Enforcing an agent's contract in breach of section 18, Estate Agents Act 1979

In January 2017 I reported on the case of Wells V Devani [2016], a case which had recently been heard by the Court of Appeal which considered the question of a term could be inferred into an estate agent’s contract after the agent has already introduced a purchaser to the property?

At the time, the court also reviewed the question of enforceability of an agent’s contract when the agent had failed to comply with its obligations under Section 18 of the Estate Agents Act 1979 (“the Act”). The court of appeal allowed Mr Wells’ appeal on whether there was ever a concluded contract dismissed Mr Devani’s cross-appeal. Mr Wells appealed to the Supreme Court and the decision has now published.

The Facts

In 2007, Mr Wells, with Mr White, a builder complete the development of a block of 14 flats in Hackney. By the beginning of 2008, only 6 of the flats had been sold, although one was under offer. They were being marketed at the time by local agents, Shaw & Co pursuant to the terms of a sole agency contract.

In 2008, Mr Wells discussed the position with a neighbour, Mr Nicholson in Andorra where they lived who mentioned he knew of an investment company in London who might be interested in buying the remaining flats. Mr Wells said he was happy for Mr Nicholson to make enquiries of the investment company.

On 29 January 2008 Mr Nicholson sent an email to Mr Devani, who traded as an estate agent in Kilburn informing him of the flats and that 7 remained unsold. He also gave him both Mr Wells’ and Mr White’s telephone numbers and explained that Mr Wells would be visiting London very soon.

Later that day, having acknowledged receipt of Mr Nicholson’s email, Mr Devani telephoned Mr Wells in Andorra. At trial, the parties gave different accounts of what was said in that telephone call. Mr Devani said he told Mr Wells that he was an estate agent and that his commission terms would be 2% plus VAT. Mr Wells said that Mr Devani made no mention of any commission and gave him the impression that he was an investor looking to buy on his own account.

Shortly after this telephone call, Mr Devani made contact with a Housing Trust who expressed some interest in purchasing the remaining flats. A viewing of the flats was arranged which was attended by a representative of the Housing Trust as well as Mr Wells and Mr White. In February 2008, the Housing Trust agreed to purchase the flats for £2.1m. Mr Wells telephoned Mr Devani to inform him of the sale and later that day Mr Devani sent him an email confirming that “as per our terms of business, our fees are 2% VAT” and asking for his solicitors’ details so that he could arrange to forward an invoice. Mr Devani attached a copy of his terms of business to that email. The relevant parts provided:

“I am required by Section 18 of the Estate Agents Act 1979, as amended to set out our terms of business prior to you formerly [sic] instructing our company.

A commission of 2% VAT (Multiple Agency) of the eventual sale price of the property.

The commission will be due on exchange of contracts with a purchaser, but payable from the proceeds of sale by your conveyance, with your written authority.”

When the purchase completed Mr Devani sought payment of his commission in the sum of £42,000.00 plus VAT which Mr Wells refused to pay. Mr Devani therefore issued proceedings.

The Trial

Mr Wells defended the proceedings contending that he had never entered into any agreement with Mr Devani as his agent because the terms of any agreement between them were too uncertain. Secondly, he said that Mr Devani’s failure to comply with his obligations under the Act rendered any agreement unenforceable or that any sum payable should be discharged or reduced in light of the prejudice Mr Wells had suffered.

So far as Mr Wells’ first argument was concerned, at first instance, the Judge accepted that as Mr Devani had only submitted his written terms to Mr Wells after he had introduced the Housing Trust his claim therefore depended on what had been agreed in the initial telephone call in January 2018. In this respect, the Judge preferred Mr Devani’s evidence. He found that he had not described himself as a buyer or said anything intended to create the impression he was. He also considered that Mr Wells had asked him about fees and he had replied confirming his terms were 2% plus VAT. He recognised, however, that no express agreement had been reached as to the precise event which would entitle him to his commission. Nevertheless, he held that the law would imply the minimum term necessary to give business efficacy to the parties’ intentions. The least onerous term for Mr Wells and one for which nobody would have disputed it had it been suggested was the payment of a specified commission due on completion.

As to the position regarding Mr Devani’s obligations under the Act, the court found that Mr Devani had failed to comply with his obligations. He also found that those failures were culpable but that having regard to the degree of culpability and prejudice suffered by Mr Wells, it would be just to permit him to enforce the agreement but to compensate Mr Wells by reducing the amount he was required to pay by one third.

Mr Wells appealed against the decision and Mr Devani cross-appealed against the reduction in his fee.

The appeal

On appeal, the court, by a majority, allowed Mr Wells’ appeal on the issue of whether there was ever a binding contract. Concluding that there was no binding contract, the court stated that the judge’s approach at first instance could not be justified for several reasons. Firstly, while a court may imply terms into contracts, this assumes there is a concluded contract into which terms can be implied. Secondly, the trigger event giving rise to an agent’s entitlement to commission is of critical importance and a variety of events can be specified. The identification of this event is therefore essentially to the formation of legally binding relations. Thirdly, it follows that unless the parties specify that event, their bargain is incomplete and it is wrong in principle to turn an incomplete bargain into a legally binding contract by adding expressly agreed terms and implied terms together.

As to the position regarding the Act, the court decided unanimously that Mr Wells’ appeal should be dismissed. It held that if there had been a binding agreement, Mr Devani’s failure to comply with his obligations under the Act would not have rendered it unenforceable. The court also dismissed Mr Devani’s cross-appeal regarding the reduction of his fee.

Mr Devani appealed against the decision that there was no binding agreement and Mr Wells cross-appealed against the decision in relation to Mr Devani’s failure to comply with his obligations under the Act.

The Supreme Court

In order to consider the appeal, the Supreme Court had to consider three factors as follows:

1    Was there a binding contract?

Yes said the court.

The court considered that the existence of a binding agreement depended on whether, objectively assessed, what had been communicated between the parties by their words and conduct led to the conclusion that they intended to create a legally binding relationship and had agreed all the terms required by law for that purpose.

The trial judge had been satisfied that the parties had intended to create legal relations and understood that the agent would be entitled to a commission. Although they had not discussed the event that would trigger the payment of the commission, the only sensible interpretation was that they would naturally have understood it to become due on completion. A bargain would not necessarily be incomplete without an express term identifying the event triggering the payment of commission. If the substance of the bargain was that the agent would find a buyer, and the agent did find a buyer who proceeded to completion, a reasonable person would understand the parties to have intended the commission to be payable upon completion.

2    Was it necessary to imply a term specifying the trigger event?

No said the court.

Given the foregoing, the court considered it was unnecessary to imply a term into the contract specifying the trigger event. However, had the agreement not been interpreted as providing for payment of the commission on completion, the court would have upheld the Judge’s implication of such a term – it would have been necessary to give the agreement practical and commercial coherence.

3    Did the agent’s failure to comply with the Act render the agreement unenforceable?

No said the court.

Section 18 of the Act required the agent to give the client written particulars of the circumstances in which the client would be liable to pay the agent for his work, before any contract was entered into. Section 18(5) provided that non-compliance would render the contract unenforceable unless, pursuant to its power under Section 18(6), the court ordered otherwise.

In exercising that power, the court had to have regard to the degree of the agent’s culpability and any prejudice caused to the client. The ultimate question was whether it was just to dismiss the agent’s claim for enforcement. If the court did not dismiss the claim, it could reduce or discharge the sum payable to compensate the client for any prejudice. In the instant case, the Judge had been entitled to take that course.

In all the circumstances, the court allowed Mr Devani’s appeal that there had been no binding contract and dismissed Mr Wells’ cross-appeal as regards unenforceability due to a failure to comply with obligations under the Act.