Aldridge and Brownlee Solicitiors

When terms can be implied into contracts because of market practice

* Businesses trading in sectors that operate well-known market practices or use industry customs will welcome guidance from the Court of Appeal on when those market practices could be implied into their contracts with clients, customers, suppliers and others.

In disputes over what contracts mean, the courts try to objectively work out what the intentions of the parties were. They look at the ordinary meanings of the words used, and decide what a reasonable person, who knows the ‘factual matrix’ forming the background to the contract, would take them to mean.

In a recent contract dispute, the Court of Appeal considered whether a usual practice in a particular marketplace could be taken into account as part of the background factual matrix when deciding what a particular contract meant.

The dispute was complicated but, in essence, it was about whether an individual (a sub-broker) commissioned by a broker to find investors for a client company running a new project was entitled to his commission anyway, or only when the broker was paid by its client. The matter was important because the client had gone into administration after the investors had put their money in, but without paying the broker.

A term can be implied into a contract based on market practice if the practice is well-known, certain and reasonable, provided that there is no inconsistency between the contract’s express terms and the market practice.

The contract between the broker and sub-broker did not expressly say that the sub-broker would only be paid when the broker was paid, but the High Court accepted evidence that there was a general market practice or understanding that a sub-broker is only paid when the broker is paid. It decided there was therefore an implied term in the contract between them to that effect.

The Court of Appeal disagreed. It discussed when a term will be implied into a contract because of market practice:

• A term can only be implied if the contract does not expressly provide for a particular situation.
• If, however, the contract works without the implied term, then the term should not be implied.
• If a reasonable person with full knowledge of the relevant factual matrix would understand the contract to mean more than it expressly says, ie that ‘something is to happen’ in relation to the particular situation, then that is an implied term.
• An implied term does not add a new clause to the contract – it merely spells out what the contract means, as a matter of construction of the whole contract.
• A market practice can result in an implied term to help construe what is to happen in a particular situation.

The Court of Appeal asked whether the only meaning of the contract, given its other provisions and the background factual matrix, was that the sub-broker should only be paid if the broker was paid. It decided that, for the contract to support that, it would be necessary to imply other terms into the contract – at least, for example, that the broker should take reasonable steps to recover its fees from the client and that it would not do anything to stop payment by the client of its fees – and decided that that could not have been what the parties intended.

Despite the finding in this case that there was no implied term, it is now clear that a market practice can result in an implied term if the circumstances are right.

Recommendation
Business entering into contracts should consider whether there are market practices in their industry for dealing with particular situations, and cater for those situations expressly in the contract, either to confirm that the market practice applies or to make some alternative provision.

Case ref: Thomas Crema v Cenkos Securities [2010] EWHC 461

* This is not legal advice; it is intended to provide information of general interest about current legal issues.