Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE HON. MR JUSTICE MALES
Between :
EDMOND DE ROTHSCHILD SECURITIES (UK) LIMITED | Claimant |
- and - | |
EXILLON ENERGY PLC | Defendant |
Mr Andrew Twigger QC and Mr Seth Cumming (instructed by Stephenson Harwood LLP) for the Claimant
Mr Stephen Midwinter (instructed by PCB Litigation LLP) for the Defendant
Hearing date: 27th June 2014
Judgment
Mr Justice Males :
Introduction
The issue for determination on this application for summary judgment is whether the claimant’s right to payment of a “success fee” under the terms of an Engagement Letter dated 25 January 2013 by which it agreed to provide services to the defendant is conditional on proof that its activities were an effective cause of the success in question being achieved.
The circumstances in which this issue arises are not in dispute and can be stated briefly as set out below. The issue is one of construction of the Engagement Letter. Neither party suggested that any additional background evidence would be relevant. Although the issue arises on an application by the claimant for summary judgment, the parties agreed that I am in a position to and should decide the issue one way or the other.
The facts
The claimant (“Rothschild”) is an English company which provides corporate advisory services.
The defendant Exillon is an energy company registered in the Isle of Man and listed on the London Stock Exchange. It has oil producing interests in Russia.
In January 2013 Exillon had a shareholder called Worldview Capital Management, with a shareholding of about 12%. Worldview had made public criticisms of the board of Exillon and had indicated its intention to requisition an extraordinary general meeting to remove the chairman of the board from office and to appoint three of its own nominees to the board.
The board of Exillon regarded the activity of Worldview as disruptive and engaged Rothschild to assist it in dealing with the situation, both in relation to the forthcoming EGM and more generally. In summary, Rothschild’s task was to “develop and implement a strategy to persuade Worldview to agree to withdraw from activism against Exillon”.
Rothschild was to be paid a retainer for its services at the rate of US $50,000 per month together with a success fee of US $500,000 (less any monthly payments received) if certain events occurred, one of which was that Worldview reduced its shareholding in Exillon below 5%.
Rothschild provided services to Exillon in early 2013 including the preparation of some shareholder circulars.
The EGM took place on 19 March 2013 and the Worldview motions were resoundingly defeated. Thereafter Rothschild continued to provide some services, but ceased to carry out any such work in about May 2013. It has been paid its retainer for four months, a total of US $200,000.
Although there appears to have been no formal termination of Rothschild’s services, the parties agreed that the agreement could be treated as having been effectively terminated at this time. The precise date of termination does not matter.
Thereafter, in the autumn of 2013, Exillon received two bids from third parties to take over the company. It decided that, in light of these bids, the company should undertake a formal auction process. At some time during the auction process, on or around 18 November 2013, Worldview sold its shareholding in Exillon to one of the potential bidders in the auction process and made a public announcement that it had done so.
The issues
It is Exillon’s case that Worldview sold its shares as a result of the favourable price that was on offer as a result of the auction process, and that this had nothing to do with the work done by Rothschild which had ceased some five or six months before. If necessary, Rothschild says that it will dispute this and will contend that its work was an effective cause of the sale of Worldview’s shares, although it has not yet pleaded any case to that effect or indicated what it might be. If it were able to plead a case which has a real prospect of success, that would raise an issue which would have to be tried. This application falls to be decided on the assumption that Exillon’s case is correct. Rothschild contends that on the true construction of the Engagement Letter it is entitled to a success fee of US $300,000 (US $500,000 less the retainer payments already received) regardless of whether it was an effective cause of the sale of Worldview’s shares.
The Engagement Letter
The Engagement Letter was written “to set out the basis on which [Rothschild] will act as exclusive financial advisor to [Exillon] in relation to the proposed shareholder requisition by [Worldview]”. Clause 1 identified the “Transaction” for which Rothschild was engaged:
“1. The Transaction
The contemplated Transaction is to advise Exillon in its response to the proposed shareholder requisition and to develop and implement a strategy to persuade Worldview to agree to withdraw from activism against Exillon, which may include Worldview ceasing to be a significant shareholder in the Company. Both the Company and [Rothschild] acknowledge that during this Transaction the nature of the situation may change and both the Company and [Rothschild] agree that, should that occur, they will discuss in good faith at such time and agree any revisions to the Engagement as may be appropriate.”
A list of the services to be provided by Rothschild was set out in clause 2.
Clause 3 dealt with the payment to which Rothschild was to be entitled:
“3 Fees and expenses
In consideration for the services set out herein, the Company agrees to pay to [Rothschild] a fee payable as follows:
a) a retainer of $50,000 per month, payable from [Rothschild’s] appointment (the date of this letter) and on the monthly anniversaries thereof, continuing for a minimum of 3 months or until the [Company’s] EGM, whichever is later;
b) a success fee of $500,000, net of the retainers paid under (a) if a resolution to the issues posed by Worldview’s requisition has been achieved, such achievement being assessed because one or more of the following has occurred:
i. Worldview has indicated a willingness to cease hostilities;
ii. the prospect of future Worldview action is agreed between the Board and [Rothschild] to be remote;
iii. Worldview has reduced its shareholding in the Company to below 5%;
iv. a strategy has been developed that will be/can be implemented such that the negative impact of future Worldview action is agreed between the Board and [Rothschild] to be negligible; and
v. The Company has been able to successfully launch its proposed bond issue; …
The Company agrees to reimburse [Rothschild’s] reasonable out-of-pocket expenses (including legal and travelling expenses) incurred in connection with the Transaction. Such fees, costs and expenses will be payable within 10 days of [Rothschild’s] invoice and irrespective of whether the Engagement is completed.”
As already noted, the monthly retainer was paid for four months, one month more than the minimum provided by clause 3(a). The claim in this action is made pursuant to clause 3(b)(iii). There is also a small and non-controversial claim for reimbursement of expenses.
Clause 7 provided:
“7 Exclusivity
The Company agrees that [Rothschild] has the exclusive right to act as its financial advisor in connection with the Transaction. If, notwithstanding the termination of this agreement, the Company completes the Transaction within a period of eighteen months from the date of such termination, the appropriate fee set out in Clause 3 above shall be payable to [Rothschild].”
The reference to “the appropriate fee set out in Clause 3” was a reference to the “success fee”. The parties agreed that the eighteen month period referred to in the clause was to be taken as still running in November 2013 when Worldview sold its shares so that, subject to the issue of effective cause, Rothschild would be entitled to the success fee pursuant to this clause.
Finally, clause 14 dealt with termination and its consequences:
“14 Termination
This agreement may be terminated by the Company or [Rothschild] with 48 hours’ written notice to each other. However, … [Rothschild’s] right to fees, expenses reimbursement and exclusivity as set out in Clauses 3 and 7 will survive any such termination and continue to exist to the benefit of [Rothschild].”
The parties’ submissions
Mr Andrew Twigger QC for Rothschild submitted in outline that:
The five events listed in clause 3(b) define when “a resolution to the issues posed by Worldview’s requisition has been achieved”, so that the “success fee” is then payable without further inquiry.
While some of those events contain elements of subjectivity, the event defined by paragraph (iii) (providing that “Worldview has reduced its shareholding in the Company to below 5%”) is clear and certain and has occurred.
Clause 3(b) is expressed in the passive voice (“a resolution … has been achieved”) and does not require that Rothschild should have achieved this result by its efforts.
Accordingly there is no need, and no scope, to imply into clause 3 (or to read it as containing) a requirement that Rothschild should be an effective cause of the defined events.
Support for the absence of any such requirement is derived from clauses 7 and 14, which provide for an entitlement to a success fee even if the “success” in question is only achieved some considerable time after termination of the agreement, at a time when Rothschild’s work is unlikely to have constituted an effective cause of the event in question.
Mr Stephen Midwinter for Exillon submitted, again in outline, that:
The Engagement Letter is a contract of agency.
There is a general principle in contracts of agency that, subject to any special terms or other indications in the contract, an agent’s commission on a transaction to be brought about is dependent on the agent being an effective cause of the transaction (see e.g. Bowstead & Reynolds on Agency, 19th Edition, Article 57).
To construe clause 3 as entitling Rothschild to a success fee where Rothschild is not an effective cause of the event in question would provide Rothschild with a windfall; this would flout business common sense (see per Lord Clarke in Multi-Link Leisure Developments v North Lanarkshire Council [2010] UKSC 47 at [45]).
The events listed in paragraphs (i) to (v) of clause 3(b) are the events which define “success” but do not define what part Rothschild must have played in the achievement of that “success” in order to be entitled to payment of the success fee – for that, one must look to the general principles set out at (a) to (c) above, so that Rothschild must be an effective cause of the “success” in order to qualify for the payment.
Even if this is not the only possible meaning of clause 3, it is at least a possible meaning and if that is so, it should be adopted, in part because it reflects business common sense and in part because of the contra proferentem rule.
Clauses 7 and 14 of the Engagement Letter are at best (from Rothschild’s point of view) neutral.
Decision
Save that I agree with Mr Midwinter that Rothschild derives no real assistance from clauses 7 and 14 which are capable of operating equally well on either party’s construction, I accept Mr Twigger’s submissions as summarised above. In my judgment this is the natural meaning of clause 3(b)(iii). That natural meaning is powerfully supported by the considerations (a) that it will generally be difficult for Rothschild to prove that its work constituted an effective cause of a sale of Worldview’s shares even if that is in fact the case and (b) that it does not matter to Exillon why Worldview decides to sell its shares, what matters is simply that it has done so.
As to the difficulty of proof, the premise for the Engagement Letter was that Worldview was viewed as a hostile party whose co-operation in explaining a decision to sell its shares was unlikely to be available. The parties must therefore have contemplated that it would often be difficult, and might well be impossible, to tell whether a decision by Worldview to sell its shares was influenced to a greater or lesser degree, or indeed at all, by any strategy devised by Rothschild and that, even if Rothschild’s strategy played a part, it might well be impossible to evaluate how significant a factor that had been. No disclosure from Worldview would be available and the only potential witnesses (the directors or senior management of Worldview) would be unlikely to co-operate. To construe the clause as limiting Rothschild’s right to a success fee to a case where it had been an effective cause would therefore condemn the parties (at best) to a dispute which it might be very difficult to resolve (the costs of which could easily be disproportionate to the relatively modest sum at stake) and (at worst) to the injustice that even though Rothschild’s work had in fact played a significant part in what might be a multifactorial decision, a claim to the success fee which Rothschild had therefore earned might well fail for want of proof.
Mr Midwinter ripostes that any agent whose right to payment is dependent on proof that he was an effective cause of the transaction will face similar difficulties of proof, but I do not agree. The typical agent will be able to point to his dealings with the third party and to the fact that the third party has concluded a transaction with his principal. Even if there is no disclosure or witness evidence from the third party, the agent’s and the principal’s dealings with that third party together with evidence about the transaction finally concluded will be before the court. In this case, however, these factors are not present. There need be no dealings at all between Rothschild and Worldview, Rothschild’s role being to provide advice to Exillon and to develop a strategy. There will be no concluded transaction between Exillon and Worldview, but only a sale of shares by Worldview to a third party in circumstances and for reasons which will often be largely unknown.
As for Mr Midwinter’s submissions summarised above:
I do not accept that the Engagement Letter is a contract of agency. It is a contract to provide strategic and financial advice. It does not contemplate, as a typical agency contract would, that Rothschild will introduce or seek to introduce counterparties who will enter into contracts with Exillon. While it may be said in general terms that Rothschild is performing some services on behalf of Exillon, and therefore that the Engagement Letter has something in common with contracts of agency, I think it preferable to focus on the terms of the contract rather than to debate what label should be attached to it.
In any event the general principle that an agent’s (or equivalent person’s) right to commission is dependent on the agent being an effective cause is subject to any special terms or other indications in the contract, as Mr Midwinter acknowledged. Cases on both sides of the line were cited to me, but ultimately each was a decision on its own facts. Here there are such indications, in my judgment, for the reasons given above.
I do not accept that Rothschild’s construction provides it with a windfall or that it is contrary to business common sense. Indeed, for the reasons given above, to limit Rothschild’s right to a success fee to cases where it can prove that it was an effective cause of the sale of the shares would run a real risk that a valid claim would fail for want of proof, in which case it would be Exillon who was provided with a windfall. In circumstances where the desired event (the sale of the shares) has in fact been achieved, I see nothing contrary to business common sense in entitling Rothschild to its fee without requiring the parties to argue (often at considerable cost) about whether it was an effective cause of that event. On the contrary, there is much to be said for simplicity and certainty.
In my judgment, for the reasons already given, clause 3(b) does require Exillon to pay a success fee if “a resolution … has been achieved” (passive voice). The events listed in paragraphs (i) to (v) define what is meant by the achievement of such a resolution. There is, therefore, no need to resort to general principles as to “effective cause” to discover when payment must be made.
Despite Mr Midwinter’s attractive submissions, business common sense does not assist Exillon. To my mind Rothschild’s construction does make sense and in any event business common sense is something of a double edged sword in this case for the reasons given above. Similarly, there is in my judgment no ambiguity in this case and therefore no scope for the contra proferentem rule.
Conclusion
Rothschild is entitled to summary judgment for the sum of US $300,753.11 claimed.