Performance key to performance fee
17 May 2021
In 2012, Donovan and Grainmarket entered a joint venture to acquire commercial properties and redevelop them for residential use. They had agreed heads of terms but never signed a long form contract. After identifying a suitable property for redevelopment, Donovan’s role was to attract investors for its acquisition and Grainmarket’s role was to redevelop and manage the property. Investors would pay Grainmarket an “administration fee”, of which Grainmarket would pay 10% to Donovan. On the sale of the property, Grainmarket would receive further fees from the investors, a so called “performance fee” of which Donovan would be paid 40%.
In 2015, Donovan moved to another role, arguably abandoning the joint venture. At this time, 5 properties had been redeveloped and sold, but Donovan had not received his full share of the performance and administration fees. Donovan sought to recover these fees, arguing that the heads of terms contained the contractual agreement, and that the best evidence of the parties duties’ were the actual tasks performed. As Donovan’s role had been to secure investment for each property, he argued that he had already performed his duties in respect of the 5 properties. Grainmarket countered that the contract was entered into by performance over a prolonged period of time and that in any event, by abandoning the joint venture, Donovan was in repudiatory breach of the contract.
The High Court agreed with Donovan’s position, and therefore held that he was entitled to both the administration fees and performance fees due to him. It also held that the failure of Grainmarket to request that Donovan continue to perform his work on the joint venture after he abandoned it was a jointly agreed position and not consistent with Donovan being in repudiatory breach of the contract.
Grainmarket appealed. The Court of Appeal upheld the High Court's decision:
1. Right to receive fees were independent of obligations under the joint venture
The Court of Appeal stated whether Donovan's right to fees were independent or not depended on the true interpretation of the contract, a difficult task given the lack of a single long form agreement. Instead, terms were pieced together via a collection of correspondence. There was nothing to suggest that the right to a share of the fees was conditional on performance of Donovan or Grainmarket’s obligations. Provided the joint venture continued to the time when a property was sold at a profit, a party’s right to a share of fees was unconditional.
2. The agreement had not been renounced
The Court of Appeal agreed that the correspondence from Donovan was not a renunciation of the agreement. Rather it was part of discussions as to appropriate next steps for the joint venture, after both Donovan and Grainmarket had voiced concerns.
3. No repudiatory beach
The correspondence showed Donovan wanted to step away from day-to-day involvement in the joint venture and become a “passive investor. However, Grainmarket had agreed to this. The agreement was fatal to any suggestion that Donovan had repudiated the contract.
4. High Court’s findings on termination
While the High Court may have made inconsistent statements about whether the joint venture agreement remained in force, Grainmarket's only basis for the joint venture being terminated was the rejected repudiation claim.
5. Court of Appeal not in a position to determine that there had been a consensual termination
Grainmarket wished to argue that even if there was no repudiation, the joint venture had still been terminated prior to Donovan's right to fees materialising. The Court of Appeal did not feel able to undertake this exercise in the absence of sufficient evidence.
Judgment: Donovan v Grainmarket.
This article was originally published on 02 March 2020. It has been updated to reflect the Court of Appeal decision.