Ambiguous fee arrangements: how courts can read them narrowly

Articles Written by Richard Lilly (Partner)


The decision of the NSW Court of Appeal in JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 on 8 February 2011 emphasises the extent to which the Courts are prepared to read down commercial agreements that are primarily for the benefit of the party that drafted them.

In this case, the Court held that an agreement entered into between JP Morgan and Consolidated Minerals did not entitle JP Morgan to $50 million in fees for the services it performed. The Court made active use of the "contra proferentem" rule of contractual interpretation to take a narrow reading of an agreement that had been drafted by JP Morgan, was for JP Morgan's benefit and was relied upon by JP Morgan for its claim, in circumstances where a large part of the value of the transaction on which it was advising was derived from matters completely outside of its control.

The Court also held that the fact that JP Morgan took and banked a $20 million cheque from Consolidated Minerals for part of the fees it claimed, did not constitute an agreement to settle its claim for the banked amount. The letter from Consolidated Minerals enclosing the cheque did not clearly state that the cheque was sent as part of an offer of compromise, even though it was sent on a "without prejudice" basis and contained the words "in full and final settlement of this matter".


In 2006, Consolidated Minerals engaged JP Morgan to provide it with advice and other assistance on any takeover or merger offers that Consolidated Minerals expected would shortly be made to it.

The agreement was constituted by an Engagement Letter, drafted by JP Morgan.

The terms of the Engagement Letter included the following in relation to JP Morgan's fees:

"(i) Base Defence Response Fee

  • for advice in relation to an Offer that proceeds to completion, a fee equal to 0.75% of the Transaction Value; or
  • in the event the Company successfully defends an Offer, a fee equal to 1.0% of the proposed Transaction Value; plus

(ii) Incentive Fee (if any, as defined below).

The Incentive Fee will recognise the achievement of additional value to the Company's shareholders beyond that contemplated at the announcement of an unsolicited Offer initially proposed in relation to a friendly Offer. The Incentive Fee will be equal to:

  • 3.0% of any increase in the Offer price, up to 25% above the initial Offer price which was communicated to the Company publicly or privately; plus
  • 5.0% of any increase in the Offer price in excess of 25% above the initial Offer price which was communicated to the Company publicly or privately."

A number of takeover offers were received by Consolidated Minerals following the engagement of JP Morgan:

  • between October 2006 and November 2007 Pallinghurst Resources Australia Ltd made a series of offers, starting at $2.24 per share and ending at $4.50 per share;
  • in mid-2007, Territory Resources Ltd made an offer of $3.65 per share; and
  • between August and December 2007, Palmary Enterprises Ltd made a series of offers, starting at $3.95 per share and ending at $5.00 per share.

Palmary was ultimately the successful bidder, with its last offer. Prior to making its bids, Palmary had acquired a stake of 14.29% of the shares in Consolidated Minerals.

During this period, Consolidated Minerals' share price rose from approximately $1.71 to $5.00 per share. This was partially the result of the "bidding war" between the above companies, and partially the result of a surge in the price of manganese, a product sold by Consolidated Minerals.

In January 2008, JP Morgan rendered an invoice to Consolidated Minerals for approximately $50 million, relying primarily on the "Incentive Fee" provisions in the agreement: they claimed that they were entitled to a fee calculated on the difference between the value of the first offer made to Consolidated Minerals shareholders (from Pallinghurst) and the offer (from Palmary) that was ultimately accepted.

Consolidated Minerals disagreed, and took the view that the Incentive Fee should be calculated on the difference between the values of the first and last offers made by the party that ultimately succeeded in its bid, Palmary.

Consolidated Minerals expressed this view in a letter to JP Morgan in February 2008, enclosing a cheque for $20 million which it considered to be the appropriate fee amount. JP Morgan banked this cheque, and subsequently commenced proceedings to recover the balance of the fees to which it claimed it was entitled.

At trial, JP Morgan failed in its claim. The Judge also dismissed a cross-claim by Consolidated Minerals, in which it claimed that, even if JP Morgan's construction of the agreement was correct, an "accord and satisfaction" had been reached between the parties (precluding JP Morgan from bringing its claim) by reason of the fact that JP Morgan banked the cheque for $20 million.


JP Morgan appealed the trial judge's decision. The key issues were:

  1. Should the cost of Palmary's 14.29% pre-bid stake be included in the "Transaction Value" for the purposes of the "Base Defence Response Fee"?
  2. What should the successful offer price be compared to, in order to calculate the Incentive Fee: the first offer received from any bidder, or the first offer received from the successful bidder?
  3. If the answer to issue 2 is to only look at the offers made by the successful bidder, was JP Morgan entitled to Base Defence Response Fees in relation to the other 2 bidders?
  4. In any event, was JP Morgan precluded from bringing its claim because it banked the cheque for $20 million?


Relevance of pre-bid stake

If the cost of Palmary's pre-bid stake were included in the "Transaction Value", JP Morgan's Base Defence Response Fee would be higher.

The definition of "Transaction Value" in the agreement included "the total proceeds and other consideration paid and to be paid or contributed and to be contributed in connection with the Offer" (the "Offer" being defined as the offer which resulted in a takeover, or which was successfully defended). The critical issue was whether Palmary's pre-bid stake was "in connection with" the offer it subsequently made for the balance of the shares.

There is much case law concerning the meaning of "in connection with": it is generally afforded a very wide meaning.

Notwithstanding this the Court held that only transactions that flowed from the offer (i.e. shareholders accepting the offer of $5.00 per share) were "in connection with" the offer for the purposes of the agreement.

The Court applied the "contra proferentem" rule of contractual interpretation: in the case of ambiguity in a document, the construction least favourable to the person seeking to rely upon it should be taken. The Court readily applied this rule in this case, as the agreement was clearly for JP Morgan's benefit (i.e. it gave JP Morgan an entitlement to fees), and was also drafted by JP Morgan. In these circumstances, if the agreement did not give a clear entitlement to the fees in question, it ought be read down as excluding them.

The Court also had regard to the purpose of the Base Defence Response Fee: to compensate JP Morgan for advice that it gave on a takeover bid that is successful, with regard to the value of that specific transaction (and so should not include the value of pre-bid acquisitions of shares on which JP Morgan gave no advice).

Lastly, the Court noted that 25 days passed between the acquisition of Palmary's pre-bid stake and the making of its first offer, which diminished JP Morgan's argument that the two transactions were "in connection" for the purposes of the agreement.

Relevance of other offers to Incentive Fee

The lower the initial offer price for the calculation of the Incentive Fee, the higher that fee for JP Morgan.

The issue was whether the "initial Offer price" for the purposes of the Incentive Fee provision meant the initial offer of the successful bidder, or the initial offer received by Consolidated Minerals from any bidder.

The Court placed emphasis on the use of the word "Offer", with a capital "O"; this implied that the "initial Offer" must be from the same party that made the ultimately successful "Offer". The clause contemplated that an offer from a bidder might change over time, but ultimately it would remain the same offer.

This view was reinforced by the fact that the Incentive Fee provision referred to an "increase in the Offer price"; if it contemplated that a comparison should be made between different offers from different bidders, a word other than "increase" would have been used.

The Court was not persuaded by arguments that this formula could produce arbitrary results; holding that on any construction of the formula, arbitrary results could flow. For example, in this case there was a substantial increase in the fee as a consequence of the "massive spike" in manganese prices (over which JP Morgan had no control); had manganese prices fallen sharply, JP Morgan may have been entitled to no fee, irrespective of its efforts. The Court noted that the formula will always need to be arbitrary, as it would be "difficult if not impossible" to precisely value the benefit to Consolidated Minerals' shareholders of JP Morgan's services.

The Court again referred to the contra proferentem rule, and noted that a $20 million fee was not "plainly unreasonable or uncommercial in the circumstances".

Whether entitled to Base Defence Response Fee for unsuccessful bids

Given that the Court held that the Incentive Fee was to be calculated having regard to only the offers made by the successful bidder, the issue then became whether JP Morgan was entitled to a Base Defence Response Fee in respect of the two unsuccessful bidders.

The Court held that the Pallinghurst and Territory bids were not "successfully defended" for the purposes of the agreement, stating that that phrase did not contemplate a "bidding war" which ultimately results in the target company being taken over. The unsuccessful bidders in that situation have not been "successfully defended according to any commonsense meaning of that expression" in circumstances where the board encouraged the bids and the competing bids drove up the ultimate price paid.

The Court held that it would be "capricious, unreasonable and unjust" to allow JP Morgan to extract multiple fees out of what was a single set of circumstances. This view was reinforced by the fact that the agreement was stated to expire on the completion of the transaction or the offer defended: if JP Morgan was entitled to Base Defence Response Fees for the "defended" offers, the agreement would have terminated prematurely.

The Court noted that it was prepared to consider "reasonableness" arguments in relation to the Base Defence Response Fee, but not arbitrariness arguments in relation to the Incentive Fee, because:

(a) the Incentive fee was arbitrary on any construction; and
(b) the Base Defence Response Fee is ambiguous, but not arbitrary on Consolidated Minerals' construction, again alluding to the contra proferentem rule.

Whether there was "accord and satisfaction"

The letter from Consolidated Minerals to JP Morgan in February 2008 enclosing the cheque for $20 million was marked "without prejudice" and contained the following:

We have reviewed the engagement letter and we consider that an appropriate payment in respect of the transaction is $20,000,000.00. Accordingly, we are pleased to enclose a cheque for $20,000,000.00 in full and final settlement of this matter. We trust that this brings this issue to a close.

JP Morgan banked the cheque shortly after receiving this letter.

The issue was whether these facts constituted an "accord and satisfaction" between the parties (i.e. whether there was an agreement to settle the matter).

The Court held that the letter did not constitute an offer of $20 million in exchange for JP Morgan foregoing the balance of its fees. Rather, the words quoted above were simply the assertion of a view by Consolidated Minerals, which it hoped would persuade JP Morgan to not pursue its claim. The Court noted that marking a piece of correspondence "without prejudice" does not on its own convert the correspondence into a settlement offer, and the words "in full and final statement" were simply an adamant statement of Consolidated Minerals' position.

There being no offer, there could not have been an agreement that JP Morgan would not bring its claim for the balance of the fees.


It is clear that the Court took the view that $20 million was a more than adequate fee (and $50 million would have been a disproportionately high fee) for JP Morgan's services in circumstances where a large part of the value of the transaction was driven by the surge in manganese prices (over which JP Morgan had no control).

Accordingly, the Court was able use the contra proferentem rule (in particular) to find a construction of the agreement (which was drafted by JP Morgan, for its own benefit), that limited the fees payable to JP Morgan to $20 million.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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