‘Trade use’ and local custom can affect how construction contracts apply

Trade usage is a term that generally refers to the practices within a particular industry that have become widely accepted and recognised as the norm. Similarly, business customs refer to practices that are specific to businesses in a particular culture or location. For example, in the energy and petrochemicals sectors, it is customary to inspect and test the processing plant before accepting delivery.

In cross-border construction contracts, the importance of trade usage and business customs can vary significantly across jurisdictions, such as in China, Spain, and Hong Kong SAR.

The role played in China

In China, trade usage and business customs have a relatively important role as sources of contractual interpretation when there are gaps or ambiguities. Under Chinese law, for instance, usage of trade is recognised as an interpretative tool. Specifically, section 510 of the Chinese Civil Code stipulates that when “there is no agreement in the contract between the parties on such content as quality, price or remuneration, place of performance etc., or such agreement is ambiguous” and the parties could not agree on amendment to fill the gap, “such terms shall be determined in accordance with the relevant provisions of the contract or usage of trade”.

Trade usage and business customs may also influence the interpretation of a construction contract governed by Chinese law even if the contract terms are unequivocal. One of the most notable examples is the interpretation of a fixed lump sum contract. In China, unit price remeasurement contracts have been prevalent for many years in the construction market and they are considered an important business custom. They remain influential in the judicial mindset even to this day. As a result, when there is a dispute over price, even if the construction contract had clearly been agreed to be a fixed lump sum contract, the court might engage a forensic expert to determine the price on a remeasurement basis.

The role played in Spain

In the Spanish legal system, trade usage and business customs also play an important role, with a dual function. Customs are recognised as one of the sources of law under Article 1.1 of the Código Civil. As such, a proven custom shall apply in the absence of applicable law, provided that it is not contrary to morality or public order.

Like Chinese law, trade usage and business customs are recognised as interpretative tools under Spanish law where contract terms are unclear or ambiguous. Thus, Article 1287 of the Código Civil provides that “the usage or custom of the country shall be taken into account in the interpretation of ambiguities in contracts, making up for the omission of clauses which are usually provided for in contracts”.

This wide recognition by Spanish law and courts of trade usage and business customs as an interpretative and legal loophole-filling tool, together with the development of international construction contracts practice over the last decades, have meant that it is not uncommon for Spanish courts to make use of them when dealing with construction contracts disputes.

For instance, the Spanish Supreme Court has recently recognised the existence and role of the project manager in construction projects and ruled that such individuals should be subject to the specific liability regime established under the Law 38/1999 of 5 November on building regulations. Further, the Spanish Supreme Court allowed an appeal against a judgment from a lower court that had failed to recognise and apply what was said to be a construction industry practice where a company representative may verbally authorise personnel in charge of a construction site to sign shipping notes attesting to the delivery of goods to the site.

The role played in Hong Kong SAR

As is the case in many common law jurisdictions, in the Hong Kong Special Administrative Region (SAR), trade usage and business customs play a limited role in interpreting construction contracts. Instead, the approach to contract interpretation is generally more focused on the written text of the contract. Trade usage and business customs are seen as a supplementary aid in the interpretation of the written terms of the contract only to the extent they are unclear or ambiguous.

Trade usage and business customs may still play a role as a gap-filling tool, however. In appropriate circumstances, Hong Kong law permits the implication of certain terms on the basis that they reflect trade usage and business customs. Terms requiring adherence with certain trade usages may be implied if the usages consist of certain, reasonable, and uniform practices that are notorious, well known in the trade, and established as a practice having binding effect.

Similarly, terms concerning the adoption of certain business customs may be implied if the custom is certain, reasonable, and has an immemorial and continued existence. For instance, some common trade usages and business customs in the construction industry in Hong Kong arise in relation to progress payments, design and approval procedures by regulators, site safety and signage, and quality control.

In summary, however, if the contract terms are clear, Hong Kong law does not typically permit any departure from the express terms, and therefore trade usage and business customs have a lesser role to play in the interpretation of contracts.

General guidance

The importance of trade usage and business customs in contract interpretation may vary across jurisdictions. Regardless of the role played, parties should always ensure that the contracts are clearly drafted to ensure they reflect the parties’ intention and to avoid future disputes on the meaning of the contractual terms. If parties wish to rely on a particular trade usage or business custom, then the parties should expressly set it out in the contract.

Trade usages and business customs within a particular jurisdiction or industry sector might relate to a broad range of matters including, among other things, workmanship, safety procedures, business practices for pricing, as well as invoicing and payment for particular types of work or materials.

By being aware of these trade usages and business customs, the parties may use them as a reference point for negotiating contract terms, such as payment schedules or project timelines, to ensure that the terms are fair and reasonable based on prevailing practices. Importantly, such trade usages and business customs do not override express contractual terms. As a result, the parties should negotiate clear and unambiguous contractual terms reflecting their agreement as to the extent to which these trade usages and business customs will be adopted.

Co-written by Melissa Sanchez of Pinsent Masons.