Oral contracts: Lessons from the Supreme Court

Interpreting and enforcing oral contracts: What did the Supreme Court say in Barton v Morris?

Mr Barton and a representative of Foxpace Limited had discussed a proposal that if Barton introduced a buyer who would purchase Foxpace’s property, Nash House, for £6.5 million, Foxpace would pay introductory fees of £1.2 million. No account was made of the potential for a sale at less than £6.5 million. When, following an introduction by Mr Barton, a buyer purchased Nash House for £6 million, a dispute arose as to the existence, terms and enforceability of the alleged oral contract for introductory fees.

In the absence of an oral contract, the Supreme Court considered the possible ways in which Foxpace could be contractually bound to pay an introductory fee to Mr Barton:

• The express terms of the contract? The oral contract only provided for a sale at £6.5million. There was no express contractual term which created an obligation on Foxpace to pay Mr Barton a fee if Nash House was sold for less.

• A term implied as a matter of fact? To imply a term into the oral contract which would force Foxpace to pay Mr Barton an unspecified sum if Nash House was sold for less than £6.5million, would be to contradict the express term that payment would be due on a sale for £6.5million. Further, the majority held that it was not necessary to imply such a term to give the agreement business efficacy (necessity is a pre-requisite for implying terms).

• A term implied as a matter of law? The Supply of Goods and Services Act 1982 implies a term that the party contracting with the supplier will pay a reasonable charge where payment is not determined in the contract.  However, this again did not apply.  Payment had been determined by the oral contract (namely, Foxpace would pay commission if Nash House was sold at £6.5million).  Estate agent cases where commission was payable on a completed sale were found to be irrelevant. Barton was not an estate agent and “he had no scale of fees or other terms and conditions which he usually adopted and which a reasonable person engaging him would expect to govern the relationship” [Lady Rose, para 70] [2].

• A claim in unjust enrichment? Unjust enrichment [3] can’t be relied on to circumvent the terms of an existing contract. An obligation on Foxpace to pay any commission to Mr Barton when the sale was for less than £6.5million is at odds with what was agreed. These circumstances were not unjust.  It was an outcome provided for by the oral agreement. Although this may seem harsh for Mr Barton, unjust enrichment will not mend a poor bargain.

By a majority decision, the Supreme Court found that Mr Barton wasn’t entitled to any commission. The oral contract failed to account for the circumstances that arose. The court could not imply any term to cover Nash House being sold for less than £6.5million. It’s a common misconception between commercial parties that the law of unjust enrichment can resolve deficiencies in oral contracts or in poorly constructed written contracts.

Barton v Morris on oral contracts: What practical advice arises?

This case provides further clarity on implying terms into oral contracts or contracts generally. It’s particularly helpful in the context of introductory fees and estate agency commission. The case also highlights the fact that doing business solely on the basis of oral contracts can be a costly mistake.

Parties can ensure better mutual understanding and cooperation where fundamental terms are committed to writing. Sometimes the mere process of recording an arrangement in writing – never mind instructing a specialist solicitor – immediately prompts the necessary questions: have we covered everything; what if this or that happens; who should pay for what and when; etc.

Key starting points to consider and iron out with the counter-party include:

• Subject: what do both parties ultimately want to receive from the arrangement?

• Payment: who is paid what, why, when and how much?

• Duration: how long do you want to be tied into an agreement?

• Termination: how easily do you want to be able to walk away, and what happens if you do?

In addition, before undertaking any work, supplying any goods or services or incurring any significant expenses or obligations, any business or person involved in discussions concerning potential commercial arrangements should:

• review their negotiating practices and be aware of the risks associated with informality/oral contracts;

• educate staff as to the risks of both inadvertent contract formation (covered in our earlier article) and of conducting business on the assumption that contractual backing exists, or exists on certain terms, when in fact it may not;

• clearly record whether any agreement reached is intended to have legal effect, or whether the parties require any such agreement to be formally documented and signed by the parties before it has contractual force;

• ensure that different teams are aligned to the same position (so that, for example, operational teams within a business behave consistently with, say, the procurement team); and

• clarify that any counterparties have committed to their side of the bargain, and that all necessary terms are consistently understood between the parties.

In the vast majority of commercial cases, the best advice will be not to start work, invest any significant time or money, or otherwise proceed with a venture, until a formal written contract has been completed.  Recording oral agreements in writing can significantly lessen the chances of a dispute. If/when any dispute does arise, perhaps in relation to the parties’ differing interpretations of the written contract or where a contract otherwise somehow falls short, the written contract and any correspondence or file connected with the contractual negotiations and drafting can constitute valuable evidence to aid resolution.

Oral contracts and formality/informality: How we can help

Informal/pre-contractual communications and negotiations can be a minefield. Walker Morris’ Commercial and Commercial Dispute Resolution specialists understand that it’s crucial for a business to get the balance right between being able to quickly obtain sufficient comfort to enable parties to proceed with their plans, and acquiring reliable, written contractual protection. An awareness of key contractual principles, and the practical scenarios in which risks in relation to oral contracts and informality may arise for any particular business, is essential.

For further information or staff training in relation to pre-contract traps and tips; for assistance in relation to effective commercial contract drafting; or for strategic advice if and when any informal negotiations or oral contracts do result in issues or disputes, please contact Louise Norbury-Robinson, Jack Heward 0r Jake Phillips. They, or any member of the Commercial and Commercial Dispute Resolution teams, will be very happy to help.

[1] Barton and others (Respondents) v Morris and another in place of Gwyn–Jones (deceased) (Appellants) [2023] UKSC 3

[2] In an earlier briefing we considered the case of Wells v Devani, another Supreme Court case on implying terms into oral contracts, also in the context of introductory fees.  In Barton v Morris, the Supreme Court has effectively distinguished Wells v Devani because Mr Barton was not an estate agent.  Together, these two Supreme Court decisions, arising from similar facts but reaching two different conclusions, highlight the uncertainty and ‘litigation risk’ always associated with seeking to enforce alleged oral contracts

[3] See our previous article for more information and advice on unjust enrichment