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Investors’ Group Can Amend Contract Claim

In this contract dispute between plaintiff investors’ group that allegedly procured financing for defendant Allied Defense Group, a Fairfax Circuit Court reconsiders its earlier rulings on demurrers, and says plaintiff arguably has stated a claim for breach of a promise to pay plaintiff for its services after plaintiff was advised that the funding was rejected, and grants plaintiff leave to amend.

The complaint alleges that defendant Allied Defense Group contracted with a non-party, Zurmont Research Inc., for Zurmont to act as a loan broker and secure for ADG a line of credit in the amount of $10 million to $15 million for ADG’s wholly owned subsidiary, Mecar. Under that agreement, Zurmont agreed to locate for plaintiff Sterling an “offer of credit deemed acceptable by ADG at their sole discretion.” ADG agreed to pay Zurmont an unspecified commission upon the signing of the credit agreement.

Zurmont, in turn, contracted with Sterling for Sterling to act as a consultant to help Zurmont locate and negotiate the financing for ADG and Mecar. Pursuant to that contract, Zurmont promised to pay Sterling a success fee of 4 percent of the “loan funding that is made available to, and accepted by, [Zurmont’s] Client.” The success fee was to be paid at the time of the first funding to Zurmont’s client of the facility arranged.

The complaint further alleges that Sterling procured financing acceptable to ADG, but that ADG, acting in bad faith, rejected the financing. Sterling alleges that ADG never intended to finalize the financing, and only wanted the loan commitment to make ADG a more attractive merger partner for Chemring Group PLC.

The complaint alleges that, after Sterling learned of ADG’s wrongful conduct, it contacted ADG to request the success fee. ADG said it could not enter into any agreement for payment for services without the consent of its merger partner. Nevertheless, the complaint states, ADG acknowledged Sterling Investors’ right to compensation. ADG requested that Sterling continue working for it in the event that the merger fell through and ADG would need the financing. In later emails, Sterling told ADG that Sterling would not receive the success fee but also “acknowledged ADG’s obligation to compensate Sterling Investors.”

ADC and Mecar demurred to the complaint; Sterling opposed the demurrer. The court sustained the demurrer without leave to amend. The court ruled that ADG had the right in its sole discretion to reject any financing that Zurmont might procure. Zurmont’s consulting contract with Sterling similarly limited Sterling’s right to payment of a success fee upon the acceptance of a credit facility. The success fee was payable on first funding, an event which did not occur.

The court found that the “prevention doctrine” did not save Sterling’s claims. The covenant of good faith was contained in an agreement between Zurmont and Sterling, not ADG and Sterling. (Zurmont is not a party to this suit). Zurmont’s ability to bind ADG and Mecar was limited by ADG’s express reservation of the right to reject any funding in ADG’s sole discretion. The use of the term “sole discretion” meant that ADG could reject a proposed loan for any reason or for no reason. In effect, by specifying its ability to reject any proposed funding in its sole discretion, ADG negotiated for the right to act unreasonably. The court concluded that Sterling was asking the court to rewrite ADG’s contractual obligation to provide that ADG will not unreasonably withhold its acceptance of any funding procured. The court, of course, cannot rewrite the parties’ contracts.

Having reviewed Sterling’s motion to reconsider, the court concludes that plaintiff arguably has stated some sort of claim for breach of a promise to pay Sterling for its services after Sterling was advised that the funding was rejected in favor of ADG merger with Chemring and was asked to “continue working” for ADG.

The court will sustain the demurrer as to counts I, II and III, with leave to amend count II to allege a breach of oral contract, if counsel can in accordance with counsel’s obligations under Va. Code § 8.01-271.1, based on the facts alleged in paragraphs 28 through 30 of the complaint.

Sterling Investors Group Ltd. v. The Allied Defense Group (Roush) No. CL 2010-5276, Jan. 28, 2011; Fairfax Cir.Ct.; Bruce M. Blanchard, Douglas R. Kay for the parties. VLW 011-8-035, 6 pp.

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