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Contracts made verbally – are they worth the paper they aren’t written on?!


Two 2019 cases concerning contracts made over the phone highlight the potential uncertainty of agreeing contracts orally.

 

1) In Wells v Devani [2019] UKSC 4, the Court found that context is just as important as the words used in contracts with few contractual formalities.

An estate agent and a property developer discussed the sale of some flats. Mr Devani, the estate agent, spoke to Mr Wells, the developer, and offered his services at an expressly stated commission of 2% plus VAT. Wells’ contention was that Mr Devani did not explain the event that would trigger the payment. The Supreme Court found that a binding oral agreement was reached between the parties and the estate agent was entitled to his commission. The express reference by Mr Devani to the 2% commission was, in the context, a clear reference to the price receivable by Mr Wells upon the sale of the flats to persons introduced by Mr Devani. 

In the Court’s judgment, Lord Briggs illustrated his thinking: 

[Take] 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. But the subject matter of the sale, and the date of time at which payment is to be made, are not subject to terms expressed in words. All the essential terms other than price have been agreed by conduct, in the context of the encounter between the parties at the householder’s front door.

The Court said that the agreement was sufficiently certain and complete by way of construction of the parties’ words on the phone call and their conduct. 

 

2) In Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), the High Court highlighted that the courts will uphold commercial contracts, including by implying terms where necessary, so as to render contracts workable.

The dispute concerned the correct interpretation of a disputed debt trade which had been concluded over the phone. At the time, the parties both thought the debt instruments were worth $7,700. They later realised, after the trade had been settled, that the true value was 1000 times higher: $7.7m. The buyer, Exotix, argued the agreement was for a sale of a fixed number of instruments at a fixed price of $7,700. However, the Court found that the agreement referred to the notional value of the instruments rather than to a fixed quantity. The seller had over-delivered and the buyer had to compensate the seller for the amount of the undue benefit. However, that interpretation meant that the contract was not capable of being performed (as it required delivery of a fractional number of instruments). As such, with some reluctance, the Court implied a term enabling a fractional sale in order to give effect to the contract.

 

Takeaway Point: reduce risk and get contracts in writing. Oral contracts should ideally be either avoided, or confirmed in writing (an email will suffice) immediately after concluding the verbal agreement. The Courts may be pragmatic if there are missing terms that need to be implied for a verbal contract to make sense, as seen in the Lehman Brothers case.

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