Corporate Insights | Corporate Advisor Retainers – Always Read the Fine Print!

Recently, the Queensland Supreme Court has dismissed a claim by a corporate advisor to be paid a success fee on completion of a client’s business sale [1].

The advisor (Findex) had signed an engagement letter with its client (DKSP) to assist in the sale of that business.  Although DKSP was eventually sold, the sale was outside the agreed time period for which a success fee would be paid.  Nevertheless, Findex attempted to claim the success fee, claiming it was the “effective cause” of the sale.  Findex also claimed (alternatively) DKSP had breached implied terms of cooperation and good faith in the business relationship.

Findex’s claim failed.  This decision illustrates the importance of carefully considering standard terms of engagement, as well as the difficulties in relying on an “effective cause” implied term in corporate advisory retainers.

Facts

Findex was an accounting and corporate advisory firm.  DKSP supplied aftermarket truck and bus parts. In 2016, Findex signed an engagement letter with DKSP to facilitate a sale of the business.

The letter included:

• an exclusivity period of 6 months;
• a success fee payable on completion of a sale within the exclusivity period; and
• an acknowledgment that a success fee would still be payable if DKSP completed a sale with any party that discussions were held with during the sale process, within 12 months from the end of the exclusivity period.

Findex prepared a list of potential buyers and facilitated negotiations for sale. Despite several rounds of discussions, no sale eventuated.  Findex did not undertake any further work on the sale of DKSP from July 2018.

In July 2018, DKSP resumed discussions with one of the potential buyers introduced by Findex (Bapcor).  Findex was not involved.  DKSP established a new data room based on a copy of the original data room established by Findex.  Bapcor eventually agreed to buy the business in November 2018, which completed in early December of that year.  Completion occurred about nineteen months after the end of Findex’s exclusivity period.

When Findex learned of the sale, it sent DKSP an invoice for a success fee of $1.4 million. DKSP refused to pay the invoice.

Findex’s claim to a success fee

Findex claimed an amount of $1.4 million as a success fee owing to it by DKSP, or alternatively as damages for breach of contract, on the basis that:

• the contract contained implied terms concerning DKSP to pay Findex a success fee;
• even though the sale to Bapcor occurred outside the period agreed in the engagement letter, the sale was effected through the efforts and agency of Findex.  In other words, Findex was an effective cause of that sale; or
• alternatively, DKSP breached implied duties of good faith and cooperation in the agreed retainer terms.  As a result, but for the termination of that contract, Findex would have facilitated and effected the sale.

Findex also argued that DKSP had terminated the Findex engagement when negotiations with Bapcor had recommenced, so as to avoid paying any success fee. However, the Court found that by the time DKSP was aware of the prospective new deal with Bapcor (July 2018), Findex’s engagement was already on a non-exclusive basis.

The Finding

Justice Cooper of the Queensland Supreme Court dismissed Findex’s claim, because no sale had been completed during the six month exclusivity period, or within 12 months of the end of that exclusivity period.

Justice Cooper also considered Findex’s claim that it was the “effective cause” of the sale.  Findex contended that the retainer included an implied term it would be paid a success fee in this case.  However, the Court rejected this because:

1. such an implied term could not operate independently from the express terms of the engagement letter;
2. it was not common or market practice that an “effective cause” term be implied into commercial agency contracts;
3. such a term was not necessary for the retainer to operate, and was inconsistent with its express terms; and
4. even if this term could somehow be implied, Findex was still not the effective cause of the sale to Bapcor. It was not enough to say the transaction would not have occurred without Findex’s introduction of Bapcor. Instead, Findex needed to demonstrate that it had continued to influence Bapcor in its decision to buy, or had brought about the ultimate sale. Also, DKSP was not required to notify Findex that sale negotiations had recommenced, or offer DKSP with an opportunity to effect the sale.

Conclusions

While it is common for Courts to find there is an implied contractual duty to cooperate, this finding demonstrates the scope of that duty is defined by what has been promised under the contract.  There is no general legal duty to ensure that one party obtains an anticipated benefit – in this case, the success fee.

For corporate advisors, this decision also shows the importance of carefully considering the operation of standard terms of engagement.  It is not sufficient to pin one’s hopes on an “effective cause” implied term, particularly when the retainer already expressly set outs when the advisor is entitled to a success fee.

Keypoint Law regularly advises M&A participants in relation to the legal aspects of a sale process, including advising on the terms of retainer letters by and with corporate advisers.

[1] Findex Corporate Finance (Aust) Pty Ltd v Don Kyatt Spare Parts (Qld) Pty Ltd [2022] QSC 100.