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What Makes a Legally Binding Contract

By National Practice Group Leader, Business Advisory

In a recent case, the Court of Appeal ruled that an estate agent should not get paid commission because his contract was incomplete.

The ruling provides a helpful reminder that you must have four essential components to create a legally binding contract. These include:

  1. An offer which has been accepted.
  2. An agreement on essential contractual terms between all those involved in the contract.
  3. Everyone involved must have the intention to create a legally binding contract.
  4. Consideration, which is a legal term meaning that a person to whom a promise is made cannot enforce a promise unless they have given or promised something in exchange for it, for instance in exchange for providing a service to X, X agrees to pay £Z to Y.

In this case the contract for the commission the estate agent would receive for selling a number of properties had an essential term missing, that was, what event would trigger payment of the commission.

The estate agent, Mr Devani, was tasked with finding a buyer for a property developer, Mr Wells, who was struggling to sell half of the flats in a block of 14 he had recently developed. Following an introduction, they had a telephone conversation about the flats and Mr Devani explained how his commission would be calculated but not what would trigger payment.

After finding a buyer for the remaining flats, which Mr Wells accepted, Mr Devani sent his terms of business which stated that his commission should be paid when the property developer exchanged contracts with the buyer. When the sale completed, Mr Well refused to pay and the dispute subsequently came before the courts.

When the case reached The Court of Appeal, overturning the lower court’ decision, the court decided that even though the estate agent explained how his commission would be calculated in detail, as he failed to say when the commission should be paid the contract was incomplete and, therefore, unenforceable.

This case is a helpful reminder that the courts cannot always imply terms into a contract. The Court of Appeal rejected an argument that the trigger event for payment could be implied through interpretation of an oral contract. Terms can only be implied into a concluded contract.  

The contract between Mr Devani and Mr Wells was incomplete as the time for payment of commission was an essential term, highlighting the risk of one party embarking upon what it believes are its obligations under a contract which has not yet been concluded.

The Court of Appeal decision could have far wider reaching consequences as it could be applied to any contract in which a commission is payable.

Businesses could be at risk of not getting paid, despite having engaged significant amounts of resources and time carrying out what they believe to be their obligations under a contract, if the terms of the contract have not been met. If you are a business owner you should ensure you have clearly defined terms, preferably recorded in writing, where all those involved understand their obligations.  

If a customer seeks to challenge your terms of business and whether they are enforceable, please contact one of our dispute resolution solicitors who can advise you on the enforceability of your terms. 

If you consider that you may need assistance in the drafting of your terms or wish for your contract terms to be reviewed, please contact Daniel Varney a corporate and commercial lawyer at Slater and Gordon. To contact the team call freephone 0800 916 9052 or contact us online and we will be happy to help.

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