John M. Floyd & Associates (“Floyd”) is a consulting firm that provides services to banks. Floyd entered into an agreement with Star Financial Bank (“Star”). The agreement proposed four phases of the engagement. In the “analysis” phase, Floyd would analyze current operations at the bank and come up with recommendations and a plan to implement the changes. During the “presentation” phase, Floyd would meet with Star to determine which recommendations Star wanted to pursue. During the third phase, which Floyd's proposal referred to as the “installation” phase, Floyd would coordinate and assist in the installation of approved changes and install monitoring processes to track how the changes were working. In the final “follow-up” phase, Floyd consultants would meet with Star to review the results and fine-tune any implemented changes.
The parties disputed whether Star was obligated to pay for two changes that Floyd recommended. First, Floyd recommended that the bank initiate an overdraft privilege program. Under such a program, instead of returning overdrawn checks unpaid, the bank would honor many of those checks and would charge customers a fee for the privilege of overdrawing their account. Second, Floyd recommended that Star sell its portfolio of credit card accounts to a major national credit card issuer.
Star asked Floyd not to implement either of these ideas. Shortly after Floyd made the “presentation” phase on the overdraft protection, Star engaged another banking consultant which implemented substantially the same type of program that Floyd had offered to implement, but was willing to do it for roughly one fifth of the cost Floyd intended to charge Star. Star also implemented Floyd’s recommendation to sell its consumer credit card portfolio, but used a different vendor for that sale. Floyd’s compensation on its proposal to Star was contingent on savings from Floyd’s recommendations. The cost to Star was “one-third of the first-year’s pre-tax earnings that are the results of [Floyd’s] recommendations plus out-of-pocket expenses.” The contract also provided that “[t]he bank will have the final decision as to the installation of recommendations and only approved and installed recommendations will be used to quantify earnings.” The parties agreed that Floyd did not install or follow-up on either of these recommendations because Star engaged another banking consultant.
When Star implemented the types of programs that Floyd had recommended, Floyd sued Star for breach of contract for the contingent fees that Star would have owed if Star had used Floyd for those two changes.
Floyd argued that the contract required that Star pay if Star implemented any recommendation that Floyd made, even if Star hired another entity to implement it or made the changes internally, without the help of a consultant or other contractor. Star argued that the contract only obligated it to pay for changes if Floyd recommended and installed them (or coordinated the installation).
In finding that Star did not breach its contract, the court stated: “To interpret the contract in the way that Floyd asks us to would require that we add terms to the contract that are not contained within the four corners of the document. We are unwilling to do this. The contract does not envision that Star would pay for ideas, but rather for action. In the paragraph entitled ‘Payment,’ Floyd’s proposal states that the bank would‘have the final decision’ on any recommendation and ‘only approved and installed recommendations’ would be used to quantify earnings. This is clear language that the obligation to pay did not arise after analysis or presentation of recommendations, but only after a change was installed. By the very terms of the contract, installation required that Floyd would ‘coordinate and assist in installation of approved changes [and] design and install monitoring and reporting mechanisms...’ The language here is unambiguous: the obligation to pay could not arise until a change was installed.”
The language of the contract set the measure of the payment at one-third of the benefit of the recommendations that are “accepted and installed.” But installed by whom? Floyd’s request for payment might have been valid if the contract provided that Star would pay for installed recommendations, even if Floyd was not involved in the installation. Consultants sometimes provide in their contracts for reimbursement for their ideas even if somebody else actually installs the recommendation, the theory being that the lion’s share of the work has been done at the point of recommendation.
Floyd argued that it conferred a substantial benefit on Star through its thorough analysis and its persuasive recommendation, and the obligation to pay arose when the recommendation was made. Floyd could have written into the contract that Star would be obligated to pay Floyd for any recommendation that was installed within twenty-four months of their engagement, even if somebody other than Floyd performed the installation. But Floyd did not write that term into the proposal it sent to Star, so it was not part of the contract between the parties. Floyd also could have written an exclusivity clause into the contract and required that Star refrain from using another banking consultant to implement any change that Floyd recommended for some time period after the engagement. But Floyd did not write that clause into the contract either.
The court concluded: “We have mentioned, in passing, some of the clauses that Floyd could have inserted to protect that compensation interest. But Floyd did not insert any of that language. Failing to bind Star to pay for Floyd’s work earlier in the engagement might have been slipshod contract drafting, but a slipshod contract is not necessarily an ambiguous contract. We are left to enforce the contract as we find it – a contract that left Star free to pick and choose which recommendations to adopt and free to shop for a more competitive quote from other consultants and service providers.”