaser introduced to Wells by Devani. The Judge also granted Devani permission to enforce the contract on the grounds that it would be draconian not to allow Devani to recover any commission at all. However, he reduced the final award by one-third – £16,450 – to reflect Devani’s failure to comply with the law.
Both parties appealed to the Court of Appeal (neither side was satisfied with the Trial Judge’s ruling on the Estate Agents Act issue). The Court allowed Wells’ appeal on the binding contract issue. According to the Court, the Judge had gone too far in impermissibly seeking to make a contract for the parties. However, the Court refused to interfere with the Trial Judge’s decision on the Estate Agents Act issue. Both parties further appealed to the Supreme Court. The Court allowed Devani ’s appeal on the binding contract issue and reinstated the Trial Judge’s decision, although the Court did not entirely agree with his reasoning. Looking at what had been said during the phone conversation and the surrounding circumstances, it was possible to conclude that the parties had actually agreed that the commission was payable on the completion of a sale of the flats. It was simply unnecessary to resort to the implication of a term. As to the Estate Agents Act issue, like the Court of Appeal the Supreme Court refused to interfere with the Trial Judge’s decision.
So, all’s well that ends well? Well, up to a point. Lawyers will not be surprised by the Supreme Court’s decision on the contract issue. Generally speaking, where two parties have intended to enter into a legally binding contract, the courts will be reluctant to find that their agreement was too uncertain to be enforced. However, the case is a reminder of the importance of adequately recording the terms of any contract. The case also reminds estate agents that the 1979 Act has real teeth.