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  Custom and practice

Ordinary trade practice might become a new area for expert evidence

The law in relation to the interpretation of contracts and commercial agreements has long allowed evidence to be adduced in relation to the customs of a particular locality or the usage of a particular trade. The argument runs that, when construing and interpreting contractual terms, the court needs to know what was reasonably in the minds of the parties. In deciding this, the court may take account of the customs of the locality in which the parties live or carry out business, or the usage given to certain words and expressions by their trade. This is considered relevant to the interpretation of the contract if it forms part of the background knowledge available to the parties at the time the contract is entered into (see Investors Compensation Scheme Ltd -v- West Bromwich Building Society 1). Extrinsic evidence is admissible in demonstrating the existence of such customs.

However, there has been an important proviso to this general rule. In Cunliffe-Owen -v- Teather and Greenwood 2 the court said that such evidence was only permitted where the custom was ‘notorious, certain and reasonable’. This means that evidence of market practice can be admitted only where its meaning is so well known in that market as to lead to a term being implied. The notorious market practice must also be certain and reasonable and must not be illegal.

In some cases, market practices that fall within these definitions can be proved in evidence. In a few cases, though, they are so well known and accepted that judicial notice can be taken of them without the need for their existence to be proved in formal evidence. Importantly, mere trade practice was not considered admissible in construing contracts unless it fell within the notorious usage rule.

Recently there has been some shifting in the view taken by the court in cases of mere trade practice. Potentially this creates a new category of evidence that the courts did not previously allow, and may provide a new area of work for experts engaged in commercial fields.

In Thomas Crema -v- Cenkos Securities plc 3, the court was asked to consider trade practice that fell short of notorious usage as part of the ‘factual matrix or background’ in construing a commercial agreement. The claimant was an investment banker in the City who was engaged as a sub-broker by the defendant, a stock broker. The claimant said that he had been responsible for raising £18 million out of a total of £20 million in connection with fundraising for a company called Green Park Ventures. This, said the claimant, entitled him to a payment of 70% of 7% of the sum he had raised. The defendant disputed the sum claimed but contended, in any event, that the claimant was only entitled to receive payment out of money actually received from the company, as this was the custom of the City. As Green Park Ventures had become insolvent, the defendant had received no brokerage from them. He argued, therefore, that he was not obliged to pay the sum claimed.

Both parties called expert evidence on commercial practice in the City of London in relation to payment of sub-brokers. The experts were in broad agreement that there was a general market practice in the City that sub-brokers would not be paid until the broker had received a fee from the client. It was clear, however, that this was merely an understanding amongst commercial brokers in the City and it fell far short of being a notorious custom.

The claimant argued that as soon as it became apparent that a practice fell outside the rule, the court could not consider further evidence of it in relation to the agreement or its interpretation. Relying partly on the Investors Compensation Scheme case, the defendant put forward the counter-argument that the court was perfectly entitled to look at trade or commercial practice as part of the factual matrix that formed the background to the agreement.

The judge, Jonathan Hirst QC sitting as a deputy judge, distinguished the case from previous authorities (and in particular Cunliffe-Owen) on the ground that, at the time those cases were decided, the courts took a more restrictive view of the admissibility of evidence relating to the construction of contracts. He also made a distinction between evidence of notorious usage and evidence of background knowledge. Notorious custom, he said, might be applied so as to bind the parties even though one or other of them might be wholly ignorant of it (although how a party could be ignorant of a notorious custom we aren’t told). Ordinary trade practice, on the other hand, could only amount to background knowledge that was generally available to both parties and was simply evidence of what might reasonably have been in their minds at the time the agreement was struck. He took the view that the court was entitled to consider such evidence but that this could never, by itself, determine the meaning of the contract. Indeed, its importance and relevance would vary from case to case.

So far as the admission of evidence was concerned, the judge did not consider it a requirement that both experts should agree on whether a trade or market practice had been established. It was for the court to decide on this, and this was not subject to whether or not there was agreement between the experts.

It must be conceded that, in deciding the case in the defendant’s favour, the judge ultimately based his decision on the facts and not on the evidence of market practice. That said, however, it is significant that he was prepared to consider general market practice in the course of the proceedings. The decision does appear to open the way for expert evidence in future cases where evidence of ordinary trade practice might become admissible.

References

  1. Investors Compensation Scheme Ltd -v- West Bromwich Building Society [1998] 1 WLR 896
  2. Cunliffe-Owen -v- Teather and Greenwood [1967] 1 WLR 1421
  3. Thomas Crema -v- Cenkos Securities plc [2010] EWHC 461
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Issue 66
February 2011

VAT on expert reports
Custom and practice
TCC guidance for experts


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