Watersheds v Simms

This is an appeal brought by the Claimants, Watersheds Limited, with the permission of Eady J against the dismissal by Master Foster of their application for summary judgment. This is a contractual dispute for fees arising out of an agreement between Watersheds and the Defendant, Christopher Simms, which they entered into on 10 December 2004. By that contract Watersheds agreed to provide services to the Defendant to raise capital for a waste business and then to assist him in its sale. The business concerned was Wastecom Limited. It was eventually sold to Shanks Group plc, for a figure of at least £4.2m.

Master Foster was faced with an unusual set of competing submissions. Watersheds argued that subject to quantum, there could be no defence to its claim. By contrast the Defendant sought to strike out the claim on the basis that it was bound to fail. Both arguments proceeded from the respective parties’ construction of the contract. Master Foster considered that Watersheds’ arguments were to be preferred, but that he could not dismiss the Defendant’s counter arguments as bound to fail, so he ordered a trial. There was a subsidiary argument run by the Defendant before the Master, to the effect that the agreement had been terminated. That argument has not been repeated before me.

Before turning to the contract itself, a little more by way of introduction is perhaps required. Watersheds is an organisation that provides corporate services, in particular, it would appear, in the buying and selling of businesses and in the raising of capital. The Defendant is a businessman who had a long-standing relationship with a director of Watersheds called Andrew Cuddihy whom he knew and trusted. As the Defendant says in his witness statement, the work that he engaged Watersheds to do had two phases. The first was to act as financial advisor for the raising of finance and the second was to project manage the sale of the business.

The essence of what the Defendant wished to do was to buy into a business, raise capital for expansion and then sell on at a profit. The Defendant’s statement explained in paragraphs 4 and 5 a little of what happened as follows:

“4.

The first stage of the work proceeded satisfactorily. Watersheds assisted in raising finance. They sent their invoice on 27 May 2005 and my solicitors immediately paid it upon completion by telegraphic transfer on 27 May 2005.

5.

In April or May of 2006, I learned that Mr Cuddihy was leaving Watersheds when I received a call from him regarding a non-related property matter. During this conversation I asked him whether he would be interested in taking up employment with me and helping me to deploy the business plan which we had built together. He was not. He wanted to pursue other work, which would allow him to see more of his family. He said that he did not think that I needed anyone who was as well qualified and expensive as him for the work which was required. He thought I was good at what I did and understood the business better than he did. Since, as I have explained, he was my reason for choosing Watersheds I said to Mr Cuddihy that if he did leave, as I understood he would, I would proceed alone. I said I would not use Watersheds because I did not know or trust anyone else there.”

The date on which Mr Cuddihy left Watersheds is not in evidence before me, but it is clear that the Defendant proceeded as he suggested he would. There was no further communication between the Defendant and Watersheds until November 2007, when they offered further assistance. At the time the Defendant was abroad. When he returned to the United Kingdom he was devoting his energies to the sale of the business with the assistance of his solicitors and so, it would appear, did not even open Watersheds’ letter until he had completed that sale to Shanks. The sale was completed by 31 January 2008. The Defendant says that he received just short of £4.2m for the business, not the £6m referred to in a press release issued by Shanks. The difference may be accounted for by performance related payments, which had been agreed as part of the sale, but which the business had not since achieved. Therein lies the dispute about quantum, because the remuneration provided for by the agreement was a percentage of the sale price.

The Defendant did not involve Watersheds in the sale of the business at all. It is therefore common ground that Watersheds did not do any work in connection with the sale and was not “the” or even “an” effective cause of that sale. That formulation has resonance, because the Defendant’s case is that there should be implied into the remuneration clause of the contract, to which I will shortly turn, a term that allows for payment only when Watersheds carry out work, which was an effective cause of the sale. In advancing that argument the Defendant relies upon a series of cases involving estate agents.

The Contract

On 5 March 2006, Watersheds sent the Defendant an invoice for £176,400 plus VAT, being 2.94 per cent, plus VAT, of the £6m sale figure referred to in the Shanks press statement. The terms of engagement went on to define exhaustively the meaning of the word “consideration”, to take account of the varied and sometimes imaginative ways in which payment for a business can be made. They then continued:

“Watersheds becomes entitled to a fee if:

i.

a disposal of the whole or part of the share capital or business or assets of the company acquired to a purchaser introduced by us is completed by the Client and/or the company at any time, during or after the Engagement Period; and/or

ii.

any disposal of the whole or part of the share capital or business or assets of the company is completed by the Client and/or the company during the Engagement Period.”

The remainder of the terms do not need to be set out.

Mr Nicholls, who appeared on behalf of the Defendant, in formulating the implied term for which he contends, agreed that it was best formulated by adding to sub-clause (ii) of the entitlement clause, words to produce the following result:

“Any disposal of the whole or part of the share capital or business or assets of the Company is completed by the Client and/or the company during the Engagement Period for which work carried out by Watersheds was an effective cause.” (emphasised words are the additional words)

The terms of business contained the provisions of the agreement dealing with termination. Leaving aside automatic termination resulting from insolvency and the like, the provisions were as follows:

“8.

Both Watersheds and the Client shall be entitled to terminate the Engagement for any reason and at any time by 14 days written notice to the other.

9.

Such termination will be without prejudice to the accrued rights of each party. In the event that Watersheds terminates, Watersheds will thereby forego the right to be paid any fee to which it would, but for such termination, have become entitled during the remainder of the Engagement.

10.

In the event that the Client terminates:

(1)

such termination shall;

(a)

relieve Watersheds of the obligation or right to render any further performance; but

(b)

have no effect whatsoever on Watersheds’ right to be paid any fee to which it would, but for the termination, have become entitled during the remainder of the Engagement or, if the Engagement is divided into Phases, during the remainder of the Phase in which the termination occurred; and

(2)

Watersheds shall be entitled:

(a)

during the remainder of the Engagement or Phase, to retain the Client’s Papers as security for its fees; and

(b)

at any time, to be provided with such information and/or papers as it may request to enable it to see whether any fee had become payable and, if so, in what sum and with effect from what date.”

Neither party suggested that there was any useful evidence that might be called to illuminate further the meaning of the contract. The essence of Watersheds’ submission was that the contract, read as a whole, was carefully crafted to reflect the intention that it should receive its fee if the business was sold on during the seven year period, whether or not the Defendant had required it to provide any services and whether or not its input was “the” or “an” effective cause of the sale. Conversely, the Defendant’s case reduces to the proposition that it cannot have been the intention of the parties that Watersheds would receive a fee if, in fact, it did not work in pursuance of the phase II objective and was not at least an effective cause of the sale. The contract was indistinguishable, for the purposes of implying the term for which the Defendant contended, from that of an estate agent agreeing to act in the sale of real property.

Mr Zacaroli QC, who appeared for Watersheds, emphasised that this was not a simple agency contract for the disposal of property. This was an agreement for a seven year retainer, the ultimate object of which was to facilitate the sale of a business, which the Defendant hoped to build into a valuable asset. Whilst the phases represented different aspects of the advice and assistance Watersheds agreed to provide to the Defendant, they were steps towards the same end. Both the Defendant and Watersheds were contemplating a long-term goal which would provide substantial rewards to both if achieved. The funding was necessary to establish the business and to enable it to grow. The fact that the agreement was for seven years was a reflection that the process of establishing a good business attractive to potential buyers would not be completed overnight. In fact, as we have seen, the Defendant’s entrepreneurial skills enabled him to sell on an attractive package within three years of the agreement and only two and a half years of the finance being raised.

Mr Zacaroli argued that the remuneration clause was clearly drafted to ensure payment of the fee whether or not the Defendant in fact used Watersheds to project manage the process. He contrasted sub-clauses (i), which provides for payment whenever the business is sold if the ultimate purchaser was introduced by the Defendant, with sub-clause (ii) where the need to have introduced the purchaser is not required for payment upon a sale within the life of the retainer. He also relied upon the termination clauses. They enable either party to terminate the agreement at any time on short notice. They contemplate that the client, that is the Defendant, would remain liable for fees that would accrue during a period, which may be many years, and in circumstances where Watersheds may itself be entirely ignorant of whether a fee is payable without being provided with information by the client.

Mr Nicholls submitted that the agreement did not give a right of exclusivity to Watersheds, and that in respect of both phases it contemplated that Watersheds were expected to do some work, albeit at the election of the Defendant. In this instance the Defendant did not ask Watersheds to do any work in connection with Phase II, because in due course he did it himself with the help of his solicitors. The true intention of the parties, submitted Mr Nicholls, could not have been that Watersheds should receive its fees in these circumstances when it had done nothing. Furthermore, even the doing of some work pursuant to the agreement in connection with Phase II, which were not the facts of this case, would be insufficient to earn the fee.

Mr Nicholls was at first inclined to argue that Watersheds would have to be the effective cause of any disposal. That was the pleaded case, which reflected the language of many of the estate agency authorities. He realistically accepted that the nature of the arrangement for phase II; that is project management in conjunction with the Defendant without even the need to have introduced the eventual purchaser, could not be reconciled with the need for Watersheds to be the effective cause. He submitted instead that there should be the implied term that Watersheds must be an effective cause of the sale. Mr Nicholls submitted that the vice which had led the courts readily to imply such a term in estate agents’ contracts, namely that the seller may otherwise end up liable for two or more multiple commissions, was here present by analogy.

The Legal Principles

The parties relied upon three cases to illustrate the principles in play. The first was Brian Cooper & Company (A firm) v. Fairview Estates Investments Limited [1987] 1 Estates Gazette Law Reports 18, a decision of the Court of Appeal. The case concerned a development of commercial property, for which the Plaintiff, Coopers, was retained to find a tenant on the following term offered by the Defendant developer:

“We confirm that we are pleased to offer a full scale letting fee to your company should you introduce a tenant by whom you are unable to be retained, and with whom we have not been in previous communication and who subsequently completes a lease.”

Coopers introduced a company as a potential tenant. Some initial interest was evident, but that interest went off the boil and the company made clear that it did not intend to proceed. The development was in due course completed. Some months later a senior American executive of the company determined that new office accommodation should after all be found, and a search began using the company’s own employees, who were wholly ignorant of Coopers’ earlier involvement. An agent was appointed by the company, he identified the premises, and a lease was agreed. On becoming aware of this, Coopers sought its commission from the developer. It was accepted by the developer that on the literal interpretation of the agreement a fee was payable to Coopers, but on its behalf it was suggested that it should be made subject to an implied term that Coopers were only entitled to the commission if they were at least an effective cause of the transaction. Woolf LJ, as he then was, gave the only reasoned judgment. He reviewed the law and concluded:

“When the cases to which I have already referred and the other cases upon which Mr Chadwick relies are examined, and six of the decisions are decisions of this court, it is clear that the court very readily infers an implied term either that the agent is required to be an, or the effective, cause of the subsequent purchase. This is not surprising when it is remembered that in the ordinary way and in particular in the case of agents retained by private individuals to sell their homes, what the agent is being employed to do is to find a prospective purchaser or a prospective tenant who actually purchases or takes a lease. From the viewpoint of the vendor in such a case, the estate agent has not fulfilled his engagement unless he is an effective cause of the sale of the tenancy. As Viscount Simon, L.C.in the leading case on estate agents’ commission, Luxor, Eastbourne Limited and ors v. Cooper [1941] A.C. 108, at page 117 says of the role of an estate agent:

‘He is commonly described as ‘employed’: but he is not employed in the sense in which a man is employed to paint a picture or build a house, with the liability to pay damages for delay or want of skill. The owner is offering to the agent a reward if the agent’s activity helps to bring about the actual sale.’”

On behalf of Coopers it was submitted that developers were in a different position from private sellers, because in particular they do not rely exclusively on the agent’s efforts, but have their own sales and marketing staff. It was thus in that case the introduction of a potential tenant with whom the developer had not had previous contact which was important, rather than any further effort on the part of the agent. Woolf LJ continued at page 8:

“In particular he refers to another passage in the speech of Viscount Simon at page 119 where he says:

‘There is, I think, considerable difficulty, and no little danger, in trying to formulate general propositions on such a subject, for contracts with commission agents do not follow a single pattern and the primary necessity in each instance is to ascertain with precision what are the express terms of the particular contract under discussion, and then to consider whether those express terms necessitate the addition, by implication, of other terms... in contracts made with commission agents there is no justification for introducing an implied term unless it is necessary to do so for the purpose of giving to the contract the business effect which both parties to it intended it should have.’

He also refers to passages in the speech of Lord Russell at page 124 and in Lord Wright’s speech in particular at page 130.

Adopting the approach laid down in these speeches in the House of Lords, but having as I must confess changed my mind more than once in the course of the admirably arguments which were presented on both sides in this court, I have ultimately come firmly to the conclusion that Mr Morrison’s submissions and the decision of the learned judge are correct. I can see no necessity in this case to imply a term. On the contrary, I regard the relevant language as being inconsistent with implication of a term imposing an additional implied requirement that the estate agent must be at least an effective cause of the lease being granted.”

That approach was reflected in Favermead Limited v. FPD Savills Limited & Ors [2005] EWHC 626 Chy. It arose in circumstances far removed from those of the case with which I am concerned. Favermead applied for an injunction to restrain the Defendant estate agents from presenting a winding up petition based upon non-payment of £1.175m of commission, said to be due in connection with the sale of a house in which Favermead had a long-leasehold interest in Kensington Park Gardens. The material condition in that case was:

“I will pay the agreed fee on the basis that one of you introduces an applicant who subsequently purchases the property from us. If I procure a purchaser through my own endeavours then you will be entitled to a reduced fee of 20% of the £1 million. I am not bound to pay fees to you under any other circumstances. The content of this letter is our sole agreement”.

The eventual sale of the property was to a company controlled by the Mittal family, whose home the house was apparently to become. Favermead argued that there was an implied term of the sort considered in Cooper. Savills, the estate agents, resisted that contention. Patten J, before whom the case was argued, was concerned with whether the question was an arguable one, because he was considering the grant of an injunction. He explicitly referred in the course of his judgment to the lack of evidence before him necessary to determine the point, but having cited extensively from Cooper he said this:

“It seems to me that the modern approach, and the one that ought to be adopted in this case, is to look at the language against the relevant factual background and decide whether in that context the language which the parties have used does or does not require the implication of the relevant term.”

That may be thought to be a useful distillation of the principle that was articulated by Viscount Simon and explained by Woolf LJ in the Cooper case. It is a proposition from which neither party before me dissents.

The final authority to which my attention was drawn is the County Home Search Co (Thames and Chilterns) Limited v. Cowham [2008] 1 WLR p 909. The facts were that the Defendant engaged County Home Search to find him a property for purchase. There was a registration fee payable, together with a percentage on exchange of contracts within a specified period, on a property which had been introduced to the Defendant by County Home Search. There was a deeming provision to the effect that a property was “introduced” if the Defendant had either received particulars of the property from County Home Search, directly or indirectly, or from any estate agent with which County Home Search had regular contact.

The Defendant exchanged contracts “privately” on a property, which had been mentioned in a telephone call between the parties and which was on a list delivered to the Defendant. However, County Home Search had taken no other steps in relation to the property which the Defendant suggested had been introduced to him by his planning consultant. The question at trial was whether by analogy with selling agency contracts, a term relating to “effective cause” was to be implied. The Recorder, before whom the matter was tried, considered that a term to that effect would be inconsistent with the express terms of the contract. The Court of Appeal’s conclusion as distilled in the headnote was this:

“That unless the contract indicated otherwise a term would be implied into a home buyer's agency contract that the agent would not be entitled to commission on a transaction to be brought about unless his services were the effective cause of the transaction being brought about; but that to imply such a term in the present case would be inconsistent with the express terms of the contract, which imposed an obligation to work with the client to find a property without requiring that the agent should be an effective cause of the transaction and, by introducing the concept of a deemed introduction, contemplated the possibility of commission falling due when there had been no true introduction by the claimant.”

Longmore LJ, with whom the other members of the court agreed, reviewed the relevant law and set out his conclusions between paragraphs 14 and 19 of his judgment:

“14.

The present day rationale for the implication of a term that the agent should be at least an effective cause of the transaction is thus, mainly at any rate, the need for the client to avoid the risk of having to pay two sets of commission. This is consistent with the older authorities in which the agent was claiming a second commission when his principal, who had already paid a commission for the procuring of a tenant, was asked to pay a second commission on the purchase of the property by the tenant at a later date, see the decision of the House of Lords in  Toulmin v. Millar  (1887) 12 App Cas 746 per Lord Watson and Millar, Son & Co v. Radford  19 TLR 575 itself in 1903.

15.

It is common knowledge that persons desiring to sell their property do often, as Woolf LJ said, engage more than one agent. But for my part, I doubt if it is very common for a person who desires to buy a property, as opposed to sell a property, to engage more than one purchasing agent, at any rate if the first engagement is on some such terms as the present contract. In the first place, under the contract with which we are concerned, the client has to pay £500 down and in the second place he has to pay the expenses and disbursements of the agent if the agreement expires without any transaction having been achieved. Thirdly any work done by a second agent would be bound largely to duplicate the first since sellers put their houses on the market in a semi-public manner whereas buyers of houses have no similar semi-public market and have to be sought out.

Similarity of selling agency contracts and purchasing agency contracts

16.

There are undoubted similarities between the normal estate agent's contract and purchasing agency contracts but for the reasons given in the last paragraph there are also likely to be differences which may well be reflected in the terms of the purchase agency contract. If they are so reflected it may well be that a court will conclude that the term, normally to be implied into a selling agency contract, will not be so readily implied into a purchasing agency contract. The question, however, still is whether there is any inconsistency between the express terms and the term which the law would otherwise imply. This was, I think, the approach of the recorder who said both that the fourth sub-paragraph of clause 3 was inconsistent with the proposed implication and that the contract contemplated that there be no other buyer's agents so that the rationale for the effective cause implication was missing.

Conclusion on implied term

17.

I have already given some reasons for agreeing with the second strand of the recorder's reasoning. The contract did not prohibit the employment of a second agent but, in so far as its terms would inhibit any sensible person from doing so, it is fair to say that the contract contemplated that there should be no other buyer's agents. The rationale for the implication (that the principal should not have to pay twice) is, therefore, absent.

18.

Whether that would be enough on its own is perhaps doubtful since the strength of the implication in the selling agency contracts has to be acknowledged and the two kinds of contracts are certainly very similar.

19.

But I also agree with the recorder that the express terms of the contract are inconsistent with any implied requirement that the agent be an effective cause of the transaction. In the first place clause 2 imposes an obligation to work with the client to find a property without requiring that the agent should be an effective cause of the transaction. More importantly, however, the fourth sub-paragraph of clause 3 is, as the recorder said, inconsistent with the implied term. That is because of the concept of a "deemed" introduction; if the contract goes to the trouble of defining the concept of the requisite introduction by reference to matters which would otherwise not constitute an introduction at all (eg the receipt of particulars from an agency other than County Homesearch itself), it must follow that there may be cases where commission is due following a situation where there is no true introduction by County Homesearch at all. If even the limited causation inherent in an introduction is unnecessary, it makes no sense to say that nevertheless there must be an effective cause before the agent can recover his commission. The deeming provision would then be written out of the contract. The recorder did not spell this out in so many words but I have little doubt that it was this he had in mind when he said that the implied term was "flatly inconsistent" with clause 3. I agree with him.”

The conclusion that I have reached, applying the principles articulated in the textbook and the cases cited to me, is that there is no implied term of the sort contended for by the Defendant. In my judgment this contract is not directly analogous to an estate agent’s contract with a seller or a property finder’s contract. It was a contract which engaged Watersheds for a period of seven years. That was in recognition that the process of building and then disposing of the business or its assets may well have been a protracted one. The contract contemplated that the parties would work together, with Watersheds responsible for project management, a process that did not involve the necessity of identifying or introducing the eventual successful prospective purchaser.

The clause in the terms of engagement concerned with entitlement to fees draws a clear distinction between the Defendant’s liability to pay in cases where the purchaser is introduced by Watersheds and when it is not. It is, in my judgment, quite impossible to imply into the first aspect any suggestion that Watersheds must be an effective cause of the eventual sale. The introduction of the eventual purchaser is enough. That is because the nature of the agreement envisages that such an introduction might take place years before any serious negotiations or work which lead to an eventual sale. That itself might be after the seven year engagement period has come to an end. If it is inconsistent with the express terms and nature of the agreement to imply the term into that part of the clause, it is difficult to see how it can be implied into the other. Entitlement to a fee if a sale is achieved during the seven year period is not even subject to the need to have introduced the client and it applies to any disposal of the business with no limitation. It provides, as it seems to me, protection to Watersheds in circumstances where the Defendant chooses to exclude it from the process even if he has not formally terminated the agreement. If the Defendant were right, it would also have the effect of rendering the termination clause nigh on redundant.

Furthermore, despite Mr Nicholls' submissions to the contrary, I consider that the termination clause supports the argument that Watersheds does not need to be an effective cause of the eventual sale to be entitled to its fees. The contract may be terminated at any time on 14 days notice and without any reason, good or bad. This is a contract which delivers remuneration to Watersheds only when money is raised, or when the company is sold. It is to be contrasted, for example, with an agreement for fees payable by the hour or by the day.

The Defendant’s suggested implied term would leave Watersheds vulnerable to receiving no fees, effectively, at the whim of the Defendant. Furthermore, if the Defendant’s construction were correct it would enable him to terminate, even after Watersheds had done much useful work, but relieve him of an obligation to pay fees unless that work turned out to be an effective cause of a subsequent sale. Additionally, the termination clause requires the Defendant to provide information to enable Watersheds to determine whether, and from when, a fee is payable. That is an obligation which is open-ended in time, and more consistent with there being no implied term.

I am also unable to accept the Defendant’s argument, attractively though it was put, that the implied term is necessary to protect him against the risk of paying double commission. It is true that the contract did not prohibit him from engaging someone else to provide similar services. But, in my judgment, its terms contemplated the strong likelihood that there would be no one else project managing the sale of the business during the currency of the agreement. If the Defendant chose to use someone else or indeed no one at all, he did so whilst remaining liable for the fees contemplated by the agreement.

For these reasons this appeal is allowed. Judgment will be entered for the Claimant with the amount due to be determined at a disposal hearing. I will hear counsel on any ancillary matters.