When interpreting a contract, a court may take into account the background knowledge which would have been available to the parties at the time that they entered into the contract. In Thomas Crema v Cenkos Securities plc [2010] EWCA Civ 1444, an action involving a Claimant investment banker who was engaged by the Defendant stockbroker as a sub-broker, the Court was required to consider whether custom and practice in the City relating to the payment of sub-brokers meant that the Claimant was entitled to receive his fee regardless of whether the Defendant received its fee. The main issue was whether any such general market practice or understanding would be admissible as part of the factual matrix in which the contract was to be construed.
At first instance, the claim was dismissed and the Claimant appealed, arguing that a court could not consider expert evidence on “usual market practice”, either for the purposes of construing express terms or to assist in interpretation of implied terms, unless it was asserted that there was a “trade custom or usage”. The Defendant submitted that the court could take advantage of expert evidence on usual market practice in deciding on the construction of express terms, or on the existence and nature of implied terms.
The Court noted that the contract between the parties (which was partly written and partly oral) did not deal with the point in issue, and so the Court had to work out what the parties intended should happen as regards the Claimant’s fee in the event that the Defendant was not paid its fee. This had to be considered from the point of view of the “reasonable addressee”. In coming to a decision on this, the Court said that they should be entitled to hear independent expert evidence on “market practice”, if such evidence was relevant background knowledge for interpreting the terms of the contract. What parties agree can only be judged against the factual background available to them, and this must include the practices of any particular market in which they operated at the time and in which the agreement was made. If the parties disagree on what market practice is, the judge must decide whether a particular market practice exists or not. If it does, then the judge must decide if it is useful background evidence against which to construe the contract.
However, despite finding that evidence of market practice was admissible, the Court found that on the facts no market practice had been established, and so allowed the Claimant’s appeal.
