The federal court of appeals that oversees Texas recently ruled that a company that promoted a sale of its client, but did not cause the final sale, was still entitled to a commission on the sale, which amounted to almost $4 million on a $190 million transaction.
The seller engaged a company to advise it regarding a potential sale and promised to pay a $25,000 quarterly fee for “advisory services.” As part of the same agreement, the seller also agreed that the advisor would get an “advisory completion fee” if the seller closed a transaction, i.e., a sale of all or substantially all of the sock membership interest or assets of the company, within a certain time period.
Importantly, the parties’ agreement provided specifically that the advisory fee would be paid for any transaction “completed during the period from the date of the [parties’ agreement] until eighteen (18) months after the date of the termination of that agreement.”
Thus, even if the seller terminated the parties’ agreement, if it sold the company at any time in the next 18 months after the termination, it would owe the advisory fee to the advisor even if the advisor had nothing to do with the sale.
The seller ended up selling the company within 15 months of terminating the engagement with the advisor firm but refused to pay the commission. The advisor found out about the sale after the fact and filed a lawsuit.
The seller tried to fight the commission by arguing that: (1) because the contract between the parties was not exclusive, the payment of the commission was governed by a legal doctrine that required the advisor to actually procure the sale; (2) the contract required the advisor to procure the sale in order to earn a commission; and (3) the payment of the fee was unfair because it would constitute a windfall to the advising firm.
The court rejected each of these arguments, finding that (1) under the language of the contract, the advisor was not required to actually secure the sale; (2) the parties clearly agreed that the advisor would get the fee even if it did not secure the sale; and (3) the contract contemplated a situation where someone else secured a sale for the seller and still provided that the advisor get its fee as long as the transaction closed within the 18 month window.
CONCLUSION: Texas law believes in the freedom of contract, especially, among sophisticated business entities. When the contract is clear, courts are likely to enforce it as written, even if that means that one of the parties to the contract ends up in a situation that is “unfair” in the ordinary sense of that word.
Thus, business owners should always read and understand what they are signing and, when in doubt, seek legal advice and negotiate the terms, with the understanding that once the contract is signed, and the language is clear, the courts are likely to enforce it.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.