(i) Commodity Markets, Brokers and Auctions

The London and Liverpool commodities markets started life as informal meetings of merchants interested in foreign commodities trading based at the London coffee houses, the Royal Exchange and the docks.Footnote ¹⁵ The Baltic Exchange traces its origins to 1744, when the Virginia and Maryland coffee house changed its name to the Virginia and Baltick, to reflect the fact that the merchants and shipowners who gathered there had business in both North America and the Baltic Sea region. The formalisation of the Baltic Exchange in 1823, by the adoption of rules for membership, was a reaction against the extreme speculation in tallow on the Baltic Walk of the Royal Exchange.Footnote ¹⁶ Initially, commodity dealings on the Baltic Exchange took place in tallow, linseed, flax and hemp.Footnote ¹⁷

The sharp increase in grain imports in Britain after the repeal of the Corn Laws established a world market.Footnote ¹⁸ Wheat came initially from the Black Sea region of Russia and from the Continent, then from the 1860s from the United States and India. In the 1890s there were new entrants such as Canada, Argentina and Australia.Footnote ¹⁹ From the middle of the nineteenth century large-scale transactions in grain cargoes from abroad took place between brokers on the Baltic Exchange, which continued to be a major venue for grain trading into the twentieth century.Footnote ²⁰ In the late 1920s the Baltic was said to be the most important European market for grain, with transactions in a single day sometimes amounting to over £2,500,000.Footnote ²¹

Brokers in the grain trade in the 1930s did a considerable business for customers in continental Europe. Customary brokerage in that trade was 1½ pence per quarter,Footnote ²² but more was charged when cable and telephone expenses were high, or as a premium to cover del credere risk.Footnote ²³ Over time, the concentration of millers and their vertical integration with the large bakers, coupled with government encouragement of home cereal production, led to changes in the structure of the grain trade and the role of intermediaries.Footnote ²⁴ There was not the same level of activity for them after the Second World War, although grain was still being traded on the Baltic in the 1960s. At the end of our period the transnational grain traders like Cargill, Bunge, Garnac, Continental and Louis Dreyfus – names known though important cases in the law reports – were acting as principals.Footnote ²⁵ The Baltic continued as a leading shipping market, where shipowners and charterers could charter and buy and sell vessels.

The Baltic Exchange was for grain; the venue for trading other commodities was elsewhere. Early on there were printed conditions for the sale of commodities by public auction at places like Garraway’s Coffee House and, after their opening in Mincing Lane in 1811, the London Commercial Sale Rooms.Footnote ²⁶ By the middle of the nineteenth century brokers were buying and selling sugar, coffee, tea, spices and other ‘foreign and colonial’ produce in Mincing Lane.Footnote ²⁷ Mincing Lane continued to provide the venue for the markets for these and other commodities like rubber, which arrived later in the century. By the early twentieth century there could be sixty commodity auctions a day at the Commercial Sale Rooms – tea, sugar, coffee, cocoa and spices, as well as other produce such as jute, shellac, tortoiseshell and mother-of-pearl.Footnote ²⁸ No samples of the commodities being sold were permitted at the Commercial Sale Rooms, and they had to be inspected at the warehouses, wharfs and docks where they were stored, at brokers’ offices or, after trade associations were formed, where they kept them.Footnote ²⁹ Plantation House in Mincing Lane became the location of rubber and tea auctions.

Ubiquitous in the commodity markets until the First World War were the brokers, acting as agents for others or in some cases as principals for themselves. Brokers from the beginning of our period traded with each other and issued bought and sold notes containing the basic terms of a sale.Footnote ³⁰ They also conducted auctions, and over time the management of these became a sophisticated business.Footnote ³¹ Brokers organising and participating in commodity dealings formed themselves into associations. The terms established by the London General Produce Brokers’ Association, which dated from 1878, covered trading in a number of commodities.Footnote ³²

As well as the London General Produce Brokers’ Association, there were associations of brokers for specific commodities, such as the Tea Brokers’ Association of London (for selling brokers, who auctioned the tea, and guaranteed payment to their principal) and the Tea Buying Brokers’ Association (as the name suggests, for buying brokers).Footnote ³³ While Britons were not great coffee drinkers, London was an important centre for coffee dealing from the nineteenth century because of the banking, insurance and shipping services located there.Footnote ³⁴ The rules of the Coffee Trade Association of London governed some sales in Mincing Lane.Footnote ³⁵

Separate from dealings in other commodities were the auction sales for wool from Australia, New Zealand and South America. These were conducted in London from the first part of the nineteenth century, after 1875 at the Wool Exchange in Coleman Street in the City of London. Prior to the First World War European and American buyers took around half the quantity sold there.Footnote ³⁶ As with other commodity auctions, catalogues were prepared for each sale, briefly describing the lots to be auctioned and stating the dock or warehouse where they could be inspected. From the late nineteenth century auctions conducted in wool-producing countries like Australia and New Zealand assumed greater importance. It was the same story with tea – auctions being held in producer countries like Ceylon (Sri Lanka) and India – although important auctions continued to be held in London. In the twentieth century faster transport and communications, the development of grading and standards for commodities, and the growth of larger, integrated businesses all led to the decline of the London commodity auctions. After 1945 London’s place as a world centre for trading physical commodities was past.Footnote ³⁷

(ii) Trade Associations, Standard Form Contracts and Market ‘Plumbing’

None of the Baltic Exchange, the London Commercial Sale Rooms, Plantation House or the other London commodity exchanges set the rules for trading in commodities. They provided the venue and, in the case of the Baltic, regulated membership. It was the trade associations, formed from the last quarter of the nineteenth century, which developed (or indorsed) standards, drew up rules and regulations and drafted the standard form contracts to govern commodity trading. In addition, traders, trade associations and others like the banks were responsible for institutional developments such as the establishment of clearing systems, which are the essential ‘plumbing’ for any sophisticated market. Of prime importance was the London Produce Clearing House (LPCH), which initially cleared futures dealings in coffee and sugar, later wheat, maize, pepper, rubber, raw silk, silver and indigo. After several metamorphoses it is, today, the LCH Group, which is an international multi-asset clearing house covering financial products and commodities.Footnote ³⁸ The counterpart for clearing payments was the London Bankers’ Clearing House (Chapter 6, 6.4).

The London Corn Trade Association (LCTA) was formed in 1878, and by the early twentieth century most international dealings in grain were on the standard form contracts which it drew up and according to the standards which it collected or endorsed for reference purposes in the case of disputes.Footnote ³⁹ LCTA’s membership was drawn from the wide range of parties concerned with the international grain trade – brokers, importers, shippers and millers. In its work it was in close contact with other interests, shipping, insurance and banking, but government rarely.Footnote ⁴⁰ By the early twentieth century LCTA also had standard form contracts for dealing in grain futures, although the internationally significant grain futures market of the interwar period was in Liverpool.Footnote ⁴¹

Following LCTA there was a profusion of trade associations, including the London Cattle Food Trade Association (1906), the London Oil and Tallow Trades Association (1910), the London Copra Association (1913) and the Rubber Trade Association (1913).Footnote ⁴² The Rubber Trade Association had standard form contracts, a certification process (before rubber could be considered good tender on a contract, its standard had to be certified) and rules for the settlement of forward dealings.Footnote ⁴³ There were four trade associations for sugar, reflecting its different origins (beet, cane sugar) and condition (raw, refined sugar). All four comprised buyers and sellers. For raw sugar the Beetroot Sugar Association and the Sugar Association of London were established in 1882; they later amalgamated.Footnote ⁴⁴ All associations had their own rules and regulations. Along with rules for beetroot sugar contracts were those for storage, clearing and futures dealings in the commodity. The Refined Sugar Association followed in 1891.

By contrast with London, the two leading trade associations in Liverpool, for cotton and grain, did not rely on other organisations to house their trading activities. Eventually, they had their own venues: the Liverpool Cotton Exchange in Exchange Flags and the Liverpool Corn Exchange in Brunswick Street.Footnote ⁴⁵ A special market for cotton developed relatively early and was the main exemplar for the development of international commodity markets in Britain.Footnote ⁴⁶ Liverpool had become the most important cotton port in Britain, with the major cotton (textile/spinning) mills within sixty or eighty miles in Manchester and Lancashire connected to it by canals, rivers and later rail. Its pre-eminence as a port of entry was guaranteed once the United States became the major supplier to Britain of raw cotton. The industry comprised mainly small manufacturers who faced prices for cotton which fluctuated considerably with commercial circumstances, movements in fashion, rumour and war.

The Cotton Brokers’ Association, formed in Liverpool in 1841, gradually functioned to regulate cotton trading. Until 1863 the association had no written rules and the thriving market was based on accepted practice, what lawyers would characterise as custom and usage. The massive speculation in cotton accompanying the American Civil War promoted the adoption of the first edition of ‘The Constitution, Law, and Usages of the Liverpool Cotton Brokers Association’. A further version followed in 1869, and by 1878 there were printed contracts, with rules on the back, for American cotton.Footnote ⁴⁷ The Cotton Brokers’ Association merged with a rival Liverpool Cotton Exchange to become the Liverpool Cotton Association Ltd in 1882.Footnote ⁴⁸ In the early 1920s the Liverpool cotton market was said to provide the central world market for raw cotton.Footnote ⁴⁹ By 1939, however, the British cotton industry had collapsed, with exports a fifth of 1913 levels.Footnote ⁵⁰

After the American Civil War Liverpool became an important centre for imported grain as well as for cotton, for a period becoming the largest grain port in Europe. What became the Liverpool Corn Trade Association was formed in 1853 and in 1886 amalgamated with the Liverpool Corn Exchange.Footnote ⁵¹ It drew up standard form contracts and rules. More important in the interwar period were its future contracts. At its height in the 1930s, Liverpool had the leading international market in wheat futures. Trading was carried on in the association’s newsroom. Although much smaller than the futures exchanges for grain in the United States, the Liverpool wheat market was acknowledged in American circles as having an international character compared with the largely domestic reach of their own markets.Footnote ⁵²

In addition to these markets for so-called soft commodities, the London Metal Exchange offered an organised market for trading in some of the ‘hard’ commodities, by then in great demand as a result of the Industrial Revolution in Europe and North America. Metal trading had occurred at the Royal Exchange in previous centuries, although in domestically produced copper and tin. The increasing volume of international trade during the nineteenth century was associated with the emergence of new metal broking firms. As in other markets forward dealings developed. In 1869 a specialised exchange for metals was agreed, which grew out of the regular meetings of metal dealers. The London Metal Exchange, as it became known, had its first meeting in 1877. It issued formal rules in July 1881, concerned largely with the constitution and conditions of membership. These were elaborated in the pre–First World War years.Footnote ⁵³ With fluctuating success in the twentieth century, the London Metal Exchange is now said to be the largest futures exchange in metals in the world.Footnote ⁵⁴

The London and Liverpool markets facilitated the distribution of commodities not only through space with spot transactions for prompt delivery but also through time with forward and futures contracts. The telegraph in the second half of the nineteenth century, and the telephone from the early twentieth century, allowed international sales and the shipping to transport commodities to be organised from London and Liverpool offices.Footnote ⁵⁵ Hedging on the markets enabled the producers of commodities in various parts of the world, and the manufacturers using them in Britain and further afield, to secure protection from risk. Although open to abuse, speculation in futures worked to level out the prices of commodities on and between markets.Footnote ⁵⁶

The international physical markets in London and Liverpool, and the brokers working there, tailed off after the Second World War with the changed pattern of international trade.Footnote ⁵⁷ However, they left a legacy – infrastructure (at least in London) for the international futures and derivatives markets in commodities, as well as financial products, and the machinery for standard setting and dispute resolution in the international trade in grain, animal feed and cotton.Footnote ⁵⁸ The contracts of LCTA’s successor, the Grain and Feed Trade Association (Gafta), still govern international trading which is not conducted on private or in-house terms.Footnote ⁵⁹ Despite the cotton industry’s decline, the Liverpool Cotton Association also remains an international standard setter for trading through its Bylaws & Rules, but under the nomenclature adopted in 2004, the International Cotton Association.Footnote ⁶⁰

(i) From Sale on Consignment to the Agency House and Beyond

In the first part of the nineteenth century agency came to the fore as a form of business organisation. Trading in raw cotton and cotton textiles is illustrative. Liverpool merchants obtained cotton from the United States either from those who forwarded it to them for sale on commission or through having agents purchase it on their behalf, perhaps on joint account. Commission-based imports to Liverpool declined from the 1860s with the improvements in communication brought about by the Atlantic cable. Instead of cotton being consigned for sale on commission, firm offers could be cabled to Liverpool merchants by their American branches or agents, or by independent sellers.Footnote ⁶⁴ There was no longer the same need for expert advice from agents on prices, since the information was now more widely distributed by cable and business publications. In the cotton-growing areas of the southern United States, ‘growers sold their cotton directly to merchants or mill agents, or even to foreign buyers, instead of entrusting it for sale to a factor in a distant port’.Footnote ⁶⁵

As the global trade in cotton was increasingly dominated by the large cotton exchanges in places like Liverpool, New York and New Orleans, the role for the old-fashioned importer, broker and factor diminished.Footnote ⁶⁶ Accounts in the first part of the twentieth century identified three broad categories of intermediaries for getting the raw cotton to the textile mills of Lancashire: agents acting between the Southern exporters and the Liverpool importers; the Liverpool houses selling to the mills as principals or through brokers; and the brokers engaged by the spinning mills on commission to obtain suitable samples from which purchases could be made.Footnote ⁶⁷ That picture was muddied in various ways: for example, cotton could also pass through Manchester brokers on its way to the mills, and some of the larger cotton mills bought directly from importing merchants or from US exporters through Liverpool brokers.

The other side of the coin from importing the raw cotton was the export of the manufactured cloth and shirtings (cloth for making shirts). In the first part of the nineteenth century the textile mills often marketed their products by sending consignments to various parts of the globe for sale through agents acting on commission. The methods in the 1840s of the Calcutta (Kolkata) firm Mackinnon Mackenzie & Co. offer an example. It had consignments of cotton and textiles – along with pig iron, iron rails and iron plates – forwarded to it by its associate firms, Wm Mackinnon & Co. in Glasgow and Mackinnon Frew & Co. in Liverpool. The goods were sent on a commission basis, but also on the firm’s own account or on joint account with others.Footnote ⁶⁸ A sideline to our story, but a crucial part of the subcontinent’s history, was the devastating impact which the importation of machine-made cotton goods had on the livelihoods of the traditional Indian weavers.

By the middle of the nineteenth century, British exporters moved away from supplying textiles on consignment to places like India. Trading houses in those markets purchased on their own account as principals for onward sale, becoming independent intermediaries in the chain of distribution.Footnote ⁶⁹ Better communications also transformed the dynamics of importing commodities to Britain from abroad. The head of a large Manchester firm, with a network of branches in India, told a Royal Commission in 1887 that as a result of the telegram there were very few ‘Manchester’ (cotton) goods shipped to India for sale on consignment. He explained:

Figure 1.1 Landing goods in Calcutta (Kolkata), India, 1860s ((c) The British Library Board).

Agency was not, however, eliminated. It still had a role in the sale and distribution of textile products in the early twentieth century, albeit to a decreasing degree. In one contemporary account a cloth agent selling the entire product of a spinning mill received 1 per cent commission, but 1½ or 2 per cent if it guaranteed the account. If it had only a partial agency, the agent received 2 per cent without a guarantee and 4 per cent with a guarantee.Footnote ⁷¹

As with cotton, the arrangements for importing other commodities could also involve agency. Liverpool importers of wheat from California – for a time a key source for British millers – appointed agents, with a preference for exclusive agents, although in the case of firms like Balfour, Guthrie & Co. Ltd a branch was also opened in the state.Footnote ⁷² At one point coffee had been sent to London and Liverpool for sale by agents on consignment, but from the second half of the nineteenth century importers had increased market power and appointed agents abroad who were able to control the market and set the prices where it was produced.Footnote ⁷³ In London, commodity brokers acted as agents for foreign producers, and importers might appoint their own agents abroad, having authority to buy up to a certain limit and to supervise the shipping arrangements.Footnote ⁷⁴

(ii) The Trading Firm (‘Agency’ House) and Managing Agent

The term ‘agency house’ was used in some parts of the world to reflect how trading firms (trading houses) bought and sold goods on commission, as well as providing other agency services such as shipping, insurance and banking. ‘[T]he Agency House … though primarily a trading house, also acted as bankers, bill-broker, ship-owner, freighter, insurance agent, purveyor etc.’Footnote ⁷⁵ As well as acting as agent, these trading firms acted on their own account. In 1863 most of the Calcutta (Kolkata) trading firms had agency arrangements with London merchants. Twenty-six were also directly linked to business outside London through agencies in Liverpool, Manchester and Glasgow.Footnote ⁷⁶

Advances on sales might be made to manufacturers by a trading firm abroad or its British agent accepting bills of exchange drawn on them for payment. Once accepted, the bills could be discounted in the market with the proceeds used to pay the manufacturer’s invoice.Footnote ⁷⁷ Advances were relatively safe since the trading firm or its agent would have control of the goods through possession of the shipping documents, notably the bill of lading, which was the document of title representing the goods.Footnote ⁷⁸ By the early twentieth century the larger trading houses would have departments for goods (perhaps styled ‘Imports’ for European manufactured goods; ‘Produce’ for exports). There would then be separate departments for agency business in shipping, insurance and banking.Footnote ⁷⁹

On the eve of the First World War a writer for the British Export Gazette explained that buying agents (sometimes called ‘home commission agents’), working on commission, were frequently employed by trading firms abroad to obtain manufactured goods from Britain and elsewhere in Europe. The orders (indents) either specified the name of the manufacturer (say) from whom the goods were to be purchased or were open orders for specified goods, to be obtained from the best source.Footnote ⁸⁰ In the interwar years London commission (or indent) houses still acted for foreign buyers in placing orders with British manufacturers.Footnote ⁸¹ In the late 1950s trading houses in Malaya (Malaysia) and Singapore still described themselves as ‘general merchants and agents’. The merchant side comprised the import of construction and building materials, consumer items, estate supplies, engineering and electrical goods; the agency side included shipping, airlines, insurance, estates, mines and export sales.Footnote ⁸²

Another reason that the term ‘agency house’ survived was because British trading firms took on the role of managing businesses as agents. The managing agent system was a crucial, if now a largely forgotten, aspect of British services and investment funds being supplied abroad.Footnote ⁸³ Managing agents had begun early on, as British merchants in India began investing in plantations of indigo, an important source of cotton dye, retaining tight control of the business even when there were other investors in the company being managed.Footnote ⁸⁴ Later, estates growing tea, cotton and rubber; mines; cotton mills and factories; and utilities – all featured in the managing agent’s repertoire.Footnote ⁸⁵ The managing agent system became the prevalent feature of British mercantile enterprise in India, with a network of diversified businesses orbiting around the original trading firm.Footnote ⁸⁶ The system was emulated in Hong Kong, Malaya (Malaysia), Singapore, South Africa, Persia (Iran) and elsewhere. The trading firm (agency house) was appointed as agent to manage members of the group, often after floating them on the stock exchanges in London or locally. Managing agents were the face of British economic power and direct investment in many colonial societies.

A distinctive feature of this form of business group was that control was retained through the appointment of the trading firm as the manager of the businesses in the investment group.Footnote ⁸⁷ Those controlling it benefited from the management fees for the businesses being managed, from the commissions earned on agency business in selling their goods and getting them to market, and from the dividends flowing from the shares held in them.Footnote ⁸⁸ Agency and company law combined to facilitate managing the businesses in the interests of the controllers. For most of their history there was no special legislation for managing agents. However, since they represented foreign control, curbing their role became a platform of the independence movement in India, and to a lesser extent elsewhere. It did not assist the cause of managing agents that they had an advocacy role behind the scenes in matters of political economy.

(i) Manufacturers and Distribution of their Products

Over time, larger British manufacturers reduced their reliance on trading firms abroad to distribute their products. From the end of the nineteenth century they were opening branches in foreign countries, sometimes with the dual role of both selling products and purchasing local raw materials for transmission to their factories at home.Footnote ⁹⁴ The twentieth-century norm for larger businesses became forward integration and centralised control.Footnote ⁹⁵ The corporate amalgamations of the interwar years led to a significant increase in the size of some British manufacturers, typified by Unilever and Imperial Chemical Industries.Footnote ⁹⁶ Selling was undertaken by specialised sales departments within manufacturing firms, reducing their reliance on wholesalers and other intermediaries.Footnote ⁹⁷ Given advances in communications, they might deal directly with customers abroad. They might even establish a direct presence abroad, cutting out the number of intermediaries needed to market their products.

British-based multinational companies also established manufacturing subsidiaries overseas, as well as sales and distribution networks. Courtauld was early in the field. In the first part of the twentieth century Samuel Courtauld & Co. appointed agents both at home and abroad to sell rayon, its new synthetic fibre. In 1908 it appointed an English merchant in New York as the exclusive agent, on a 1 per cent commission of net sterling receipts from US customers. Sixteen years later he became the president of the company’s American subsidiary, American Viscose Corporation, which had factories in a number of states making rayon and other artificial fibres.Footnote ⁹⁸ Other British companies followed suit. To find markets for their motor vehicles, processed foods and pharmaceuticals, as well as for intermediate goods such as chemicals, industrial gases and engineering products, they established factories abroad.Footnote ⁹⁹

None of this meant the complete demise of British manufacturers selling abroad through wholesalers or agents.Footnote ¹⁰⁰ Many manufacturers were small and could not afford an employed salesforce for overseas markets. They continued to depend on agents, merchant importers and direct dealings.Footnote ¹⁰¹ In some cases, the continued use of agents reflected a failure to move with the times and to take marketing seriously. As well as complacency, the fate of the Sheffield cutlery industry after the Second World War has been attributed, in part, to its continued use of agents, who secured orders on commission but did not carry stocks or order on their own account. When competition arrived from foreign manufacturers like the Japanese, the industry therefore lacked the marketing tools to match it.Footnote ¹⁰²

(ii) Sale, Hire and Distribution Networks

With manufactured goods the distributor might be labelled as the manufacturer’s ‘agent’, with the marketing advantages of a reputation and brand – and possibly also an access to spare parts and the authorised provision of after-sales services – which this conferred. In legal terms the ‘agent’ was in fact an independent intermediary who obtained the goods from the manufacturer and then dealt with its own customers as principal. In other words there were at least two contracts, a sale (say) between the manufacturer and the ‘agent’, and a sale or hiring between the ‘agent’ and its customers. The motor-vehicle dealer, labelled as the manufacturer’s ‘agent’, was an example. It was also with products like motor vehicles that new techniques for financing their distribution emerged. For the dealer, the manufacturer might arrange inventory finance, provided by means of various types of stocking plan; for the ultimate customer, credit might be provided by means of hire or hire purchase. Chapter 4 covers hire and hire purchase as important legal devices in the narrative about the distribution of manufactured goods to commercial parties as well as consumers.

Another part of this narrative is how manufacturers and producers used their market power to control those in the distribution chain. At the international level they might allocate geographic areas, giving distributors the exclusive right to sell there. At a time of European empires, an allocated area might encompass the territory of both the metropolitan power and its colonies.Footnote ¹⁰³ A range of factors would determine the prices at which distributors obtained the goods from the manufacturer or producer. Discounts could turn, for example, on whether a distributor arranged for payment against shipping documents, perhaps under a documentary credit. Under their contract distributors might be contractually obliged to ‘push’ the manufacturer’s products (or use reasonable or best efforts in marketing them) and have their endeavours monitored. The ultimate sanction against bad performance was termination of the distributorship.

Control over those in the distribution chain was heightened at the domestic level. As well as distributors being confined to an allocated area, they might have to sell a manufacturer’s products at set prices and their marketing efforts might have to proceed along strict lines. Controls over marketing might descend into the details of how the product was to be displayed, whether the products of other manufacturers could be marketed alongside, servicing obligations and the availability of spare parts, and a distributor’s opening hours.Footnote ¹⁰⁴ Resale price maintenance – a common tool in the British manufacturer’s distribution toolbox – was virulent in the first part of the twentieth century and only gradually began to wither at the end of our period under the force of legislation.Footnote ¹⁰⁵

(i) The Merchant Banks

As their name suggests, the merchant banks began life as merchants as well as bankers. Thus, the Barings and the Rothschilds traded commodities internationally, both on their own account and through agents.Footnote ¹¹¹ The Barings dealt in a wide range of goods, making advances to induce overseas merchants to send consignments through the firm.Footnote ¹¹² For example, in the 1830s the Second Bank of the United States authorised agents to purchase cotton and to ship it to Barings Brothers & Co. in Liverpool.Footnote ¹¹³ N. M. Rothschild & Sons was choosier than Barings, attempting to dominate in particular commodities such as cotton, tobacco and sugar from the Americas, and copper from Russia. Rothschild tended to deal through partners and salaried agents in key markets such as New Orleans, Havana and St Petersburg.Footnote ¹¹⁴ As well as finance, George Peabody & Co. (whose business became J.P. Morgan & Co. after Peabody’s retirement) had been dealing in American grain and the China trade. In 1849 it began to engage directly in the export trade from Britain of iron rails for American railways. Peabody’s rationale was that the profits on exporting the rails exceeded what he could make in financing the transactions.Footnote ¹¹⁵ Early on J. Henry Schroder & Co. specialised in the Baltic trade, for example receiving tallow on consignment from St Petersburg.Footnote ¹¹⁶ A number of other merchant banks such as Kleinwort Sons & Co. and Antony Gibbs & Sons continued to have trading arms throughout the nineteenth century.Footnote ¹¹⁷

From the perspective of the merchant banks, banking and trading were intertwined. To others the merchant banks offered trade credit by lending their names to bills of exchange drawn by exporters which would pay for their goods. Given their reputation, if a merchant bank accepted a bill of exchange (by writing this on its face), that meant the bill could be readily sold (discounted) in the money market either in London or abroad. The bills might be issued under letters of credit. This financing of trade through bills of exchange was the so-called acceptance business, which from the mid-1820s began with British trade with Europe and the United States.Footnote ¹¹⁸ What became known as the Bill on London – a bill of exchange accepted by one of the first-class London banks, payable in London in pounds sterling – became the benchmark for financing international trade. When Britain was under the gold standard the pound sterling became the reserve currency of the world, literally convertible into gold.Footnote ¹¹⁹ Closely related to the acceptance business was the exchange business – in other words, dealing in bills of exchange to take account of the differences in currencies between London and elsewhere. For example, a bill of exchange might be drawn in pounds sterling, but the exporter might want payment in the local currency, say the Indian rupee. Until the 1870s, the leading merchant bankers gathered twice weekly at the Royal Exchange to settle the rates of exchange for bills and currencies. When the Rothschilds and the Barings decided that there were more profitable outlets for their activities, other merchant banks such as Samuel Montagu & Co. became foreign exchange and arbitrage specialists.Footnote ¹²⁰

As well as the acceptance business, the merchant banks assisted in securities issues. Hence, they were sometimes called ‘issue houses’.Footnote ¹²¹ Early in the nineteenth century, those like the Rothschilds and the Barings had been appointed by foreign states for the issue of government bonds.Footnote ¹²² Other merchant banks followed, along with a few mavericks like Parr’s Bank Ltd, an expanding joint stock bank, which assisted with Japanese government issues in the early twentieth century.Footnote ¹²³ As well as government bonds, the merchant banks became involved in the issue, underwriting and marketing of corporate shares and bonds. In the nineteenth century this was mainly for companies operating abroad, such as American railways, although in the early twentieth century the Barings organised some domestic issues and took investments (both for itself and customers) in developments like the London tramways and underground railway, and the Liverpool docks.Footnote ¹²⁴ After the First World War the merchant banks turned to domestic issues as international business dried up. The company amalgamations and rationalisations of the 1920s and 1930s were a source of opportunities.Footnote ¹²⁵ It was at this point that their role in proffering corporate advice became an important avenue of activity. Morgan Grenfell was a leader in this with its role in the acquisition of Vauxhall Motors by General Motors in 1925.Footnote ¹²⁶ Following the Second World War exchange controls remained in place and there was a decline in the acceptance business. The advent of the hostile takeover in the late 1950s filled the gap.Footnote ¹²⁷ From the 1960s there was further expansion for the merchant banks with unit and investment trusts, insurances broking, asset finance, venture capital and, of major significance, a resurgence of international issues and international lending with the arrival of the Euromarkets.

(ii) The Joint Stock Banks and the Finance Houses

Merchant banking was well established when the joint stock banks arrived on the scene. Unlike the merchant banks their focus, at least initially, was domestic banking as rivals to the private banks, which predated them. The joint stock banks were a creation, it seems almost accidental, of nineteenth-century statute.Footnote ¹²⁸ At least for a time, there was intense rivalry with the private banks. An Act of 1826 enabled unlimited liability joint stock banks outside a sixty-five miles radius of London.Footnote ¹²⁹ The Bank Charter Act 1833 allowed such joint stock banks also to be established in London.Footnote ¹³⁰ Large numbers of joint stock banks were formed, and thus the possibility of a system of national banking. An attempt to restrict them, through curtailing their right to issue bank notes, was contained in the Bank Charter Act 1844.Footnote ¹³¹ Further legislation in 1858 and 1862 allowed them to assume the mantle of limited liability.Footnote ¹³²

It was outside London that the Industrial Revolution had its base, and it was there that an extensive network of private and joint stock banks existed, so-called country banking. These were sometimes established by local industrialists intent on making money, providing payment services and financing their businesses.Footnote ¹³³ They linked to London banks and others through agency arrangements. There was no love lost between the private and joint stock banks. For a while the private banks excluded the joint stock banks from the London Bankers’ Clearing House. But the deposits of the joint stock banks grew, and in the final decades of the nineteenth century the private banks transformed into joint stock banks or loitered for a while as smaller rivals to them.Footnote ¹³⁴ In part as a reaction to the 1844 restrictions, the joint stock banks had continued to establish branches. By the end of the century these had become relatively large national networks, constituting the core of their banking business.Footnote ¹³⁵ Bank amalgamations which began in the 1880s culminated in 1918 in a domestic banking market dominated by five of the joint stock banks – Lloyds, Barclays, Midland, National Provincial and Westminster – all with extensive branch networks.Footnote ¹³⁶ This combination of growth and amalgamation had transformed them into powerful financial institutions, which they remained for the rest of our period.

In the nineteenth century, the main functions of the joint stock banks were to facilitate their customers’ payments, to make short-term advances and, later, to take and keep safe their deposits. An efficient payments system was especially important. Inland bills of exchange and the banks’ own bank notes facilitated payments in the first part of the nineteenth century. But the system still fell short. In the mid-nineteenth century, for example, obligations between members on the Liverpool Cotton Exchange were being directly settled in cash and gold.Footnote ¹³⁷ The use of inland bills declined, and, as we have seen, the 1844 Act limited the banks in issuing their own notes. Cheques and Bank of England notes, which had become legal tender in 1833 for sums above five pounds, began to dominate.Footnote ¹³⁸ In the second half of the nineteenth century and until the end of our period the cheque became the commonly used instrument for commercial payment domestically.Footnote ¹³⁹

As for bank advances, these were primarily for short-term, not long-term, capital purposes. Most British industries in the nineteenth century were modest in size; the services of the merchant banks for securities issues were simply not appropriate, although by the end of our period the picture was different. For working capital, however, industry could turn to a bank, or at least its branch at the local level, which might provide an overdraft facility, or perhaps a loan. Before the amalgamation movement in banking took hold at the end of the nineteenth century, the acceptance business was not regarded as the work of the joint stock banks, although Liverpool banks like the Liverpool Union Bank began accepting bills in the 1880s.Footnote ¹⁴⁰ Then in the early twentieth century the larger joint stock banks, at least in London, became rivals to the merchant banks in offering their customers trade finance and foreign exchange services.Footnote ¹⁴¹ The issuing business remained with the merchant banks. For example, in the interwar period Barclays occasionally underwrote issues for first-class borrowers, but it was usually content to refer customers wanting to raise capital through shares or debenture issues to a merchant bank.Footnote ¹⁴²

Standing apart from the banks were the finance houses. These took various forms, but one type in the twentieth century provided what today is called ‘asset finance’, in other words credit secured on the asset being financed. Asset finance began in the nineteenth century as hire and deferred (hire) purchase. Some of these finance houses had their origin in the railway wagon companies, which from the late 1850s built and repaired wagons for use on the railways and provided them to customers on hire and hire purchase. The British Wagon Company provided hire purchase for motor vehicles and lorries in the interwar years, as did the Birmingham Wagon Company.Footnote ¹⁴³ Perhaps the best example is the North Central Wagon Company, which began business in 1861, incorporated in 1894 and, in the twentieth century as the North Central Wagon and Finance Company Ltd, became an important provider of hire purchase and leasing (hire) facilities for motor vehicles and lorries.Footnote ¹⁴⁴ In time, it became Lombard North Central (after amalgamating with Lombard Bank) and part of National Westminster Bank.Footnote ¹⁴⁵ It was not the only finance house to be acquired by a bank.Footnote ¹⁴⁶ At the end of our period Lombard North Central was a provider of asset finance, leasing items such as aircraft, ships and petrochemical works.

In addition to the wagon companies, new finance houses appeared on the scene.Footnote ¹⁴⁷ One of the most important, United Dominions Trust (UDT), began in 1919 as a branch of Continental Guaranty Corporation of New York. It was acquired by British interests in 1923.Footnote ¹⁴⁸ It concluded agreements in the 1920s with Austin Motor Company and Morris Motors to finance their vehicles on hire purchase, and agreements with other motor vehicle manufacturers followed. The UDT credit facility with Morris was partly financed by the company itself, which had a veto over who was to be given hire purchase contracts.Footnote ¹⁴⁹ Most hire purchase for motor vehicles was accounted for by UDT and the other finance houses, but in London some of the large car dealers operated their own hire purchase schemes.Footnote ¹⁵⁰ In the post–Second World War period controls over lending by the finance houses were used by the government as an instrument of monetary control. Industrial output of consumer durables was adversely affected when the tap was turned down.Footnote ¹⁵¹

(iii) Financial Architecture

The merchant banks, joint stock banks and finance houses were important parts of Britain’s financial architecture during our period. Other parts of that architecture, ensuring before the First World War London’s role as the world’s leading financial and commercial centre, included Lloyds of London (the insurance market), the Baltic Exchange (as a shipping market) and the London Stock Exchange. At the centre, and an essential part of Britain’s wider history, was the Bank of England.

The Bank of England was a private institution until 1946, and as such it had private customers and occasionally rubbed up against other financial interests in competition with it. The Bank was especially troubled in the first part of the nineteenth century by the competitive threat from the newly founded joint stock banks. In 1837, for example, it resorted to law and obtained an injunction against the London and Westminster Bank accepting demand bills and bills with maturities of less than six months, which it regarded as its privilege to handle in London. The injunction lasted until the 1844 Act.Footnote ¹⁵² Despite public criticism, the Bank also refused to open an account for the new bank or to discount bills payable there. However, in the second half of the nineteenth century there was a general expectation that the Bank of England would act in the national, not in its private, interest. In 1890 it averted any wider financial crisis when leading the rescue of Barings, which as a result of the failure of its Argentinian interests had thought itself unable to carry on business.Footnote ¹⁵³ The Bank’s special status derived from its position as the government’s bank, the monopoly provider of banknotesFootnote ¹⁵⁴ and the backstop in providing accommodation in times of financial stress.Footnote ¹⁵⁵ By the time of the First World War the Bank’s function as the lender of last resort was confirmed.Footnote ¹⁵⁶

In the money market the Bank of England acted primarily through the discount houses, which bought and sold acceptances (bills of exchange accepted by a first-class London bank) and took surplus funds from the banks on a short-term (often overnight) basis.Footnote ¹⁵⁷ From 1864 the Bank became a member of the Bankers’ Clearing House. The clearing house functioned to short-circuit the payment process for the banks. They no longer needed to pay individually each cheque or other payment order but could set off with other banks all the payment orders received in a day. Members of the clearing house held accounts with the Bank of England so that, at end of the day, they were able to settle across the Bank’s books the net amounts they owed the others. These accounts with the Bank provided the banking sector with a source of liquidity.

(i) The Legislative Framework

Legislation intruded little, if at all, on commercial transactions. The design of one body of legislation was explicitly to facilitate commerce, not curb it. The codifications pertinent to our story of transactions, the Sale of Goods Act 1893 and the Bills of Exchange Act 1882, fell into that category.Footnote ¹⁸³ Their facilitative aim was made explicit on various occasions by Mackenzie Chalmers, who drafted them. As he put it in the first edition of his book on the 1893 Act, it ‘does not seek to prevent the parties from making any bargain they please. Its object is to lay down clear rules for the cases where they had either formed no intention, or failed to express it.’Footnote ¹⁸⁴ Legislative intention had some impact on implementation, not least this indication that his codified sales law comprised default rules, at work if parties did not choose otherwise, but freely modified or avoided if they so wished.

Similarly, the Factors Acts were facilitative of commerce. They were aimed at protecting against claims by owners those third parties who were caught out by the wrongful actions of the owner’s agent – for example, the merchant purchasing goods in an ordinary commercial dealing not knowing that they were not the agent’s, or the bank making an advance to an agent, wrongly believing that the documents of title to goods proffered as collateral were his, not the principal’s. We see in Chapter 3 there was an affection for owners leading courts to undermine the legislative intent in the Factors Acts to protect third parties entering market transactions. Over time, that led to Parliament throughout the nineteenth century periodically rewriting the legislation to maintain the goal of protecting third parties in their market dealings.Footnote ¹⁸⁵

In addition to facilitative legislation like this, there was a body of statutes which were regulatory in character, although in practice commercial and financial dealings were largely untouched. At one extreme was the Larceny Act 1861, which on rare occasion was wheeled out to address fraud and egregious market abuse.Footnote ¹⁸⁶ Short of the full weight of the criminal law there was, as regards sales, statutory control to ensure reliable weighing and measuring equipment, relevant to some spot sales. Prohibiting short weight and measure did not really arrive until the Sale of Food (Weights and Measures) Act 1926, which, as its title suggests, had a limited ambit.Footnote ¹⁸⁷

Next, there was some control on the claims circulated when selling goods. The Merchandise Marks Act 1862 criminalised applying false marks in the sale of goods with intent to defraud. The legislation was, though, a dead letter.Footnote ¹⁸⁸ Its successor, the Merchandise Marks Act 1887, prohibited the false application to goods of the marks and names of others, false trade descriptions of goods and false indications that goods were made in Britain.Footnote ¹⁸⁹ But again it fell short of the mark: the offences were unclear, had limited scope, were rarely enforced and applied only where the offending occurred within the jurisdiction. In commercial circles it was regarded as a dead duck.Footnote ¹⁹⁰

Further, there was the regulation of anticompetitive practices in sales. The common-law doctrine of restraint of trade had taken a benign view of such practices. The judicial justification for this echoed the conventional wisdom and public policy of the time: first, the courts said, commercial parties had freedom to enter the contracts they wished, even those restricting competition in marketing;Footnote ¹⁹¹ and, second, there were benefits from such practices in steadying prices and preventing ruinous competition.Footnote ¹⁹² Towards the end of our period attitudes and public policy advanced, and the anticompetitive practices of manufactures and producers in marketing and distributing their goods started to face regulatory challenge.Footnote ¹⁹³

As for banking services, apart from the restraints of company law (such as they were) banks as institutions were largely unregulated until after our period.Footnote ¹⁹⁴ Banks were limited in issuing banknotes, but as long as they complied with bills of exchange law they were free in the payment services they offered customers. Once the usury laws were repealed in 1854, there were no statutory restrictions relevant to the overdrafts and loans they furnished. The Bills of Sale Acts required the registration of chattel mortgages, but this was not the type of collateral banks took when they wanted security to back an advance to a commercial customer.Footnote ¹⁹⁵ Nor, after judicial clarification, were the Bills of Sale Acts relevant to those providing asset finance through hire and hire purchase facilities.Footnote ¹⁹⁶

(ii) Private Law-Making – Markets and Institutions

In this almost regulation-free environment, party autonomy gave free rein to the private law-making of commercial parties. One aspect was the founding of organised markets and of the institutions to underpin them. Firstly, there were the rules and regulations governing the membership of venues where dealings were conducted; and, secondly, there were the standards, rules and regulations for trading on these markets and for the settlement of the disputes which arose. In the London and Liverpool commodity markets the standards, rules and regulations were contained, in part, in the standard form contracts drawn up by the trade associations to govern individual sales, in separate rules establishing standards, and in the terms and conditions for the auctioning of imported commodities where this occurred.Footnote ¹⁹⁷ Private law-making on financial markets tended to be less extensive and dealings less formulaic. For example, the London money market embraced a relatively small, close-knit group of banks and discount houses, with the Bank of England casting its shadow from the background. Verbal agreements were common for individual dealings, without being reduced to writing in the same detail they were on the commodity markets.Footnote ¹⁹⁸ Trust and the pressure of informal norms smoothed the edges if problems arose.

Accompanying the private law-making for the organised markets was the establishment of market-supporting structures. Notable with the commodity markets were the rules and regulations for the clearing and settlement of individual transactions. These were prepared by private bodies such as the London Produce Clearing House (LPCH). Again, contract was central – standard form contracts for individual trades combined with the rules of the clearing house as regards how the mechanism worked. The contractual network framing the work of the LPCH dressed it in the drapery of a law-making body.Footnote ¹⁹⁹ As to financial markets, the London Bankers’ Clearing House was an important market-supportive institution, formed by the banks and enabling them to handle payments between their customers in bulk, so only net differences needed to be paid.Footnote ²⁰⁰ The rules of the clearing house were spartan and mechanical, but backed by formal and informal understandings between the banks, with the backing of the Bank of England.

The systems of private law constituted by these rules, regulations and standard form contracts had a number of characteristics. One was standardisation, which reduced transaction costs in contracting since there was no need on each deal to negotiate all the terms anew.Footnote ²⁰¹ Multilateral standardization boosted confidence in a market, in part because commercial parties knew that they were getting terms no worse than others.Footnote ²⁰² A second characteristic was that the system of private law created was detailed and sophisticated. It was drawn up by commercial parties, after input from relevant interests. Unlike some state law-making, there was a wealth of experience to draw on regarding the problems likely to be encountered, the different contexts in which they occurred and their incidence at different times. Third, although these systems of private law governing markets and institutions were erected on a foundation of profit-making and competitive interests, their architects worked to certain principles and were attuned to the balance of interests to be accommodated.Footnote ²⁰³

Fourth, lawyers had little hand in this private law-making. The drafting of standards, rules and contracts was by commercial parties, knowing what they wanted, with lawyers having an ancillary role of vetting for legal error and occasional advice on drafting. When disputes arose, the involvement of lawyers was discouraged on the basis that commercial parties would be better able to understand the issues and be more motivated to reach a quick and efficient solution.Footnote ²⁰⁴ That only changed if legal proceedings ensued. Fifth, almost from the outset these systems of private law had an international reach. That was attributable to Britain’s leading role during our period in trade, banking, shipping and insurance, and the outward looking nature of those involved, many of whom were foreign or whose families originated abroad.Footnote ²⁰⁵ Britain’s dominant role in private law-making was not uncontested.Footnote ²⁰⁶ However, once international merchants and bankers reached a certain size, the reality was that they had to deal through London (and, to a lesser extent, Liverpool) with its banks and reserve currency, its marine insurance and its shipping and commodity markets.

Sixth, and as a corollary, to engage in these activities – finance, ship chartering, marine insurance, international commodity sales and so on – commercial parties, wherever they were, had to comply with the rules of these London and Liverpool institutions and markets. This meant that English law – and these systems of private law it spawned – was at the same time both local and global.Footnote ²⁰⁷ Thus the standard form contracts predominantly employed for international commodity sales were drawn in Britain.Footnote ²⁰⁸ (First-mover advantage means that their descendants still apply to dealings in a considerable volume of international trading in commodities like grain and cotton.Footnote ²⁰⁹) Crucially, commercial dealings were deemed to be made and performed in England – whatever the reality – and the mandatory dispute resolution mechanism of trade arbitration occurred there.Footnote ²¹⁰ The upshot of arbitration was, on scattered occasions, the subject of supervision by the English High Court.Footnote ²¹¹

Seventh, if these systems produced untoward results, the principle of party autonomy was generally there to remedy matters through redrafting the relevant rule or standard form contract, or institutional redesign.Footnote ²¹² Finally, enforcement was largely self-contained and free of state law. Markets and institutions exercised the power to exclude members in cases of serious non-compliance with the system of formal norms, although with the maverick or recalcitrant this might fall short in bringing them to heel. The courts adopted a hands-off approach to member discipline.Footnote ²¹³ In some contexts informal norms operated within close-knit groups where trust was at a maximum and future interactions, both commercial and perhaps social, were anticipated. This was a characteristic of London and local financial markets.Footnote ²¹⁴ It was less the case with the commodity markets, where size alone meant more rough and tumble. Informal norms, and the big stick of the courts in reserve, buttressed compliance with arbitration awards, albeit that observance abroad was an occasional concern.Footnote ²¹⁵

(iii) Private Law-Making – Distribution Networks

Party autonomy allowed individual manufacturers and producers to control the marketing of their products down the distribution chain.Footnote ²¹⁶ Distributors in handling goods for onward sale were bound by contract to do this in specified ways, confining their efforts to particular parts of the country or the world, obliging them to ‘push’ the product or use their ‘best endeavours’ in marketing it and requiring them to supply goods to their own customers at the prices the manufacturer or producer laid down. These contracts could also contain sanctions for errant distributors. Manufacturers and producers might act individually in such cases, with the possibility of in terrorem enforcement through an injunction from the court obliging compliance.

During our period manufactures and producers also acted collectively through trade associations, which had powers conferred under their rules to impose fines and, as an ultimate sanction, stop orders, effectively preventing a distributor handling a product for non-compliance with these strictures.Footnote ²¹⁷ The courts saw nothing wrong in this.Footnote ²¹⁸ When these systems of fines and stop lists were challenged, they upheld them as legitimate practices in furtherance of business interests. Parties, as the court said in a parallel case, were the best judges of what was reasonable among themselves in relation to such practices, and all the courts should do was ‘within due bounds to facilitate, not to fetter, trade and industry’.Footnote ²¹⁹ The upshot was, as the Board to Trade put it in 1951, that ‘the collective punitive action by which most fixed resale prices are enforced amount to a private system of law which in effect is outside the jurisdiction of the Courts’.Footnote ²²⁰ It was not until the competition legislation of the post–Second World War period that this type of behaviour vis-à-vis distributors came under a cloud. Effective regulation of restrictive trade practice was slow in coming, and when it arrived, towards the end of our period, the relevant law initially lacked bite. When cases reached the courts, enforcement efforts did not always receive a sympathetic audience.Footnote ²²¹

(i) Certainty vs Merits

Certainty as a component of modern English commercial law can be traced to Lord Mansfield, who in a marine insurance case in 1774 said: ‘In all mercantile transactions the great object should be certainty: and therefore it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.’Footnote ²²⁴ That was litigation where Mansfield wanted a clear definition of barratry as it related to a contract of marine insurance, so that in the future underwriters and insurers would feel more confident in entering commercial contracts. This was not an isolated sentiment.Footnote ²²⁵ As the touchstone for commercial law, certainty echoed throughout our period.Footnote ²²⁶

A corollary of certainty was a strict application of the rules. In 1920 the House of Lords considered the lender’s use of a clause imposing default interest, in other words, a higher rate of interest absent punctual payment. Lord Birkenhead LC observed that ‘it would be a very singular circumstance if he who had been careful to stipulate that certain payments of interest under an instrument of this kind should be made to him punctually upon a certain specified day, were deprived by a decision of the Law Courts of the right of insisting upon the strict implement of that for which he had so stipulated’.Footnote ²²⁷ In circumstances like this, the assumption ran, borrowers could bargain with their lenders for the inclusion of provisions such as days of grace or negotiate for relief post-default.Footnote ²²⁸

In light of the certainty principle, the merits of individual cases took a back seat to the strict application of legal rules. Adherence to bright-line rules, it was accepted, could result in some commercial parties with unmeritorious claims profiting at the expense of others. Despite this, the assumption ran, bright-line rules meant a greater consistency in the courts’ decision-making, and that promoted its own fairness. Further, what was sauce for the goose was sauce for the gander. Markets oscillated, and commercial parties seeking to take advantage of unmeritorious points one day faced the possibility of being victims the next. Lord Atkin in Arcos v. RonaasenFootnote ²²⁹ thought that there was no difference between the views of businesspeople and lawyers on the point: commercial parties should be able to insist on their strict legal rights, regardless of the harsh consequences for the other side.Footnote ²³⁰ A familiar example was the owner’s withdrawal of a vessel for failure of the charterer to pay hire on the due date. The courts sanctioned this, notwithstanding that late payment was neither deliberate nor negligent; that the payment, when made, was only a few days late; or that the owner’s motivation was to snatch back the vessel to charter it elsewhere on a rising market in chartering rates.Footnote ²³¹ A parallel example was the buyer’s use of an immaterial breach in a sales contract to refuse delivery, when with a movement in market prices the goods could be obtained more cheaply elsewhere. Again, the courts were unmoved.Footnote ²³²

(ii) ‘Business against Chancery’

During our period, and particularly after the Judicature Act 1873, some judges expressed trenchant views that equitable doctrines should be kept at arm’s length from English commercial law so as not to threaten its bright-line rules.Footnote ²³⁴ It would be ‘dangerous and unreasonable’ to apply to mercantile agreements the equitable rules that a contract might be enforced although the time fixed for its completion had passed, said Cotton LJ about a typical commodity sale in Reuter, Hufeland & Co v. Sala & Co.Footnote ²³⁵ In the twentieth century Lord Atkin was the forthright opponent of equitable niceties blurring the bright-line rules of English commercial law. ‘Business against Chancery’ as he put it in the private correspondence quoted, a regular theme of his work as a law lord.Footnote ²³⁶ Eschewing equity’s influence in sales law was the basis of his well-known judgment in Re Wait.Footnote ²³⁷

Figure 1.3 Lord Atkin on the jetty at Aberdovey, Wales

(Treasurer and Masters of the Bench, Gray’s Inn)

There in another commodity sale Wait bought 1,000 tons of Western White wheat from Balfour Williamson & Co., London, ex Challenger, expected to load in December 1925 at Oregon or Washington. It was a CIF contract, dated 20 November 1925, on LCTA’s form 22.Footnote ²³⁸ The following day Wait sold 500 tons to sub-buyers. The wheat was shipped in bulk on 21 December, a bill of lading for the 1,000 tons reaching Wait on 4 January 1926. Payment was due thirty-three days after sight, that is on 6 February. The previous day the sub-buyers gave Wait a cheque, although they had no bill of lading, delivery order or document of title. Wait paid this cheque into his account and pledged the bill of lading to his bank. He became bankrupt before the ship arrived and so never appropriated the 500 tons to the sub-buyers. His trustee in bankruptcy redeemed the bill of lading and the entire 1,000 tons, leaving the sub-buyers to their remedy in damages. It was argued that they had a pro rata equitable interest in the cargo. A Divisional Court in the Chancery Division agreed and gave them specific performance of their contract, an equitable remedy.

The Court of Appeal (Lord Hanworth MR and Atkin LJ) held that the sub-buyers could not obtain specific performance. That remedy required as a precondition that goods be specific or ascertained. That was not the case since Wait had never allocated the 500 tons in relation to the sub-buyers. The court rejected the argument that there had been an equitable assignment, giving the sub-buyers a beneficial interest or lien in the 500 tons. The sub-buyers had taken the well-known risk of insolvency in paying Wait without receiving a bill of lading or other document of title. Atkin LJ was scathing about the role of equitable principles in sales. They had beneficial results in their own sphere, he said, but in this context he felt ‘bound to repel the disastrous innovations’ which would be introduced into well-settled commercial relations. Trade finance would be adversely affected, he continued, because a financing bank would be affected by notice of the sub-buyer’s equitable interest, even though it acquired legal title through the documents of title.Footnote ²³⁹ It would have to satisfy itself on being paid that those equitable interests were not being defeated, presumably by contacting the sub-buyers. The effect would be, he concluded, ‘to throw the business world into confusion, for credit would be seriously restricted’.Footnote ²⁴⁰

Atkin was not the only commercial judge to inveigh against equitable notions (and what might now be the law of unjust enrichment). ‘There is now no ground left for suggesting as a recognizable “equity” the right to recover money in personam’, said Lord Sumner in Sinclair v. Brougham, ‘merely because it would be the right and fair thing that it should be refunded to the payer’. But Atkin was the most insistent. In Re Wait there was a strong dissent by Sargant LJ (‘complete and fundamental’ disagreementFootnote ²⁴¹). In a pointed comment on the majority judgments in the Law Quarterly Review, Sir Frederick Pollock observed that the modern equity lawyer felt that he was ‘walking in a shadow of archaic superstition’.Footnote ²⁴² Nonetheless, as Pollock conceded, the majority judgments represented the law, indeed, continue to do so.

Constructive notice was another equitable doctrine whose recognition in commercial dealings was deprecated. Manchester Trust v. FurnessFootnote ²⁴³ was the leading case. There the Court of Appeal held that the bank as the indorsee of bills of lading – it had made an advance – did not have constructive notice that the charterparty contained a special clause that the captain, although appointed and paid for by the owners, was the agent of the charterers. If the bank had had notice it would have had to sue the charterers, not the owners, as the party liable for the captain’s failure to deliver the cargo of Merthyr steam coal to Rio de Janeiro. It was ‘perfect good sense’, said Lindley LJ, that the courts had resolutely set their face against an extension of the equitable doctrines of constructive notice to commercial transactions. ‘[I]n commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country.’Footnote ²⁴⁴

A few years earlier, in London Joint Stock Bank v. Simmons, Lord Herschell had said that he would be ‘very sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments’.Footnote ²⁴⁵ That was a case where brokers, now insolvent, had pledged foreign bonds, which a client left with them, to their bank to support an overdraft. In reversing the Court of Appeal, the House of Lords held that there were no suspicious circumstances to put the bank on inquiry.Footnote ²⁴⁶ It therefore took in good faith (and of course because of the overdraft, for value), and so its security was good. In Sir John Paget’s view, the case put paid to what he described as the ‘pernicious theory’ of constructive notice as regards negotiable instruments.Footnote ²⁴⁷ The upshot of the case was that a bank was not put on inquiry in such circumstances: simply because it dealt with brokers did not infect it with knowledge that they might be pledging, without authority, the bonds and instruments of their clients as collateral for an advance. As Lord Halsbury LC put it, the deposit of securities as cover in a broker’s business was a well-known commercial practice, and it would be a startling proposition that in every case the bank had to inquire whether a broker had the authority of his customer to do so.Footnote ²⁴⁸ To put it another way, this was standard commercial practice, and the court should be loath to upset it.

The protection against constructive notice in commercial transactions was further extended. In general, banks were held not to be on constructive notice in conducting standard banking operations.Footnote ²⁴⁹ In 1926 Scrutton LJ generalised the position: in commercial transactions, he said, a person could not be taken to know what he had the means of knowing.Footnote ²⁵⁰ Summing up the approach of the courts during our period, Diplock J said in 1958: ‘“Reason and justice” do not seem to me to prescribe the introduction into commercial matters … of the doctrine of constructive notice.’Footnote ²⁵¹

But while there was a good deal of huffing and puffing about equitable principles not being allowed to pollute commercial transactions, they had, in certain situations, an acceptable, indeed essential, purchase. Agency was the best example, where equitable principles governing the duties of the agent to the principal were brought to bear against the dishonest agent, the agent failing to disclose crucial information to their principal or those agents acting in their own and not their principal’s interests. In such cases, even Lord Atkin was disposed to act, albeit not always willing to ascribe the remedy’s source to equity.Footnote ²⁵² In Chapter 3 we encounter a number of examples of dishonest agents being brought to book as a result of a breach of their fiduciary duties.Footnote ²⁵³ After our period, the role of equity in commercial law obtained a much firmer, albeit ring-fenced, footing.Footnote ²⁵⁴

(i) Custom and Usage

The common law accepted that commercial practice could have normative force if it constituted trade usage.Footnote ²⁶⁰ Whether it did depended on whether the practice was so widely observed and so well known in a market or locality that it was taken as the basis of contracting. In practice the courts took a flexible approach, although to have normative force a commercial practice had to be proved as a matter of fact. Until the First World War, when civil juries faded, the existence of trade usage might be decided by them.Footnote ²⁶¹ Once the existence of usage was established, the courts used it in two main ways. First, as Lord Cairns LC held in a case of an international commodity sale, while it was for the court to interpret the words of the contract, that was subject to ‘any peculiarity of meaning which may be attached by reason of the custom of the trade’.Footnote ²⁶² Second, as Parke B put it in another case, usage ‘may be used to annex incidents to all written contacts, commercial or agricultural, and others, which do not by their terms, exclude it, upon the presumption that the parties have contracted with reference to such usage’.Footnote ²⁶³

Through contractual interpretation and ‘annexing incidents’ to contractual terms, trade usage introduced flexibility into different areas of commercial law. With organised markets the courts gave welcome effect to commercial practices operating there.Footnote ²⁶⁴ Graves v. LeggFootnote ²⁶⁵ is just one case in point. London merchants employed a Liverpool broker to purchase wool, who bought bales for them deliverable at Odessa, the contract stating that ‘the names of the vessels to be declared as soon as the wools were shipped’. Custom and usage in Liverpool was that all a vendor needed to do was to inform the broker of the name of the vessel, not the buyer. Consistently with that practice, the Exchequer Chamber held that the vendor was not in breach of contract in failing to pass on to the buyer the ship’s name. ‘[Having] employed an agent at Liverpool to make a contract there, it must be taken to have been made with all the incidents of a contract entered into at Liverpool’, said Cockburn CJ.Footnote ²⁶⁶

The normal rule was that, as agents, brokers on the commodity markets would drop out of the picture and liabilities on the transaction would be between the principal and the third party. That did not accord with the commercial need to make the person on the spot liable. In various decisions the courts invoked trade usage to impose liability directly on brokers when things went wrong.Footnote ²⁶⁷ There was even authority that a third party employing a broker to conduct a transaction on a market, in the usual manner, impliedly assented to the market’s reasonable usages, whether aware of them or not.Footnote ²⁶⁸

The ports generated various cases. Early on it was held that the usage of a port might bind a party, ignorant of it, if it was well known in the trade.Footnote ²⁶⁹ As late as 1959 it was held that it was a usage of the London freight market that forwarding agents should incur personal liability to shipowners.Footnote ²⁷⁰ Petrocochino v. BottFootnote ²⁷¹ had entered the books much earlier: where goods were consigned to a particular port, delivery was to be according to the customs and usages prevailing there. In that case the court held that it was the usage in the Victoria Docks in London that, as soon as the goods left the ship’s deck, the liability of the vessel owner ended and that this was not affected by any terms of the bill of lading.Footnote ²⁷² Accordingly, the shipowner was not liable when one of sixty-nine bales of hides from Calcutta (Kolkata), ex the steamer Zeno, went missing between the vessel’s discharge in the Victoria Docks and arrival of the bales by lighters at Sun Wharf, further up the Thames, for storage for the consignees. No doubt all this was gratifying to some using the ports, if not to those on the wrong end of it.

Trade usage featured as well with sales transactions, although there was less scope when deals were conducted according to standard form contracts, since it had long been accepted that usage could not be invoked to contradict the terms of a written contract.Footnote ²⁷³ Hire and deferred (hire) purchase as marketing tools were given a boost in the late nineteenth century by decisions that the hiring of furniture was usage in the hotel trade and that ‘the three years’ system’ for hiring pianos ‘was a custom well known to the mercantile world and the public generally’.Footnote ²⁷⁴ As regards high finance, Cockburn CJ led the charge in Goodwin v. Robarts,Footnote ²⁷⁵ invoking usage to extend negotiability to the new types of international bonds flooding the market. It was a question of fact, the courts held, but negotiability could attach by usage to instruments, even of recent origin. This liberal approach did not pass unchallenged, but to no avail.Footnote ²⁷⁶ It meant that there was no need for statute to confer the protection (if it was such) of negotiability on the bonds and corporate instruments which could find their way into the investment portfolios of the upper middle classes; the common law undertook the task.

In some quarters there was a concern that the courts might be accepting usage too readily. There was a looseness, the Law Times opined in 1878, as regards the legal tests applied, which had led to an ‘enormous amount of litigation’, and an ‘impression among commercial men that the cloak of usage and custom will cover a multitude of mercantile shortcomings’.Footnote ²⁷⁷ There may well have been something in this. Despite the condemnation, however, a steady stream of cases continued in the years prior to the First World War in which, in commercial dealings, custom and usage were recognised as binding. In one extraordinary case it was held that the standard term in LCTA contracts – that generally speaking buyers could not reject poor-quality grain but must cope with an allowance on the price – was the custom and usage of the London market and applied despite the parties contracting on their own terms without using a LCTA contract!Footnote ²⁷⁸

In the interwar years there were attempts to rekindle Cockburn CJ’s enthusiasm in Goodwin v. Robarts for the efficacy of custom and usage, invoking his rhetorical question as to why the door should be shut to their further adoption.Footnote ²⁷⁹ Commercial parties, said a writer in 1922, would then be assured that their transactions ‘will not necessarily be illuminated only by the farthing rushlight of mercantile customs prevalent in the days before the New World was discovered or the steam engine invented’.Footnote ²⁸⁰ As late as 1935, Mackinnon J upheld the conclusion of the arbitrators in the case that there was a trade usage in the London oil and tallow trade that brokers acting for an undisclosed principal were liable, along with their principal, on the contract with the third party.Footnote ²⁸¹ By then, however, the ground for trade usage was rather barren. One problem, said Professor Chorley, was that commercial practice had moved on from the usages recognised by the courts in a previous era, yet these could not be overruled under the English system of precedent. That, he added, struck a blow at the whole conception of keeping commercial law developing through incorporating contemporary customs and usages.Footnote ²⁸²

By the end of our period the prerequisites to establishing custom and usage had hardened and were almost impossible to satisfy. Kum v. Wah Tat Bank LtdFootnote ²⁸³ serves as an example. There the Privy Council considered in the context of trade between Sarawak (East Malaysia) and Singapore whether mate’s receipts could be a document of title as a result of the custom of that trade. It did not rule out the possibility, although in the end it did not have to decide the point. However, the Privy Council emphasised that, if proved, the custom would take effect as part of the common law of Singapore, be applied by any court applying Singaporean law and thus bind anyone anywhere in the world.Footnote ²⁸⁴ So stated, this was a high hurdle and assimilated trade usage to custom as a source of law. Lord Devlin, the author of the Privy Council’s opinion, had expressed the view in a lecture at the London School of Economics in 1951 that a successful claim of custom was by then extremely rare and that it ‘can no longer be regarded as a revivifying source of commercial law’.Footnote ²⁸⁵ That, at the end of our period, was the prevailing view.

(ii) Accommodating Commercial Practice

Here the cases fell along a spectrum as the courts accommodated commercial practice in their decision-making. At one end, a commercial practice could bear heavily on the outcome of the legal issue, even if it did not constitute custom and usage; at the other end, commercial opinion in, for example, the City of London was advanced to bolster a conclusion on other grounds. Either way this diverged from the approach in other branches of law, where the courts would have looked askance at the notion of according any leverage to the practices or views of landlords, motorists or burglars in decision-making in those areas.Footnote ²⁸⁶ The explicit harmonising of law with commercial practice not only injected English law with a desirable responsiveness but also enhanced its legitimacy. It was one element in its reputation that in commercial causes it took commercial practice and need seriously.

At one end of the accommodating spectrum was the line of argument in a 1909 book on custom and trade usages by Dr Robert Aske (later Sir Robert Aske QC, MP). Commercial practices, he contented, while not hardened into definite and uniform shape were not devoid of worth as regards the performance of a contract.Footnote ²⁸⁷ If adopted by those engaged in trade, a commercial practice would almost invariably possess the merits of fairness and convenience, or at least would not be unsuitable for the purpose of determining performance issues such as the usual manner or time taken.Footnote ²⁸⁸ In 1936 Aske had some luck to appear as counsel in The Njegos,Footnote ²⁸⁹ which went a little way to boosting his textbook speculations. One issue in determining the proper law of the bills of lading in that litigation was whether the arbitration clause in the charterparty was incorporated into them. Aske (and counsel for the shipowners) had to accept that in the absence of a specific contractual provision, the commercial practice in London was that this was never the case. At that point Sir Boyd Merriman P stopped argument; the commercial practice that the arbitration clause was not incorporated in the bill of lading was determinative.Footnote ²⁹⁰

The charterparty in The Njegos was on the UK Chamber of Shipping River Plate (Centrocon) form, which had been introduced in 1914. The Centrocon form reappeared in The Annefield,Footnote ²⁹¹ another case of the charter of a vessel to carry Argentinian grain to Europe. Rather boldly, counsel for the shipowners contended that The Njegos should be overruled on the point of the non-incorporation in the bills of lading of the arbitration clause in the charterparty. The Court of Appeal was having none of it. There was a course of practice from 1914 to 1970, some fifty-six years, and after that lapse of time it would require a very strong case to upset it.Footnote ²⁹² There was the additional point weighing in The Annefield, that a court had put a construction on a standard form contract and commercial parties would have acted on it. House of Lords authority was that, in commercial cases, it was of the highest importance that legal authority should be certain and that consequently, in circumstances like these, an interpretation of a standard form would only be altered if it was clearly wrong.Footnote ²⁹³ If the commercial community was not satisfied with the court’s judgment, said Lord Denning MR, it should alter the standard form.Footnote ²⁹⁴

Arab Bank v. RossFootnote ²⁹⁵ was another case at the end of the spectrum where Lord Denning, for one, treated commercial practice as determinative. A purchaser of a Lancashire cotton mill gave two promissory notes as payment, which the bank discounted (bought), enabling the vendors to obtain their money earlier than if they had waited for the notes to mature. The vendors were a firm registered in Palestine and as payees of the notes were described as a company. However, when they indorsed the notes to the bank they failed to add the word ‘company’ to their names. The purchaser when sued on the bills contended that the bank was not a holder in due course of the notes under section 29 of the Bills of Exchange Act 1882 since, at the time it took them, they were not ‘complete and regular on the face of it’. The Court of Appeal agreed: there was doubt that the indorsers were the same legal person as the payees. Somervell and Romer LJJ reached their conclusion on an examination of the notes; there was some authority supporting their conclusion.Footnote ²⁹⁶ However, Denning LJ thought the question was best determined by banking opinion, which would not accept the indorsements in the case as regular. It was impossible for bankers to inquire whether all indorsements on a bill were genuine, but it was some safeguard against dishonesty that they were regular on their face. ‘[W]e shall not go far wrong if we follow the custom of bankers of the City of London on this point’, he said.Footnote ²⁹⁷

At the other end of the accommodating spectrum were those cases where commercial practice or opinion was offered as support of the court’s legal analysis. Lord Mansfield was early in the field in Miller v. Race.Footnote ²⁹⁸ Trade and commerce ‘would be much incommoded by a contrary determination’, he said, if bank notes were not negotiable.Footnote ²⁹⁹ Referring to the status which a bill of lading had as a document of title, Lord Campbell CJ asserted in an 1854 case that ‘it to be of essential importance to commerce that this law should be upheld’.Footnote ³⁰⁰ In 1914 Atkin J said that if commercial practice indicated that a contract on CIF terms meant anything different to what it had in the past – he did not believe it did – ‘the Courts should be prompt to recognize the altered use if they are satisfied that there is in fact a change’.Footnote ³⁰¹ And in 1924 McCardie J said in a case involving a commodity sale into Europe that the common law’s object was ‘to solve difficulties and adjust relations in social and commercial life … An expanding society demands an expanding common law.’Footnote ³⁰² These are but a few examples.

In the twentieth century, City of London practice became a source on which courts drew to buttress legal conclusions. In upholding the validity of the trust receipt in In re David Allester Ltd,Footnote ³⁰³ Astbury J said that it was a device enabling the bank to realise the goods over which it already had security ‘in the way in which goods in similar cases have for years and years been realised in the City [of London] and elsewhere’.Footnote ³⁰⁴ Branson J adduced City practice to aid the construction of the Assurance Companies Act 1909 and held that insurance business encompassed the carrying on of reinsurance. In practice, he said, insurance and reinsurance ran alongside each other, and that, with life assurance, this was ‘continually done every day in the City of London’.Footnote ³⁰⁵ In 1966 the Court of Appeal held that a party liable on a bill of exchange as acceptor could not resist judgment against the holder in due course on the ground that it had a counterclaim on a related trading transaction. Any other result, said Winn LJ, would lead to ‘surprise and some disquiet in the City of London’.Footnote ³⁰⁶ Earlier that year the majority of the same court had held that the finance company UDT escaped categorisation as an unlicensed moneylender because of its reputation among City bankers as bona fide carrying on banking business.Footnote ³⁰⁷ When Parliament had given no guidance on the meaning of that term, said Lord Denning MR, the judges could not do better than look at the reputation of the business among them.Footnote ³⁰⁸

Along the accommodating spectrum were the cases where, for example, the courts stated that their task was to bring business knowledge and sense to the task of interpreting commercial documents. In a case involving construction of a marine insurance policy in 1885 Lord Esher MR stated that ‘the proper way is to consider them with the aid of our knowledge of business, and to take it for granted that merchants and insurers have acted in a business like way’.Footnote ³⁰⁹ ‘[B]usiness sense will be given to business documents’, said Lord Halsbury in Glynn v. Margetson & Co, a case turning on the construction of a bill of lading.Footnote ³¹⁰ In Hillas & Co Ltd v. Arcos Ltd,Footnote ³¹¹ Lord Wright said that since commercial parties often recorded the most important agreements in crude and summary fashion, it was ‘accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects’.Footnote ³¹²

Cases where the courts adopted a commercially sensitive approach in applying the ordinary rules of interpreting contracts are not difficult to find. In Burrell & Sons v. F. Green & Co,Footnote ³¹³ the ejusdem generis rule – that words following general words are generally construed as limited to things previously enumerated – was ditched in favour of giving an unrestricted meaning to a charterparty term, ‘because charterparties often contain many redundant words’, an approach adopted by other eminent judges.Footnote ³¹⁴

Another aspect of a more generous outlook was when the parties had added words to a standard form contract without working through the implications for its other terms. Sometimes this might be nothing more than an application of the general rule that greater effect should be given to what the parties had added over the printed words already there. For example, in Dudgeon v. E. PembrokeFootnote ³¹⁵ the court held that although the parties had used a printed form of insurance for a voyage policy, the added terms referring to a voyage from 22 January 1872 to 23 January 1873 meant that it was to be treated as a time policy. Yet Lord Penzance might be thought to have been stating a wider principle of giving effect to any terms the parties added to a standard form when he said: ‘[T]he practice of mercantile men of writing into their printed forms the particular terms by which they desire … is too well known, and has been too constantly recognised in Courts of Law.’Footnote ³¹⁶ Other courts reflected a generous approach along these lines as they sought to repair the mangling by commercial parties of standard form documents.Footnote ³¹⁷

(iii) Hurdles to Commercial Sensitivity

In various ways, then, the courts adopted a commercially sensitive approach, and in some cases went as far as conferring on commercial practices a normative force. But on occasion there were reasons holding them back from doing this. First, to continue with a case of interpreting an amended standard form, the parties may have botched the job so badly that, however magnanimous their outlook, the courts found it impossible to give the result commercial, indeed any, sense. In a decision in the years prior to the First World War, Lord Halsbury recalled Lord Blackburn surmising that the commercial community always wished to write it short and the lawyers to write it long, but that a mixture of the two rendered the whole thing unintelligible.Footnote ³¹⁸ In that case Lord Loreburn LC expressed exasperation: ‘[I]it is useless to draw the attention of commercial men to the risks they run by using confused and perplexing language in their business documents.’Footnote ³¹⁹ In this regard Lord Atkin was splenetic in a case concerning marine insurance. Commercial parties, he said, habitually ventured large sums of money on contracts which were ‘a mere jumble of words’, trusting to luck of the opposite party, and ‘with the comfortable assurance that any adverse result of litigation may be attributed to the hairsplitting of lawyers and the uncertainty on the law’.Footnote ³²⁰ Commercial practice, from this perspective, was not something to be encouraged.

Second, there are examples of how a conclusion contrary to what commercial interests thought desirable was driven by legal doctrine or judicial disfavour of the substance of a commercial practice.Footnote ³²¹ In some cases, the result was to check the commercial practice; in others, the court’s disapproval was surmounted by amending a market rule or the relevant standard form contract.Footnote ³²² Third, as Scrutton LJ put it in the early 1930s, ‘in many commercial matters the English law and the practice of commercial men are getting wider apart’. What Scrutton LJ was suggesting – however inaccurately – was that unlike earlier judges his contemporaries were not as concerned with reconciling commercial practice and commercial law where these were opposed, perhaps did not even think it was their task to do this. The result was, he thought, a flight from the courts, and for commercial disputes to be decided by commercial arbitrators.Footnote ³²³ The immediate background to Scrutton’s remarks was his tussles with the House of Lords.Footnote ³²⁴ However, there was support for Scrutton’s view that things were not as right as rain.Footnote ³²⁵ Commercial practice and commercial law were sometimes out of kilter. Perhaps this is not surprising: on the one hand, there was commerce, ever-changing with new techniques to pursue profit; on the other, a judicature, dependent on commercial parties litigating the right cases so it could bring law up to date, and a Parliament, where law reform was near the bottom of the agenda.Footnote ³²⁶