ON APPEAL FROM THE HIGH COURT OF JUSTICE
THE CHANCELLOR OF THE HIGH COURT
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE THOMAS
LORD JUSTICE ETHERTON
| Barclays Bank PLC
|- and -
|Nylon Capital LLP
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A Merrill Communications Company
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Mr Graham Dunning QC and Mr Nigel Dougherty (instructed by Allen & Overy LLP) for the Respondent
Hearing date: 13 June 2011
Crown Copyright ©
Lord Justice Thomas:
The LLP agreement
The disputes between Barclays and Mr Burnell on behalf of the LLP
This agreement and the rights of the Members shall be governed by and construed in accordance with English law and the Members hereby submit to the exclusive jurisdiction of the English courts."
The dispute in relation to profits
"The Managing Member [Mr Burnell] shall following the end of each financial year by reference to the Partnership Accounts drawn up in respect of that financial year by the Partnership determine the allocation of the profits amongst the Members in accordance with the provisions of Clause 9.3 and, having regard to anticipated, current or foreseen liabilities and expenditure of the partnership and the need to maintain a minimum level of financial resources, determine what proportion of such profits as have been so allocated shall be retained in the partnership or made available for drawing by Members."
Clause 9.3 then set out the principles of allocation:
"Subject to Clause 9.4 (in relation to capital profits) and Clause 9.6, the profits of the Partnership in respect of each financial year of the Partnership shall be allocated amongst the Members as follows:
(C) Thirdly, there shall be allocated to the Investor Member [Barclays] an amount equal to 19.5% of the Third Party Profit.
(E) The remainder of the profits, being the remainder of the Third Party Profit and the BB Investment Profits, shall be allocated to the Corporate Member, the Second Corporate Member, the Managing Member and Executive Members in such proportions as the Managing Member shall in his absolute discretion determine, or as he may have agreed with any Member, including to the Corporate Member in relation to the provision of the HR Services."
"'Third Party Profit' means the net profit attributable in any financial year to the management of funds or other managed accounts other than the BB Investment and any other profits (not being BB Investment Profits) of the Partnership after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or Associate of any Member, save for amounts allocated to the Corporate Member pursuant to Clause 9.3(B) or paid under Clause 8, and provided that no amounts allocated to the Investor Member or the Corporate Member as capital to its Capital Contribution Account pursuant to Clause 9.3(A)(1) or Clause 9.3(A)(2) (respectively) shall be treated as costs or expenses of the Business)."
To arrive at the Third Party Profit it is necessary to have regard to the BB Investment (defined in the LLP agreement as "the sum of £250m to be provided by Barclays") and the BB Investment Profits which are defined in the definition provisions as referring to the profit derived from the BB Investment:
"'BB Investment Profits' means the net profit attributable in any financial year to the BB Investment after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or the Associate of any Member, save for amounts allocated to the Corporate Member pursuant to Clause 9.3(B) or paid under Clause 8, and provided that no amounts allocated to the Investor Member or the Corporate Member as capital to its Capital Contribution Account pursuant to Clause 9.3(A)(1) or Clause 9.3(A)(2) (respectively) shall be treated as costs or expenses of the Business)."
i) The LLP agreement should be construed in its factual matrix.
ii) There was a collateral agreement which related to the capital profits.
The provisions of the expert determination clause
"(A) In the event of any dispute regarding (i) the amount of any profit or loss allocations due to a Member pursuant to Clause 9 or (ii) any payment due to an Outgoing Member under Clause 17, then if such dispute has not been resolved within 30 days following any determination by the Managing Member under Clause 9.2 or allocation under Clause 9.3, or any calculation or valuation made or required under Clause 17, any affected party may refer the matter or matters in dispute to a partner in an independent firm of internationally recognised chartered accountants agreed upon between them, or failing such agreement within 7 days to be selected at the instance of any party by the President for the time being of the Institute of Chartered Accountants of England and Wales. The parties shall use their respective best endeavours to procure that the accountant delivers his decision within such time as may be stipulated in the terms of reference.
(B) Such accountant shall act as an expert and not as arbitrator and shall determine the matter or matters in dispute (which may include any dispute concerning the interpretation of any provision of this Agreement or his jurisdiction to determine the dispute or the content or interpretation of his terms of reference) and his decision shall be final and binding on the parties hereto.
(C) Each of the parties hereto shall provide to the accountant such information as the accountant may reasonably require a party to provide for the purpose of determining the dispute and which such party has in its possession or under its control.
(D) The fees and expenses of the accountant shall be borne by the parties hereto equally or in such other proportions as the accountant shall direct."
The determination of the jurisdiction of the expert
Should the court determine the issue of jurisdiction first?
(i) The approach to the jurisdiction of an expert: Fiona Trust
"Having made this choice I believe that it is in accordance, not only with the presumption exemplified in the English cases cited above that those who make agreements for the resolution of disputes must show good reasons for departing from them, but also with the interests of the orderly regulation of international commerce, that having promised to take their complaints to the experts and if necessary to the arbitrators, that is where the appellants should go. The fact that the appellants now find their chosen method too slow to suit their purpose, is to my way of thinking quite beside the point."
(ii) The mandate of the expert in a dispute within his jurisdiction
"It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything."
Dillon LJ summarised his view of the modern law:
"On principle, the first step must be to see what the parties have agreed to remit to the expert, this being, as Lord Denning M.R. said in Campbell v Edwards, a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect – e.g., if he valued the wrong number of shares, or valued shares in the wrong company, or if, as in Jones (M.) v Jones (R.R.)  1 W.L.R. 840, the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that – either party would be able to say that the certificate was not binding because the expert had not done what he was appointed to do.
The present case is quite different, however, as [the experts] have done precisely what they were asked to do."
"In my judgment it [Jones] provides for a contractual analysis of the task set for the expert to perform and it gives full effect to the parties' agreement regarding with what it was that the expert should be entrusted.
The result, in my judgment, is that if parties agree to refer to the final and conclusive judgment of an expert an issue which either consists of a question of construction or necessarily involves the solution of a question of construction, the expert's decision will be final and conclusive and, therefore, not open to review or treatment by the courts as a nullity on the ground that the expert's decision on construction was erroneous in law, unless it can be shown that the expert has not performed the task assigned to him. If he has answered the right question in the wrong way, his decision will be binding. If he has answered the wrong question, his decision will be a nullity."
"If, on the proper construction of the agreement, the question sought to be put to the court is an issue within the scope of the matters remitted to the nominated arbiter, then (by definition) the parties have chosen, for better or for worse, to have that question determined by a tribunal other than the court."
"So in questions in which the parties have entrusted the power of decision to a valuer or other decision-maker, the courts will not interfere either before or after the decision. This is because the court's views about the right answer to the question are irrelevant. On the other hand the court will intervene if the decision-maker has gone outside the limits of his decision- making authority.
One must be careful about what is meant by 'the decision-making authority'. By 'a decision-making authority' I mean the power to make the wrong decision, in the sense of a decision different from that which the court would have made. Where the decision-maker is asked to decide in accordance with certain principles, he must obviously inform himself of those principles and this may mean having, in a trivial sense, to 'decide' what they mean. It does not follow that the question of what the principles mean is a matter within his decision-making authority in the sense that the parties have agreed to be bound by his views. Even if the language used by the parties is ambiguous, it must (unless void for uncertainty) have a meaning. The parties have agreed to a decision in accordance with this meaning and no other. Accordingly, if the decision-maker has acted upon what in the court's view was the wrong meaning, he has gone outside his decision-making authority. Ambiguity in this sense is different from conceptual imprecision which leaves to the judgment of the decision-maker the question of whether given facts fall within the specified criterion."
(iii) The informality of expert determination
(iv) The entitlement of the expert to determine the issue of jurisdiction first
"It does not follow, however, that because the court will intervene to correct a decision-maker who has gone outside his authority, it will declare in advance what the limits of that authority are. The reason for this reluctance is not one of substantive law but procedural convenience. It is because in advance of the decision, the true meaning of the principles upon which he has to decide is usually a hypothetical question. It is hypothetical because it will only become a live issue if one of the parties think that the decision-maker has got it wrong. It is always possible that he may get it right and therefore wasteful and premature to come to the court until he has made his decision. The practice of the courts is not to decide hypothetical questions: see Re Barnato  Ch 258."
"The defendants under this head are entitled to say that the court normally will not give a ruling as to the meaning of words to be applied by another decision-maker before he has had a chance to express his own views about it and that the courts will not answer questions which are wholly academic and hypothetical"
"The Court has jurisdiction ahead of a determination by the expert to determine a question as to the limits of his remit or the conditions which the expert must comply with in making his determination, but (as a rule of procedural convenience) will (save in exceptional circumstances) decline to do so. This is because the question is ordinarily merely hypothetical, only proving live if, after seeing the decision of the expert, one party considers that the expert got it wrong. To apply to the Court in anticipation of his decision (and before it is clear that he has got it wrong) is likely to prove wasteful of time and costs – the saving of which may be presumed to have been the, or at least one of the objectives of the parties in agreeing to the determination by the expert."
(v) Is there a real dispute?
(vi) What course is in the interests of justice and convenience?
The scope of Clause 26.1
Conclusion on the stay
The determination of the dispute on whether the profits on Barclays' initial capital investment has to be brought into account.
Lord Justice Etherton
Lord Neuberger MR