18 March 2020

Which came first, the binding contract or the implied term?

Over the course of 2019, the Courts of England and Wales heard several cases which explored the circumstances in which the Courts are willing to imply terms into contracts. We have considered two such cases, Wells v Devani and Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP and set out our observations below. 

Wells v Devani [2019] UKSC 4

Facts

A property developer struggling to sells flats was introduced to a property agent who, during a phone call, informed the developer that his fee for assisting with the sale of such flats was 2% of the sale price (as commission) plus VAT. Not long after the phone call, the agent succeeded in selling all of the flats and emailed the developer with the good news, setting out again his fees in writing and attaching to the email his terms of engagement pursuant to section 18 of the Estate Agents Act 1979 (the “1979 Act”). 

The agent claimed his commission after completion of the sales, however the developer refused to pay, arguing, among other things, that there was no binding contract under which he had agreed to pay the agent because a crucial term to such contract, the trigger for payment, was absent, thus rendering the agreement too uncertain to be binding.

The question with which the Court of First Instance, the Court of Appeal and the Supreme Court were left to grapple with was whether a term setting out the payment trigger could be implied into the agreement. 

Judgement

In the first instance, the Court determined that a term could be implied where such term is necessary to give efficacy to the parties’ intentions. As such, the Court implied the term least onerous to the developer, being that the trigger for payment was completion. The Court of Appeal disagreed, determining that to imply terms where there was no binding contract would be putting the horse ahead of the cart. As the term that was “missing” was crucial to there being a contract, the Court of Appeal determined that there was no binding contract and that terms could therefore not be implied into the contract. 

On appeal, the Supreme Court disagreed and determined that payment triggers are so obvious in the property market and that, namely, commission would be payable on completion and taken from the proceeds of sale. Importantly, the Supreme Court distinguished between cases where an agreement is so vague and uncertain that it cannot be enforced or have terms implied, as opposed to cases where an agreement is enforceable despite requiring a fundamental term. 

When considering whether the payment trigger should be implied, the Supreme Court considered a spectrum of payment triggers existent in the market – from (i) an agent introducing a prospective buyer and claiming commission was payable on the basis of the introduction, regardless of whether or not the sale proceeded to completion (the least favourable terms to the developer) to (ii) an agent claiming commission was payable on completion of the sale from the sale proceeds (as was the case in this situation). Whilst the less favourable terms would not necessarily have been implied, the Supreme Court had no problem implying the more favourable (and therefore obvious) terms.

Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP  [2019] EWHC 2380 (Ch)

Facts

During the aftermath of the collapse of the Lehman Brothers, the administrators of Lehman Brothers International (Europe) (“LBIE”) agreed over the phone to sell to Exotix Partners LLP (“Exotix”) Peruvian Government Global Depository Notes (the “GDNs, and each a “GDN”) for $7,707.93 (with market value understood to be approximately $7,438). Shortly after the sale, Exotix received coupon payments on the GDNs indicating that the GDN’s true market value was more than $7 million. Instead of flagging this to LBIE, Exotix sold the GDNs on to a third party for circa $7.7 million.

Upon learning of the sale, LBIE applied to the Court for restitutionary relief, claiming (i) that both parties had intended to contract in respect of “scraps” and that the trade should be construed as a sale of GDNs having a value commensurate with the price paid; and (ii) that if the contract was found to be for the sale of 22,955 GDNs, then the agreed sale price should be $7.7million and Exotix should pay LBIE circa $7m. Exotix maintained that the trade should be construed as a trade of sale where the contract was the sale of 22,955 GDN’s for $7,707.93.

Judgement

The Chancery Division found in favour of LBIE’s argument that the parties had intended for the trade to be the sale of GDNs with a total nominal, face or par value of the GDNs rather than a fixed quantity. It found that LBIE had over-delivered and Exotix should compensate LBIE for the amount of the undue benefit. 

Contrary to the findings in Devani v Wells set out above (in which the Court was willing to imply a term where such term was obviously integral to the contract), the Court held in this case that the implied term was implied because, had it been included as an express term, the parties would have realised that they were both under a fundamental misapprehension about the nature of the GDNs and would have abandoned the agreement. The Court was willing to imply a term in this instance because, without implying such term, the trade had no practical or commercial coherence and likely would not have happened.

What we can learn from these cases

These cases show that the Courts appear to be reluctant to find an agreement too uncertain to be enforced when conduct and actions indicate a party had an intention of being contractually bound.  The Courts have shown a desire to uphold commercial contracts and take a pragmatic approach in implying terms into agreements, where necessary, in order to make such contracts workable. 

The natural presumption prevails, which is backed by caselaw, for example, where a “trigger event” is not defined in an agreement for the payment of any commission, it is payable on completion of the transaction (unless otherwise provided for). Therefore, such term where an “obvious” commission of the parties has a “fundamental misapprehension” would be implied into the agreement. The above cases prove helpful as, in some circumstances, the Courts are willing to consider remedying a lack of certainty over terms of an agreement by implying relevant terms into the agreement.  

Finally, although neither of the cases turned on the point that each of the contracts was made over the phone, it is worth noting that even a short phone call can constitute a binding contract!


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