In Wells v Devani, the Supreme Court found that a contract made verbally during a telephone call was enforceable and clarified the circumstances in which legally binding relations will be created.
It is often said that whereas numbers are the currency of accountants, words are the currency of lawyers. And there is, of course, a good reason for that. Indeed, in Scotland, many types of document must be in writing in order to be legally effective. However, it is has long been possible to contract with others verbally or by conduct alone. There are numerous examples from every day life: consider the contract made between the auctioneer and the purchaser or the floor traders in the New York Stock Exchange.
However, where a contract or agreement requires any further detail (such as when an obligation to make payment becomes effective, as the case was in Wells) it is always advisable to set out the terms of that agreement in writing. Wells serves as an important reminder of why it is important to do so; not least, because the dispute between the parties began over a decade ago.
Mr Wells was a property developer who had completed a development of a block of flats in 2007. Some of the flats were still on the market by the beginning of 2008. A neighbour of Mr Wells', sent an email to Mr Devani who was trading as an estate agent informing him of the unsold flats. Mr Devani subsequently contacted Mr Wells by telephone. The contract that was the subject of the dispute was formed during that call. Mr Devani's evidence was that he told Mr Wells that he was an estate agent and that his commission terms would be 2% plus VAT. Mr Wells maintained that Mr Devani made no mention of any commission. Mr Devani was subsequently successful in introducing a purchaser who agreed to purchase the remaining flats for £2.1M. After completion of the transaction, Mr Devani rendered his invoice to Mr Wells claiming his commission. Mr Wells refused to pay and court proceedings were initiated.
The principle question for the Court was whether the agreement was complete and enforceable?
The County Court found in favour of Mr Devani by implying a term to give business/commercial efficacy to the contract. The Court of Appeal by majority overturned that decision and the matter came before the Supreme Court.
What is needed for there to be a binding contract?
The question of whether there was a binding contract between the parties required consideration of:
- What was communicated between the parties by their words and conduct;
- Whether, objectively assessed, that led to the conclusion that they intended to create a legally binding relationship; and
- Whether they had agreed all the terms that the law requires as essential for that purpose, namely offer, acceptance, consideration (although note that consideration is not an essential term of contract in Scotland).
The Court acknowledged that while there may be cases in which the words and conduct relied upon are so vague that the Court is unable to identify the terms of any contract or to attribute to the parties any contractual intention, the Court confirmed that the courts will be reluctant to find on agreement that is too vague or uncertain to be in force where it is found that the parties had the intention of being contractually bound.
It is perhaps significant in this case that the commercial arrangement in question was a fairly common one. Indeed, Lord Kitchin giving judgment said that he had no doubt that it would naturally be understood that payment would become due on completion and made from the proceeds from sale.
Okay: so, there were no bedknobs, but broomsticks there most certainly were. In his concurring judgment, Lord Briggs indulged in some classic judicial analogy and in an amusing passage he gave the following example:
"Take for example, the simple case of the door to door seller of (say) brooms. He rings the doorbell, proffers one of his brooms to the householder, and says "one pound 50". The householder takes the broom, nods and reaches for his wallet. Plainly the parties have concluded a contract for the sale of the proffered broom, at a price of £1.50, immediately payable."
In other words, very little indeed is required in certain circumstances for the creation of legally binding creations. Lord Briggs noted that lawyers frequently speak of the interpretation of contracts as if it is concerned exclusively with the words used expressly, either orally or in writing by the parties. And, as he rightly stated, so very often, it is. However, there are occasions, particularly in relation to straightforward contracts, such as contracts of sale, where the context in which the words are used, and the conduct of the parties at the time when the contract was made, tells you as much or even more about the essential terms of the bargain than do the words themselves. He pointed out in the scenario above that all of the essential terms, other than price, have been agreed by conduct.
This case was an appeal from a lower English Court and accordingly it is not strictly binding in Scotland; however, it will be highly persuasive. It should serve as a reminder that care should be taken to ensure that key terms of agreements are set down in writing wherever possible. However, it ought also to serve as a warning that parties must always be aware that their actions and conduct alone may be sufficient to create legal binding relations.
Brodies is home to Scotland's leading and largest dispute resolution and litigation team in Scotland and are experts in contractual disputes and all other aspects of litigation. If you would like further information, or wish to seek advice on any matter, please contact Peter Begbie or your usual Brodies contact.