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ICC Award No. 9839, YCA 2004, 66 et seq.

Title
ICC Award No. 9839, YCA 2004, 66 et seq.
Content
66

Final award in case no. 9839 of 1999.

Facts

Q, Inc., an international mergers and acquisitions firm, specializing in crossborder transactions comprised a network of affiliates, all bearing the Q name. Q Spain, S.L. (Q-Spain) was Q's affiliate in Spain. Q-Z, Ltd. (Q-Z) was Q's affiliate in the United States.

After terminating the managing director of the existing Q office in the United States (Q-Z) due to substandard performances, S, the president of Q, recruited YY as a new US representative. In the lead-up to concluding a contract of representation (the Agreement), YY was informed by S and S's representatives that the office could be started with a modest investment and that it was necessary to recruit an experienced mergers and acquisitions (M&A) consultant to head the team and to set up the necessary computer equipment. YY was also informed of the "File Summary", a list which set forth the status of all Q deals involving the United States, (known as "pipeline deals") as a summary of possible transactions that could generate future income for Q-Z.

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Following negotiations between Q and YY, during which Q-Z was represented by counsel, Q and Q-Z entered in the Agreement. Pursuant to the Agreement, Q-Z became the exclusive representative of Q in the United States for an initial trial period of twenty-four months.

Clause 8(1) of the Agreement provided that either party could terminate the Agreement for any reason upon one month's notice. Clause 8(3)(1) stated that the Agreement could be terminated in the event of "a breach by the other party of any material term of the Agreement, which remains unremedied for 21 days after receiving written notice thereof. Finally, clause 9(2)(1) of the Agreement provided that Q would not be entitled to a portion of any future gross fee income to which it would otherwise be entitled if the Agreement was terminated for any of the reasons set forth in clause 8(3). The Agreement also provided for ICC arbitration.

From the inception of the Agreement, Q and Q-Z had differences with respect to the hiring of an experienced dealmaker and an experienced secretary as well as the failure to update the computers. In response to S's demands to hire a dealmaker, YY identified JJ as a candidate for a dealmaker position with Q-Z on the condition he would be paid a salary. Contrary to Q's general practice of dealmakers only working on commission, Q agreed to pay 40% of JJ's salary and Q-Z hired JJ as a dealmaker. Although two experienced dealmakers were eventually hired, several of Q's European offices had voiced concerns about the performance of the New York office. The initial trial period of the Agreement was extended for another year on the recommendation of Q-Italy, but shortly thereafter Q concluded that it would end its relationship with Q-Z. S verbally informed YY that Q was going to terminate the Agreement. Shortly thereafter, Q notified Q-Z in writing of the termination of the Agreement, with one month's notice.

Several months earlier, Q-Z was involved in the acquisition of U, S.A. a Spanish company by MM Group, a US company (the MM/U transaction) and received a success fee for the transaction from the US company. Pursuant to the fee sharing arrangement in Clause 6(1 ) of the Agreement, Q-Z was obligated to pay Q a percentage of the success fee. Q in turn was obligated to pay a portion of this amount to Q-Spain, the "selling country". Q-Z failed to remit the fee to Q and after failing to reach an acceptable arrangement for the payment, several days after having notified Q-Z that the contract was terminated, Q also notified Q-Z that it considered Q-Z's action a material breach of the Agreement. The Agreement terminated twenty-one days after the notice of termination and several months later, Q and Q-Spain commenced ICC arbitration against Q-Z.

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In the arbitration, Q-Z objected to Q-Spain as a party to the arbitration. Applying New York law which was the applicable law under the contract, the sole arbitrator found that the Agreement did not evidence the parties' intent to confer a right to enforce performance on Q-Spain. Q-Spain was not a signatory to the Agreement nor an intended beneficiary. Therefore Q-Spain was not a proper party to the arbitration.

The sole arbitrator held that Q-Z had materially breached the Agreement under Clause 8(3). The contract was first terminated due to Q-Z's "poor performance". Q had then notified Q-Z of a material breach due to its failure to pay the contractual percentage from the MM/U transaction. According to the Agreement, termination due to material breach meant that Q-Z was no longer entitled to a proportion of any Gross Fee Income to which it would otherwise have been entitled. The sole arbitrator, finding that Q-Z's assertions were not sufficiently supported by the evidence, rejected Q-Z's argument that despite its breach of the Agreement it should still be able to recover the fees owed on on pipeline deals because Q had breached the implied covenant of good faith and fair dealing which applies to all contracts governed by New York law.

Q also sought liquidated damages from Q-Z because Q-Z had violated the non-solicitation clause in the Agreement by soliciting the services of former and present Q employees. The sole arbitrator, examining the non-solicitation clause under New York law, observed that such clauses must be reasonable in time and scope and were intended to protect the employer's legitimate interests. The sole arbitrator held that the clause was of finite duration (two years) and did not prevent Q-Z from acting as an international M&A advisory firm or from competing with Q. The geographic scope of the non-solicitation clause was worldwide, but it did not restrict Q-Z from soliciting Q's clients or competing with Q anywhere in the world, nor did it prohibit Q's past or present employees from pursuing their vocations anywhere in the world. It only prevented Q-Z from soliciting for a finite time period those person who had acquired knowledge of Q's business and transactions being pursued by Q. Therefore, the nonsolicitation clause was a reasonable restriction. The sole arbitrator concluded that the totality of evidence demonstrated that Q-Z had undertaken a pattern of conduct that constituted solicitation of former and present employees of Q. In particular, Q-Z had sent out memos on Q-Z's letterhead soliciting present and former employees of Q. Applying Clause 9(3)(2) of the Agreement which provided for liquidated damages in the event of a breach of the non-solicitation clause, the sole arbitrator found that the sum stipulated in the Agreement for such breach was a reasonable estimate of the expected loss from a violation of the clause.

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Q-Z had counter-claimed that Q was liable for tortious interference with Q-Z's contracts. The sole arbitrator agreed with Q's argument that the contracts in question had been voluntarily terminated and that the clients would have done so regardless of Q's contacts with them. The sole arbitrator also did not accept Q-Z's claim that YY had been fraudulently induced into entering into the Agreement. Under New York law, in order to establish a claim for fraud, a plaintiff must show that: '(1) a representation was made, (2) as to a material fact, (3) which was false when made and, (4) was known by the maker at the time to be false, (5) which was made with a present intent to deceive and induce reliance by plaintiff and, (6) upon which the plaintiff did justifiably rely, (7) without notice of its falseness, (8) to his injury'. In the view of the sole arbitrator, Q-Z failed to prove the elements of fraudulent inducement, in particular, the element of reliance. YY was an experienced business man and had an attorney who assisted him in the negotiation of the Agreement but had not examined Q's financial statements before entering into the Agreement. Moreover YY chose not to terminate the Agreement after becoming aware of what he perceived as the falsity of Q's representations. Thus Q-Z was bound by the Agreement.

Q-Z was condemned to pay compensatory damages with interest, liquidated damages and the costs of the proceedings.

Excerpt

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72

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III. MATERIAL BREACH BARS PAYMENT

10" "Q claims that Q-Z's material breach of the Agreement precludes it under Clause 8(3) from sharing in any gross fee income generated by Q and its affiliates for transactions initiated during the term of the Agreement but concluded after its termination. Q-Z counters that, since Q did not follow the proper procedures for terminating the Agreement and violated the implied covenant of good faith and fair dealing, Q-Z is entitled to various 'pipeline deals'."

(....)

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11""The arbitral tribunal finds that Q-Z is barred from recovering any fees it may otherwise have been entitled to under the Agreement because: (1) Q-Z materially breached the Agreement under Clause 8(3) and (2) Q did not violate the implied covenant of good faith and fair dealing in terminating the Agreement."

1. Contractual Provisions

12" "The relevant clauses of the Agreement state:

'8(1 ) This Agreement maybe terminated during the Initial Trial Period ...by either party with one month notice.

8(3)(1) This Agreement may be terminated by either Q or the Representative in the event of:

(1) a breach by the other party of any material term of this Agreement, which remains unremedied for 21 days after receiving written notice thereof;

9(2)(1 ) Unless termination has been for any of the reasons stated in Clause 8(3)above (in which case no entitlement shall arise), the Representative shall have a right to receive a proportion of any Gross Fee Income to which it would otherwise have been entitled pursuant to Clause 6 for all transactions initiated during the term of this Agreement but concluded after its termination.'

Under the above-stated provisions, either party could terminate the Agreement for any reason with one month's notice during the initial two-year term of the Agreement (as subsequently amended). Either party could also terminate the Agreement after giving written notice of a material breach and affording the other party an opportunity to cure the breach.

13" "In this case, Q terminated the Agreement under Clause 8(1) due to Q-Z's poor performance'. YY admitted that Q's dissatisfaction with Q-Z's performance is well documented in a series of memoranda between Q and Q-Z regarding Q-Z's need to hire dealmakers and a qualified secretary and Q-Z's failure to follow Q procedures. Following Q-Z's failure to remit Q's portion of the MM/U fee, Q notified Q-Z that Q-Z had committed a 'material breach' 74 under Clause 8(3)(1). Q-Z failed to cure this material breach within twenty-one days."

2. Covenant of Good Faith and Fair Dealing

14" ''Q-Z argues that despite its breach of the Agreement, it should still be able to recover the fees owed on pipeline deals because Q breached the implied covenant of good faith and fair dealing. The implied covenant of good faith and fair dealing applies to all contracts governed by New York law. Kader v. Paper Software, Inc., 111 F.3d 337, 342 (2d Cir. 1997) (The covenant of good faith and fair dealing [is] implied in every contract under New York law.... ') Good faith and fair dealing mean that 'neither party [...] shall do anything which has the effect of destroying or injuring the right of the other party to receive the fruits of the contract....' M/A-Com Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990) (per curiam). See also Walther v. Bank of New York, 111 F.Supp. 754, 763 (S.D.N.Y. 1991). The implied covenant of good faith and fair dealing does not, however, 'extend so far as to undermine a party's general right to act on its own interests in a way that may incidentally lessen the other party's anticipated fruits from the contract'. M/A-Com Sec. Com., 904 F.2d at 136.

15" "Q-Z asserts that Q violated the implied covenant of good faith and fair dealing under the Agreement by terminating the Agreement for reasons other than the justifications proffered by Q such as Q-Z's failure to hire dealmakers and a secretary. Q-Z asserts that S induced YY to extend the trial period for another year so that he could steal Q-Z's clients and employees by availing himself of the most advantageous termination method available under the Agreement. Moreover, Q-Z alleges that S prevented YY from developing a lucrative business because he simply wanted YY to stabilize the US business rather than complete transactions before terminating the Agreement. Q-Z alleges that, in so doing, S withheld support from Q-Z, denigrated YY to the Q network, and circumvented the non-solicitation clause of the Agreement by agreeing that Q would pay 40% of JJ's salary in exchange for excluding JJ from the non-solicitation clause in the Agreement.

16" "Q-Z's assertions are not supported by a preponderance of the evidence. During the initial trial period of the Agreement, Q did not need to offer any reason for terminating the Agreement. Q did provide ample evidence that it terminated the Agreement due to what it perceived was Q-Z's poor performance rather than in a bad faith effort to prevent Q-Z, from developing business. For example, employees testified that during the two years that Q-Z was affiliated with Q, Q's foreign offices were not given adequate support by the US office and 75 that Q-Z's employees lacked the 'business acumen' needed for succeeding in the M&A business. Witnesses also testified that Q-Z failed to recruit and hire dealmakers fast enough, that Q-Z lacked proper secretarial and computer support and that Q-Z failed to implement certain Q rules and procedures as set forth in the procedure manual. Q was legally entitled to protect its business interest by terminating the Agreement during the 'Initial Trial Period'. Accordingly, the termination of the Agreement in accordance with contract terms does not render Q's conduct a breach of the covenant of good faith and fair dealing under New York law.

17" "Q followed the procedure under the Agreement when it notified Q-Z of a material breach Q-Z failed to cure the breach within twenty-one days of notice from Q. As a result, Q-Z forfeited its right to any pipeline deals that it otherwise would have been entitled to under the Agreement.... Therefore, the arbitral tribunal concludes that Q-Z is not entitled to any of the fees that were or may have been generated by the foregoing transactions according to the term of Clause 9(2)(1) of the Agreement."

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Referring Principles
Trans-Lex Principle: I.1.1 - Good faith and fair dealing in international trade
A project of CENTRAL, University of Cologne.