Can a standard agreement constitute trade usage?

29 Nov 2022

Common in bankruptcies and company reorganisations, for example in the retail sector, is that there is property that is in transit or stored by a creditor at the outbreak of bankruptcy or at the time of the decision on company reorganisation, where the creditor asserts a preferential right in the property in its possession and thus priority for payment out of the property ahead of other creditors. There is not always an agreement governing the asserted preferential right. What is the legal basis for a preferential right in such a situation? I address this in part in this article, based on a relatively recent Supreme Court case concerning the question of whether a standard agreement can constitute trade usage.

Trade usage constitutes a custom in business life that has reached a high level of establishment. In several industries, standard agreements are common, i.e. agreements drawn up to be used in a number of similar business situations. However, the fact that a standard agreement is generally used does not mean that there is a trade usage between the parties. So what is required for a standard agreement to be considered to constitute trade usage? This is a question that the Supreme Court (“HD”) clarified in a decision dated 28 June 2022, case no. Ö 5481-21.

In the case in question, the complaining party (“the Freight Forwarder”), which was a company in the logistics industry, had performed services for the opposing party, which sold sportswear. The Freight Forwarder handled the opposing party’s distribution of goods from supplier to customer. In February 2020, the opposing party was declared bankrupt. In the bankruptcy, the Freight Forwarder asserted that it had a pledge over the goods in the Freight Forwarder’s possession, also for claims that lacked any connection with the goods in question (thus, a basis for pledge other than the statutory right of retention for connected claims).

The parties to the case disagreed as to whether part of the claim that the Freight Forwarder had asserted in the bankruptcy—relating to outlays primarily for freight of goods that the Freight Forwarder had previously had in its possession in connection with assignments already completed—should be secured by a pledge in entirely different goods that, at the outbreak of bankruptcy, were in the Freight Forwarder’s possession. There were neither agreements between the parties regulating the situation in question nor agreements referring to standard terms. The Freight Forwarder argued, among other things, that the Nordic Association of Freight Forwarders’ General Conditions (“NSAB”), with the security rights that follow from NSAB, should apply between the parties on the basis that NSAB should be considered to constitute trade usage, which was disputed by the opposing party’s bankruptcy estate. The Supreme Court therefore had to decide what is required for a standard agreement to be considered to constitute trade usage and whether NSAB in the case in question should be considered to constitute trade usage.

The Supreme Court began by noting that the starting point in the order of priority is that all claims in a bankruptcy should have equal rights, the so-called principle of equal treatment. However, the Supreme Court highlighted that a number of practically important exceptions are made to the principle of equal treatment. It follows from Chapter 4, Section 3 of the Preferential Rights Act, among other things, that preferential rights attach both to possessory pledges and rights of retention, regardless of whether the security rights are based on agreement, statute or general legal principles.

As regards the question of what is required for a standard agreement to constitute trade usage, the Supreme Court stated that a prerequisite is that the use of the standard agreement has achieved the requisite stability and spread. In this assessment, the Supreme Court stated that it is of fundamental importance how generally used and well known the standard agreement is within the industry. The Supreme Court also highlighted that it does not have to cover the entire standard agreement; it may also be the case that only certain contractual provisions have achieved the sufficient stability and spread required for them to constitute trade usage. The Supreme Court further stated that if the situation is such that there are no competing standard agreements within an industry, this may indicate that trade usage exists. Also of significance is how the standard agreement came about and how long it has been used. The Supreme Court stated that the conditions for viewing the agreement as trade usage increase if the agreement is well balanced and safeguards both parties’ interests. The same applies if the use of the standard agreement meets a need that is not met in any other way.

As regards NSAB specifically, it has existed as standard terms for just over a century. No agreement regulating the situation that had arisen had been entered into between the parties in the case in question. In its reasoning, the Supreme Court stated that the content of NSAB constitutes an expression of trade usage and corresponds to the needs that have manifested themselves in the industry over time. The Supreme Court further noted that, according to what has emerged, NSAB is today used in professional contexts between freight forwarding and logistics companies and transport buyers in the Nordic countries. No other general conditions of the same significance were found to exist. The Supreme Court also stated that, since there was no regulation in the form of specific legislation for the freight forwarding and logistics industry, the freight forwarders’ conditions fulfil an important function.

After an overall assessment, the Supreme Court concluded that special circumstances were required for the provisions in NSAB not to be considered binding on the parties. No such circumstances had been invoked in the case. As regards NSAB, the Supreme Court therefore concluded that the agreement was considered to constitute trade usage within the freight forwarding and logistics industry. In the case in question, the Freight Forwarder was therefore considered to have a pledge in all goods over which the Freight Forwarder had control, even though part of the claim against the opposing party lacked any connection to the goods in question.

The Supreme Court also discussed the significance of the rules on security rights in the Commission Act. Under Section 15 of the Act, a commission agent is granted a pledge as security for its claim, including commission, against the principal. The pledge applies to the principal’s goods that the commission agent has purchased or received for sale in connection with the assignment, provided that the commission agent has the goods in its possession or under corresponding control. The assignment as a freight forwarder in its traditional form includes that the freight forwarder, as an intermediary, enters into agreements for the transport and storage of goods. If the assignment is carried out in the freight forwarder’s own name but on the principal’s account, it is a service commission. The Supreme Court states that the reasons put forward in the legislation in support of commission agents’ linked pledges apply correspondingly to freight forwarders. In summary, the Supreme Court also considered that support for the freight forwarder being deemed to have a linked security right can be derived from the Commission Act.

It may be noted that two Justices dissented and considered that preferential rights could only be granted for claims relating to traditional transport services, not claims for the other services provided by the Freight Forwarder.

The decision in question clarifies which circumstances are relevant in the assessment of whether a standard agreement, or terms therein, can be considered to constitute trade usage or not. It remains to be seen going forward whether additional standard agreements may be considered to fall within the Supreme Court’s qualifications for being deemed to constitute trade usage.