In a welcome Court of Appeal decision on quantum meruit, Benedetti v Sawiris confirms that, when compensating the claimant for the value of the benefit received by the paying party, the court should look to the "market value" of that benefit ( EWCA Civ 1427). Searching for something no more precise than a "reasonable" value is unhelpful, and has led to some confusion in the authorities on how to go about the task of the assessment.
Mr Benedetti had a binding agreement in place with his client Mr Sawiris to provide merger and acquisition (M&A) advisory services for a particular complex transaction, which would have given him a substantial equity stake in the business to be acquired (the prior agreement). The transaction ultimately took an equally complex but different form, for which there was no revised agreement on price; however, Mr Benedetti's services were considerable and influential in the successful outcome. The issue arose from the parties’ failure to agree a price for that outcome.
Mr Benedetti claimed damages by way of restitution for the unjust enrichment (pleaded as a quantum meruit) of the value of his work. Quantum meruit is, broadly, a reasonable remuneration for work done or goods supplied where there is no agreement as to price, including where a contract never becomes binding or is later discovered to be void.
The trial judge and the Court of Appeal took different approaches to, among other things, the basis for calculating quantum meruit.
Although most quantum meruit cases have tended to focus on professionals who by market practice have charged on the basis of hourly rates, the hourly rate has begun to take a back seat, no more so than in M&A transactions, where it is almost irrelevant on most banking mandates.
The trial judge relied entirely on expert evidence as to what was the normal range of fees for the work in question. He first exercised his discretion to award Mr Benedetti a sum at the top end of the range (€36.3 million) to reflect a number of factors, including the complexity of the transaction and the enormous value that the client had received from Mr Benedetti's services. He then adjusted the sum down to €14.52 million to reflect part of a sum received by Mr Benedetti from the client under a separate and, as the judge found, related brokerage agreement.
Finally, the judge increased the sum to €75.1 million by reference to evidence of what the parties had, after the event, come close to accepting would represent a settlement price reflecting the value of Mr Benedetti's services to the client. The judge also apparently relied on the previous key authority of Way v Latilla, which entitled the court to look to the negotiations between the parties as evidence of the value that each of them had put on the services ( 3 All ER 759).
In this respect, the judge considered (wrongly, as the Court of Appeal found) that earlier authorities entitled him to treat the prior agreement as having great weight in determining value (in contrast to earlier authorities holding that, where the parties had in a formal sense "abandoned" a prior agreement, it would have no evidential value).
In addition, the judge found that Vedatech Corporation v Crystal Decisions was authority that the court was entitled to look to the "value to the paying party" as a relevant guide ( EWHC 818 (Ch)).
The Court of Appeal rejected the trial judge’s approach. There was no distinction between an abandoned agreement and one that simply failed for some technical reason to become binding on the parties (or, in this case, the eventual transaction). In both instances, the correct, and more general, approach was for the court to give such weight as it thought fit to any prior (albeit unenforceable) agreement on price in the context of other communications between the parties and, moreover, the expert evidence on market value.
In addition, "value to the paying party" was not an approach in itself but rather one factor which could be taken into account. It might lead to the quantum meruit being at the top of the market range, or even beyond that; but to increase an award of €14.52 million to €75.1 million was so excessive as to constitute a "windfall for Mr Benedetti". The Court of Appeal therefore reduced Mr Benedetti's award back down to €14.52 million, to represent the net sum due to him for a fee that was calculated at the "top end of the scale" of market value.
The Court of Appeal did, however, indicate that evidence as to the value to a paying party should never result in an award of less than the bottom end of the market value range. The particular importance of this in M&A mandates is that, typically, the banker's fees are agreed up front (that is, ex-ante). They reflect a variety of factors, including reputational risk and the possibility that the adviser could be asked to carry out a great deal, or very little, work; in other words, whatever is required to ensure that the transaction is successful, success commonly being the market driver of price.
The Court of Appeal was therefore making clear that a client of such an adviser could not point to the fact that, as a transaction turned out, little work was required from the adviser, since those ex-post factors had no relevance to how mandates are valued and priced in the market ex-ante. So, in the M&A context, and reflecting general principles, the court should look to value the services at the point in time when they were first provided (and not the last point when they were supplied), and, if appropriate, accept the expert evidence of what a success fee would be at that point.
Overall, what mattered was the market value (or range of values) and not simply what was "reasonable", although reasonableness might come into the exercise of the discretion as to where in the range of market values the quantum meruit should be fixed.
What comes out of Benedetti is the paramount importance in quantum meruit cases of expert evidence on market value and the need for the parties to search for the factors which have more, rather than less, weight in driving the assessment towards the top or bottom end of that range.
As the Court of Appeal noted in Smith v Hammond, a court is not bound to accept the evidence of such experts, but must identify good reasons for choosing to depart from it ( EWCA Civ 725). In many cases, the court will have little experience of its own to offer for rejecting the expert evidence. If a court is to depart from an approach adopted by the experts at trial, it is to be expected that the court will set out its own approach, with good reasons, so that the parties can make submissions on the matter. Otherwise, the parties will, in their evidence and submissions, be tilting at windmills with all the consequent risks and costs of doing so.
Graham Huntley is former president of the London Solicitors Litigation Association and a partner at Hogan Lovells International LLP, and Ramsey Shubbar is an associate at Hogan Lovells International LLP.