New York is the heart of the capital markets. Companies rely on placement agents, brokers, and investment bankers to help them raise capital for a success fee, which is often a percentage of the capital raised. But negotiating a clear-cut fee can be challenging. Capital can be raised in many different forms (debt or equity, short term or long term, active or passive) and the ultimate form of the deal may be unforeseeable. Fee provisions can remain in effect for several years, the so-called “tail” period, during which market conditions can dramatically change. As a result, investment banking agreements sometimes provide for a customary or market-based fee—for example, a fee “consistent with investment industry practice.”

Over the past few decades, a deep split has developed between New York’s state and federal courts over the enforceability of fee provisions incorporating general commercial practice. The First Department has upheld them, but federal judges in the Southern District have invalidated them as unenforceable “agreements to agree.” Below, we explain this divide among the New York courts. We also suggest that the divide is driven by a difference in the courts’ willingness to allow contracting parties to punt on a material term. 

The First Department’s Position