In Fenchurch Advisory Partners LLP v AA Ltd (formerly AA plc), the court considered a number of issues:
- Whether the parties had entered into a binding contract;
- If so, whether AA’s obligation to pay what is described as a ‘success fee’ was triggered; and
- If there was no binding contract, was there an implied contract or does Fenchurch have a restitutionary claim and, if so, to what sum is it entitled?
The case had a long, complex history, which is only summarised here. In essence, AA was in financial difficulty and was looking to potentially sell off the insurance side of its business in a proposal which became known as Project Zodiac. Fenchurch were instructed in this context to advise AA on Project Zodiac.
Fenchurch forwarded an engagement letter (“EL”) to AA for their approval and asked them to sign and return the agreement if they agreed it. In their EL, Fenchurch sought a ‘progress payment’ of £0.35 million, (which was deductible from the end success fee), a success fee of £4 million and a Value Creation Fee element of the success fee, which would depend on the value of any sale, and which Fenchurch wished to be uncapped.
Issues arose between the parties over some of the terms and wording within the retainer, over the point at which the success fee would engage, and AA also took issue with the success fee being uncapped. There then followed significant to-ing and fro-ing in correspondence between the parties in relation to the terms and fee arrangements within the proposed EL.
Whilst this was ongoing, Fenchurch undertook significant work advising on Project Zodiac on AA’s behalf. Around January 2020, AA’s Board effectively shelved Project Zodiac and so Fenchurch rendered a bill for the £0.35 million ‘progress payment’. Fenchurch also sought their success fee. AA responded advising that as there was no contractual agreement in place for Fenchurch’s fees, so no payment was due.
Fenchurch sued, arguing there was a binding contract as of November 2019 on the basis that the “legal” aspects of the retainer had all been agreed by that stage as the negotiations over the terms of the EL had concluded and only a few “commercial” aspects of the retainer, such as the uncapped success fee remained to be agreed. Alternatively, Fenchurch agreed that there was a binding agreement of the fee construct and the success fee trigger, even if some of the other terms were outstanding and so the only issue was whether the success fee was capped at £4 million or subject to no upper limit. Fenchurch also argued that AA’s post-contractual conduct was consistent with there being a binding contract in place.
AA argued that there was no binding contract because the parties intended that once the terms were agreed, the EL would be signed and only then would it become binding. They argued that Fenchurch could not argue everything had been agreed by November 2019, because they themselves had pleaded that some elements remained outstanding beyond that point. Further, they argued the success fee trigger was never agreed, was never discussed directly and formed no part of the agreed fee construct. Additionally, that the terms which remained outstanding were “highly material” to the agreement of the contract.
The court noted that essentially, both parties had the same essential understanding of the process involved in entering a binding contract: “they would agree all of the terms and then there would be a signed EL.” and that “there was never any suggestion that a binding agreement would come into being at any earlier stage.” The court also considered the outstanding issues were material to the contract and that there was “uncertainty about where to draw the line between what is agreed, and what is not”. Fenchurch’s arguments that parts of the retainer were binding could not, therefore, succeed. Accordingly, the court found there was “no binding agreement between the parties.”
The court then moved on to consider whether there could be said to be an implied contract between the parties.
Fenchurch’s argument in this regard was that it was “commercially absurd” that it would act on the basis that it did not expect to be paid. They argued that, by their conduct, the parties agreed that if the AA unilaterally withdrew from the negotiations, Fenchurch would be entitled to a reasonable fee for the work it had undertaken.
The AA argued that this argument could not succeed in circumstances where the parties intended to agree terms, but then failed to do so.
The court agreed with AA that the facts in this matter were not capable of giving rise to an interpretation of there being an implied contract as “it was never contemplated that AA would pay a “reasonable” fee. The parties envisaged agreeing the fee”.
The final point to consider was whether Fenchurch had a claim in restitution. Fenchurch’s position was that it was entitled to recover in restitution as AA had been unjustly enriched.
The court considered that it “is likely to order restitution where the defendant has received a benefit … as a result of the claimant’s services; or where the defendant has asked the claimant to provide services, or the defendant accepted them … when offered, in the knowledge that the services were not intended to be given freely.” The court also noted internal emails from AA in which their employee had said they believed Fenchurch’s fees “definitely payable morally” as being “relevant territory for a claim in restitution”. The court also took into account as a factor the quantity of work undertaken by Fenchurch on behalf of AA.
Taking all of this into account, the court considered it would be “unjust if the AA was able to take the benefit of the work done by Fenchurch without paying for it …”. It was then necessary to consider if the AA received any benefit of the work undertaken. The court determined that Project Zodiac was important to AA and the work undertaken by Fenchurch was of benefit. Accordingly, “… all the necessary ingredients for a restitution claim are present here.”
Whilst both parties accepted that Fenchurch would not be paid on an hourly charging structure, the parties disagreed as to the quantum of the restitution claim. Fenchurch argued that it has undertaken “the majority” of the work and should be entitled to around £1.6 million of the success fee element, whilst AA argued that because Project Zodiac did not proceed, the services provided by Fenchurch were of “negligible value”.
The court concluded that even if there had been a signed EL, the success fee trigger would not have been engaged, and so Fenchurch’s contractual entitlement would have been limited to £350,000 plus expenses of £16,276.06. Thus, this was the figure Fenchurch were awarded as restitution.
This case highlights the importance of parties ensuring that they have a retainer in place as soon as possible after being instructed, particularly with a new client. Only then can both parties have certainty in relation to what fees are to be paid and when.
