Cracking the Crema egg

Until recently, evidence of custom or market practice has not generally been admissible in assisting contractual interpretation. The Court of Appeal in Thomas Crema v Cenkos Securities plc [2010] EWCA Civ 1444 has taken a different view. It has confirmed that evidence of market practice may be used as an aid to contractual interpretation.

Crema, an investment banker, was engaged by stockbroking firm Cenkos Securities Plc as a sub-broker to find investors for a company called Green Park Ventures Ltd. Crema sought payment of his fee from Cenkos on the basis that he was entitled to it regardless of whether Cenkos had received payment from GPV. This was the point of dispute.

The first instance judge heard evidence from two 'expert' witnesses on when a sub-broker would be paid his commission in such circumstances. Neither witness suggested a trade usage or custom. However, the judge accepted that 'market practice', which supported the position of Cenkos for sub-brokers to be paid after brokers had been paid by their clients, existed and was admissible despite falling short of the usual 'notorious, certain and reasonable' standard required for a trade usage or custom.

Crema appealed but the court agreed with the judge at first instance. It used different reasoning but came to a unanimous conclusion:

1) The partly-written and partly-oral contract between Crema and Cenkos contained no express term making the payment from Cenkos to Crema conditional on payment being received by Cenkos from GPV.

2) Conditional payment could not be implied into the contract between Crema and Cenkos. Aikens LJ gave the leading judgment in this case, extending the principles in Attorney General of Belize v Belize Telecom Ltd to partly-oral and partly-written contacts. The principles he considered were:

• a court cannot improve the instrument it has to construe to make it fairer or more reasonable;
• the meaning is that which the instrument would convey to the 'reasonable addressee' having all the background knowledge which would reasonably be available to whom the instrument is addressed;
• the question of implication of terms only arises when the instrument does not expressly provide for what is to happen when some particular event occurs;
• the default position is that nothing is to be implied in the instrument;
• if the 'reasonable addressee' would understand the instrument to mean something more, then it is said that the court implies the term; and
• the process does not add another term to the instrument, it only spells out what the instrument means.

Aikens LJ confirmed that to establish what the parties intended from the point of view of the 'reasonable addressee', a court should be entitled to receive expert evidence of 'market practice'. It was regarded to be relevant background knowledge to assist the court in interpreting both express and implied terms of a contract.

While it is already common practice for the Commercial Court to hear evidence of 'market practice' to gain a full understanding of the factual background to the proper construction of a written contract, this is the first time the Court of Appeal has considered the specific issue of whether evidence of 'market practice' is generally admissible in implying and construing contractual terms. They have decided that it is.

The result is that it may now be possible to support interpretation of a clause/ agreement by reference to the customs and practices of the market in which parties operate. Furthermore, it is a reminder to parties entering contracts to be fully aware of the market in which they function and to be absolutely clear, in express terms, if they intend to deviate from general market practice.