2011 was a year for litigation over success fees. These are the lessons:
1. Make your calculations clear
In ING Bank NV v Ros Roca SA  EWCA Civ 353, the terms of a success fee for introducing a third-party investor were too imprecise – it was based on “EBITDA 2006 “. The transaction was delayed. In the High Court, the client argued successfully that the EBITDA for 2007 should be used (resulting in a lower fee for the bank). ING had to appeal to the Court of Appeal to receive its due. Had its drafting been clearer, it would have avoided that cost – and the following unexpected twist.
2. Don’t prejudice your rights by hiding them
The client cross-appealed. It had asked ING how many shares the investor should receive. That depended in part on the deal costs. ING allowed the client to believe the fees were based on the EBITDA for 2007. As “estoppel by convention” applied – that is where a party allows another to rely upon an assumption, it can be held to that assumption.
Hence, ING’s claim for higher fees would have prevailed had it been more open as its expectations.
3. Make sure the right party sues
In Barnett Fashion Agency Ltd v Nigel Hall Menswear Ltd  EWHC 978 (QB) a commercial agent claimed compensation from a designer for termination of its agency. However, the agency had been granted to a partnership and not to the company in which the partnership was now incorporated. That company’s claim was doomed from the outset,
4. Again, don’t prejudice rights
However, as it happens, the solicitors to the designer wrote to the company (not the partnership) in 2005 to terminate the agreement. The court recognised that the letter should have been addressed to the partnership. The company tried to rely on estoppel by convention to argue that that letter prevented the designer from claiming it did not have a contract with the company. That failed, but the point remains – there is risk in being unclear, even in mere correspondence, as to which rights are claimed and which are not.
5. Make any claim on time
Ultimately, the court held that, because the partnership and the designer both treated the 2005 solicitor’s letter as terminating the contract between them, the claim was out of time.
6. Be the effective cause
Engagement letters must identify precisely and clearly the circumstances in which the success fee is payable. In the context of agents’ commissions, the seemingly endless development of the law (itself illustrating the unwillingness of clients to pay agents) underlines that, in the absence of an express term, the agent must actually cause the sale if he is to be paid.
7. Clear conditions of payment
In Glentree Estates Ltd v Holbeton Ltd  EWCA Civ 755 the court noted that, in the absence of an express term, being “an” effective cause of the transaction completing may be insufficient. It is likely that the courts will expect you to be “the” or “the only” effective cause.
The conditions of payment must also identify what performance is expected to what standard. Is the success fee affected by the involvement of other advisers? Express words discounting (or including) such influences will help to avoid litigation.
Is the success fee triggered by completion or merely by exchange? In Foxtons Ltd v (1) Desmond O’Reardon (2) Diana O’Reardon  EWHC 2946 (QB) an agent was entitled to commission on finding a purchaser even though completion had not taken place; the remuneration was clearly payable on exchange.
I have seen a corporate finance advisers’ success fee which was payable only on the sale of the shares without reference to a sale of the business. In Estafnous v London & Leeds Business Centres Ltd  EWCA Civ 1157 an agent was due commission on the sale of a property. The court confirmed that that there was no liability to pay any commission when the transaction was structured as a sale of the company which owned the property.
In Christie Owen & Davies PLC v Raobgle Trust Corp  EWCA Civ 1151 a business sale agent had to go to the Court of Appeal to prove that the introduction to the seller of an individual who subsequently became one of three in a partnership which bought the business entitled it to its commission. A better agreement would have saved at least two trips to the court.
If your success fee is significant, make sure you spend a significant amount of time to ensure it is clear how much is payable, when and why. Time spent getting that right will be cheaper than any dispute or non-payment.
Mark Lucas is a partner at Barlow Robbins LLP
Image credit: Shutterstock
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