Payment of Commission Fees: Who bears the risk?
The issue of, if and when commission fees become due and payable, particularly following termination of a contractual retainer, has long been a difficult and thorny legal issue under English law. In a recent judgment handed down by HHJ Dight in ABI Insolvency v Deutsche Bank , the Court has provided welcome guidance on the issue. The case serves as a stark reminder for all parties to a commission arrangement of the importance of clear and unambiguous drafting, particularly in relation to the payment of fees (if any) following the termination of a contractual relationship between the parties.
AB Insolvency v Deutsche Bank was a case which, amongst other things, concerned the right to payment of a potential commission fee following the introduction in 2012 by a recruitment firm, Gibb Consultancy Limited (“GCL”), to Deutsche Bank (“Bank”), in respect of a senior executive candidate who was subsequently hired by the Bank in November 2013. The relevant framework agreement between the Bank and GCL had terminated on 1 January 2013. GCL went into compulsory liquidation in October 2013 and AB Insolvency (“ABI”), an assignee of GCL’s claim, sought to argue that the Bank had failed to make payment of the commission fee (to GCL) following the hire of the candidate.
Whilst the case raised a number of issues, for the purposes of this note, the key questions were:
- When does a commission fee become payable.
- Does a right to commission payment survive termination of a contract.
When does a commission fee become payable?
The key point of contention between the parties in this case was whether the commission was payable on introduction of the candidate by GCL, or on hire.
ABI argued that by making the introduction, GCL had done all that was required under the contract and the right to commission had arisen. The Bank contended that the question was one of construction, and on a strict interpretation of the contract, no right to commission had arisen on introduction and/or survived termination.
HHJ Dight agreed with the Bank. He noted that a distinction had been drawn between the introduction and hire of a candidate. The contract expressly referred to the “hire” being the trigger for payment, i.e. ‘Should [Deutsche Bank] proceed to hire an unsolicited candidate provided by the Search Firm, the fee rate shall be 20% of the New Hire’s first year total compensation with [Deutsche Bank]…’.
As the agreement terminated on 1 January 2013 and was not extended, HHJ Dight held that the right to payment had not accrued by the termination date.
Does a right to commission survive termination of a contract?
The next question the court had to grapple with was, if a commission fee had become payable by the termination date (which it had not), did it survive termination of the contract.
In this case, the court noted the distinction between “solicited” and “unsolicited” introductions of candidates. However, the court held that on a strict interpretation of the contract, whilst payment of commission fees was expressly stated to survive for a period of six months after the termination of the contract in respect of “solicited” candidates who were hired after termination, there was no equivalent express (or implied) term in respect of “unsolicited” candidates. Accordingly, HHJ Dight held that as this case related to an “unsolicited” introduction to the Bank of a candidate in 2012, the commission rights had not accrued and were not intended to survive post-termination.
The Judge accepted ABI’s argument that having made the introduction of the candidate to the Bank, GCL had done what it needed to do and that it had no other obligations under the contract. The court therefore acknowledged the perceived “unfairness” of the situation where a hire of an unsolicited introduction took place after termination but the agent went unpaid. However, HHJ Dight held that this was a risk that GCL was aware of and assumed at the date of the introduction.
The claimant had also tried to raise a quantum meruit argument (i.e. “the amount a party deserves” or “had earned”) but the court gave this relatively short shrift. The parties had agreed contractual terms in this case, and in any event, no evidence had been provided in relation to market rates to evidence what amount was deserved or payable for this type of case.
The decision of the court was based on contractual interpretation principles set out in Arnold v Britton , i.e. to place greatest weight on the words used in the contract on the basis that “the parties have control over the language they use in a contract”. The decision acts as a stark reminder to parties negotiating a contract, particularly in commission arrangements, to make expressly clear when commission fees are intended to become due and payable, and the impact of termination on any contingent fees. In this case, the court was reluctant to imply a term into a contract to assist the agent reinforcing the importance of express terms.
Sohail Ali (Partner), Victor Sampson (Associate) and Saffron Goldberg (Trainee Solicitor) acted for Deutsche Bank in this matter.