Reinhard v Ondra LLP and others

The judgment is a first-instance trial of liability concerning an offer letter dated 15 July 2009 by which the claimant, Mr Reinhard, accepted employment with Ondra LLP and was said to be "granted a 1.0% share of the partnership". The principal legal issues were (a) construction of that clause in the employment letter (whether it created immediate LLP membership and, if so, on what terms), (b) the effect of section 4(4) of the Limited Liability Partnerships Act 2000 on any concurrent status as employee and member, (c) whether the defendants misrepresented the nature of the entitlement, and (d) disputes over bonus, expenses and alleged misconduct.

The judge held that, on ordinary commercial construction taking into account the contemporaneous draft LLP documentation supplied to the claimant, the offer letter should be read as granting a partnership/membership interest to take effect on commencement of employment, the relevant membership rights being those reflected in the draft LLP arrangements then in circulation. However, the court did not finally resolve whether the claimant could be both an employee and a member because that question engages s.4(4) of the LLP Act and required further submissions on its practical effect; the judgment set out provisional conclusions and invited further argument on that statutory point.

Separately the judge determined other issues: Ondra had breached the contractual obligation to review the claimant's ownership percentage in a timely way and also had failed to exercise the bonus discretion in a rational way (entitling the claimant to damages for underpayment of bonus); the claimant's claims for a further increase (2% → 3%) were dismissed; the claimant's relocation and other expense claims succeeded; the claimant was entitled to salary in lieu of notice (PILON); and Ondra's counterclaim for repayment of the 2011 bonus was dismissed. The judge also found that the claimant had committed serious breaches of the firm’s dealing policies (notably failing to notify or obtain approval for a personal account) which would have justified summary dismissal, but that did not defeat the claimant's entitlement to certain contractual sums.

Background and claims

• The claimant, an investment banker, joined Ondra LLP under an offer letter of 15 July 2009 that, among other terms, stated he would "initially be granted a 1.0% share of the partnership". He later alleged that this constituted immediate and enduring LLP membership entitling him to income and capital rights. He also alleged misrepresentation, wrongful/summary dismissal, unpaid bonuses and unpaid expenses. Ondra denied he obtained actual membership on those terms, contending instead that he received only a notional profit-share while employed and that any membership would have been subject to formal deeds and the LLP agreement then in draft.

Procedural posture

Trial of liability before Mr Justice Warren in the Chancery Division. (Appellate history: Not stated in the judgment.)

Issues framed

1. How is clause 3 of the offer letter ("1.0% share of the partnership") to be construed against the contemporaneous matrix, including the draft LLP agreement and investor documentation?
2. If clause 3 did create membership, on what terms (statutory defaults, the February 2009 LLP agreement, or the April 2009 draft LLP agreement)?
3. What is the effect of section 4(4) of the LLP Act on any concurrent status as employee and member?
4. Were any pre-contractual statements actionable misrepresentations?
5. Were the defendants’ exercises of discretion (especially on bonus) lawful and rational?
6. Did the claimant breach contractual/confidentiality/share-dealing obligations such as to justify summary dismissal?

Court’s reasoning and findings (concise)

• The judge conducted an extensive factual analysis of pre-contract communications, contemporary documents (business plan, term sheets, draft LLP agreement) and the parties’ evidence. He concluded that on ordinary commercial construction, read against the draft LLP documentation supplied and the matrix known to the parties, the offer letter was to be read as granting the claimant a partnership/membership interest to take effect on commencement of employment, the relevant rights being those reflected in the draft LLP arrangements.
• However, the judge also concluded that, as a matter of English law, a person could not be both a partner (in the notional partnership sense underlying s.4(4)) and an employee of the same firm in the same relationship. Because of this statutory point, he declined finally to implement the construction point without further submissions on the practical effect of section 4(4). He set out (at length) provisional conclusions and invited further argument on the interaction between the contractually granted membership interest and the LLP Act.
• On distinct issues the judge found that Ondra had failed to undertake the contractual reviews promised under the offer letter and had exercised its bonus discretion irrationally in 2011 (entitling the claimant to damages for underpayment). The claim for an increase to 3% was dismissed. The claimant’s relocation and other expense claims succeeded. The judge found that the claimant had seriously breached the firm’s share-dealing and disclosure policies (notably failing to notify or obtain approval for a Jersey personal account and failing to notify individual trades), breaches which would have justified summary dismissal; nevertheless, those findings did not preclude the claimant’s entitlement to contractual sums already due and did not support Ondra’s counterclaim for repayment of the 2011 bonus.

Practical note: the judgment is fact- and document-heavy and requires further submissions on the interaction of the contractual construction reached with s.4(4) of the LLP Act. The court emphasised that the case did not involve rectification or relief for mistake.

This first-instance court held (i) on construction, reading the offer letter against the contemporaneous draft LLP documents and surrounding matrix, the letter granted the claimant a membership/"partnership" interest to arise on commencement of employment, the membership rights being those reflected in the draft LLP arrangements; (ii) the practical/legal effect of that finding against the background of section 4(4) Limited Liability Partnerships Act 2000 (on being both employee and member) required further focussed submissions before a final determination; (iii) on other issues the court held that Ondra had breached contractual duties to review ownership and to exercise the bonus discretion rationally (awardable damages for underpayment), the claimant’s claim to a 3% uplift failed, the claimant’s relocation and reasonable expense claims succeeded, the claimant was entitled to payment in lieu of notice (PILON), and Ondra’s counterclaim for repayment of the 2011 bonus was dismissed; (iv) the court found the claimant had seriously breached the firm’s dealing and disclosure rules (notifying a Jersey personal account and failing to obtain or give prior/after-the-event notifications) which would have justified summary dismissal, but those breaches did not negate certain contractual entitlements already due. Further submissions were directed on the statutory question under s.4(4) LLP Act and on any remaining issues of remedies/quantum.