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OUTER HOUSE, COURT OF SESSION

[2008] CSOH 2

CA9/07

OPINION OF LORD GLENNIE

in the cause

SCOTT GRECK

Pursuer;

against

HENDERSON ASIA PACIFIC EQUITY PARTNERS (FP) LP

First Defender;

HENDERSON EQUITY PARTNERS (GP) LIMITED

Second Defender;

HENDERSON EQUITY PARTNERS LIMITED

Third Defender;

ROGER GREVILLE

Fourth Defender:

________________

Pursuer: MacKenzie, Solicitor Advocate, Pinsent Masons

Defenders: Johnston QC, Burness LLP

8 January 2008

Introduction

[1] The pursuer seeks declarator that he is a "Good Leaver" in terms of a Limited Partnership Agreement ("The Limited Partnership Agreement") dated 21 November 2001 between himself, the second defender and others. The second defender ("the General Partner"), as the General Partner in the Limited Partnership established by The Limited Partnership Agreement ("the Limited Partnership"), has declared the pursuer to be a "Bad Leaver". The pursuer's status as a "Good" or "Bad" Leaver has consequences in terms of his entitlement to "carried interest" in the assets of the Limited Partnership.

[2] The pursuer has been involved in the private equity business for a number of years. In about August 2000 he entered into employment with AMP, an Australian private equity business, which had acquired Henderson Global Investors in 1998 and, in consequence, when the pursuer joined in 2000, operated in the private equity business worldwide. At the beginning of his employment with AMP, the pursuer was based in Sydney, Australia. AMP was about to launch the Henderson Asia Pacific Equity Partners I fund (HAPEP I), a pan-Asian private equity fund. The pursuer was one of the investment managers in the HAPEP I fund. In 2001 he became a partner in the Limited Partnership which, as I explain below, was designed to give investment managers in the HAPEP I fund a stake in the success of the fund. In 2002 the pursuer moved his base to Singapore on the instruction of Sanjiv Kapur, the managing partner in HAPEP I, who had decided that opportunities were being missed through the fund not having people "on the ground" where the investment opportunities were. Thereafter, until sometime in 2005, the HAPEP I fund had an Asian "team" under Sanjiv Kapur, consisting of Lucian Wu in Hong Kong, the pursuer in Singapore, and Vishal Marwaha and Wei Hsien Chan in India.

[3] At the end of December 2003, for reasons which I need not go into, AMP and Henderson "de-merged". The position after the de-merger was that AMP retained the business in Australia and New Zealand, whilst the UK, North American and Asian operations were retained by Henderson - that is no doubt an oversimplification, but it is sufficient for the purposes of this action. Since the pursuer was involved in the pan-Asian HAPEP I fund, he went with the Henderson side of the business; and his contract of employment was transferred to Henderson Global Investors (Singapore) Limited. He remained based in Singapore. Save where it is necessary to identify presently which "Henderson" company is involved at any particular stage, I shall refer to them indiscriminately as "Henderson" or collectively as "Henderson group".

[4] Early in 2005 Henderson began marketing to institutional investors a new fund called Henderson Asia Pacific Equity Partners II ("HAPEP II"). The intention was to market HAPEP II on the strength of the success of HAPEP I, using the same investment management team. However, difficulties were soon encountered due to the departure from Henderson of a number of people who had been part of that team. Sanjiv Kapur and Lucian Wu left in September and October 2005. Others left shortly afterwards. At the end of 2005 the pursuer was made a partner in the HAPEP II fund (no doubt, though it was not produced in evidence, under an agreement similar to the Limited Partnership Agreement). The other two partners involved in the HAPEP II fund at that time were Vishal Marwaha and the fourth defender, Roger Greville.

[5] On 27 March 2006 the pursuer sent a letter of resignation from Henderson Global Investors (Singapore) Limited. He was asked to extend his notice period until fundraising for HAPEP II had been completed but he declined. He explained in evidence that he wanted to return to Australia both for family reasons and because there were uncertainties over the HAPEP II fund. He finally left on 10 June 2006, having assisted in recruiting a replacement, Sigit Prasetya. About three weeks later, on about 3 July 2006, he joined Archer Capital Pty Limited ("Archer"), a private equity manager based in Sydney, Australia. At a board meeting of the General Partner on 29 January 2007, it was noted that the pursuer had previously been treated as an Intermediate Leaver. The minutes of the meeting go on to say this:

"However the Company [the General Partner] had become aware that [the pursuer] had joined a competitor within 6 months of becoming a Leaver and as such, pursuant to the terms of part 1 of Schedule 2 to the LPA [The Limited Partnership Agreement], became a Bad Leaver on 10 June 2006."

It is this decision as to his status which has provoked the present litigation. The pursuer's principal contention is that Archer is not a competitor of Henderson or any associated company.

The Limited Partnership Agreement

[6] All the witnesses were agreed that investors in private equity funds wanted the investment fund managers to be "aligned with them" by sharing in the successes of the fund. They wanted the investment team to be "incentivised". Accordingly, in addition to remuneration by way of salary and bonuses, fund managers receive a share of the gains made by the fund. Such an arrangement is not uncommon in the private equity business, although the precise terms of, and amounts involved in, any such scheme may differ from one company to another. The pursuer told me that typically some 20% of any profit over 8% per annum might be shared between the individual fund managers and the company (through the General Partner); and the portion going to the individual fund managers would be shared between them in differing percentages reflecting the seniority and experience of the particular individual and the length of time he had been with the company and/or the particular fund. The intent is not only to reward fund managers for the success of the fund to which they have contributed but also to encourage them to stay with the fund, the stability and continuity in the investment team being of importance to the success of the fund. To this end the scheme will often provide for the entitlement of an individual investment manager to be reduced if he leaves early in the life of the fund; and for his entitlement to be removed altogether if, within a certain period after leaving, he takes up employment with a competitor. Within Henderson, the share of the profits of the fund which goes to the fund managers as an incentive is known as "carried interest" (or "carry"). For tax reasons, as to which I heard very little, the incentive scheme is channelled through a limited partnership. Each limited partnership relates to only one fund. It appears that a separate limited partnership is established in respect of each private equity fund in order to give effect to a similar incentive scheme in relation to that fund.

[9] The Limited Partnership Agreement provides for the allocation of sums to the partners in accordance with their "Relevant Proportion", i.e. the percentage set against their names in Schedule 1 as adjusted or amended from time to time. Schedule 1 contains the names of the Carried Interested Partners and the General Partner. The Relevant Proportion attributable to the General Partner is 46.9232%. The balance is apportioned between the individual Carried Interest Partners. The Relevant Proportion attributed to the pursuer is 4.6154% (of the whole). Schedule 2 provides for the making of adjustments to these percentages to deal with the cases of people joining after the beginning of the Limited Partnership or leaving before the end. The adjustment to be made where people leave early is governed by paragraphs 2, 3 and 4 of Schedule 2 Part 1. The position varies depending upon the Leaver status of the person leaving.

[10] Before turning to those paragraphs, it is necessary to note certain definitions in that Part of Schedule 2. A "Leaver" is defined as:

"A Carried Interest Partner who has, or whose Related Party has, ceased for whatever reason to be employed full time, by Henderson Administration Limited, the Manager or any Associate of the Manager (referred to in this definition as the 'Employers') ..."

That last expression covers, in effect, all companies within the Henderson group. Leavers are classified into Good Leavers, Bad Leavers and Intermediate Leavers. A Good Leaver is someone who has become a Leaver by reason of death, retirement (on or after the age of sixty), disability or other incapacity, or termination for any reason other than "for cause". Of central importance to the present action is the definition of Bad Leaver. A Bad Leaver is:

"any Leaver who has, or whose Related Party has:

(i) Prior to a Change in Control or Default Event voluntarily become a Leaver and who, or whose Related Party, within six months of them or their Related Party becoming a Leaver joins a competitor of the Manager or any Associate; or

(ii) Who has become a Leaver by reason of termination for cause;

and for the purposes of this definition a Leaver shall be deemed to have joined a competitor of the Manager or any Associate if they (or their Related Party) take employment with, or provides services to, a competitor of the Manager or any Associate and a business shall be deemed to compete with the Manager or any Associate if its business includes making, dealing in, managing or advising as to unquoted equity investments whether for its own account as principal or as agent, trustee, manager or adviser on behalf of others or if it includes seeking to raise or raising commitments (or similar) from other persons to facilitate the making, dealing in, managing or advising as to unquoted equity investments and further, for the avoidance of doubt, any Leaver who has become a Leaver by reason of them (or their Related Party) being constructively dismissed shall not be deemed to have voluntarily become a Leaver."

The definition of an Intermediate Leaver is: "A Leaver who is not (at any time) either a Good Leaver or a Bad Leaver".

[11] Paragraphs 2, 3 and 4 of Schedule 2 Part 1 set out the consequences, in terms of the adjustments to be made to the Relevant Proportion when a Carried Interest Partner leaves early, of him being classified as a Good, Bad or Intermediate Leaver. In summary the position is as follows:

(1) If he is a Good Leaver, then his Relevant Proportion may be reduced depending upon when he leaves. The amount of the reduction is set out in Schedule 2 Part 2. If he leaves before 1 January 2006, i.e. within the first five years of the life of the fund (a period which, according to the evidence, can be described as the "investment period"), he suffers a reduction to his Relevant Proportion calculated according to a formula therein set out. The position improves after the Investment Period. If he leaves within a year after the end of the Investment Period, his Relevant Proportion is reduced by 20%. If he leaves during the following year, it is reduced by only 10%. And if he leaves more than two years after the end of the Investment Period, his Relevant Proportion is not reduced at all.

(2) The treatment given to an Intermediate Leaver is somewhat less favourable. He loses all of his Relevant Proportion if he leaves within the first three years of the life of the fund. If he leaves in the next two years his Relevant Proportion is reduced by reference to a formula set out in Schedule 2 Part 3 - the reduction is by rather more than the reduction applicable to a Good Leaver who leaves at the same time. However, if he does not leave until on or after 1 January 2006, i.e. until after the end of the Investment Period, then he is treated as if he were a Good Leaver (see para.4 of Part 3).

(3) By contrast, a Bad Leaver, whenever he leaves, ceases to be a partner in the Limited Partnership and has his Relevant Proportion reduced to zero: Schedule 2, Part 1 para.3.1. (This is subject to him remaining entitled to his share of such sums, if any, as are held in an escrow account and which, but for certain events, would otherwise have been distributed to him before he became a Bad Leaver - but for present purposes this can be disregarded.)

In each case where there is a reduction in a Leaver's Relevant Proportion, the Relevant Proportions of the remaining Carried Interest Partners and of the General Manager are increased by an amount which is roughly in proportion to their pre-existing interests.

[12] The practical effect of these provisions was summarised in a letter from Henderson to the pursuer dated 20 July 2001 setting out the terms on which he was invited to become a partner in the Limited Partnership. This letter, which parties referred to as the "vesting schedule", set out in percentage terms the respective entitlements of Good, Bad and Intermediate Leavers. It provided that a Good Leaver could expect to retain the following amount of carried interest:

Leaver during Year 1	70% of the Invested Proportion of the Fund (%)
Leaver during Year 2	70% of the Invested Proportion of the Fund (%)
Leaver during Year 3	70% of the Invested Proportion of the Fund (%)
Leaver during Year 4	70% of the Invested Proportion of the Fund (%)
Leaver during Year 5	70% of the Invested Proportion of the Fund (%)
Leaver during Year 6	80%
Leaver during Year 7	90%
Leaver after Year 7	100%

An Intermediate Leaver could expect to receive the following amount:

Leaver during Year 1	0%
Leaver during Year 2	0%
Leaver during Year 3	0%
Leaver during Year 4	70% of the Good Leaver Schedule
Leaver during Year 5	85% of the Good Leaver Schedule
Leaver during Year 6	100% of the Good Leaver Schedule
Leaver during Year 7	100% of the Good Leaver Schedule
Leaver after Year 7	100% of the Good Leaver Schedule

A Bad Leaver, however, immediately forfeits the whole of his future entitlement to carried interest.

[13] Two other provisions of Schedule 2 Part 1 to The Limited Partnership Agreement are relevant to the issues in this action. The first is para.3.4 of that Part. This permits the General Partner, in his discretion, to allow a Bad Leaver to be treated in many respects as if he were a Good Leaver. That paragraph provides as follows:

"3.4 Notwithstanding the above, the General Partner may in its sole discretion determine in respect of a Bad Leaver that paragraphs 3.1, 3.2 and 3.3 shall not apply and instead that the provisions of paragraph 2 shall apply as if such Bad Leaver were a Good Leaver save that the reduction of Relevant Proportion pursuant to paragraph 2(a) shall be determined not in accordance with Part 2 of Schedule 2 but in the General Partner's sole discretion (to be determined within 60 days of the Carried Interest Partner becoming a Bad Leaver). Adjustments to Capital Contributions as a result of a reduction to the Relevant Proportion shall be made in accordance with paragraph 6."

The second is para.3.5 of Schedule 2 Part 1. This applies the Bad Leaver provisions to any Intermediate Leaver who, after becoming an Intermediate Leaver, subsequently becomes a Bad Leaver.

The Evidence

[14] I heard evidence in this case from four witnesses. They were, in order of giving evidence: (i) the pursuer; (ii) David Bull, a former finance director within Henderson and their Head of Private Equity in Europe, and now Chief Financial Officer with Archer; (iii) Roger Yates, the Chief Executive Officer of Henderson Group plc; and (iv) Roger Greville, the fourth defender. The first three were called by the pursuer and the fourth by the defenders. There was little dispute between them on the way in which the private equity business operated. The main point of contention was as to whether, as a matter of fact (and regardless of the definition of competitor in the Limited Partnership Agreement), Archer could be said in fact to compete with Henderson. Otherwise the differences between them consisted mainly of differences of emphasis and interpretation. Neither party challenged the general credibility or reliability of any of the witnesses. It was clear that they were all knowledgeable about the private equity business. Although the pursuer gave his evidence when he was clearly fatigued the day after a long flight from Australia, and Mr Bull gave his evidence by video link from Australia, I was satisfied that they were not disadvantaged by this - they were both able to give the evidence they wanted to give and to do so with the same clarity and cogency as the other witnesses. All of their evidence was helpful in giving the court an understanding of the salient features of the private equity business. I summarise it below.

(i) The pursuer

[15] The pursuer gave evidence as to the private equity business generally and the particular activities of both Archer and Henderson. He said that private equity investment was at the riskier end of the investment range. Pension funds would put about 6-8 percent of their investment into private equity funds. His role as an investment manager involved identifying businesses in which to invest, executing the investment and then managing those businesses with a view to selling them for such sum as would maximise the return for the investors in the fund. The majority of his time was spent in "sourcing deals", i.e. identifying and trying to secure investment opportunities. He might expect to look at about 150 companies and only make one investment. Usually the deals would be sourced through accountancy firms or banks; but where there were a number of funds targeting the same types of business in the same way, they would sometimes approach certain businesses direct rather than through intermediaries. There was no scientific answer to the question of how to win a particular deal. One consideration was price. Another, particularly if the existing management was staying in the business, was the personal relationship between that management and the fund manager, and the investor's plans for the business. Where intermediaries were involved, the relationship with the intermediary was important. The skills needed of a successful fund manager were many and varied. He needed to be numerate and analytical but also to be able to connect with people. He needed a commercial and strategic mind. Once the fund was interested in a particular company as an investment opportunity, they would sign a confidentiality agreement and on that basis see confidential information from the company. In this way a fund manager would acquire a bank of knowledge enabling him to compare one opportunity with another. But he would hold no confidential information about the private equity fund itself apart from his awareness of the then current targets for potential investment. He emphasised that it was important as a fund manager to have a geographic focus and, to be taken seriously, to have an ear to the ground. It was an advantage to be on the spot where the potential investments were.

[16] The normal life of a fund was ten years, but the fund manager could extend that by about two years. That ten year period was normally divided into an "investment period", usually the first five years, within which the fund would both attract investors and source deals and make investments into identified businesses. After that investment period they would start selling to realise the best profit on their investment. The period in between making the investment and selling (generally about four to five years) would, in the case of each company, be taken up working with the management of the company (or sometimes in taking over the management of the company altogether) in attempting to grow the business and maximise the value of the investment.

[17] The pursuer joined AMP in August 2000. He was based in Sydney and became part of the HAPEP I fund which was about to be launched. He joined as an investment manager and reported to Sanjiv Kapur. AMP was a big player in the private equity business. It had been in the private equity business in Australia since the 1960s and had sought to expand into other markets when it acquired Henderson. When the pursuer joined, it had private equity investments in Chile, Alaska, Australia, New Zealand and Europe. The pursuer moved to Singapore in 2002 because Sanjiv Kapur had decided that, without being on the ground, they were not seeing the opportunities as they arose. At the same time as he moved himself and the pursuer to Singapore, Sanjiv Kapur decided to set up an Asian team with Lucian Wu in Hong Kong and Vishal Marwaha and Wei Hsien Chan in India. The fund thereafter had offices in India, Hong Kong and Singapore. This was all part of the process of being taken seriously. Shortly after the pursuer arrived in Singapore, there was further discussion as a result of which it was agreed that he would work with the Delhi partners for deals in India; and from that time onwards he focused almost entirely on India. After the de-merger he joined Henderson. Despite being UK based, Henderson in effect continued the UK, North American and Asian private equity business, including the business on which he was engaged.

[18] The pursuer referred to the Private Placement Memorandum ("PPM") for the HAPEP II fund issued on 25 January 2006. The PPM is designed to tell investors about the fund and to encourage them to invest in it. The fund was being promoted on the basis that the investment team which had been responsible for the success of HAPEP I would carry out the investment activities for HAPEP II. There had been some changes to the investment team by the time the PPM was issued, amongst the most important of which was the replacement of Sanjiv Kapur by the fourth defender as managing partner, but the remaining members had been responsible for sourcing some 85% of the investment for HAPEP I. The PPM outlined the investment strategy to be applied and emphasised the advantage which this fund had by having an investment team with a thorough knowledge of targeted industries. It emphasised that in the Asian market business opportunities were gained through relationships and through having a team on the ground. Other documents to which he referred in his evidence also reflected the importance of the team. A revised PPM dated 2 March 2007 for the HAPEP II fund did not show the pursuer as one of the team, but it still sought to emphasise the continuity from the earlier fund.

[19] He was presently working for Archer. He was involved in a particular private equity fund investing in Australian and New Zealand businesses, the value of any one investment being between Aus $20-100 million. This fund was typically looking at family businesses facing, for example, succession issues and therefore wanting to sell out altogether, or at least to sell a majority stake. He only looked to source deals in Australia and New Zealand. That was true of Archer as a whole. They only invested in businesses headquartered in Australia and New Zealand.

[20] Asked what value he brought to Archer when he joined it from Henderson, he answered: "not a lot". He had been out of the Australian market for five or six years and had lost contact with key people; his knowledge of Asian markets was no good to Archer. When he went back to Australia, on joining Archer, it took him a good twelve months to be in a position to see opportunities. He had not yet completed a deal with Archer; and the fund for which he was working had only completed one deal so far. Nonetheless, he accepted in a broad sense that private equity companies were global businesses and competed for talent - the recruitment of Mr Bull and himself by Archer were illustrative of this.

[21] In order to emphasise the lack of competition between Henderson and Archer, the pursuer referred to an internal Henderson document concerning "Competition in the Asian Private Equity Space". He said it was a document provided to potential investors to inform them of the Asian market. It explained the difference between "country" and "regional" funds, the former investing in only one country while the latter covered a number of countries in a region. The pursuer said that Archer was a country fund, Australia and New Zealand being regarded as one country for this purpose. Under the heading "Who are the competitors for HAPEP?" the document listed and described "some of the key players in the Asian PE market". At Henderson, he said, we knew who our competitors were. The list did not include Archer. Another document, "Profiles of Asian Private Equity Market Participants", painted the same picture. He referred to pages from the Henderson Group Plc website which contained no reference to Henderson doing business in Australia. It was true that they had a registered office there, but this was only to deal with shareholder enquiries arising from the de-merger. A cutting from the Australian Financial Review of 5 March 2007 quoted the Henderson Chief Executive, Roger Yates, as saying that Henderson had no plans to enter the Australian market. By contrast, the Archer website showed it to be focused on investments in businesses headquartered in Australia or New Zealand. In cross-examination on this part of his evidence, the pursuer accepted that Archer and Henderson sought to attract the same investors. There was therefore some competition between them, but only in a broad sense. Investors sought to diversify, he said. They tended to make their investment decisions based on the geographic focus of the fund. Within that area, they would back the best manager. He accepted that companies in one country might have subsidiaries in another, but did not accept that this resulted in any significant overlap or competition between private equity funds concentrating on different countries.

[22] He explained that his reasons for resigning from Henderson in March 2006 had been twofold. He and his wife had just had a young son and he wanted to be home in Australia. In addition he had some uncertainties over the future of the HAPEP II fund given the individuals who had left. After some discussions, in particular with Roger Greville, it was agreed that his last day of employment would be 10 June 2006. A letter from Henderson dated 25 May 2006 confirmed these arrangements. There was no mention of carried interest in the letter. The pursuer said that he thought that he would get the amount set out in the vesting schedule for a Good Leaver, because he was joining a company far removed from the market in which Henderson worked. Henderson knew that he was going to Australia. He explained to Archer when he joined them that, as an Intermediate Leaver - who, since it was after the end of the Investment Period, was to be treated as a Good Leaver - he expected to lose 20% of his carried interest entitlement. He asked Archer to compensate him for that loss and they agreed to do that. He knew that a Bad Leaver would lose 100% of his entitlement, but he thought that he was not a Bad Leaver because Archer was not a competitor.

[23] After he tendered his resignation on 27 March 2006, Mr Greville had asked him if he would stay on until the fundraising for HAPEP II was completed. He was not willing to do this. Quite apart from wanting to get back to Australia for family reasons, he did not want to be a party to any misrepresentation to the effect that he was going to be part of the team on HAPEP II. Although he had known that the HAPEP II fund was being marketed on the basis that he was part of the team, he had never made a commitment to stay with the fund for any particular period. Having decided to resign, he wished to leave quickly so as to avoid the risk of would-be investors being misled. He referred to a series of e-mail exchanges between himself and the fourth defender. He had emphasised on 30 March 2006 that he was not willing to extend his notice period. Henderson were clearly concerned about the timing of the announcement of his resignation. He accepted in cross-examination that his resignation came at an inconvenient moment for the HAPEP II fund. As he put it, his name added to a growing list of departures. Gaps remained to be filled. However, he rejected the idea that this led to adverse public reaction or negative publicity for the fund. He attributed the fund's difficulties to other factors.

[24] Before leaving, the pursuer had helped to recruit his replacement, Sigit Prasetya. In August 2006, soon after leaving, he had at the request of Mr Greville provided a reference for Henderson to a potential investor in the HAPEP II fund. It was at this time, he said, that he was first told that he was to be regarded as a Bad Leaver. He was disappointed, and had asked: how can I in good faith give a decent reference if I am treated as a Bad Leaver? He nonetheless gave the reference.

[25] He received a number of documents after he had left Henderson which he would not have expected to receive had he been regarded as a Bad Leaver. These included quarterly reports on the HAPEP I fund as at 30 September 2006, 31 December 2006 and 30 June 2007. People at Henderson knew that he had joined Archer. He had given Mr Greville his contact details there in July 2006. He had received e-mails of congratulation about his employment with Archer. If he was a Bad Leaver, with no remaining entitlement to "carried interest" under the Limited Partnership Agreement, why was he being sent such documents?

[26] He was formally told that he was a Bad Leaver by letter dated 17 January 2007. He had been told by phone on the previous day. He was extremely disappointed, particularly since he had left on good terms. He said that he was never given any reason for the failure to exercise the discretion in his favour; nor was he given any opportunity to influence the exercise of that discretion.

[27] In the course of his evidence, the pursuer gave evidence as to other employees of Henderson who had left. I deal with these below. His argument was that these others had been treated more favourably than he had been treated. He commented particularly on the departure of Sanjiv Kapur. There had been friction within the team. Something had had to give. He had brought certain matters to the attention of Mr Greville which, he thought, should have led to Mr Kapur having his employment terminated for cause. He told Mr Greville this but his advice was not accepted. In the event, Mr Kapur left as a Good Leaver. In answer to a suggestion put to him in cross-examination, he said that he did not recall Mr Greville emphasising to him how important it was that he stayed.

(ii) David Bull

[28] Mr Bull described his position both in Henderson and in Archer. He had left Henderson because of family considerations. Within Henderson he had been responsible for the "non deal-doing" activities. He spoke to the organisation of the Henderson group. He had been responsible for establishing the group structure; and for putting in place the carried interest scheme under which team members participated in the growth of the fund. He was involved in drafting the documentation. Members of the team, including the pursuer, had obtained legal advice, paid for by Henderson, before joining the partnership. He agreed with the pursuer that it was only for historical reasons, to do with the de-merger, that Henderson had a representative office in Australia. As far as he knew, they had no investment manager in Australia. However, he accepted, when asked about Henderson's PPM, that nothing in it precluded Henderson from seeking investment opportunities within Australia and New Zealand.

[29] Mr Bull gave evidence as to the private equity business generally and the question of competition between Henderson and Archer. He confirmed what the pursuer had said about the "investment period" in the life of a fund. He supported the pursuer's evidence that although investors might come from anywhere and that, to that extent, the market was global, nonetheless the business was not competitive between funds operating in different regions. Investors identified the country or region that they wanted to be in and then backed the best manager in that area. He accepted that it was possible for private equity business in different countries or regions to compete through subsidiaries of target companies, but said that, typically, Australian companies had not worked through foreign subsidiaries. It would have been unusual for a would-be investor in Asia to approach Archer. It was seen as a different market from that in Australia. Any decision about investing in Australia would have been quite separate from a decision about investing in Asia. Fund managers tried to "sell" their funds by reference to the countries or regions in which they operated. Potential investors wanted to know that the team had the knowledge to operate in the market that they wanted to invest in.

[30] Mr Bull said that when he tendered his resignation he did not have another job lined up. He wanted to go to Australia for family reasons. It was difficult to secure employment from a distance. His plan was to take a break, go out there and see what happened. Henderson wanted him to extend his notice period. He told them that he was prepared to extend it, but was concerned with what it would mean in terms of having to take another six months off afterwards in order to be a Good or Intermediate Leaver and thereby protect his carried interest. He discussed the matter with Roger Greville and Roger Yates and they agreed that he would be considered a Good Leaver even if he were to join a competitor within 6 months of his (delayed) leaving date.

(iii) Roger Yates

[31] Roger Yates gave evidence about the Henderson group and the private equity market generally. He explained that AMP and Henderson had split on a geographical basis. The shareholders received one share in each company. Henderson therefore had a historical listing on the Australian stock exchange. Some of the original shareholders had now been replaced by institutional investors in Australia. Henderson kept a representative office there, with a staff of two, dealing with shareholder enquiries. They had no investment manager based in Australia.

[32] He explained that the Henderson group was purely an investment management business. It managed about £61 billion of investments. By far the greater part of that (about £50 billion) was in listed assets, i.e. publicly quoted securities. The client base for that was international. It managed something over £1.1 billion investments in private equity. The largest part was made up of two infrastructure funds (Private Finance Initiatives), then the Asian funds (HAPEP I and II) and some smaller funds. The client base differed from fund to fund. The infrastructure funds were mainly UK based. In HAPEP I the biggest investor was a UK institution, though he thought there was one Australian investor as well. The investors in HAPEP II, which was still marketing, were more international in scope. The Henderson Group plc website described the group as "a financial services group focused on asset management operations in Europe, Asia and the United States ...". Mr Yates said that he was happy with that headline but it was in no way designed to be exclusive. He confirmed that they had not been involved in Australian domiciled businesses thus far. He was referred to an interview in The Australian Financial Review dated 5 March 2007 in which it was attributed to him that Henderson had no plans to make a splash in Australia because of the structure of the local market which favoured large wealth managers such as the big four banks and AMP. He accepted that he had said this and he stood by it. They had no particular plans to create an office in Australia so as to compete head on; but they did invest in Australian companies, albeit from London, and did have Australian clients. He confirmed again that they had not done any private equity business in Australia to date, though, as the article quoted him as saying, they would continue to monitor Australia. In cross-examination, he emphasised that he had meant that if they developed products of interest to Australian investors, they would then decide whether to make more efforts to win Australian clients. The percentage of Australian investors was continuing to rise. Under reference to a document about Henderson Global Investors, he explained the terms "country fund" and "regional fund". With the former, all or most of the fund's investments are in businesses domiciled in the particular country or which do most of their business there. With the latter, investments are more broadly spread across a region. The document identified Henderson's major competitors. They did not include Archer. He knew very little about Archer; but he did know that they operated a number of private equity funds and invested largely, but not exclusively, in Australian based companies. In cross-examination he was asked whom he regarded as competitors. He replied that there were legions of competitors on many levels. There was competition for staff, which was global in nature, and competition for assets and for clients.

[33] Mr Yates explained the arrangements made with David Bull on his departure. It was very straightforward. Henderson were in discussions with one of their clients. Mr Bull knew all the details. It was essential from Henderson's point of view that Mr Bull continued working for Henderson until these discussions had been concluded. In exchange for him extending his notice period, it was agreed that he would be a Good Leaver. Otherwise, by staying on, Mr Bull would be prejudiced in any future employment plans, in that the commencement of the six month period (before the expiry of which he could not work for a competitor without losing his carried interest entitlement) would be delayed. He regarded the pursuer's assistance in finding a replacement as helpful, but it was quite a different situation from that surrounding Mr Bull's departure. In cross-examination he accepted that he did not personally have the power to agree that Mr Bull should be a Good Leaver. This was for the board of the General Partner to decide. But he made a recommendation to them that they make Mr Bull a Good Leaver, and they agreed.

[34] In answer to a question about how much Henderson employees would have known about the carried interest arrangements, Mr Yates said that he thought that they would know about the whole process, including the Good Leaver/ Bad Leaver classification and its consequences, in "almost forensic detail".

(iv) Roger Greville

[35] As well as being managing director of the Manager, Mr Greville was co-head of Henderson's Asia-Pacific Funds and a carried interest partner in both HAPEP I and HAPEP II. He had stayed with Henderson after the de-merger, running its world-wide operations. The role of the Manager was that of gathering money from investors who wanted to invest in unlisted assets and of managing and growing the businesses into which they invested. He said that clients (investors) were interested in the track record of the company and concerned about the stability of the investment management team (whether they would stay together; and how to lock them in). In this connection he referred to the scheme in place for rewarding members of the team by carried interest in addition to their salary and bonus. The carried interest scheme implied a long term link with investors. The life of a fund was ten years. A successful private equity business had overlapping funds and would aim to keep a stable investment management team in place over a considerable period of time. If people left the team, this had to be handled delicately with investors. The carried interest scheme was the component to which investors looked to ensure that the team was together for an extended period of time. In the private equity business it was typical of such schemes that a person would expect to lose his carried interest entitlement if, having left, he went to join another organisation to carry on similar activities. He thought that this was pretty standard in the market place.

[36] Mr Greville gave evidence about how Sanjiv Kapur came to leave. The team had become fractured. There had been criticism from the pursuer and others of certain deals which Mr Kapur had carried through; and Mr Kapur, in turn, had made negative comments about some members of the team. Mr Greville looked into the complaints against Mr Kapur. He decided that there was no foundation for some of the allegations. There had been more substance in some of the others, but after careful consideration he had formed the opinion that it would be almost impossible to dismiss Mr Kapur "for cause". He had tried unsuccessfully to get the team working together again. He was faced with a difficult position. Mr Kapur had headed up a successful team but it was no longer viable. Mr Greville had to decide whom to back. He wanted to get the fundraising for HAPEP II under way. One option was to let Mr Kapur go and rebuild the team with himself (Mr Greville) playing a bigger role. There were many one-to-one discussions in which he tried to get commitments from the pursuer and others that, if he let Mr Kapur go, they would stay. He felt that he had commitments from the pursuer and some others, though he recognised that some might leave - I should note that, in the face of an objection to this line based on lack of record, Mr Johnston confirmed that he did not seek to rely on any evidence to the effect that the pursuer had given a commitment to stay for the whole life of the fund. Mr Greville said that he took the decision to let Mr Kapur go. It was really a commercial decision to let him go. He decided that he could not terminate his employment for cause. Accordingly, Mr Kapur left as a Good Leaver and therefore retained a significant percentage of his carried interest. He was put on gardening leave in September 2005 and left his employment in April 2006. During the intervening period, Lucian Wu, Roger Wu and Wei Hsien Chan all left and, with the pursuer's help, replacements were hired. This was all just before the pursuer left.

[37] Mr Greville said that the pursuer telephoned him to say that his letter of resignation was coming by fax. The pursuer had said that he was leaving principally for family reasons but also because fundraising (for HAPEP II) was not going so well. They had spent some time together when Mr Greville was in Singapore the previous week, but the pursuer had not mentioned that he was leaving. He could understand the timing, and his not mentioning it before then, since the pursuer would not have wanted to do anything before he received his bonus. When he heard the news he was flabbergasted, stunned. The implications both for him and the fundraising were "monumental". In cross-examination he maintained this position: it was a "devastating" blow. Mr Greville described the impact on the HAPEP II fund. He had wondered whether they should stop raising money for HAPEP II. By this time they had put together the presentation pack for HAPEP II. The pursuer was identified as a partner in the team being built around the remnants of the old team. Quite a lot of marketing had been done. The pursuer had been involved in the marketing within Europe. They had had to re-configure things and delay going back to the market while they worked out how to present the situation. Mr Greville went through the exchange of e-mails between himself and the pursuer. He tried to persuade him to change his mind. Failing that, he wanted him to stay longer than the three month notice period. When marketing the fund, they would have to tell clients that he was leaving, and they therefore wanted more time to manage the transition smoothly. The pursuer was not willing to extend his notice period. He was pushing to go earlier than the three months. He had mentioned at one point that he was losing his patience, which Mr Greville thought was "pretty amazing" in the circumstances. The pursuer helped in the recruitment of his replacement, Sigit Prasetya, but this was not entirely successful since Mr Prasetya moved on to greener pastures soon afterwards. The pursuer had also helped Henderson by giving a reference. This was in late August 2006. Mr Greville explained that they were trying to get an investor to come into the fund. One of the people from the investor had wanted to interview the pursuer, to find out why he left and why Mr Kapur had left, and to ask his views about the team that remained. Mr Greville had rung the pursuer to find out if he would take the call. The pursuer had turned it into a negotiation over the "carry". He had said that he was taking a risk in giving a reference; and that he felt badly treated because Mr Kapur had been treated as a Good Leaver, whereas he was an Intermediate Leaver and his position was up in the air. Mr Greville told him he was not participating in a negotiation and cut him off. Mr Greville knew that at this time the pursuer was working for Archer. Soon afterwards he received an e-mail from the pursuer saying that he, Mr Greville, had got the wrong end of the stick. He was willing to speak to the potential investor and did so. The feedback that Mr Greville got from this was "lukewarm".

[38] Mr Greville was taken to the minutes of the board meeting at which it was noted that the pursuer was a Bad Leaver, and to the letter of 17 January 2007 informing the pursuer of this. He accepted that there had been no specific discussion at the board meeting about the e-mail correspondence with the pursuer. Mr Greville explained that all board members sat close to each other at work in an open plan office and they were all aware of what was going on They did not at the board meeting formally consider the question of whether to exercise the discretion in favour of the pursuer. They had discussed the issues amongst themselves before - the discretion issue would have featured in the discussions, since it had been raised in correspondence from the pursuer's Australian solicitors - but no motion about the exercise of the discretion was put to the board to vote on.

[39] Mr Greville discussed what had happened in terms of their Leaver status to others who had left. David Bull had agreed to stay longer in return for being made a Good Leaver. Lucian Wu resigned and became an Intermediate Leaver. He did not join a competitor within six months and remains an Intermediate Leaver. Roger Wu and Wei Hsien Chan both joined competitors within six months of leaving and therefore became Bad Leavers.

[40] In cross-examination Mr Greville was pressed, by reference to various documents lodged in process, on the question of whether Henderson in fact competed with Archer. It was put to him that the PPM for HAPEP II dated 25 January 2006, showed that the fund was targeted to leading Asian businesses, predominantly in India, South East Asia, South Korea and Greater China, without any mention of Australia. He agreed, but said that they were not precluded from going outside that market. In some cases he would have to go back to ask the investors; but in others not. He gave as an example the fact that they were presently discussing funding a company in South Korea which wants to invest in a company in Australia. They would not need to go back to the investors to do that. But if they were going to invest directly into an Australian or European company with no Asian exposure or business, then they would certainly discuss it with the investors before doing so. He said that they had recently considered the case of a company in India with strong exposure to defence and military contracts. They had gone back to the investors on that, because it was "on the edge" of what their investors would have expected them to do. They had also consulted the investors on an investment into an Australian company which wanted to partner an Asian business. He gave a similar answer when it was put to him, by reference to the Limited Partnership Agreement for HAPEP II, that as a matter of contract they were limited in their investment range; if there was any question, they would go back to their investors and ask them. He agreed that the PPM also stressed the advantages of having a team "on the ground" in the markets in which it was intended to invest, but it was not the "be all and end all" and it did not restrict you to those markets. It helped for origination of deals, and it was important to keep talking to managements to see where their businesses were heading, but you could do it effectively without a permanent presence. For example, they had had one person permanently in India, with others, including the pursuer, flying in from Singapore. They were currently going through due diligence on a company in Hyderabad, many hours flying from Delhi, but it was fanciful to think that they should have an office in Hyderabad. Instead their people flew in, stayed in hotels and hired local consultants. There did not need to be a focus on a particular area - some of the companies they were looking at were involved in global businesses. They were helping grow global business and for that purpose they might, if required, help their target company to buy a company in Australia or Europe. He thought that the extent of the differences in management style between companies in the different markets was exaggerated. Of course one had to adapt to every market and understand the conventions, but you did so by using advisors and intermediaries and doing research. He agreed that HAPEP II was being sold in part on the back of HAPEP I. It was also borne of their drive to build up their origination capacity. HAPEP I covered Asia and the Pacific, from Australia to Korea and beyond. For HAPEP I, some twenty deals in Australia had been looked at, though none were concluded; however he accepted that it was possible, though he could not be certain, that these opportunities in Australia had arisen prior to the de-merger from AMP. One investment in India led indirectly to an investment in a company in Germany. They had never precluded themselves from looking outside the Asian region or funding Asian companies to invest in Australian companies. He agreed that the Quarterly Report as at 30 September 2006 for HAPEP I contained no reference to Australia. It showed that the regulatory status of the relevant Henderson businesses was limited to the UK, Hong Kong and Singapore and did not include Australia.

[41] On being asked in cross-examination whether the pursuer was a good fund manager, Mr Greville said that he had no complaints about the work he and his colleagues were producing. They were a good team and worked effectively together. His skills were internationally tradeable. He rejected the suggestion that the pursuer's knowledge of Asian and Indian markets was of little use to him in Sydney. He had learned due diligence, how to run companies, etc. These were marketable attributes. Mr Greville gave a careful and considered answer to the suggestion put to him that, in Sydney, the pursuer was not a threat to Henderson. To the extent that Henderson looked at Australian transactions, he could be a threat. He posed this question:

"If I was talking to him, or having a beer with him, would I mention an Australian company that we were looking at?"

The answer he gave was: "No". "That's the test", he said, and added (on more than one occasion):

"We haven't competed with Archer to my knowledge. I wouldn't expect them to be against us, but I wouldn't be surprised if they were."

He agreed with the suggestion that Archer's exclusive focus was on companies headquartered in Australia and New Zealand; but the significance of this turned on the word "headquartered". He named two or three companies headquartered in Australia but having business in Asia. Their business interests might compete in other markets. He knew that Archer had invested in companies which had interests in Asia. Henderson might invest in a coffee company in Asia which would compete with an Australian company involved in coffee in Asia. While you knew who your main competitors were, you did not know them all - competition could come from anywhere. Further, Archer had definitely been a threat in the labour market. He gave as an illustration of this the fact that both David Bull and the pursuer were now with Archer.

Submissions

(i) Submissions for the pursuer

[42] Both Mr MacKenzie, who appeared for the pursuer, and Mr Johnston QC, who appeared for the defenders, helpfully put in written outlines of their submissions and, subsequently, supplementary notes of submissions. I am grateful to them for that.

[43] Mr MacKenzie invited me to sustain the pursuer's first plea in law and to grant decree as concluded for. He began his submissions by referring to the evidence. He submitted that one critical question of fact had to be resolved: was Archer a competitor of Henderson? In answering this question it was necessary to have in mind three areas of potential competition: competition for funds; competition for deals; and competition for staff. Mr MacKenzie submitted that Archer competed with Henderson for funds and for staff only in the broadest sense. Investors, particularly pension fund investors, would invest with both Henderson and Archer. Their selection of a particular fund would depend on the investor's preference in terms of the geographical and risk profile of the fund. An investor seeking to invest in Asia would not go to Archer; nor would an investor seeking to invest in Australia go to Henderson. On the evidence, Archer did not compete with Henderson for deals at all. There was not a single instance of them having come up against each other in connection with a proposed deal. It was relevant to consider whether there was a legitimate business interest for Henderson to protect in seeking to restrain the pursuer from leaving at all. There was no such interest unless he went to join a competitor. Mr MacKenzie submitted that if, on the evidence, the court considered that Archer was not in fact a competitor, it followed that the pursuer was not a Bad Leaver and was entitled to succeed in his action.

[44] The remainder of Mr MacKenzie's submissions were made in anticipation of an argument by the defenders that, because of the "deeming provision" in the definition of Bad Leaver, the pursuer must fail regardless of any finding that Archer did not in fact compete. They fell under five heads. First, he considered the relevant contract framework. He pointed out that although the pursuer was initially employed by AMP, and had become a Carried Interest Partner whilst the business was still merged, after the de-merger his employment was assigned to Henderson. Accordingly, the assessment of his Leaver status must now be made by reference to employment with Henderson without AMP. Schedule 2 to The Limited Partnership Agreement sets out the Leaver arrangements. He then went through various provisions in The Limited Partnership Agreement. He referred to the definitions of Bad Leaver and Intermediate Leaver. In connection with the definition of Bad Leaver, he pointed to the width of the definition of Associate which included parent companies, subsidiaries and associate companies, and their parents and subsidiaries; in other words all companies in the Group, up, down and across. He noted that Good Leavers received their carried interest subject to the relevant reduction depending on when they leave, whereas Bad Leavers received nothing. Finally, he pointed to the "saving provision", as he called it, in Schedule 2, Part 1 para.3.4, which gave the General Partner a discretion to allow a Bad Leaver to be treated, for the purpose of his entitlement to carried interest, as a Good Leaver. That discretion had to be exercised within 60 days of him having become a Bad Leaver.

[45] Secondly, Mr MacKenzie developed an argument that, on a proper construction of The Limited Partnership Agreement, the pursuer was automatically a Good Leaver by reason of the terms of Schedule 2, Part 3 para.4. He pointed out that, when he left Henderson on 10 June 2006, the pursuer was an Intermediate Leaver and had been, in advance of his leaving, classified as such by the General Partner at a board meeting of 25 May 2006. There was no attempt to re-classify him as a Bad Leaver until the board meeting of 29 January 2007. On the evidence, therefore, the pursuer became, and was categorised as, an Intermediate Leaver after 1 January 2006. Para.4 of Schedule 2, Part 3 provided that "if a Carried Interest Partner becomes an Intermediate Leaver on or after 1 January 2006 they shall be treated as a Good Leaver ... and Part 2 above [i.e. the Good Leaver provisions] shall apply." Having left as an Intermediate Leaver after 1 January 2006, the pursuer had the right to be treated as a Good Leaver so far as concerned his entitlement to carried interest, and any attempt to change that status at a later date was inept.

[46] Third, Mr MacKenzie made submissions about the definition of Bad Leaver in Schedule 2. He drew attention to the order in which phrases appeared in the definition. A Bad Leaver was a Leaver who, within six months of leaving, "joins a competitor". In ordinary language, this meant a Leaver who joined a business which in fact competed with Henderson. The important wording was: "joins a competitor". The purpose of the second ("deeming") part of the definition - "shall be deemed to compete with the Manager or any Associate if ...", followed by a series of business activities - was not to expand the class of competitors relevant to Leaver status to include those who, although they did private equity work, did not compete; it was to restrict the relevant class of competitors to competitors who did private equity work;. To read the "deeming" provision in such a way that "competitor" meant all those engaged in private equity work whether they were competitors or non-competitors would be absurd. In support of this argument, Mr MacKenzie put forward a number of well-known principles on construction of contracts under reference to well-known authorities. Emcor Drake & Scull Limited v Edinburgh Royal Joint Venture 2005 SLT 1233 at para.[13] and Melville Dundas Limited (In Receivership) v Hotel Corporation of Edinburgh Limited 2007 SC 12 at para.[17] identified the correct approach to construction. Under reference to McBryde, The Law of Contract, 3^rd ed. paras.8-10 to 8-13, he submitted that words in a contract should be given their ordinary meaning; the construction of a contract should accord with business reality; and absurd meanings should be rejected. Parties could create their own "dictionary": Lewison, The Interpretation of Contracts, para.5.10. Any ambiguity could be assisted by reference to the presumption of legality: McBryde para.8.37; Neilson v Stewart, 1991 SC (HL) 22, per Lord Jauncey at 38; Scottish Farmers' Dairy Co. (Glasgow) Limited v M'Ghee 1933 SC 148; or by resort to the contra proferentem rule, in either or both of the ways in which that rule is commonly understood: McBryde para.8-38.

[47] Fourth, Mr MacKenzie sought to argue that the Bad Leaver provisions were unenforceable. Before summarising his argument, I should observe that the only contention to this effect of which notice had been given in the pleadings was the averment in Article 6 of Condescendence: "esto the pursuer has been correctly classified as a Bad Leaver (which is denied) Clause 3 of Schedule 2 to the [Limited] Partnership Agreement is a penalty clause". The reference should, I think, be to clause 3 of Part 1 of Schedule 2, but nothing turns on this. Mr MacKenzie did not in fact seek to support the "penalty clause" argument, and I say nothing more about that argument. Instead, however, he sought to argue that the Bad Leaver provisions were unenforceable as being in restraint of trade. Under reference to the Stair Memorial Encyclopaedia, volume 15, at paras.770-777, he identified an agreement in restraint of trade as being one whose terms profess to prevent one of the parties to it from conducting itself in a manner which is economically damaging to the other party. As a general proposition, he submitted, a contractual term restricting an employee's activities after termination is unenforceable as being in restraint of trade and contrary to public policy unless the employer can show that (a) it has a legitimate proprietary interest that it is appropriate to protect and (b) the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd. [1894] AC 535, especially per Lord Herschell at 547 and 549. An employer cannot impose a covenant merely to stop someone competing; but it can seek to stop that person using or damaging something which legitimately belongs to it. This type of restriction is to be distinguished from a restriction to enforce a duty of confidentiality that an employee owes to an employer. Each case must be considered by reference to the business needs of the employer imposing the restriction. In the case of a restraint against joining a competitor, the meaning of competitor will be construed at the time employment ceases: Commercial Plastics Limited v Vincent [1965] 1 QB 623, 639; McBryde paras.19-102 and 19-103. To determine what rights may require protection, it was necessary to look at the nature of the business and the employee's position in that business: Mason v Provident Clothing and Supply Co. Ltd [1913] AC 724, 731, 742; Herbert Morris Ltd v Saxelby [1916] 1 AC 688. The rights that a court will allow to be protected fall broadly into two categories: trade connections (with suppliers or customers) or goodwill; and trade secrets and other confidential information. As regards trade connections, an employer must distinguish its own customer connections from the personal qualities of the employee: Cantor Fitzgerald (UK) Ltd v Wallace [1992] IRLR 215. If there is a legitimate interest to protect, the restriction must be no wider than is reasonably necessary to protect that interest: Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60. In some cases exception was taken to the period for which the restriction was sought to be enforced, but in this case the restriction was for six months only, and no objection was taken to that period if the restriction were otherwise valid. The geographical extent of the limitation must also be considered. Worldwide covenants have been held to be enforceable (Nordenfelt). Relevant factors will include: whether there is an actual relationship between the interest to be protected and any specific geographical area (Office Angels Ltd v Rainer-Thomas and O'Connor [1991] IRLR 214 CA); the area of activities of the employee; and the size and nature of the population of the area. By way of example, he referred to Dyson Technology Ltd v Strutt [2005] EWHC 2814; TFS Derivatives Ltd v Morgan [2005] IRLR 246; Wincanton Ltd v Cranny [2000] IRLR 716; Lansing Linde v Kerr [1991] 1 All ER 418. In reliance on FSS Travel and Leisure Systems Limited v Johnson [1998] IRLR 382, he submitted that employers seeking to enforce a non-compete clause must identify the trade secrets and confidential information which may be legitimately protected. Mr MacKenzie emphasised that the law concerning agreements in restraint of trade did not apply only to prohibitions on working for others. In Marshall v N M Financial Management Limited [1996] IRLR 20 it was held, relying on Wyatt v Kreglinger & Fernau [1933] 1 KB 793, that rules of a commission scheme under which a person was entitled to accrued commission after he left only on condition that he did not work for a competitor, amounted to a covenant in restraint of trade. In the present case, Mr MacKenzie submitted, the pursuer had had a geographical focus, any proprietary information in his possession related to the availability of deals in a particular location (not Australia) and the pursuer did not take anything of value with him to Archer, apart from his skills and experience. The definition of Bad Leaver in The Limited Partnership Agreement, however, had no geographical limit; and, further, though this was not essential to his argument, on the defenders' reading of the clause it included a definition of competitor which went too wide in many respects.

[48] Finally, Mr MacKenzie made submissions on the exercise of the discretion under para.3.4 of Schedule 2 Part 1 to The Limited Partnership Agreement. He accepted that the court would be reluctant to interfere with a contractual discretion so long as it was exercised honestly and in good faith: Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd's Rep IR 221, 230, 239; Abu Dhabi National Tanker Co v Product Star Shipping (The Product Star) [1993] 1 Lloyd's Rep. 397, 404. In the context of a widely drawn non-compete covenant, the discretion given in this contract is an obvious "check" on the wide scope of the restriction and is therefore of great importance. He submitted that where a discretion of this sort is given, it ought to be exercised reasonably, and reasons given: see Burgerking Limited v Rachel Charitable Trust 2006 SLT 224. On its proper construction, para.3.4 obliged the General Partner to address the question of discretion in every Bad Leaver case. In this case it was not clear that the discretion was exercised at all. The evidence suggested that it was not. Certainly no reasons were given. Any decisions were taken in an informal and casual manner. In such circumstances the court was entitled, as it had in Burgerking, to rule that the discretion should have been exercised in favour of treating the pursuer as a Good Leaver, having regard to a number of factors, viz.: that Archer was not actually a competitor of Henderson; that the pursuer was recognised to be a good fund manager; that he left primarily for family reasons; that he assisted the defenders by providing references when asked to do so; and that he assisted in finding his replacement. Alternatively the court could remit the matter to the General Partner for it to reconsider.

(ii) Submissions for the defender

[49] Mr Johnston QC moved the court to sustain the defenders' second to fifth pleas-in-law and grant decree of absolvitor. He did not challenge Mr MacKenzie's submissions concerning the principles to be applied in construing a contract, though he emphasized that, whilst it would look for the construction which appeared to make the best commercial sense, the court would not "re-write" a contract to achieve a particular result.

[50] His primary submission was a very simple one. For the purpose of determining whether a leaver has joined a competitor, the relevant provision of the agreement was the definition of "Bad Leaver" in Part 1 of Schedule 2, which provided that a business was "deemed to compete" in certain circumstances. It was established in evidence, and was anyway a matter of admission in the pleadings that, having tendered his resignation on 27 March 2006 and having left that employment on 10 June 2006, the pursuer entered employment with Archer on about 3 July 2006. Archer was a private equity manager in Australia. It was also established in evidence that the business of Archer included making, dealing in, managing, or advising as to unquoted equity investments, and raising or seeking to raise commitments (or similar) from other persons to facilitate the same. Accordingly, Archer fell within the relevant definition of "competitor"; and since the pursuer joined that competitor within six months of becoming a leaver, he fell squarely within the definition of Bad Leaver.

[51] During the course of the proof Mr Johnston had objected when the pursuer sought to lead evidence about the nature of Archer's business. The evidence was allowed subject to the usual reservations. In his closing submissions Mr Johnston insisted upon his objection. Whilst such evidence might have been relevant for other purposes, it was objected to in so far as it was led for the purpose of supplanting or contradicting the definition of competitor in The Limited Partnership Agreement. It was well established that evidence which seeks to qualify or contradict the clear terms of an agreement is inadmissible: see Dickson, Evidence paras.1015-22, Walker, Evidence para.267 and Macphail, Evidence paras.15.02, 15.08, 15.35-6. However, he went on to submit that even if this evidence was admissible, it did not assist the pursuer. The evidence showed that Archer was a competitor. Mr Johnston made detailed submissions on the evidence to the effect that private equity was a global business in which all participants competed for staff, for clients (investors) and for deals.

[52] Mr Johnston next dealt with the pursuer's submission that the General Partner should have exercised its discretion to treat the pursuer as a Good Leaver. He pointed out that this question arose only in the event that the pursuer was a Bad Leaver in terms of The Limited Partnership Agreement. He referred to para.3.4 of Schedule 2 Part 1. He submitted that there was no duty on the General Partner to exercise the discretion at all, let alone in every Bad Leaver case. The clause was permissive. In considering whether to exercise the discretion in favour of a Bad Leaver, the General Partner owed a duty - and in the context of a partnership, a fiduciary duty - not only to the Bad Leaver but also to all the other partners who would stand to lose financially if the discretion were exercised in his favour. He submitted that the pursuer had made no averments and had led no evidence sufficient to allow the court to review the exercise or non-exercise of the discretion. The discretion was reviewable, if at all, only if ultra vires or exercised in bad faith. This was the approach taken in the cases cited by Mr MacKenzie and it was consistent also with the case law concerning discretionary trustees: see Board of Management for Dundee General Hospitals v Bell's Trs 1952 SC (HL) 78 and MacTavish v Reid's Trs (1904) 12 SLT 404. The pursuer had not proved, or even averred, anything of this sort. In any event, it was not for the court to exercise the discretion in place of the General Partner. At most the court could remit the matter to the General Partner for reconsideration.

[53] Turning to the facts relevant to the exercise of the discretion, Mr Johnston suggested that little weight should be attached to the fact that the pursuer had assisted in recruiting his replacement. It was the least he could have done in the circumstances. Had a replacement not been recruited speedily, the pursuer would not have been able to leave early but would have had to serve out his notice. According to the evidence of Mr Yates, what really makes a difference is if a person stays on; help in finding a successor, though welcome, is not as good. Mr Johnston submitted that there were no grounds on which the General Partner could fairly or appropriately have exercised the discretion in favour of the pursuer; and there were certainly no grounds for saying that a failure to exercise it in favour of the pursuer was unreasonable, let alone mala fide. He had joined a competitor; he had resigned suddenly and had refused the request to stay longer to assist with transitional arrangements; he had had a key role in the HAPEP II fund and, despite having given a commitment to the fund, had left at a damaging time for it, given recent departures from the investment team. Mr Johnston also submitted that the pursuer had not been treated inconsistently with the way in which other leavers were treated.

[54] Mr Johnston moved on to consider the argument that the pursuer was automatically a Good Leaver. Mr Johnston submitted that that argument was flatly contradicted by Schedule 2 Part 1 para.3.5, which dealt with the case of someone moving from being an Intermediate Leaver to being a Bad Leaver. Para.4 of Schedule 2 Part 3, on which the pursuer relied, was concerned not with altering the status of an Intermediate Leaver but with quantification of the sums to which he was entitled. He was to be treated for these purposes as a Good Leaver. That clearly would not apply if an Intermediate Leaver joined a competitor within six months of leaving and thereby became a Bad Leaver; because then he would no longer be an Intermediate Leaver and would no longer be entitled in terms of that paragraph to be treated for quantification purposes as a Good Leaver.

[55] Mr Johnston submitted that the pursuer was not entitled to argue the restraint of trade point. There was no record for any such argument. Under reference to Morrison's Associated Companies Ltd v James Rome & Sons Ltd 1964 SC 160, 182, 190 and Burns v Dixon's Iron Works 1961 SC 102, 107-8, he submitted that the pursuer was not entitled to advance a case of which he had given no notice and in respect of which the defenders had had no fair chance to lead evidence. The case on restraint of trade was not a mere variation, modification or development of the pursuer's case on record. The penalty clause argument was entirely different. Had restraint of trade been in issue, the defenders would have conducted the proof differently. For example, they would have led evidence about the legitimate interest which the Bad Leaver provisions sought to protect: were they seeking to protect Henderson from the use or misuse of confidential information and trade connections? were they seeking to protect goodwill? or was the restriction aimed at preventing the pursuer using his personal skills in competition to them? He referred in this connection to Cantor Fitzgerald (UK) Ltd v Wallace. As appeared from the authorities cited by the pursuer, consideration of these issues required detailed evidence about the nature of a person's employment (and the court had not even seen the pursuer's contract of employment); the character of any information held; restrictions on its dissemination; the extent to which it was in the public domain; and the damage that might arise if it is used or disclosed: cf. Lansing Linde v Kerr and FSS Travel and Leisure Systems Ltd v Johnson. Detailed evidence of this kind was not available to the court at this stage.

[56] Mr Johnston said that if, contrary to that argument, the court regarded this point as open to the pursuer, on such limited evidence as there was the provisions should not be regarded as unenforceable. He relied upon a number of factors pointing to this conclusion. The provisions only affected (for a period of six months) working for a company dealing in unquoted securities and therefore did not touch working for companies that deal in quoted securities or any other kind of investment management. The industry is global in nature and a world-wide restraint is therefore reasonable: c.f. Commercial Plastics Ltd v Vincent. The terms were industry standard; they were entered into by the various partners, including the pursuer, with the benefit of independent legal advice obtained on their behalf in a consultation process that took many months; and the Bad Leaver provision was not (as for instance in Marshall v NM Financial Management Ltd) part of the contract of employment but a provision within a separate partnership agreement whose whole purpose on the evidence was to make it financially attractive for the partners to stay with the defenders for a reasonable period.

[57] Further, the pursuer on his own evidence knew that a Bad Leaver would lose 100% of his carried interest and knew the definition of a Bad Leaver. He had anticipated losing 20% on the basis that he was not joining a competitor and had negotiated a payment from Archer to compensate him for that loss. There was no evidence of what Archer would have been willing to pay had he approached them as a Bad Leaver who would lose 100%. The court cannot assume that, had he tried so to do, the pursuer could not have negotiated a payment from Archer (or another intended employer) of the full amount of his carried interest. Accordingly the court had no evidence that the loss of carried interest in the event of a Leaver joining a competitor amounted to a restriction on employment at all.

[58] Mr Johnston emphasised that the court was here concerned with a multiparty agreement. The pursuer's submissions appeared to be directed at disapplying the provisions so far as they applied to him but adhering to them so far as the other partners were concerned. That was not possible as a matter of law. The terms on which the partners made their agreement were such that the determination of the Leaver status of any one partner affected every other partner. It is not possible for the clause to be legal with respect to some partners and illegal with respect to others, since its legality is tested at the date the contract was made: McBryde, para.19-102.

[59] Finally, Mr Johnston reminded me that The Limited Partnership Agreement was entirely separate from the pursuer's contract of employment. The Limited Partnership Agreement had no content other than the calculation of and attribution to the various partners of shares in carried interest: it was not possible to sever the clause of which the pursuer complains from the remainder of the agreement. Accordingly, to delete Schedule 2 Part 1 clause 3 on grounds of illegality would be illegitimate since what would remain would be an altogether different bargain from that which the partners entered into: cf. e.g. Marshall v NM Financial Management Ltd at para.17.

(iii) Reply for the pursuer

[60] In a brief reply, MacKenzie submitted that the restraint of trade point was open to him. The argument was a legal one. It challenged the enforceability of the clause founded upon. The Summons contained an averment that "... Clause 3 of Schedule 2 is penal and unenforceable." While the legal arguments were different, the factual basis for such an argument had been set out on record. He pointed out that restraint of trade is mentioned as early as the initial correspondence from the pursuer's Australian solicitors. He submitted that the defenders had already in their pleadings put in issue matters relating to what, if any, legitimate interest the defenders had to protect, what confidential information the pursuer possessed and his knowledge of customer connections. They also made averments about the duration and reasonableness of the restriction. They had had the opportunity of dealing with these matters in evidence, and had put forward a case on the evidence as to why the pursuer's argument should not succeed on the merits. They had suffered no prejudice and it would be wrong not to allow the restraint of trade point to be argued.

[61] On the question of the multipartite nature of the agreement and the linked arguments about severability, he submitted that the terms of the Limited Partnership were unenforceable as between the pursuer and the defenders. Enforceability depended on whether it was reasonable for the protection of the legitimate business interests of the defenders. What those interests were would depend on the nature of the business and the pursuer's position in the business. He referred to Robin M. Bridge v Deacons (A firm) [1984] 1 AC 705, 714G; and Gloag on Contract, 2nd ed., at page 585 ("The objection that a contract is immoral or illegal as between plaintiff and defendant..."). He submitted that the provision in this contract was capable of being severed, and should be regarded as unenforceable as between the pursuer and the defenders. When this provision was severed from the rest of The Limited Partnership Agreement, the relationship between the various partners continued to exist.

[62] Mr MacKenzie also drew my attention to the case of Alec Lobb (Garages) Ltd v Total Oil GB Ltd [1985] 1 WLR 173 as an illustration of two agreements being taken together for the purpose of considering a restraint of trade argument.

Discussion

(i) Is the pursuer a Bad Leaver as defined in The Limited Partnership Agreement?

[63] Mr MacKenzie submitted that the critical issue of fact was whether Archer was a competitor of Henderson. The correctness or otherwise of that submission depends upon the proper construction of The Limited Partnership Agreement.

[64] There was little difference between the parties as to the general principles to be applied in construing a contract. This is not, therefore, the occasion on which to attempt yet another re-statement of those principles. For present purposes I am content to approach the matter in accordance with the guidance given by Lord Drummond Young in Encor Drake & Scull v Edinburgh Royal Joint Venture at paras.[13]-[14] and in Melville Dundas Ltd v Hotel Corporation of Edinburgh Ltd at paras.[9]-[10] and [17]. The court attempts to identify the bargain which the parties have made primarily by reference to the words which they have used in the contract, giving those words their ordinary meaning except where it is shown, objectively, that a different meaning must have been intended. The contract must be construed as a whole; and, since no contract is made in a vacuum, must also be construed in the light of the factual background against which it was made. That background will sometimes assist in identifying whether a suggested construction appears to make commercial sense; and, of two or more possible constructions, the court will generally prefer that which is the most sensible commercially, not because of any preconceived notion by the court that parties ought to be sensible but simply because that is what is more likely to have been intended by reasonable businessmen. But the court will not impose its own view of what makes business sense; and it will not rewrite the contract so as to make it fit with its own ideas of what the parties ought reasonably to have agreed.

[65] The relevant background here is that the private equity business is a global business. There are a large number of private equity funds competing both for investors and for deals. The success of a fund will depend on being able to source and win deals, on being able to help the target businesses grow, and on having a successful exit strategy. Much depends, particularly at the initiating stage, on the abilities of the particular fund managers. The track record of the fund management team will affect its ability to attract inward investment. A company will want to hold onto members of a successful fund management team, particularly during the investment period, the early period of a fund when it is trying to attract inward investment and source deals. Investors in the fund, for their part, want the fund managers to be incentivised by having a stake in the success of the business. It is common within the private equity business to link such incentives to the willingness of each individual fund manager to stay with the fund for a substantial part of its life, and in particular for the duration of the investment period. There is generally a desire that, during that period at least, fund managers should not leave; and in particular should not leave to join other companies in the private equity business. An early departure will weaken the team and may risk breaking it up further, to the detriment of the fund. Movement of some team members to another private equity company may have an adverse effect on inward investment. Although I accept, to some extent, the pursuer's evidence that a fund manager's expertise and experience in one market is not readily transferable to a different market, and that those wishing to invest in private equity funds will tend generally to decide on a geographic basis before choosing the best fund with that focus, it seemed to me that this was somewhat overstated. I do not accept that there is a firm dividing line. The pursuer accepted in cross-examination that funds do compete to some extent for investors. This was confirmed to varying degrees by the other witnesses. I accept also that they compete for the best fund managers, though which fund managers go to which companies will also depend upon personal reasons. It is not always easy to say whether private equity companies compete for deals. The pursuer placed great reliance on the documents which did not include Archer amongst Henderson's main competitors; but all that such documents show is that Archer is not perceived as one of Henderson's main competitors. As Mr Greville explained, you know your main competitors, but competition can come from anywhere. Nor do I consider that the geographic focus of the fund in the PPM and the Private Partnership Agreement excludes the possibility of competition with Archer. I found convincing the whole evidence of Mr Greville, and in particular that which I have summarised at paras.[40]-[41] above. In so far as his evidence was in conflict with the evidence of other witnesses, I prefer it. He pointed to the global nature of the business and to the fact that investment into a business headquartered in one region may enable that business to compete in another region. In his only real criticism of the witnesses, Mr MacKenzie said that Mr Greville tended to be argumentative, to avoid simple questions and to make "nice distinctions". I reject that criticism. He was argumentative only in refusing to accept what he regarded, rightly in my view, as an over-simple analysis of the private equity business. And if he made "nice distinctions", it was because there were nice distinctions to be made. I think Mr Greville put it well when he said, referring to the possibility of competition with Archer, that though he would not expect to be against them he would not be surprised if they were. To that extent it is, in my opinion, correct to say that on some level all private equity companies are at least potential competitors of one another in all three of the areas identified by Mr MacKenzie. It would not be surprising, therefore, if parties to the Limited Partnership Agreement decided to include in the definition of Bad Leaver a definition of "competitor" which included all companies operating in the private equity business.

[66] The Limited Partnership Agreement gives the members of the investment management team a stake in the business in the form of their entitlement, as Carried Interest Partners, to a proportion of the income accruing to the Limited Partnership. The Limited Partnership is specific to the HAPEP I fund. Other funds will have their own limited partnership arrangements to give effect to a similar incentive scheme. It is necessary in the Limited Partnership to make provision for some people leaving the team and others joining. The Leaver and Joiner Arrangements in Schedule 2 do this. In addition to allowing Joiners to be given a stake in the profits of the partnership, they deal with the different circumstances in which a fund manager may leave. No doubt there are a number of different ways in which Leavers might be categorised depending, for example, on whether they leave voluntarily or are dismissed, the stage at which they leave and whether or not they go on to join a competitor. Equally there are a number of different ways in which leavers falling within any particular category might be treated in terms of whether they retain or lose, in whole or in part, their entitlement to carried interest. Each categorisation, and each way of treating persons falling within such category, will have advantages and disadvantages both for the person leaving and for those remaining - and it must not be forgotten that those who remain also have an interest when a person leaves, not only because of their interest in the success of the fund which might be affected by that departure, but also because they stand to gain by an increase in their Relevant Proportion if the Leaver loses any part of his entitlement. It is not for the court in this context to assess whether any particular provision is fair or unfair to any particular person or group of persons. The court has to interpret the agreement the parties have made. That involves looking to the detailed provisions in Schedule 2.

[67] The overall scheme of Schedule 2 is that, for the purpose of identifying what is to happen to their carried interest entitlements, Leavers are categorised into Good, Bad and Intermediate Leavers. Good and Intermediate Leavers lose some of their carried interest entitlement depending on when, in the life of the fund, they leave. However, a Bad Leaver immediately ceases to be a partner in the Limited Partnership and has his entitlement to carried interest "reduced to zero", subject to a discretion given to the General Partner in any particular case to determine that a Bad Leaver's carried interest entitlement should be treated in a different way. The terms Good Leaver, Bad Leaver and Intermediate Leaver have no independent existence or meaning outwith the terms of the Limited Partnership Agreement. There was, for example, no suggestion in the evidence that those terms had an established meaning throughout the private equity business. They take their meanings from the definitions in Schedule 2; and, in order to identify the category into which a Leaver falls, one has to look to the terms of Schedule 2.

[68] In this case only the definition of Bad Leaver is in issue. A Bad Leaver is defined inter alia as a Leaver who "within six months of ... becoming a Leaver joins a competitor of the Manager or any Associate". I accept Mr MacKenzie's submission that, in light of the de-merger, it is right to look at the term "Associate" as referring to companies in the Henderson group, rather than within both AMP and Henderson. So a Bad Leaver is a Leaver who "within six months of ... becoming a Leaver joins a competitor of" a company in the Henderson group. A Leaver shall be deemed to have joined a competitor if he takes employment with or provides services to a competitor. That presents no difficulties. But there is then the further deeming provision which has given rise to the present dispute. A business shall be deemed to compete

"if its business includes making, dealing in, managing or advising as to unquoted equity investments whether for its own account as principal or as agent, trustee, manager or adviser on behalf of others or if it includes seeking to raise or raising commitments (or similar) from other persons to facilitate the making, dealing in, managing or advising as to unquoted equity investments ...."

That definition identifies the critical issue of fact in this case. The critical issue is not, as Mr MacKenzie submitted, whether Archer in fact competes with Henderson. The issue is whether Archer falls within the definition of competitor in Schedule 2 to the Limited Partnership Agreement. I did not understand it to be disputed that Archer does fall within that definition. It is admitted in Articles 2 and 7 of the Summons (as adjusted), and was admitted by the pursuer in evidence, that the pursuer joined Archer within six months of becoming a Leaver and that Archer is a private equity manager in Australia. It was established in evidence, and was not disputed, that Archer, like all other private equity managers, deals in unquoted equity and investments and also seeks to raise commitments from others to facilitate that dealing. Accordingly it falls within both parts of the deeming provision and is deemed to be a competitor. Since the pursuer joined a competitor so defined (Archer) within six months of becoming a Leaver, he falls within the definition of Bad Leaver.

[69] Mr McKenzie's argument was that the definition of Bad Leaver focused on whether or not the Leaver joined a competitor. That meant what it said. Only those who joined actual competitors within six months of leaving were Bad Leavers. The purpose of the deeming part of the definition was not to widen the meaning of competitor to include any company whose business included dealing in unquoted equity investments, whether that company was an actual competitor or not; but rather to narrow the wide range of actual competitors, so that the only competitors to be taken into account for the purpose of determining whether or not someone was a Bad Leaver were those competitors who were involved in dealing with unquoted equity investments. Without this narrowing, a Leaver might be a Bad Leaver if he joined any company which was in fact a competitor of any company in the Henderson Group. Since companies in the Henderson Group carried on a wide range of activities, only a small part of which were to do with unquoted equities, that could include almost anything. The deeming provision therefore protected the Leaver by limiting the range of competitors, the joining of which made him a Bad Leaver, to those engaged in the private equity business. But for this to cut in at all, he had to have joined a business which was in fact a competitor. To determine whether or not a particular company was a competitor, one needed to look at the facts.

[70] In my opinion this argument must fail on a proper construction of the agreement. Two factors point strongly against it. The first is the way in which the clause is drafted. A Leaver is a Bad Leaver if he joins a competitor. He is deemed to have joined a competitor if he takes employment with a competitor. A business is deemed to compete if its business includes dealing in unquoted equities; or if its business includes raising commitments from third parties to facilitate dealing in private equities. The clause drives one through a number of stages to determine whether the business that the Leaver joins is a competitor. It answers this by deeming such a business to be a competitor if it deals etc. in unquoted equities. There is no ambiguity. It does not seek to narrow a potentially wide class of competitors. It would have been easy to achieve the result preferred by Mr MacKenzie had such a result been intended. The deeming clause would have said something like: a business shall be deemed to compete only if its business includes dealing etc. in unquoted equity investments. But it does not.

[71] The second is this. The definition of Bad Leaver has to be seen in the context of the Limited Partnership Agreement of which it forms part. That Partnership Agreement is concerned, and solely concerned, with giving the various partners a stake in the gains arising from the operations of the HAPEP I fund. It is entirely to do with dealing in unquoted equities. In those circumstances it seems to me to be clear that the deeming provision in the definition of Bad Leaver is deliberately framed so as to identify as a competitor any company whose business includes dealing in unquoted equities. There are sound reasons for this. As the evidence demonstrated, the private equity business is global in nature. Every company is capable of competing with any other. They may not have come up against each other in competition for deals in the past, but that is not to say that they will not in the near future. They compete for funds, even at the most general level. They compete for employees, if only in the sense that investment managers move from one company to another. And such movement may make one company more competitive both in attracting funds and in its ability to source deals. The situation is inevitably fluid. Regular or major competitors can readily be identified. But outside the list of major competitors, it is not easy to say whether one company is a competitor of another. The lack of competition in the past may not be conclusive as to the future. It cannot, so it seems to me, have been the intention of the parties that the status of a Leaver should depend upon a minute examination of whether the business which he joins, assuming it to be a business involving dealing in unquoted equities, has in fact been and/or is likely in the future to be a competitor of a company in the Henderson Group. Would one look for evidence of past competition on particular deals? Or would one take into account that although their paths had not yet crossed, they might do so in the future? The possible uncertainties are, in my opinion, almost unlimited. This would remove any certainty from the arrangements. A Leaver wanting to join a business dealing in unquoted equities would simply not know, in some cases, whether the business that he was joining was or was not a competitor - and therefore would not know whether by joining them he stood to lose all or only a small part of his "carried interest". I do not think that reasonable businessmen would be likely to have intended to enter into an agreement fraught with such uncertainty. More likely, in my view, that they put in the deeming provision to make it clear beyond doubt that all businesses dealing in unquoted equities were to be regarded as competitors for the purpose of the definition of a Bad Leaver.

[72] A question was raised in argument as to whether the deeming provision provided an exhaustive definition of a competitor for the purpose of the Bad Leaver definition. That does not arise for decision. There might be good arguments why it should include businesses that compete with parts of the Henderson Group other than those involved in dealing in unquoted equities; and there might be good reasons to exclude such businesses. I do not think that the answer to this issue affects the answer to the question of construction with which I am concerned. Should the point become important in some other case, it can be answered then.

[73] In case I am wrong, however, I should state my conclusion on the question whether Archer was a competitor of Henderson. I have already foreshadowed this in paras.[65] and [71] above. I accept that they had not knowingly competed. I also accept that they operated primarily in different geographic markets. But for the reasons I have given I find that Archer were competitors of Henderson not only for investors and for employees but also, potentially, for deals. Mr MacKenzie accepts that, albeit only in the broadest sense, they competed for funds (investors) and staff (employees). This would be enough in my view to make them actual competitors. I note that the definition of competitor in the Bad Leaver provision is not limited to companies competing for deals; it specifically includes a company raising commitments (funds) for private equity investment. When one adds to that the fact that they potentially compete for deals, there can be no doubt in my mind that they are actual competitors in a real sense. Accordingly, even if I were to accept Mr MacKenzie's submission that the critical issues of fact was whether Archer is a competitor of Henderson, I would still find the pursuer to be a Bad Leaver.

(ii) "Automatically" a Good Leaver?

(iii) Should the discretion have been exercised in the pursuer's favour?

[75] I consider next the argument for the pursuer that the General Partner failed properly or at all to exercise the discretion given by Schedule 2 Part 1 para.3.4. In terms of that paragraph the General Partner "may in its sole discretion determine" that (and I summarise) a Bad Leaver should not lose his whole carried interest entitlement but should instead receive such proportion thereof as shall be determined by the General Partner. Any such determination has to be made within 60 days of the Carried Interest Partner becoming a Bad Leaver. It should be noted that, contrary to Mr MacKenzie's argument, this provision does not entitle a Bad Leaver in whose favour the discretion is exercised to be treated in all respects as a Good Leaver. The reduction of his Relevant Proportion is to be determined not in accordance with Schedule 2 Part 2 (the provisions applicable to Good Leavers) but in the General Partner's sole discretion. For that reason, if for no other, a successful argument that the discretion should have been exercised in favour of the pursuer would not lead automatically to decree in favour of the pursuer in terms of the first Conclusion to the Summons. If this were the only difficulty, however, it could be dealt with by putting the matter out By Order for an appropriate amendment. But it is not the only difficulty, and accordingly it is necessary to consider the argument on its merits.

[76] There was no dispute about the principles to be applied in considering the exercise of a contractual discretion. The trust cases to which I was referred reflected the test suggested in the contract cases; not surprisingly, since one of the trust cases, Board of Management for Dundee General Hospitals v Bell's Trs, was relied on (under the reference Dundee General Hospitals Board v Walker [1952] 1 All ER 896) by the Court of Appeal in Ludgate Insurance. I take the law to be as set out at para.35 of the judgment of Brooke LJ in Ludgate Insurance:

"... provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene."

I would only add that where the discretion is exercised, reasons ought usually to be given, not necessarily in any formal way but in some manner sufficient to indicate to interested parties what decision has been taken and why.

[77] Mr MacKenzie said that the discretion did not appear to have been exercised at all. He is correct on this point. Indeed, Mr Greville accepted as much. There was no formal decision taken at a board meeting of the General Partner. At best, it appears that the members of the board discussed the question of the pursuer's Leaver status informally in the office. The decision was then taken at the board meeting of 29 January 2007, no doubt without much discussion but nonetheless correctly (as I have found), that the pursuer had become a Bad Leaver because he had joined a competitor within six months. No separate consideration was given at that meeting or at any other time to the exercise of the discretion in his favour. Mr MacKenzie submitted that the failure to consider the matter brought the case within the principles described above. Mr Johnston, on the other hand, argued that it was not necessary that there should have been any consideration of the question. There was no duty on the General Partner to exercise the discretion in every Bad Leaver case. I think that Mr Johnston is correct in this submission. There are various ways in which a discretion comes into play in a contract. In Ludgate Insurance the discretion under review arose in the context of how the Bank should allocate drawings under letters of credit in the absence of agreed instructions within a reasonable time. The contract provided for them to be allocated "in such manner as the Bank considers appropriate in its sole discretion". In Abu Dhabi National Tanker Co v Product Star Shipping Ltd, the owners of the vessel were allowed to request charterers to nominate another port if the nominated port of loading or discharge was "considered by the Master or Owners in his or their discretion dangerous". In such types of case, the requirement to exercise a discretion under the contract is dictated by circumstance and any challenge is to the decision which has been taken. I am not convinced that in such cases one is really talking about a person exercising a discretion at all, as that expression is normally used; what he is doing is really just taking a decision or making a judgement when faced with particular circumstances, in which context words such as "in its discretion" are intended to do no more than indicate that the decision reached is to be subject to challenge only in extreme circumstances. In other cases there may be something more akin to the traditional requirement, often imposed upon a trustee, to exercise a discretion. In such a case, a complaint might properly be made if the discretion is not exercised at all. What is the position here? It depends, in my view, upon the proper construction of the contract. Mr MacKenzie argues that there is a duty on the General Partner in every case where a Carried Interest Partner becomes a Bad Leaver to consider whether or not to exercise its discretion in favour of the Bad Leaver under para.3.4. I do not agree. In my opinion, para.3.4 does no more than permit the General Partner to exercise its discretion in favour of a Bad Leaver if it is so minded. The use of the word "may" is instructive. It is permissive. The words "in its sole discretion" apply to "may ... determine [that the Bad Leaver provisions should not apply]". If the General Partner does take the first step and determine that the Bad Leaver provisions shall not apply in a particular case, it has a further discretion as to what reduction of the Bad Leaver's Relevant Proportion should apply in its place. But I consider that there is no general obligation on the General Partner, in every case when a Carried Interest Partner becomes a Bad Leaver, to take the first step and apply its mind to the question whether the Bad Leaver should be treated not as a Bad Leaver but in some other way. That is not to say that the General Partner could not be criticised if, without explanation or reason, he simply ignored a request for the discretion to be exercised in favour of a Bad Leaver. But that is not the case here, since no such request has ever been made. On the contrary, the pursuer has always contended that he is a Good Leaver; and could not consistently with that have requested the General Partner to exercise that discretion in his favour.

[78] Had I taken the view that the question of discretion under para.3.4 ought to have been considered by the General Partner, I would have had to consider how to deal with its failure to do so in the present case. The only relevant Conclusion in this action is that for declarator. There is no Conclusion directed towards the question of the exercise of the discretion, nor is there any plea-in-law raising this issue. Nonetheless, the question of discretion is specifically pled on an esto basis in Article 10 of Condescendence and both parties have approached the matter in argument on the basis of the averments contained in that Article and such further matters as have emerged during the evidence.

[79] In support of his argument that the discretion ought to have been exercised in his favour, Mr MacKenzie relied strongly upon the treatment of other Leavers. The thrust of the pursuer's pleaded case was that the General Partner had exercised its discretion in their favour; and that the treatment he received was not consistent with that. Thus, it was averred that David Bull, who left Henderson at about the same time as the pursuer and also joined Archer within six months of leaving, was treated as a Good Leaver in terms of para.3.4. The pursuer averred that Lucian Wu resigned and was treated as an Intermediate Leaver. It is alleged that Sanjiv Kapur was dismissed - the pursuer had made allegations about Sanjiv Kapur's conduct both before and after his departure - but was treated as a Good Leaver. The evidence clarified all of these issues. Lucian Wu was indeed treated as an Intermediate Leaver, but he did not join a competitor and was entitled to be so treated. Two others, namely Roger Wu and Wei Hsien Chan, who were not mentioned in the Summons but whose positions were investigated during the evidence, joined competitors within six months of leaving and were correctly treated as Bad Leavers. In the case of Mr Kapur, the defenders took the decision not to dismiss him "for cause". He did not join a competitor within the six month period and was therefore, correctly, treated as a Good Leaver. The position of David Bull, who did join Archer within six months of leaving but was nonetheless treated as a Good Leaver, was explained by a number of witnesses. He was not a member of the investment team - he was responsible for the "non-deal doing" things. More importantly, he was specifically asked to stay on longer than he wanted to and he did stay longer. He made it a condition of staying that he would be treated as a Good Leaver when he left. That seems to me to be an entirely reasonable agreement. But even if it were not, his situation is clearly not comparable to that of the pursuer.

[80] Mr Mackenzie also relied upon a number of other factors. He said that the pursuer had joined a company which was not (in real terms, whatever the deeming clause might say) a competitor. I have found, however, that Archer was a competitor, though not a major or regular competitor for deals, so there is nothing in this point. He said that the pursuer was a "good fund manager". So he was, but of itself that carries little weight. He had left for family reasons. So he had, in part, though he was motivated also by concerns about the new fund. Again, I cannot see that this takes the argument very far. Mr MacKenzie said that the pursuer had been helpful in two particular respects. He had helped in the recruitment of his replacement, Sigit Prasetya; and he had helped by giving a reference. These are no doubt relevant factors which the General Partner could have taken into account. But they do not point irresistibly to the conclusion that the discretion ought to have been exercised in his favour. In any event, so far as concerns helping to recruit his replacement, my understanding of the evidence was that he did this in order to be able to leave before serving out his notice period; and he did, in fact, leave earlier than he would otherwise have been entitled to leave. That distinguishes his case from that of Mr Bull. Further, I accept the evidence of Mr Yates that helping to recruit a successor is not as beneficial to the company as staying on beyond the notice period.

[81] Having regard to all these factors, I consider that the pursuer has failed to establish that the General Partner ought to have exercised the discretion in his favour. It is noticeable that the pursuer does not plead a case that the General Partner acted mala fide or capriciously or arbitrarily, or that the failure to exercise a discretion in his favour was or would be perverse. Nor did any such case manifest itself from the evidence led at the proof. In those circumstances, standing the tests to which I have referred, there is no basis upon which the court could interfere in this matter. Equally, since I am looking at the matter from the point of view of what would have happened had a discretion been exercised, I can see no basis upon which it could be said that the General Partner ought to have exercised its discretion in the pursuer's favour, let alone that it would have been perverse of the General Partner not to exercise its discretion in favour of the pursuer. Accordingly, I see no basis on which this part of the pursuer's argument can succeed. The pursuer's primary case was that I should, in effect, exercise the discretion for myself and decide that the pursuer should be treated Good Leaver. In the alternative, Mr Mackenzie invited me to remit the matter back to the General Partner for it to exercise the discretion. I would not have adopted the former course. Nor, for the reasons I have given, do I propose to do the latter.

[82] Before leaving this part of the case, I should mention two separate matters which were raised in argument. The first is an argument by Mr Johnston that it was relevant to the exercise of the discretion that the pursuer had left at a damaging time for the HAPEP II fund, given the recent departures from the investment team. His departure was a set-back for HAPEP II since that fund was being marketed upon the success of the investment team handling the HAPEP I fund. Further, he submitted that the pursuer had made a commitment to HAPEP II, albeit informal and non-binding, which he did not honour. Henderson, and Mr Greville in particular, had been devastated when the pursuer gave his notice. I accept on the evidence that his departure at that time was unhelpful, to say the least, and that Mr Greville was taken aback by it. There may have been other problems with the fund running alongside this, but that does not take away from the fact that the pursuer's departure then was potentially damaging. However I do not consider that such matters can properly be taken into account by the defenders. The Limited Partnership Agreement is concerned only with the HAPEP I fund. If it were the case, contrary to the view which I have expressed, that the General Partner ought to have applied its mind to the exercise of the discretion in favour of the pursuer, it seems to me that it would be entitled to take into account the pursuer's conduct relating to the HAPEP I fund; but it would not have been relevant to take into account anything to do with the effect that his departure may have had on a different fund.

[83] The second point is that Mr MacKenzie relied upon the fact that, prior to January 2007, the pursuer was treated by the General Partner as a Good Leaver, notwithstanding that from July 2006 onwards he had advised various employees of Henderson, including Mr Greville, of his new employment with Archer. He was sent one or more Quarterly Reports relating to the HAPEP funds after it was known that he had joined Archer. The contention was that as a Bad Leaver would have no entitlement to receive any such financial information, the sending of these documents indicated that for that period at least the defenders were treating him as a Good Leaver. My initial reaction to this argument was: so what? Having thought further about the it, that remains my reaction. Absent any plea of personal bar - and I have heard no suggestion that any such plea would be available to the pursuer in this case - the conduct of the defenders is not relevant to the issue before me. There was no explanation as to why this material continued to be sent out to the pursuer. It is likely, as Mr MacKenzie accepted in his submissions, that it was simply an oversight.

(iv) Restraint of trade arguments

[84] I turn finally to consider Mr MacKenzie's argument that the Bad Leaver provisions were unenforceable as being in restraint of trade. As I have said, this line of argument did not find its way into the Summons. It was not raised at any preliminary or procedural hearing. It was mentioned in one letter from the pursuer's Australian solicitors, but then disappeared from view. Although it seeks to reach the same conclusion as the "penalty clause" line of argument, it is a different legal proposition and involves consideration of different facts. Since the argument was not pleaded, those facts were not investigated. The defenders had no notice of the case to be met. The restraint of trade case is not a mere variation, modification, amplification or development of the pursuer's pleaded case. In those circumstances it seems to me that Mr Johnston was fully entitled to object that it was too late to seek to argue the restraint of trade point at the stage of final submissions. I have set out his submissions on this point in para.[55] above. I agree with them and hold that this argument cannot be advanced.

[85] In those circumstances, it would be invidious for me to attempt to make any findings relevant to the restraint of trade argument which would, necessarily, be based on an incomplete view of the possible evidence. I should, however, make these brief observations. It is true, as Mr Johnston pointed out, that the Limited Partnership Agreement is entirely separate from the pursuer's contract of employment. It does not follow, however, that the two agreements cannot be looked at together as essential parts of the one transaction: Alex Lobb (Garages) Limited v Total Oil GB Limited. To come to any decision as to whether that would be the proper approach in any particular case, one would need to see both agreements. In this case one would need to see the contract of employment as well as the Limited Partnership Agreement. The contract of employment was not in evidence; and I heard no evidence as to what it said. There is a further difficulty in that, whereas the contract of employment is between the pursuer and Henderson Global Investors (Singapore) Limited, the Limited Partnership Agreement is amongst the General Partner and the Carried Interest Partners, i.e. the various individual investment managers including the pursuer. There must, at the very least, be a question as to how two different agreements between different parties can be read as though they were all part of one agreement. Further, if they are to be considered as one agreement, there is a difficulty is seeing how the court could entertain an argument that part of the overall agreement was unlawful when one of the parties to it, namely the employer under the employment contract, has not been convened as a party to the action.

[86] If, on the other hand, the Limited Partnership Agreement is properly to be considered in isolation, there is force in Mr Johnston's submission that it is not possible to sever the Bad Leaver provisions from the remainder of the agreement. The Limited Partnership Agreement has little content other than the calculation of an attribution to the various partners of shares in carried interest, that calculation and attribution depending on each partner's leaver status. One could not simply delete all references to Bad Leaver and to the consequence of being a Bad Leaver. The determination that a person becomes a Bad Leaver has an impact upon the shares of the remaining Carried Interest Partners. It has, indirectly, an effect also upon the Relevant Proportion that is to be given to a new Joiner. More generally, the Limited Partnership Agreement is in place as a method of incentivising the investment management team. It is a mixture of carrot and stick. If the stick is removed by the excision of the Bad Leaver provisions, the package is considerably altered. It has to be considered not only from the point of view of the pursuer and the General Partner but also from that of the other Carried Interest Partners, in particular those who have no intention of leaving during the lifetime of the fund. And the question would have to be asked whether such an agreement would achieve the aim apparently desired by would-be investors. I heard no evidence on these matters, but they seem to me to raise important questions. There is every possibility, seen from a number of different standpoints, that severance of the Bad Leaver provisions would make the bargain something other than the bargain which the parties objectively thought that they were making: c.f. Marshall v N M Financial Management Limited at para.17.

[87] Next, while I accept that "there is no relevant difference between a contract that a person will not carry on a particular trade and a contract that if he does not do so he will receive some benefit to which he would not otherwise be entitled" (Marshall v N M Financial Management Limited at para.14), it is not clear that this necessarily applies in the present case. The pursuer's evidence was that he anticipated losing 20% of his entitlement and asked Archer to compensate him for that. A possible inference, which was not explored in evidence, is that had he known he was to be categorised as a Bad Leaver, he would have sought to negotiate a payment by Archer to compensate him for losing his whole entitlement. There is no evidence as to what Archer's reaction would have been. However, Mr Johnston was entitled to ask where was the restriction on employment if an employer in the private equity business is generally willing to pay up to compensate a new employee for the amount which he was likely to lose by reason of such a provision? This would be a matter for evidence.

[88] Finally, on this issue, it seems to me that there are considerable difficulties in applying a two-dimensional view of restraint of trade principles to a multi-party agreement. In this action the court is asked to hold that the Bad Leaver provisions are unenforceable (unenforceability rather than illegality appears to be the better view of the consequence of a finding that the agreement is in restraint of trade, though the cases are not entirely consistent on this point). However, in considering whether a clause is unreasonable on restraint of trade grounds, it is necessary to take into account the precise circumstances of the parties to the contract. It is at least possible that a consideration of those factors might produce a different answer depending upon the circumstances of the particular Carried Interest Partner. It is thus possible that the same clause might be held unenforceable as against one Carried Interest Partner, but enforceable against another. This does not appear to make much commercial sense.

[89] In view of my decision that the restraint of trade argument is not open on the pleadings in the present case, I do not need to decide any of these points. They might merit fuller consideration in a case where they arise for decision. I mention them simply to show the difficulties that might lie in the way of the pursuer in any event.

Disposal

[90] I shall sustain the second to fifth pleas-in-law for the defenders and assoilzie each of them from the Conclusions of the Summons.