Crema v Cenkos Securities Plc

A court may admit evidence of market practice falling short of a binding trade usage or custom. Such evidence forms part of the factual background against which a commercial contract is interpreted. Its relevance depends on whether it addresses the circumstances for which an implied term is proposed.

A term cannot be implied merely because it would be commercially unsurprising or reasonable. The contract must objectively require that meaning. Where a broker and sub-broker have separate contracts, the sub-broker’s right to commission is not conditional on the broker receiving its commission unless the agreement, properly interpreted, imposes that condition.

A sub-broker agreed with a broker to receive 70% of the broker’s 7% commission for raising investment capital. The investors paid £18 million to the broker’s client, but the client did not pay the broker and later entered insolvent administration. The sub-broker claimed £882,000.

The Commercial Court dismissed the claim in [2010] EWHC 461 (Comm). It held that the parties were to share a contemplated brokerage fund and that the sub-broker had no independent right to payment before the broker was paid.

The appeal concerned whether that condition was express or implied, whether evidence of market practice was admissible, and whether the condition was necessary to the proper interpretation of the agreement.

1. Appeal allowed unanimously. The agreement did not make the sub-broker’s commission conditional on the broker first receiving its commission from the client. The sub-broker was therefore entitled to the agreed payment.

2. Per Aikens LJ, the agreement was partly written and partly oral. It contained no express term dealing with the client’s failure to pay the broker. A term could be implied only if the contract, read objectively as a whole and against the relevant background, had to bear the additional meaning proposed. The court could not improve the bargain or transfer a loss merely because that appeared fair or commercially convenient: Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 considered and applied.

3. Evidence of market practice falling short of an invariable trade usage or custom was admissible as part of the factual matrix. This applied whether the evidence was agreed or disputed. If disputed, the judge had to decide whether the practice existed and whether it assisted interpretation. The Chancellor and Hughes LJ agreed that the judge was entitled to consider such evidence.

4. The evidence did not establish a practice governing the event which occurred. Neither expert had encountered a case in which a broker was unpaid after the sub-broker had performed. Their evidence addressed only the usual sequence of payments when a transaction proceeded normally. It could not establish that payment by the client was a condition of the sub-broker’s entitlement.

5. The separate broker-client and broker-sub-broker contracts supported the ordinary conclusion that the sub-broker’s fee became due once the introduced investment was paid. The sub-broker had performed and had no control over the broker’s arrangements for collecting its own commission. Expressions such as “sharing”, a “brokerage fund” and “successful completion” did not establish the proposed condition.

6. Hughes LJ emphasised that the proposed arrangement would not have been surprising, but that was not the legal test. The parties had never addressed the contingency expressly, and it was equally possible that they intended the broker to bear responsibility for payment.

7. The Chancellor reached the same result principally by construing the written communications. They contained unqualified promises to pay and did not justify the conditional gloss imposed below. The broader extension of the Belize analysis to contracts not wholly written was unnecessary to the decision.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The agreement did not condition the sub-broker’s entitlement on the broker receiving payment from its client: [2010] EWCA Civ 1444.

2. High Court, Commercial Court: Mr Jonathan Hirst QC, sitting as a Deputy High Court Judge, dismissed the claim after holding that the sub-broker had no independent right to commission before the broker was paid: [2010] EWHC 461 (Comm).