Fennell v Halliwells LLP

Where professionally drafted contractual language is clear, the court must apply it. Commercial considerations and the surrounding circumstances may assist construction, but they cannot justify subverting clear words to achieve a supposed commercial purpose that is not shown to have been shared by the parties. A deed guaranteeing specified monthly drawings and providing that sums paid to or for the benefit of a retiring member would not be reclaimed barred recovery of drawings paid under the relevant membership agreements, even though the LLP later made no profits. The same construction meant that the associated tax payments were not overpayments recoverable from the member.

The claimant, a fixed share member of the defendant solicitors’ LLP, resigned to join another firm and entered into a Retirement Deed. After the LLP entered administration and liquidation, its liquidators sought to recover drawings and tax payments made on his behalf, on the basis that the LLP had made no profits. The claimant sought a declaration that the Retirement Deed released or barred those claims. The central issue was the proper construction and effect of clauses 3.2 and 10.3 of the Retirement Deed.

1. Declaration granted. The Retirement Deed waived and released the LLP’s claims against the claimant for overpaid drawings and overpaid tax. The court declined to make a positive declaration that the sums were recoverable, since the liquidators had issued no claim seeking that relief and the claimant had other possible defences.
2. The relevant approach to construction was objective. The court had regard to the language used, the agreement as a whole and the relevant background. However, where professional parties used unambiguous language, that language had to be applied. The court should not speculate about an alleged commercial purpose or distort clear wording to protect creditors unless there was clear evidence that the supposed objective was shared by the parties.
3. Clause 3.2 guaranteed monthly drawings at the existing rate and stated that the LLP would not reduce, reclaim, claw back or set off those drawings. Clause 10.3 likewise prevented the LLP from reclaiming sums paid to or for the benefit of the retiring member pursuant to the Retirement Deed, the Members Agreement or the FSM Deed. Neither clause was made subject to clause 7.2 of the LLP Deed, nor was either expressed to be subject to a temporal limitation.
4. The language therefore barred recovery of drawings paid under the relevant deeds, notwithstanding that the LLP’s later accounts showed no profits. The associated payments to HMRC were also not recoverable as overpaid tax: if the Retirement Deed barred recovery of the drawings, the tax payments had been properly made by reference to those drawings.
5. The claimant was awarded his costs, subject to detailed assessment, together with an interim payment on account of £48,000 including VAT. Permission to appeal was refused.

This was a first-instance Part 8 claim. Permission to appeal was refused because the judge considered that the appeal had no real prospect of success and that the test-case nature of the proceedings created no other compelling reason for an appeal.