IB4AI Llc v Auriel Capital

In construing a contractual performance target, the court must consider the commercial background and the substance of the parties’ arrangement. Where management fees are rebated to investors, the relevant fees are the amounts actually retained, even if the rebate is paid by an associated company rather than the contractual recipient. A reference to “total base fees” therefore means the aggregate management fees attributable to the relevant investors after rebates. Expert evidence may assist by explaining the commercial background and market practice, but construction remains a matter for the court.

IB provided marketing services to Auriel, the manager of a hedge fund. The Marketing Agreement allowed Auriel to terminate at 18 months if the fees attributable to investors introduced by IB exceeded a specified target. Auriel terminated after calculating the target by reference to management fees net of rebates paid to an investor by an associated investment manager.

IB contended that “total base fees” meant gross management fees before rebates. The court tried that preliminary issue finally. The central question was whether the contractual target was calculated by reference to fees charged or to fees effectively received after rebates.

1. The court found for Auriel on the construction issue. The relevant target was calculated by reference to management fees net of rebates.

2. The commercial background showed that rebates were a recognised means of giving an investor an effectively discounted management fee. A rebate could arise only because management fees had first been charged. The fact that the rebate was paid by an associated investment manager rather than Auriel did not alter the commercial reality. The entities were to be treated as one commercial unit for this purpose.

3. “Total” referred to the aggregate of the fees generated from all relevant investors. “Base” meant the basic or standard management fee, as distinct from the variable performance fee. The expressions “total base fees” and “total base fees collected” naturally referred to fees actually received after rebates.

4. The defined term “Management Fees” in the Offering Memorandum did not control the construction of clause 7.2. Clause 1.4 of the Marketing Agreement yielded where the context required otherwise, and clause 7.2 concerned performance targets based on fees effectively earned from the relevant investors.

5. The court treated expert evidence with caution. Experts could explain relevant commercial background and market practice, but could not determine the meaning of the contractual words. The principles discussed in Kingscroft v Nissan Fire and Marine [1999] Lloyd’s Report 603 and The Oakwell [1999] 1LR249 supported that approach.

6. The costs of the hearing before Master Moncaster were costs in the case. Auriel’s costs were assessed at £58,935, with interest at base rate plus 1 per cent from payment of the invoices until 8 July. Permission to appeal was refused.

Not stated in the judgment.