Thomas Crema v Cenkos Securities

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DMC/SandT/11/08

English Court of Appeal

Thomas Crema v. Cenkos Securities PLC

English Court of Appeal (Civil Division); Hughes LJ, Aikens LJ, Chancellor Morritt; [2010] EWCA Civ 1444, 16 December 2010

Hugo Page QC (instructed by De Cruz Solicitors, London) for the Appellant, Crema

Orlando Gledhill (instructed by Herbert Smith LLP, London) for the Respondent, Cenkos

CONTRACT PARTLY WRITTEN AND PARTLY ORAL: WHETHER TERM SHOULD BE IMPLIED: RELEVANT PRINCIPLES: RELEVANCE OF MARKET PRACTICE: EXPERT EVIDENCE: LIMITATIONS OF EXPERT EVIDENCE

Summary

The Court of Appeal unanimously held that the contract term for which the Respondent had argued (that it had no obligation to pay until it had itself been paid) was, in the circumstances of this case, not to be implied. But in construing the contract, the Court was prepared to consider evidence of market practice as part of the contract’s context without the need to establish that the market practice constituted a custom or usage by being ‘notorious, certain and reasonable’, and not ‘contrary to law’.

This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), a trainee solicitor in Singapore

Background

Mr. Thomas Crema and Cenkos entered a sub-brokerage agreement whereby Crema would receive commission for raising funds for a venture capital company (‘GPV’) to refine low quality used cooking oil into bio-diesel. Crema successfully procured investors for GPV. However, GPV never paid Cenkos its fees, later becoming insolvent.

The sub-brokerage agreement was partly written and partly oral, with its terms changing over time. The final agreement provided for Cenkos to pay 70% of its commission (which was 7% of the total funds raised) to Crema, amounting to GBP882,000. Crema successfully procured two investors who invested the required total of GBP18 million. Unfortunately GPV never paid Cenkos and subsequently became insolvent. Consequently, Cenkos refused to pay Crema. Crema sued for his GBP882,000.

Cenkos sought to imply a term to the effect that a sub-broker would not be paid until the broker received payment from the client (“the term”). Interpreting evidence of writing and conversations forming the terms of the agreement, Jonathan Hirst QC, the judge at first instance, agreed with Cenkos. Expert evidence was adduced to show a general market practice in London in Cenkos’ favour, though the judge disclaimed any reliance on it.

Crema appealed, claiming that evidence of market practice should not be considered in the construction of a contract and that the judge had wrongly implied the term.

Judgment

The Appeal was allowed, the Court holding that no such term could be implied.

Implying terms

Aikens LJ applied the principles for implying terms set out in AG of Belize v. Belize Telecom, [2009] 1 WLR 1988 (PC) (“Belize”) (fn.1) and The REBORN, [2009] 2 Lloyds Rep 639 (CA), expressly approving their applicability to contracts which are (i) partly oral and partly written, and (ii) wholly oral.

He emphasised that using the ‘business efficacy’ or ‘obvious’ tests may obscure the task at hand, preferring the question “what would the meaning of the contract be to the ‘reasonable addressee’ who had all the background knowledge which would reasonably be available to the two parties who concluded the contract at the time they did so”? Hughes LJ took a similar approach, and Chancellor Morritt simply characterized the case as turning on “the true interpretation of a handful of documents.”

Interestingly, Aikens LJ considered (at [54]) that if implying a term would require further terms to be implied into the contract, it is unlikely that the first implied term reflected the parties’ wishes. Neither Hughes LJ nor Chancellor Morritt commented on this point.

Market practice

The Court of Appeal unanimously agreed that expert evidence on market practice is admissible – it constitutes relevant background knowledge for the purposes of contractual interpretation. Such market practice does not have to amount to a trade usage or custom before being taken into account.

However, there are limits to the usefulness of evidence of market practice. On the facts, neither expert had ever encountered a case where the client failed to pay the broker and the broker consequently failed to pay the sub-broker. Therefore, the expert evidence was merely hypothetical and did not assist Cenkos.

Comment

Crema v. Cenkos reiterates the Belize position on implying terms into a contract. Aikens LJ’s statement (at [54]) may however warrant closer consideration.

In terms of the relevance of market practice in the construction of contracts, Crema v. Cenkos marks an advance on the previous position whereby English courts only considered evidence of market practice if the market practice constituted trade usage or custom by being ‘notorious, certain and reasonable’ and not ‘contrary to law’. Now, expert evidence of market practice is admissible simply as part of the factual context in which the contract is interpreted and the implication of terms is considered.

The case emphasizes, however, that expert evidence of market practice should be grounded on an expert’s actual experience of how the specific problem at hand is dealt with. Speculation or hypotheses drawn from general experience in that field of inquiry will be given only nominal weight, if any at all.


At [38]: “The principles are:

(1) A court cannot improve the instrument it has to construe to make it fairer or more reasonable. It is concerned only to discover what the instrument means.

(2) The meaning is that which the instrument would convey to the legal anthropomorphism called "the reasonable person", or the "reasonable addressee". That "person" will have all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed. The objective meaning of the instrument is what is conventionally called the intention of "the parties" or the intention of whoever is the deemed author of the instrument.

(3) The question of implication of terms only arises when the instrument does not expressly provide for what is to happen when some particular (often unforeseen) event occurs.

(4) The default position is that nothing is to be implied in the instrument. In that case, if that particular event has caused loss, then the loss lies where it falls.

(5) However, if the "reasonable addressee" would understand the instrument, against the other terms and the relevant background, to mean something more, ie. that something is to happen in that particular event which is not expressly dealt with in the instrument's terms, then it is said that the court implies a term as to what will happen if the event in question occurs.

(6) Nevertheless, that process does not add another term to the instrument; it only spells out what the instrument means. It is an exercise in the construction of the instrument as a whole.”