Crema v Cenkos Securities Plc

A sub-broker’s entitlement to commission depends on the agreement made with the lead broker. Where the agreement gives the sub-broker a share of commission received by the lead broker, the sub-broker has no independent right to payment if the client does not pay the lead broker. General market practice may form part of the factual matrix when construing a commercial agreement, even though it falls short of a binding trade usage. It cannot, however, determine the contract’s meaning. Terms may be implied to require reasonable steps to recover fees and to prevent the lead broker from deliberately defeating the sub-broker’s entitlement. Such terms cannot be used retrospectively to impose wider obligations, including requirements for exclusivity, escrow arrangements or formal written agreements. An effective-cause requirement may arise where commission is payable for investments raised by the broker.

The claimant, an investment banker, acted as sub-broker for the defendant stockbroker in connection with fundraising for Green Park Ventures Limited. Investors ultimately provided £18 million, but the client became insolvent and did not pay the defendant’s brokerage. The claimant sought 70 per cent of a 7 per cent commission, contending that the defendant was liable irrespective of receipt from the client.

The issues included whether the claimant was the effective cause of the investment, whether market practice affected construction of the parties’ agreement, whether payment was conditional on the defendant receiving its brokerage, and whether contractual or tortious duties required the defendant to secure payment.

1. Effective cause. The agreement entitled the claimant to commission on investments raised by him. That required him to be the effective cause of the investment. The same requirement applied between the defendant and its client because the defendant was not an exclusive broker. Applying the principles discussed in Gibb v Bennett and Coles v Enoch, the claimant was the effective cause of the BlueCrest investment. His introduction of Hutton Collins led to the subsequent approach to AgFe, and he arranged the first meeting between BlueCrest and the client.
2. Abuse of process. The defendant was not precluded from contesting effective cause merely because it had relied on the claimant’s account in earlier proceedings against the client. The issue had not been adjudicated, and requiring proof in the present action was neither unfair nor oppressive. The principle in Johnson v Gore Wood & Co was applied.
3. Market practice. Evidence established a general City practice that a sub-broker would ordinarily be paid only after the lead broker received its fee. This was admissible as background knowledge in construing the agreement, although it fell short of a binding usage and could not determine the meaning of the contract.
4. Construction of the agreement. The parties’ agreement gave the claimant 70 per cent of the 7 per cent brokerage received from the client in respect of investments raised by him. The claimant therefore had no independent right to payment before the defendant received its brokerage. The court reached that conclusion from the wording and commercial context of the agreement, with market practice providing strong support.
5. Implied terms. The contract contained limited implied obligations requiring the defendant to take reasonable steps to recover fees due and not to prevent payment of its fees so as to deprive the claimant of his share. It did not contain the wider obligations alleged, such as procuring exclusivity, a formal agreement, an escrow account or early payment of fees. Those obligations would have materially improved the claimant’s bargain and were neither necessary nor obvious.
6. Tort. The tort claim added nothing. There was no free-standing duty of care wider than the contractual obligations.
7. The defendant had made vigorous attempts to recover its fees and had not breached the limited implied obligations. The action was dismissed.