Flanagan v Liontrust Investment Partners LLP & Ors

The court addressed consequential matters arising from its earlier liability judgment. It held that the written notice from Liontrust Investment Services Limited dated 1 August 2013 validly reconstituted the Management Committee under clause 12.3.2 of the LLP Agreement and thereby removed Mr Flanagan from the Committee; accordingly the third termination letter was valid and Mr Flanagan ceased to be a member of the LLP on 22 June 2015. The judge construed the 1 August 2013 document in context, treated the word "all" as a drafting slip and held an implied exercise of the power to remove those not named was permissible; the alternative point based on deregistration with the FSA was unnecessary to decide.

On costs the court held that, although Mr Flanagan should be treated as the successful party (because he recovered a substantial payment of unpaid fixed allocations), departure from the usual rule that costs follow the event was justified by his high-risk strategy, the unreasonable pursuit of sales and marketing allegations and other conduct. Taking into account serious misconduct by Liontrust (including fabrication of minutes), the court ordered Liontrust to pay 50% of Mr Flanagan’s costs and ordered Mr Flanagan to pay 60% of Liontrust’s costs, with an interim payment of £300,000 by Mr Flanagan to Liontrust. Permission to appeal and the precise form of other relief were deferred.

Background and procedural posture. This is a judgment on consequential matters following the trial on liability and the main judgment handed down on 24 July 2015 ([2015] EWHC 2171 (Ch)). The hearing concerned four consequential matters: (1) the validity of the third termination letter of December 2014, (2) costs, (3) the form of relief to be granted and (4) applications for permission to appeal (permission to appeal was deferred).

Nature of the application. The matters for decision were principally declaratory and procedural: whether the third termination letter was valid (affecting when Mr Flanagan’s LLP membership ended) and how costs should be allocated between the parties in light of the complex litigation and earlier Part 36 offers.

Facts and issues.

• Relevant instruments included the LLP Agreement (in particular clauses 12.2, 12.3.1, 12.3.2 and 12.6) and a written notice from Liontrust Investment Services Limited dated 1 August 2013 reconstituting the Management Committee.
• The core legal issues were (i) whether the 1 August 2013 document removed Mr Flanagan from the Management Committee (so that the later December 2014 notice was valid), (ii) whether alternates could be treated as appointed, (iii) whether the court should treat the parties as successful or unsuccessful for costs purposes given the mix of wins and losses, and (iv) what costs orders should be made having regard to conduct, Part 36 offers and proportionality.

Reasoning and conclusions.

• Validity of third termination letter: the judge concluded that the 1 August 2013 document must be read in context and that the stray word "all" was a drafting error inherited from an earlier 2010 document. Reading the document with contemporaneous evidence (including an internal email) and the unchallenged evidence of Liontrust’s director showed a deliberate reduction in committee size and appointment of the named persons. The power in clause 12.3.2 to appoint was construed as including the power to remove existing appointees by implication; alternates could be treated as intended appointees or, if not, their invalidity would not affect the primary appointments. On that basis Mr Flanagan was no longer a committee member in December 2014 and his LLP membership terminated on 22 June 2015. The alternative argument based on FSA deregistration was not decided.
• Costs: the court analysed the parties’ Part 36 offers and the relative success on issues. Although Mr Flanagan recovered a non-trivial sum (unpaid fixed allocations), his primary claim for a buy-out under the default rules failed at the decisive legal point. The judge nevertheless treated him as the successful party but exercised the broad discretion in CPR 44.2 to depart from the usual rule that costs follow the event. Key factors were the complexity added by Mr Flanagan’s allegations about marketing and sales, the high-risk nature of his principal claim, his conduct at trial, and serious misconduct by Liontrust (including fabricated minutes). Balancing these, the court ordered that Liontrust pay 50% of Mr Flanagan’s costs (standard basis) and that Mr Flanagan pay 60% of Liontrust’s costs (standard basis), with an interim payment by Mr Flanagan of £300,000. The court declined to add an interim amount for VAT pending agreement. Assessment on the basis of detailed calculation was left to the usual processes.

Wider observations. The judge remarked on the practical difficulties of fine-grained issue-based cost apportionment in complex commercial litigation, emphasised the need to consider conduct on both sides, and exercised proportionality in arriving at cross-orders rather than simply following party success.

The court held that the 1 August 2013 written notice from Liontrust Investment Services Limited validly reconstituted the Management Committee and thereby removed Mr Flanagan; his membership of the LLP therefore terminated on 22 June 2015. On costs the court treated Mr Flanagan as the successful party but departed from the usual rule that costs follow the event because of his litigation strategy and conduct; Liontrust was ordered to pay 50% of Mr Flanagan’s costs (standard basis) and Mr Flanagan was ordered to pay 60% of Liontrust’s costs (standard basis). An interim payment of £300,000 by Mr Flanagan to Liontrust was ordered. Permission to appeal and finalisation of the form of other relief were deferred. Rationale: contextual construction of the 1 August 2013 document, implied exercise of removal power under clause 12.3.2, and discretionary, proportional apportionment of costs under CPR 44.2 having regard to conduct and Part 36 history.