Phone call contracts - implied terms and the importance of clarity
Wells v Devani [13.02.19]
This recent Supreme Court decision serves as an important reminder of the role of implied terms in contract law. This long-running case has ruled that it is possible to imply terms into an offer whilst also serving as a reminder that contracts do not always have to be in writing. A contract (including a contract of insurance) can be made informally, even by one phone call.
Mr Wells completed the development of a block of 16 flats in 2007, seven of which were still on the market by late January 2008. After a discussion between Mr Wells and his neighbour, Mr Nicholson, an email was sent to estate agent Mr Devani, which informed Mr Devani of the remaining unsold flats.
A phone call then took place between Mr Wells and Mr Devani. The accounts of this phone call differ, depending on the party. Mr Devani maintained that he clearly stated his profession alongside outlining his commission as 2% plus VAT. Mr Wells, on the other hand, stated that there was no mention of a commission. By February 2008, Mr Devani had successfully sold the remaining flats for £2.1 million and sought his commission. Mr Wells refused to pay.
High Court and Court of Appeal
The High Court found for Mr Devani: there was a binding contract, although the commission was to be reduced by one third on the basis that Mr Devani had failed to comply with Section 18 of the Estate Agents Act 1979, which outlines certain requirements.
On appeal, the Court of Appeal overturned the decision by a 2:1 majority. The Court of Appeal found it unjust to turn an incomplete bargain into a legally binding contract through the addition of implied terms.
Mr Devani appealed to the Supreme Court.
Supreme Court decision
There was a unanimous decision by the Supreme Court to allow Mr Devani’s appeal.
The court held that the only logical interpretation of what was discussed was that the 2% commission would be due upon completion and thus payable from the proceeds of sale. As such, it was concluded that a binding contract had been entered into during the phone call between the Mr Wells and Mr Devani. The court confirmed that both parties were fully aware of Mr Devani’s terms of business and that he was entitled to the commission.
Although a phone call may not correspond with the conservative idea of what a contract is, Lord Kitchin ruled that if, as here:
...the bargain is in substance ‘find me a purchaser’ and the agent introduces a prospective purchaser to whom the property is sold, then a reasonable person would understand that the parties intended the commission to be payable on completion and from the proceeds of sale.
The court held that Mr Devani did not deserve to have his application dismissed just because he breached the Estate Agents Act 1979. However, the trial judge’s finding that his commission should be reduced by one third was upheld.
This ruling should be a wakeup call not only to estate agents, but to all professionals. Here we have two parties, who came to an agreement following a conversation which was considered informal. Although party to the same phone call, Mr Wells and Mr Devani both came away understanding that a different agreement had been reached. This is something we see time and time again whether in commercial disputes or insurance claims.
Parties should ensure that essential terms are always recorded in a legally binding agreement. What this case tells us is that where terms are not in writing, the court will not be afraid to infer terms based upon the overall context of the agreement. In the context of insurance policies (which of course are a contract of insurance), this means that underwriting/broking intention will be relevant and it emphasises the importance of note taking and record keeping throughout the placing process.
A key lesson to take from this decision is that when agreeing a contract, the terms should be clearly outlined to avoid confusion. It would be unwise to rely on implied terms which may seem obvious to one party, but could be easily overlooked by the other.
Parties may also wish to revisit written agreements following verbal discussions in which a formal agreement could be inferred. After all, this case is clear evidence than an informal phone call or discussion could amount to a legally binding agreement.
This article was co-authored by Paddy Partridge, Legal Apprentice, Manchester.