THE BOTTOM LINE
- Performing work for a target company in anticipation of an acquisition can create a legally binding, implied contract for payment, even if the M&A deal ultimately fails.
- If no fee is agreed upon, courts will determine a reasonable price based on the specific circumstances, which may be significantly lower than standard market rates, especially if training or use of the target’s facilities is involved.
- A business owner who profits from pre-deal labor (e.g., by billing that work to their own clients) cannot later claim the work was intended to be free.
THE DETAILS
This case provides a critical lesson for companies engaging in “try before you buy” scenarios during M&A negotiations. The dispute arose after two mechanics, through their newly formed company (KMS Automotive B.V.), worked for nearly a year at a classic car repair shop they intended to acquire. When the takeover negotiations collapsed over price disagreements, KMS invoiced the shop’s owner for all hours worked. The owner refused to pay, arguing the work was part of the informal due diligence and acquisition process, with no agreement for payment.
The Hague Court of Appeal disagreed, affirming that a contract for payment existed, even if it wasn’t explicitly written down. The court pointed to the parties’ actions: the mechanics were professionals who had quit their previous jobs with the owner’s knowledge, and the owner had benefited directly by invoicing their labor to her customers. Crucially, the owner’s initial response to the invoice questioned the rate and hours, not the fundamental obligation to pay. This behaviour implicitly acknowledged that some form of compensation was expected, solidifying the existence of an agreement.
Because no hourly rate was specified, the court was tasked with determining a reasonable price. It rejected KMS’s claim for standard industry rates, reasoning that the context was unique. The mechanics were gaining valuable experience with classic cars and were using the seller’s workshop and tools. Therefore, the court based the compensation on the lower rate the owner paid another experienced freelancer, creating a pragmatic benchmark. It then adjusted this rate down for the less-experienced mechanic. In its final ruling, the Court of Appeal upheld this logic but added 21% VAT, which the lower court had omitted, increasing the final award to over €84,000.
SOURCE
Gerechtshof Den Haag (The Hague Court of Appeal)
