Role of Usage or Custom of Trade in Law of Contract

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Role of Usage or Custom of Trade in Law of Contract

Contentions on the Language of the Saving Clause

The phrase “usage or custom of trade” appears in s. 1, under the Saving Clause of the Indian Contract Act, 1872.The saving clause reads as follows:

Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.

Whether “Nor Any Usage or Custom of Trade” Should be Read With “Not Inconsistent With the Provision of This Act” or Not

In Irrawaddy Flotilla Company v.Bugwandas[1], the Privy Council took the view that both the reason of the thing and the grammatical construction of the section required that the words ‘not inconsistent with the provisions of this Act’ should not be connected with the clause ‘nor any usage or custom of trade’, and must apply only to the immediately preceding words ‘nor any incident of any contract’.[2]

The opinion of the Law Commission is contrary to that expressed by the Privy Council. In the 13th Law Commission Report, the Commission stated that it did not consider the view of the Privy Council in the above-mentioned case to be correct. According to the Commission, the legislature has rightly put the comma between ‘nor any incident of any contract’ and ‘not inconsistent with the provisions of this Act’ and the latter part governs ‘nor any usage or custom of trade’ also.[3]

Defining Trade Usage

Position in India

The expression ‘usage or custom of trade’ used in Sec. 1 relates to a particular usage as distinguished from a general or universal usage. A general usage pervading all trades has no binding force if it is inconsistent with the provisions of this Act. A general usage is equivalent to a general law, and no general law or usage in contravention of the general law laid down by the Contract Act can be consistent with the validity of the Act itself.[4]

Position in England

According to English law, every usage must be notorious, certain and reasonable, and it must not offend against the intention of any legislative enactment. Notoriety does not mean it must be known to the world, but that it must be well known at the place to which it applies, and be capable of ready ascertainment by any person who proposes to enter into a contract of which that usage would form a part.[5]

In Meyer v. Dresser[6], Erle CJ said: “It is a contradiction to say the law does not give the right, and yet that there is a universally established usage to allow it. A universal usage cannot be set up against the general law.”

A usage is not unreasonable unless it is fair and proper and such as reasonable, honest and right-minded men would adopt.[7]

A usage, however, which is founded on the general convenience of all the parties engaged in a particular department of business can never be said to be unreasonable, and where a usage has been sufficiently proved, there will be very few cases in which it will be held that the usage is unreasonable; for the fact that the usage is established and followed, tends to show that it is convenient.[8]

Position in the USA

The Uniform Commercial Code, which was formulated with the aim of consolidating the trade practices all over the United States of America[9] defines the usage of trade as “any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.”[10]

Admissibility of Usage of Trade in a Court of Law

Though a contract may be in writing, oral evidence may be adduced to prove any usage or custom by which incidents not expressly mentioned in the contract are usually annexed to contracts of that description, provided that the annexing of such an incident would not be repugnant to, or inconsistent with, the express terms of the contract.[11]

Evidence of usage can be given to annex incidents to written contracts in matters to which they are silent. Evidence of usage repugnant to or inconsistent with the written contract will not be received. The question of the existence of a usage is a question of fact and it is necessary to prove the usage in each case, until such time as the courts take judicial notice of it. Usages may be proved by evidence having special means of knowledge thereon.[12]

Proving the Existence of Usage

The acceptance or rejection of usage in contract cases will, in large part, depend upon a court’s philosophy of contract interpretation. If the plain meaning of the words of the contract is considered the sole arbiter of the legal rights and duties of the parties, evidence of usage will be rejected.[13]

English courts have allowed a proved custom or usage to modify legal rights when certain requirements are satisfied. Among the tests employed are 1. legality, 2. antiquity, 3. continuance, 4. peaceable enjoyment, 5. obligatoriness, 6. certainty, 7. Reasonableness.[14]The Mysore High Court has held that the usage to be recognized in the ordinary course of business must be certain, definite and uniformly recognized in the ordinary course of business.[15] The burden of proving the existence of a trade usage lies on the party propounding it. Evidence of one man has been held not sufficient to prove the usage of pakkiadat. A prior judgment in which it is recognized may be admissible but is not conclusive proof.[16]

Function of Trade Usage

Trade usage performs two major functions. These are in terms of trade linguistics and providing for the unprovided.

Trade Linguistics

In permitting proof of usage in the interpretation of a contract court to recognize that some phrases, bear a specialized meaning when employed by individuals engaged in certain activities or occupations even though these words when conventionally used convey an entirely different meaning.

Hurst v. Lake & Co.

B agreed to buy horse-meat scraps from A who was in the same business, with a discount of $5.00 per ton for meat containing less than 50% but at least 49.5% protein. Since it was a known usage in the trade that not less than 49.5% was accepted as equal to a content of 50% protein, the court adopted the vernacular of the parties and indicated that if they meant not less than 50% protein they should have explicitly negated the usage (49.5%) in the contract.[17]

Goode v. Riley

A court might reject usage where the words have a commonly accepted meaning while still resorting to it when the lay dictionary fails to provide an adequate explanation for the terms as used in their contractual context.[18] A court in adopting this latter view might argue that unqualified acceptance of usage encourages fraud and also makes a court’s task much more difficult.

Providing for the unprovided

A role of usage in contract law involves the proof of a usage to fill in the details omitted in the written contract.

La Nasa v. Russell Packing Co.

Once a court decides to look beyond the terms of a writing in order to ascertain the intent of the parties, usage will ordinarily be admitted. However, if it appears from the contract that the parties intended to exclude the usage, the practice will, of course, be rejected.[19] Also, where the usage is specifically excluded in the contract, or the contract excludes trade customs in general, the usage will not be admitted. Some courts, of course, never reach this step but summarily reject the usage on the grounds that the contract is clear and explicit.

Thus, usage of trade is useful in interpreting the terms of the contract in consonance with the local trade practices. Also, it is useful for bridging the gaps between the clauses stated in the contract and the practical performance of the contract which is inevitably governed by the local trade usages.

Frequently Asked Questions

  1. Is the protection of trade usage and customs justified?

The main objective behind saving usage or custom of the trade from the operation of the Indian Contract Act, 1872 was to enable local trade practices to flourish. I believe that till the time trade usage is used for this purpose, it is justified. Such a provision is prone to misuse as it saves an uncodified practice that is dependent on hearsay and conduct from a codified law.

I thus, concur with the Report of the 13th Law Commission when it states that ‘not inconsistent with the provisions of this Act’ should govern the ‘usage or custom of trade’ as well. This is because if the usages or customs of trade are inconsistent with the provisions of the Act, it actually defeats the purpose of the same. It thus becomes extremely necessary that the Courts exercise their discretionary powers with utmost caution in cases where the parties claim the defence of usage of trade. It can, therefore, be concluded that the Courts play a major role in deciding whether a particular practice qualifies as a usage of trade or not since the decision of the same is very subjective. Admission and examination of evidence thus play an important role in the determination of the existence or absence of a usage or custom of trade.

  1. Why Both ‘Usage’ And ‘Custom’ Have Been Used in the Saving Clause

Both the expressions ‘usage’ and ‘custom’ have been used in the Indian Contract Act. This is because there is a vital difference between both the expressions and thus, it becomes necessary to retain both of them. Usage is a habitual practice which is not a source of law, although it has some legal effects. Custom, provided that it fulfils the necessary conditions, is a source of law. The effect of usage is to add a term to the contract, which either expressly or impliedly was entered into with that usage in view. The usage, thus, can be excluded by a provision in the contract to the contrary.

Another difference between usage and custom is that usage need not be immemorial.  Usage cannot change a rule of law, but usage may so affect the meaning of a contract that a rule of law which would be applicable in the absence of the usage becomes inapplicable. Long continued usage may develop a rule of law in accordance with the usage.

  1. What is the role of ‘Trade Usage’ in a Common European Sales Law?

Article 67 of the initial proposal for a Common European Sales Law (CESL) stipulates that usage and practices are binding on traders. It follows that, if such customs can be referred to in the interpretation of contracts, they create flexibility in the understanding of contractual agreements and therefore introduce a factor of uncertainty in commercial dealings. One may wonder whether a flexible rule like this is appropriate for the context in which the CESL, according to this initial proposal, is meant to operate – B2B contracts in which at least one of the parties is a small or medium-sized enterprise (SME). A particular concern for the European market, in which many businesses are SMEs, is that local usage is likely to be unknown or even unknowable to one or both of the parties. If a similar rule were to be included in the digital single market package its appeal as an alternative contract regime therefore may be diminished.

  1. What are the requirements of law to admit a custom or usage?

English courts have allowed a proved custom or usage to modify legal rights when certain requirements are satisfied. Among the tests employed are:

  1. legality,
  2. antiquity,
  3. continuance,
  4. peaceable enjoyment,
  5. obligatoriness,
  6. certainty,
  7. reasonableness.

American courts when faced with the problem of usage in commercial dealings have sometimes applied one or more variations of these tests.


[References]

[1]Irrawaddy Flotilla Company v. Bugwandas (1891) 18 IA 121.

[2] In the section cited by the Privy Council, there was no comma after ‘contract’.

[3] 13th Law Commission Report, 1958.

[4] Moothora Kant Shaw v. India General Steam Navigation Co. (1883) 10 Cal 166.

[5] Halsbury’s Laws of England, Vol. 12, 4thedn., para 450.

[6] Meyer v. Dresser (1863-64) 16 CBNS 646.

[7] Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd. [1916] 2 KB 296.

[8] Moult v. Halliday [1898] 1 QB 125.

[9] David McGowan, Recognizing Usages of Trade: A Case Study from Electronic Commerce‘Washington University Journal of Law & Policy’(Volume 8 Symposium on Intellectual Property, Digital Technology & Electronic Commerce).

[10] U.C.C. § 1-205(2) (1998).

[11] Magnum Films v. Golcha Properties Pvt. Ltd. AIR 1984 Del 162.

[12] Pollock and Mulla, Indian Contract Act and Specific Relief Act, 12thedn. (Vol 1).

[13] Columbia Law Review, Vol. 55, No. 8 (Dec 1955), Custom and Trade Usage: Its Application to Commercial Dealings and the Common Law.

[14] Lisa E. Bernstein, Trade Usage in the Courts: The Flawed Conceptual and Evidentiary Basis of Article 2’s Incorporation Strategy, University of Chicago Law School Chicago Unbound.

[15] Canara Industrial and Banking Syndicate v. Ramachandra Ganapathy Prabhu AIR 1968 Mys 133.

[16] Raghunath v. Ram Partab Ramchandra AIR 1935 Sind 38.

[17] Hurst v. Lake & Co.,

[18] Goode v. Riley, 153 Mass. 58.

[19] La Nasa v. Russell Packing Co., 198 F.2d 992 (7th Cir. 1952).

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Sakshi Agarwal
I am Sakshi Agarwal from Dr. Ram Manohar Lohiya National Law University, Lucknow pursuing B.A. L.L.B. (Hons.). Having no legal background, the inspiration to study law came from the society and with the support of my parents I became the path breaker of my family. Being in my initial years of college, all the subjects at present like Law of Contracts attract me but I always keep reading Constitutional Law. The economics arena has always been my strength and in my career I would like to link economics with law. Apart from this, I do adjudicating and mooting. I love to listen to people and when it comes to debate, it’s the best opportunity to learn by listening. At law school, I have developed a keen interest in researching. At all the times, whether it’s working, studying or just sitting idle I aim to find happiness. Something I love a lot apart from reading books and watching movies, is travelling. I’m always excited about it and never miss a chance to explore new places and be adventurous.

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