Financial advisers’ engagement letters: watch out for the tail-gunner

Financial advisers’ terms of engagement typically provide the adviser with a premium for a successful outcome to the transaction. The engagement can normally be terminated at relatively short notice. What is to prevent the client from terminating the engagement before completion in order to avoid having to pay the success fee?

The answer is the so-called tail-gunner clause: it normally provides that, if the transaction completes within a given time after the client terminates the engagement without good cause, the success fee is payable to the former adviser exactly as if termination had not occurred.

If you have ever thought that these clauses would never stand up in court you may be interested in a recent application by a financial adviser in the High Court. Its former client tried to resist having to pay a success fee under a tail-gunner clause – arguing, among other things, that there was no merit in the adviser’s claim for a success fee where it had not brought about completion of the transaction. But the judge ruled that this was irrelevant: it all came down to a question of interpreting the engagement letter.

The case shows that sophisticated parties should not presume that the court will come to their assistance just because terms seem uncommercial or unreasonable. Everything turns on the meaning of the agreement and the real protection lies in careful drafting.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.