Alegro Capital LLP v AllProperty Media Pte Limited is certainly not the first time that a judge has found that, in the rush to sign binding agreements, the parties have failed to record clearly what they had (or thought they had) agreed. Nor is it likely to be the last.
However, this recent case is a stark illustration of how lack of clarity can leave both sides of a dispute hundreds of thousands of pounds out of pocket.
AllProperty (the company) was a Singapore-based company which operated an online estate agency business for properties in Asia. It was owned by a small number of individual investors.
The company's founder, Mr Melhuish, agreed with his fellow investors to seek additional external capital for expansion. He asked the other shareholders if any of them wanted to sell shares as part of the process, but only one indicated any interest in doing so.
Mr Melhuish engaged a number of corporate advisers in different regions with a view to raising capital. The adviser selected in relation to European investors was Alegro. Discussions between Alegro and the company began in July 2011 and included passing references to the possibility of the company's shareholders selling some or all of their shares. However, the main thrust of the negotiations was always for capital to be injected into the company. By 6 September 2011, after exchanging various drafts and amendments, an engagement letter was signed by the parties. This stated as follows:
- The company would pay a fee of 3.5% of the total capital paid to, or for the benefit of, the company by investors
- "Investors" were defined as third party investors introduced to the company by Alegro
- But "investors" were also stated to include companies listed in Appendix A to the letter and their subsidiaries.
- One of the "investors" named in Appendix A was Deutsche Telekom (DT).
Alegro approached DT in relation to a possible investment in the company, but this led nowhere. There was no evidence that Alegro ever introduced any external investors to the company.
Independently, the company approached ISG, which operated a similar business to the company but in relation to properties in Europe. ISG also happened to be a subsidiary of DT.
In May 2012, ISG paid 18 million Singapore Dollars for a 41% interest in the company, subscribing for new shares in the company. But at the same time, Mr Melhuish paid around double that amount to acquire shares from the company's other existing shareholders.
Alegro claimed a fee of 3.5% of the total amount paid by ISG to the company and by Mr Melhuish to the selling shareholders. The company rejected the claim because:
- Only S$18 million had been paid to the company and
- In any case, Alegro had not introduced ISG to the company.
On the first point, Alegro maintained that it had always been part of the bargain that its fee should be charged on payments made to shareholders in the company as part of any investment. It argued that in the engagement letter, references to "the company" had to be understood to include both the company itself and its shareholders. This was because the possibility of shareholders selling shares had always been recognised in the background negotiations. Alegro also argued that payments to shareholders were "for the benefit of the company".
The High Court rejected these arguments. Evidence of underlying negotiations can only be heard where the agreement in question is unclear or ambiguous. The engagement letter was quite clear; the fee was payable on payments to the company. The company was separate and distinct from its shareholders. Nor were payments to shareholders "for the benefit of the company". If the fee was to be payable on payments to shareholders, the engagement letter should have said so.
But the engagement letter was equally clear that the fee was payable on the S$18 million invested by ISG, even though Alegro never did anything to introduce ISG to the company. The fee was payable because "investors" was stated to include those named in Appendix A and their subsidiaries, of which ISG was one. If the intention was that there had to be an actual introduction before a fee was payable on an investment by a party named in Appendix A or its subsidiary, again, the engagement letter should have stated this.
In summary, Mr Justice Foskett considered that Alegro and Mr Melhuish both thought they had agreed something other than what the engagement letter actually said.
"Mr Melhuish did not believe that he... had agreed to something that entitled [Alegro] to any "success fee" because it had not in fact made the introduction of ISG to [the company] whereas the terms of the contract... demonstrated that he had."
"[Alegro] believed that the terms of the contract entitled [Alegro] to a success fee based upon any capital paid by an investor, whether to [the company] or its shareholders, but... it did not do so."
As a result of these misunderstandings, the company was required to pay around £316,000 for what it perceived as nothing. For its part, Alegro felt it had lost out on additional fees of almost £700,000. As the judge pointed out, substantial costs would also be incurred by both sides in relation to the trial.
This judgment shows, yet again, that whatever the commercial pressure to conclude a deal, there are genuine and substantial risks in signing up to terms that have not been fully considered or tested. Engagement letters are not mere window-dressing, but important contractual commitments that can result in very substantial sums falling due.
Businesses need to work closely with their advisers throughout the negotiation process in order to ensure that the legal documents reflect the bargain they actually want to strike. In short, every contract should "mean what it says and say what it means". In this way, costly disputes about what the parties actually agreed can be avoided.