Easter Term
[2016] UKPC 9
Privy Council Appeal
No 0097 of 2014
JUDGMENT
Ennismore Fund Management Limited (Appellant) v
Fenris Consulting Limited (Respondent) (Cayman Islands)
From the Court of Appeal
of the Cayman Islands
before
Lord Neuberger
Lord Mance
Lord Clarke
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
19 April 2016
Heard on 26 and 27 January
2016
|
Appellant
Mark Cunningham QC
Rupert Coe
(Instructed by
Simmons & Simmons LLP)
|
|
Respondent
Thomas Lowe QC
(Instructed by
Sharpe Prtichard LLP)
|
LORD CLARKE:
Introduction
1.
This is an appeal from an order of the Court of Appeal of the Cayman
Islands (“the CICA”) made on 16 April 2014 in accordance with a judgment delivered
on the same day. The court comprised Sir John Chadwick P and Mottley and Conteh
JJA. The principal judgment was delivered by the President, with whom the other
members of the court agreed, although Conteh JA delivered a short judgment of
his own. The CICA allowed an appeal from an order of Foster J (“the judge”)
made on 16 February 2012, which reflected his judgment of 7 February 2012. The
question in this appeal, as in the courts below, turns on what is the true
construction of the relevant parts of an agreement known as a clawback
agreement.
The background facts
2.
The background facts can be shortly stated. The Board will call the
plaintiff “Ennismore” and the defendant “Fenris”. Ennismore is a company
incorporated in England and Wales. At the relevant time it was the investment
manager of a Cayman Islands Fund, Ennismore European Smaller Companies Hedge
Fund (“the ESCF”) and an Irish mutual fund, Ennismore European Smaller Companies
Fund (“the OEIC”). From about October 2006 Ennismore was also investment
manager for a second Cayman Islands Fund, Ennismore Vigeland Fund (“the EVF”).
Mr Arne Vigeland, who is an analyst and fund manager, was employed by Ennismore
between November 2001 and July 2004. In May or June 2004 he relocated to
Norway. Thereafter he continued to provide his services to Ennismore as a fund
manager through Fenris, a company incorporated in Belize for that purpose,
under the terms of a letter (“the Consultancy Services Agreement” or “CSA”)
dated 24 June 2004.
3.
A substantial element in the remuneration paid by Ennismore to its fund
managers comprised discretionary, or “bonus”, fees based on the performance of
the individual funds or portfolios for which each fund manager was responsible.
A portion of the discretionary fees payable to each fund manager in respect of
each year was held back and invested by Ennismore on the fund manager’s behalf
on the basis that the retained investments were subject to “clawback” by
Ennismore in the event that the portfolios for which that fund manager was
responsible under-performed in future years.
4.
In 2007 and 2008, following a general collapse in financial markets, the
funds, or portfolios, for which Fenris (or Mr Vigeland) was responsible (the “Fenris
portfolios”) suffered losses. The issue in these proceedings is whether, in the
events which happened, Ennismore was entitled to exercise rights of clawback
against investments which it had retained out of discretionary fees payable to
Fenris in respect of earlier years.
5.
The CSA required that Fenris would make available to Ennismore the
services of one suitably qualified and experienced fund manager who would
provide investment advice to Ennismore. The first fund manager was to be Mr
Vigeland, whose task was to make recommendations to Ennismore concerning long
and short equity investments, upon which Ennismore might act at its sole
discretion. Neither Fenris nor Mr Vigeland was to have authority to commit
Ennismore to the purchase or sale of any investments or to place orders with
brokers on behalf of Ennismore. Mr Vigeland, as fund manager, was to monitor,
on a continuous basis, investments made by Ennismore on the basis of advice
received from him. Fees were to be agreed between the parties from time to
time.
6.
The CSA contained no provision for the payment of bonuses; but it is
common ground that it was, at the time, the practice for Ennismore to pay
annual performance bonuses to its fund managers and that, following the CSA, that
practice extended to Fenris in respect of the services provided by Mr Vigeland.
Thus for the year ending 31 December 2004 Mr Vigeland, through Fenris, earned a
bonus of £786,000 in addition to his basic salary and pension contributions,
half of which was invested through Ennismore’s Employee Benefit Trust (“EBT”)
in funds managed by Ennismore. The practice was described in a letter dated 18
July 2005 from Ennismore to the shareholders in ESCF. The purpose of that
letter was to propose a change in the fees which Ennismore charged to ESCF (the
“Fund” and, together with OEIC, the “Funds”) in its role as investment manager
of the Fund; “and to give a few thoughts on the future of our business”. The
letter was signed by Gerhard Schöningh and Geoff Oldfield, who were the
co-founders of Ennismore and (then) the holders of all its shares.
7.
As the President noted in para 9, the change in the fees which Ennismore
charged to the Fund as investment manager was explained in the second paragraph
of the letter of 18 July 2005 as follows:
“With effect from 1 September, we
propose that the annual management fee is increased from 1.5% to 2% and that
the cash benchmark, applied before a performance fee is charged, is dropped and
replaced by a high watermark only.”
That charging structure is reflected in a document headed
“Ennismore Fund Management Ltd: Ennismore European Smaller Companies Hedge
Fund”, which is undated but which the President held, from internal evidence,
must have been issued in or about August 2006. In that document, under the
heading “Fund Information”, the charges paid by the Fund to Ennismore were
summarised under three heads: (i) an annual investment management fee of 2% payable
monthly; (ii) a performance fee; and (iii) administration fees, charged ad
valorem on successive tiers of the NAV of the Fund. The performance fee was
described in these terms:
“20% performance fee on value
added. Any under-performance relative to the benchmark compounds and is carried
forward indefinitely and must be recouped fully before a performance fee is
charged. If applicable, the performance fee is paid annually in January for
performance achieved in the previous calendar year.”
8.
In para 10 of his judgment the President noted that the letter of 18
July 2005 went on to explain that Ennismore’s practice, in relation to the
remuneration of its team of fund managers “was based around the principle of
clawback” and then quoted this passage from the third paragraph:
“Each Investment Manager is
allocated a fixed amount of equity and has full responsibility for running his
or her ‘book’. Our Investment Managers’ remuneration is transparent, in that
they earn a percentage of the fees that they generate on their book. Ennismore
operates a ‘clawback’ system as a balance and check to the high degree of
autonomy given to all Investment Managers. Only 50% of an Investment Manager’s
bonus is paid in cash, while the balance is re-invested in the funds and
subject to a clawback for a three year period. Should an Investment Manager
generate a negative value-added in any of the three years, this is ‘clawed-back’
from the reinvestment.”
The letter added that increasing the fees would allow
them to remain a highly attractive employer without sacrificing the clawback
system and without re-opening the funds and that to date all their investment
managers had chosen to re-invest the vast majority of their cash bonuses in the
Funds.
9.
The President then summarised the position as at December 2005. In doing
so, at paras 11 and 12 he referred in detail to a spreadsheet entitled “Bonuses
and Salaries 31 Dec 05” which was issued to all Ennismore fund managers,
including Mr Vigeland, in early 2006. The Board does not discuss the
spreadsheet here because it is not necessary to do so in order to resolve the
issues between the parties. However the President noted in para 14 that in the
letter of 18 July 2005 there was reference to the possibility that a fund
manager might “generate a negative value-added” in one or more years but that
that did not happen in the year 2005, as shown on the 31 December 2005 spreadsheet.
The President nevertheless considered, by reference to the spreadsheet, what
the position would have been if the performance of the portfolios for which one
of the individual fund managers was responsible had been such that the value
added by those portfolios had been negative: that is to say, if the value added
by those portfolios had been less than a benchmark figure. In that event, as
the President put it at para 16, if effect were to be given to the statement in
the letter of 18 July 2005 that “should an Investment Manager generate a
negative value-added in any of the three years, this is ‘clawed back’ from the
reinvestment figure”, it could have been expected that Ennismore would have
sought to “clawback” an amount equal to the negative value added from funds
retained (and invested) out of bonuses to which that fund manager had become
entitled in the previous three years.
10.
The President makes a number of references to a “benchmark figure” but
it appears to the Board that the 18 July 2005 letter suggests that what was
described as a high watermark replaced the notion of a benchmark figure.
However, it is not necessary to focus on either because it appears to the Board
that neither is material to the resolution of the issue of construction of the
clawback agreement to which it now turns.
The Clawback Agreement
11.
It is common ground that, until April 2006, the operation of the clawback
system was not set out in any document having contractual effect between
Ennismore and its fund managers, although, as the President said at para 17, it
had been described in general terms in the letter to shareholders dated 18 July
2005. However, on 6 April 2006, Ennismore, Fenris and Mr Vigeland entered into the
clawback agreement which is central to the issues in this appeal. The agreement
was drafted by Ennismore without legal assistance and neither Fenris nor Mr
Vigeland had any input into it. It was produced to them for signature. It makes
no reference either to a benchmark figure or to a high watermark.
12.
The President set out the agreement in his judgment. In doing so he
sub-divided the text as set out below for convenience of reference. He also
referred to the individual terms of the agreement as “sentences”. The Board
will do the same. In the agreement the reference to the “Company” is a
reference to Ennismore and the reference to “AVP” is a reference to Mr
Vigeland.
13.
As so set out, the clawback agreement provides so far as relevant as
follows:
“A. Background
(i) Under the agreement between the
Company and Fenris dated 24 June 2004 the Company may pay discretionary fees to
Fenris in respect of each calendar year. (ii) It is agreed that part of such
fees may be paid subject to ‘clawback’ against a share of any net investment
losses attributable to the investment advice received by the Company from
Fenris or AVP in the subsequent three years. (iii) Such fees will be invested
in funds managed by the Company throughout the period that they are subject to
clawback and the amount subject to clawback is the value of those investments
from time to time.
B. Principles of
Clawback
(1)(i) Clawback operates on a
first in - first out basis such that any clawback claims are made against
assets subject to clawback received in respect of earlier years first. (ii) The
percentage rate of net investment losses at which clawback is applied will
match the percentage share of net investment profits upon which the assets
under clawback were determined. (iii) Eg if discretionary fees or bonuses were
paid based upon 30% of the performance fee attributable to the net investment
gain in respect of any year those fees or bonuses (and upon any investment
appreciation therefrom) will become payable to the Company based upon 30% of
the reduction in the performance fee earned by the Company attributable to any
net investment losses.
(2) For this purpose the net
investment loss (if any) shall be calculated separately for each performance
period and the performance periods shall be:
(a) each calendar year; or
(b) for the year in which
Fenris and AVP cease to manage a portfolio for the Company then the period
shall run from 1 January until the date when Fenris and AVP ceased to manage the
portfolio (the ‘Date of Cessation’) …
C. Amounts subject to
Clawback in respect of 2005
(l)(i) In respect of the year ended
3l December 2005 Ennismore has agreed to pay consultancy fees subject to
clawback of £1,526,891 to Fenris which Fenris undertakes to invest in shares of
Ennismore European Smaller Companies Hedge Fund (the ‘Shares’). (ii) The Shares
will be registered in the name of Fenris. (iii) The value of the Shares will be
subject to clawback at a rate of 55% of the reduction in the performance fee earned
by the Company attributable to any net investment losses.
(2) To provide security to
the Company that any amounts due to it under the principle of clawback will be
received by the Company, Fenris and AVP agree that the Shares cannot be sold
transferred or assigned without written consent of the Company.
(3) After 3l January 2009,
or three months after the Date of Cessation if earlier, the Company must give
consent to the sale, transfer or assignment of the shares unless any amounts
are due to it from either Fenris or AVP after offsetting any amounts payable by
the Company to either Fenris or AVP.”
As noted by the judge in para 41 of his judgment, it was
agreed between the parties that the reference to 55% in paragraph C(1)(iii) was
a mistake for 50%.
14.
The President concluded at paras 20 and 28 that the meaning and effect
of the clawback agreement were not open to doubt. He identified four distinct
matters dealt with by the agreement: first, the amount of the discretionary
fees paid or payable in respect of a given year that was to be subject to
clawback in subsequent years, which he referred to as “funds subject to clawback”;
second, the requirements which must be satisfied before a right to clawback
could be exercised against funds subject to clawback, which he called “the
conditions which give rise to the right to clawback”; third, the amount that
could be recovered from funds subject to clawback when the conditions which
give rise to the right to clawback are satisfied, which he called “the amount
of the clawback”; and, fourthly, the priority in which the amount of the
clawback in respect of any one year could be recovered from funds subject to
clawback in respect of earlier years, which he referred to as “the order in
which clawback is to be applied”. The Board will return to these points below.
Ennismore’s claim
15.
Ennismore’s claim related solely to the losses attributable to Fenris
for the year 2008. There had been a claim to claw back fees from Fenris’ losses
for the year 2007 but that claim had already been met in full and was a
non-issue by the time of the trial before the judge. For the years 2005 and
2006 Ennismore had secured its ability to claw back Fenris’ bonus by requiring
investment of 50% of the 2005 bonus in the ESCF (£1,540,779 resulting in 8,034
shares) and 50% of the 2006 bonus in the EVF (£919,904). Between 2002 and 2008
there was no year in which Ennismore had not earned a performance fee and there
were only two occasions when a portfolio manager had had his fees clawed back
by reason of losses on the portfolio. Only one predated the clawback agreement.
The other was Fenris’ loss in 2007.
16.
In 2007 and 2008 Fenris’ portfolio thus sustained losses, with the
result that no bonus was earned by Fenris. Ennismore claimed to claw back the
bonus in respect of both those years. Part of the bonus investment in the ESCF
investment (205.88 shares) was redeemed in respect of the 2007 clawback claim
and taken by Ennismore. The only claim that was live at the trial was therefore
the claim to claw back the 2005 and 2006 bonuses in order to cover the 2008
losses.
Principles of construction
17.
The relevant principles of contractual construction have recently been
summarised in the Supreme Court by Lord Neuberger, with whom Lord Sumption and
Lord Hughes agreed, in Arnold v Britton [2015] UKSC 36; [2015] AC 1619,
at paras 14 to 23. He set out the general principle at para 15:
“15. When interpreting a
written contract, the court is concerned to identify the intention of the
parties by reference to ‘what a reasonable person having all the background
knowledge which would have been available to the parties would have understood
them to be using the language in the contract to mean’, to quote Lord Hoffmann
in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101,
para 14. And it does so by focussing on the meaning of the relevant words, in
this case clause 3(2) of each of the 25 leases, in their documentary, factual
and commercial context. That meaning has to be assessed in the light of (i) the
natural and ordinary meaning of the clause, (ii) any other relevant provisions
of the lease, (iii) the overall purpose of the clause and the lease, (iv) the
facts and circumstances known or assumed by the parties at the time that the
document was executed, and (v) commercial common sense, but (vi) disregarding subjective
evidence of any party’s intentions. In this connection, see Prenn [1971]
1 WLR 1381 at pp 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen
(trading as HE Hansen-Tangen) [1976] 1 WLR 989, 995-997 per Lord
Wilberforce, Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, para 8, per Lord Bingham of Cornhill, and the survey of more recent
authorities in Rainy Sky [2011] 1 WLR 2900, per Lord Clarke of
Stone-cum-Ebony JSC at paras 21-30.”
18.
Lord Neuberger then set out seven factors in paras 17 to 23, which it is
not necessary to refer to in any detail in this appeal. The Board concludes
that the true construction of the clawback agreement depends upon the language
used, when construed in the light of factors (i) to (v) above.
Construction of the clawback agreement
19.
The critical question of construction is whether clawback depended upon
a reduction in Ennismore’s own performance fee or whether clawback applied if
the individual fund manager’s portfolio generated a loss regardless of the
effect on Ennismore’s performance fee. That that is the critical question is
not in dispute. In para 9 of Ennismore’s case it is said that a more concise
articulation of the question (than that in para 12 of the judge’s judgment) was
this. Was the CICA correct to find that clawback payable by Fenris is tied to
Ennismore’s performance fee, whether pursuant to the clawback agreement or for
any other reason?
20.
The judge held that the effect, if any, on Ennismore’s performance fee
was irrelevant. Moreover he did so after a detailed consideration of the oral
evidence. Based on this, he reached conclusions about the parties’ common
understanding, which, for reasons which will appear (paras 32-33 below) do not
have either the relevance or weight in relation to construction which he
attributed to them. In these circumstances, it was submitted on behalf of
Fenris that the issue depended wholly or substantially upon the true
construction of the clawback agreement, which made it clear that the effect on
Ennismore’s performance fee was critical. It was further submitted that oral
evidence given by Mr Blair of Ennismore explaining how he saw the clawback as
operating was of little, if any, relevance, in resolving the issues of
construction. It is important to note that, as Lord Neuberger observed in his
point (vi) in para 15 of his judgment in Arnold v Britton quoted above,
subjective evidence of any party’s intentions must be disregarded. Indeed, oral
evidence of the subjective intentions or understanding of the parties is not
relevant or admissible when the issue is what is the true construction of the
agreement in the light of Lord Neuberger’s factors (i) to (v). In the opinion
of the Board the judge fell into error in focusing on the oral evidence as he
did.
21.
The Board concludes that the submissions on the true construction of the
agreement made on behalf of Fenris are to be preferred to those made on behalf
of Ennismore and that the appeal should be dismissed. The Board would not,
however, go so far as the President did when he said that the meaning and
effect of the clawback agreement were not open to doubt. That is because there
is a tension between the language of sentences A(ii) and B(1)(ii) on the one
hand and sentences B(1)(iii) and C(1)(iii) on the other.
22.
As the Board sees it, the position is as follows. The primary agreement
is stated in sentence A(ii), namely that discretionary fees or bonuses would be
subject to clawback against “net investment losses attributable to the
investment advice received by Ennismore from Fenris or AVP in the subsequent
three years”. However sentence A(ii) does not contain a sufficient statement of
the conditions giving rise to clawback because there is no formula for the
relevant calculation. It does not state what proportion of the prior year’s
bonus is liable to be repaid in a subsequent year and how, if it is less than
the whole of the bonus, that proportion is to be calculated. Sentence B(1)(i)
defines the order in which clawback is applied and sentence B(1)(ii) defines
generally the amount of clawback by creating the principle of equivalence. Then,
critically, it is sentences B(1)(iii) and C(1)(iii) that contain the formula
for the calculation of the amount of clawback. In each case, they indicate that
the amount is to be ascertained by applying the percentage multiplier to the
“reduction in the performance fee earned by [Ennismore]”. The word
“attributable” in sentences A(ii), B(1)(iii) and C(1)(iii) describes the causal
link between the reduction in Ennismore’s performance fee and the net losses on
Fenris’ portfolio within the three year period during which the funds are
earned. The reference to “net investment losses” in sentences B(1)(iii) and
C(1)(iii) must refer back to the phrase in sentence A(ii) where it means “any
net investment losses attributable to the investment advice received by
[Ennismore] from [Fenris] in the subsequent three years”.
23.
The Board accepts the submission made on behalf of Fenris that it was
not necessary to define the “investment losses” as “the amount by which the
value added to the Funds falls short of the benchmark”. It accepts the
submission that “investment losses” simply means a loss on a portfolio over the
relevant period.
24.
The judge ignored the requirement that Fenris’ investment losses must be
causative of “a reduction in Ennismore’s performance fee”. As explained above,
the agreement expressly so provided in two places and the Board can see no
justification for ignoring those provisions. The Board accepts the President’s
conclusion in para 67 that that is essentially what the judge did. Moreover, viewing
the provisions of sentences B(1)(iii) and C(1)(iii) by themselves, there is no
ambiguity in the sentences which might justify such an approach. On the
contrary, their provisions are clear. Mr Blair said that their formulation was
a “mistake”, and the judge said that he “accepted this evidence”. But there was
and is no explanation as to how such a mistake could have been or was made by
someone who understood that the clawback system operated as Mr Blair contended.
This is furthermore not a case in which it can fairly be said that the
construction advanced by Fenris is unworkable. It seems to the Board to make
sense to include a provision requiring Ennismore to demonstrate how its
performance fee was reduced by losses caused by Fenris’ advice before it was required
to forfeit Fenris’ earlier bonus. In this way the agreement answers the
questions posed by the President in para 14 above.
25.
So far as the Board is aware, it is not in dispute that, on the facts,
the investors’ losses in 2008 easily eliminated the profit on which a
performance fee could otherwise have been earned by Ennismore. As noted on
behalf of Fenris in paragraphs 41 and 42 of its case, the result was that there
was no performance fee in 2008. It also means that, as against any one loss
making portfolio manager, Ennismore could not show that it would have made a
profit in 2008 but for the loss made by that portfolio manager; indeed, any
such manager could have said in 2008 that the total loss for that year from the
other portfolio managers would have eliminated Ennismore’s performance fee. This
is however a factor that cuts both ways. Ennismore can rightly say that it
cannot have been intended that the worse all fund managers’ performance, the
less possible clawback.
26.
To this Fenris can respond that, in the event that more than one fund
manager generated an investment loss, with the overall result that Ennismore
received less or no performance fee from its clients, the performance fee
thereby lost would have to be apportioned between fund managers in proportion
to their contribution to its loss on that portfolio. In fact Ennismore did not
seek to apportion the reduction in its performance fees in 2008 as between the
various loss making portfolios, or even to show that such reduction would not
have been possible. So it never sought to establish what reduction in
Ennismore’s performance fee was attributable to the losses on Fenris’
portfolio. Its case was simply that it was entitled to calculate a negative
bonus on Fenris’ portfolio irrespective of any loss it may have suffered.
27.
Ennismore further submits that, even in years when there were losses on
all portfolios (so that that neither individually nor together could any
manager be said to have caused Ennismore any loss of performance fees in that
year), such losses would put Ennismore further below the “high watermark”
referred to in the quotation set out in para 7 above. In order to begin to earn
any performance fee in some future year, Ennismore would have to climb back up
to the watermark, by making further profits for its clients. Such profits would
bring individual portfolio managers bonuses, but would bring Ennismore no
performance fees from its clients, until it was once again above the watermark.
Ennismore drew the attention of the Court of Appeal in this regard to, and the court
in para 9 quoted without further comment, a passage in Ennismore’s Fund
Information dating it appears from 2006. This stated, against “Charges paid by
the Fund”:
“Performance Fee: 20% performance
fee on value added. Any under-performance relative to the benchmark compounds
and is carried forward indefinitely and must be recouped fully before a
performance fee is charged. If applicable, the performance fee is paid annually
in January for performance achieved in the previous calendar year.”
28.
Although this particular Fund Information document appears to have been
issued after the clawback agreement was entered into, it may be that similar
documentation was issued in prior years. Even assuming that this particular
piece of information was within the actual or assumed knowledge of Fenris when
the clawback agreement was made, the Board does not consider that it
demonstrates that the terms of sentences B(1)(iii) and C(1)(iii) were an
unexplained mistake. There are no findings as to what the parties had in mind
or should be taken to have had in mind as background to the way in which the
benchmark operated.
29.
The Board adds that Ennismore did not advance any case to the effect
that any amount by which Ennismore was put further below the watermark because
of losses on individual portfolios could be treated as itself a “reduction in
the performance fee earned” by Ennismore, or that possible reductions of any
performance fee in future years (because of the need to climb back up again to
the watermark) could be regarded as such a reduction under the clawback
agreement. Ennismore would not necessarily succeed in climbing back up at all
in the next year, the Fund might even be closed, and it would be unclear how
many future years could be taken into account. The natural reading of the
clawback agreement is that, just as the net investment loss is “calculated
separately for each performance period” (sentence B(2)), so is likely to be any
reduction in the performance fee earned which is attributable to such net
investment loss.
30.
The Board does not in these circumstances accept the judge’s conclusion
that the construction of the clawback agreement proposed by Fenris is absurd,
extraordinary, unreasonable or contrary to commercial common sense. As submitted
on behalf of Fenris, it has the effect that Fenris compensates Ennismore when
it shows that it has suffered a clearly established loss in the relevant year
because of Fenris’ bad advice and not otherwise. It has the effect that
Ennismore does not suffer a loss so long as it proves that the loss has been caused
by Fenris. On the other hand, Ennismore’s construction has the effect that a
portfolio manager is penalised when Ennismore suffers no clearly established
loss from the advice given by that particular portfolio manager and recovers
the bonus as a potential windfall with no obligation to pass it on to the
investors who in that event have suffered the loss.
31.
The judge held in para 36 of his judgment that the concept of clawback
was well understood by all those concerned with both Ennismore and Fenris from
the start. He held that all the fund managers understood that the intention of
the clawback system was to discourage a short term approach to investment by
fund managers by entitling Ennismore to claw back a portion of an individual
discretionary bonus payments in the event of future losses in the portfolios
being managed by the particular individual. He held that all the fund managers
knew and understood the system. In particular he held that Mr Vigeland was well
aware of the clawback system. In reaching these conclusions he accepted the
evidence of the Ennismore witnesses and preferred it to that of Mr Vigeland.
32.
However, the difficulty with that approach is that, as the CICA
correctly held at para 69, there was no course of dealing between Ennismore and
any of its employees which would have prepared them for the very serious
problems which befell the markets in 2008. In normal years the question whether
Ennismore would be paid irrespective of any loss was never tested. The CICA
accepted Fenris’ submission that (as stated above) not only had there been
virtually no actual clawback in the history of the company (only two instances
over six years for seven or more fund managers) but Ennismore had never ended
up with a cataclysmic event which caused most fund managers to earn nothing. That
had not occurred before 2008; so that no practice existed which would assist on
any of the issues of construction. As the President said, no-one had ever had
to address the question whether Ennismore could exercise the right to clawback
in circumstances in which it had suffered no loss attributable to the
under-performance of the portfolios for which an individual fund manager was
responsible.
33.
In short, although the judge’s findings show that there was a
well-established background from the start that both bonuses and clawback would
be based on individual portfolio performance, (a) it is not shown or found that
there was any understanding about the precise basis on which or way in which
such clawback would then be achieved; on the contrary it is quite conceivable
that it might depend on a further condition that it should cause Ennismore
loss, (b) that there was no such understanding or finding in this respect is
not surprising when there had been no past history of losses on any portfolio
which could clarify, or generate experience of, the operation of clawback and,
moreover, (c) the internally contradictory and unexplained language of the
clawback agreement which the Board now has to construe is itself suggestive of
a lack of clarity in any understanding in this particular respect.
34.
In all the circumstances the Board accepts the submission that the CICA
was correct to conclude that it was wrong to dismiss the clawback agreement on
the basis that it was a poorly drafted document, at any rate in the respect
with which this appeal is concerned. As the President said in para 68, the
judge gave no explanation why he thought that the parties should have intended
to impose an obligation on Fenris to pay moneys to Ennismore in circumstances
where Ennismore had not suffered any clearly established loss in consequence of
the Fenris portfolios, but that is the effect of the construction which
Ennismore advanced and the judge accepted.
35.
Much of the evidence relied upon by the judge was not relevant to the
issue of the true construction of the clawback agreement. Some of it might
conceivably have been relevant to an argument that the agreement should be
rectified but no claim for rectification was advanced on behalf of Ennismore.
Conclusion
36.
For the reasons summarised above, the Board concludes that the
resolution of the appeal depends upon the true construction of the clawback
agreement and that, applying the principles summarised by Lord Neuberger in Arnold
v Britton in para 17 above, there is no warrant for giving no meaning or
effect to sentences B(1)(iii) and C(1)(iii). The point is well encapsulated in
paragraph 34 of Fenris’ case as follows. The question is whether the formula to
compute the clawback fees is a percentage “of the reduction in the performance
fee earned by the Company attributable to any net investment losses”. That expression
is used both in sentence B(1)(iii) and in sentence C(1)(iii), where it
expressly relates to the amounts subject to clawback in respect of 2005 and
2006 bonuses in order to cover the 2008 losses. Sentence C(1)(iii) is therefore
particularly in point.
37.
On Ennismore’s case, those sentences (which were used twice) were
redundant and should be ignored. The judge accepted this, and, as Fenris submitted,
gave no meaning at all to them. It appears to the Board that, in the words of
Lord Hoffmann, a reasonable person in the position of the parties would have
given the words their ordinary meaning. Moreover, their inclusion cannot be
said to have been inconsistent with the overall purpose of the agreement.
38.
It follows that, save in the case of the CICA’s order for costs, the
appeal must be dismissed. As to costs, Fenris accepts that the CICA’s order for
costs on an indemnity basis must be set aside and replaced by an order on a
standard basis. As to the costs of the appeal to the Board, subject to any
submissions received in writing within 21 days of the judgment being handed
down, the Board concludes that Ennismore must pay Fenris’ costs of the appeal.
Postscript
39.
The attention of the Board was drawn to the fact that there was a very
long delay between the hearing of the appeal and the delivery of the judgment
of the CICA. The hearing was on 23 and 24 July 2012, whereas the judgment was
not handed down until 16 April 2014, nearly a year and nine months later. The
Board is of the view that, in the absence of some exceptional justification in
or accompanying the judgment, that was a wholly unacceptable delay and wishes
to emphasise the importance of the CICA delivering judgments as soon as
reasonably practicable after a hearing. It was accepted on behalf of Fenris
that the delay was excessive. However, the question is whether it would be
unfair or unjust to allow the decision of CICA to stand. Given that the issues
in the appeal have been resolved on the true construction of the clawback
agreement, the Board is satisfied that, in the particular circumstances of this
case, it would not be unfair or unjust to dismiss the appeal.
