Commercial contracts are often concluded through the medium of specialist brokers with expert knowledge of particular markets. However, brokers will generally only earn a commission if their efforts are the effective cause of the deal being struck and that, as a High Court ruling showed, is notoriously hard to prove.
The case concerned a financial brokerage which sought £2 million in loan finance on behalf of a law firm that wished to rationalise its existing loan facilities under a single, less expensive umbrella. By a written contract, the firm agreed that it would pay the brokerage a 5 per cent commission – £100,000 – if the latter succeeded in finding an appropriate lender and negotiating an offer of finance.
The brokerage entered into extensive negotiations with a peer-to-peer lender, but progress towards finalising a loan was slow. The firm ultimately went through a different intermediary which obtained an offer of finance from the same lender and completed the deal. The brokerage launched proceedings against the firm on the basis that it had been instrumental in achieving a successful outcome and should thus be paid its agreed commission.
Ruling on the matter, the Court found that, prior to the firm switching allegiance, its then managing director had been told by the brokerage’s owner that the anticipated deal with the lender was dead. The fact that the other intermediary had more success could be explained by a change in the lender’s policy or the more trusting relationship between the two main negotiators.
The other intermediary had provided further information to the lender before the deal was closed and neither it nor the firm had taken unfair advantage of information previously given to the lender by the brokerage. The brokerage having failed to show that its work on the firm’s behalf was the effective cause of the finance offer, its claim was dismissed.