Developments in contract: Contract formation and missing terms

The principles

• A contract can be formed even though certain terms of significance have not been concluded.

• To test whether a contract has been formed, the court will examine whether, by their words or actions (but not their subjective state of mind), the parties have agreed upon all the terms they regarded as necessary, or the law required, to create legal relations.

• Whether a particular term is something the parties considered necessary, or the law requires, before legal relations are created is a matter of judgment and to a great extent uncertain.

• No terms can be implied into a contract in order to make it complete. The interpretation of the contract and the implying of terms into it cannot be mixed and if no contract exists, no terms can be implied.

Recent developments

• In Wells v Devani the court had to decide whether a contract for estate agency services had been entered into. On the telephone the parties had agreed to a commission of 2%, but had not discussed what triggered payment of this commission. The estate agent later sent his standard terms and conditions to the seller, but only after a sale of the properties had been agreed, which was the trigger for commission to be due under those terms.

• There was no dispute that the estate agent had found buyers for the properties in question who had completed the purchases, so, regardless of which of the various trigger points for commissions typically used in estate agency contracts was adopted, it would have become due. The judge at first instance therefore implied a term whereby commission was paid at the point most favourable to the seller, that being upon an exchange of contracts.

• The Court of Appeal, by a majority, overturned this decision, saying that in order to imply a term into a contract, it is first necessary to ensure a contract exists. The trigger for the payment of commission was a fundamental term and if a fundamental term is not agreed between the parties, no contract has been formed. Terms cannot then be implied in order to complete a contract which would otherwise not exist.

What this means

• The fact that one of the Lords Justices of Appeal in Wells v Devani disagreed with the other two and found that an agreement had been formed shows how finely balanced these issues can be. Arden LJ found that while the judge at first instance should have interpreted the contract rather than implied a term, in her view the parties’ communications had led to a contract, which included when commission became payable.

• The courts’ approach to the implication of terms has tightened in the last few years. The Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor effectively reinstated the test for implied terms. Lord Neuberger noted that the process of implication involves a different exercise from that of construction. Contracting parties should, therefore, seek to ensure that all terms are expressly set out in the contract, regardless of how obvious they appear to those contracting parties.

• If an agreement is to be concluded orally with standard terms and conditions to follow, those terms should be sent to the counterparty as soon as possible. If any form of performance of the contract takes place before the terms have been sent, there is a serious risk that the terms will not apply and the contract may be incomplete.