Ennismore Fund Management Limited v Fenris Consulting Limited

Contractual clawback provisions must be construed by giving effect to their natural and ordinary meaning in context, including the agreement’s structure, purpose, known background and commercial common sense. Subjective intentions and oral evidence of the parties’ understanding cannot alter that construction; they may be relevant to rectification if that claim is made. Where the agreed formula tied clawback to a reduction in the company’s performance fee attributable to portfolio losses, that causal and financial condition had to be proved. The formula could not be ignored as a drafting mistake merely because another construction appeared to better reflect the commercial purpose. A possible future reduction caused by a high watermark was not a reduction in fees earned during the relevant performance period.

Ennismore Fund Management Limited v Fenris Consulting Limited concerned the construction of a clawback agreement governing discretionary fees paid to a fund manager through a consultancy company. A proportion of earlier bonuses had been invested and was subject to clawback if later portfolio losses caused a reduction in the investment manager’s performance fee.

After losses in 2007 and 2008, Ennismore sought to claw back investments representing bonuses from 2005 and 2006. Foster J construed the agreement as permitting clawback without regard to the effect on Ennismore’s own performance fee. The Court of Appeal of the Cayman Islands allowed an appeal from that decision. The central issue before the Board was whether the agreement required the losses attributable to the relevant portfolio to cause a reduction in Ennismore’s performance fee.

Appeal and construction. The Board dismissed the appeal, save in relation to the CICA’s costs order. The indemnity-basis order was set aside and replaced by an order on the standard basis. Ennismore was ordered, subject to written submissions within 21 days, to pay Fenris’s costs of the appeal to the Board.

1. Objective interpretation. Applying the principles summarised in Arnold v Britton [2015] UKSC 36, the agreement had to be construed objectively by reference to its language, the other provisions, its purpose, relevant background and commercial common sense. Subjective evidence of intention or understanding was irrelevant and inadmissible on construction. Such evidence might have been relevant to rectification, but no rectification claim was advanced.
2. Effect of the formula. Although the agreement contained some tension between its provisions, sentences B(1)(iii) and C(1)(iii) expressly required the amount of clawback to be calculated by reference to the percentage reduction in the performance fee earned by Ennismore that was attributable to net investment losses. Those provisions had to be given meaning and effect.
3. Causation and calculation. The word “attributable” required a causal link between the losses on Fenris’s portfolio and a reduction in Ennismore’s performance fee. The net investment loss, and the attributable fee reduction, were to be assessed by performance period. A general loss across Ennismore’s portfolios, or the possibility of needing to recover a high watermark in future years, did not establish a current reduction attributable to Fenris’s portfolio.
4. Application. Ennismore had not apportioned the reduction in its performance fee between the loss-making portfolios or established what reduction was attributable to Fenris. Its construction would permit recovery of a bonus despite no clearly established loss caused by the particular manager’s advice. The CICA was therefore correct and the appeal was dismissed.
5. Delay. The Board described the CICA’s delay of nearly one year and nine months in delivering judgment as wholly unacceptable absent exceptional justification. In the particular circumstances, however, the delay did not make it unfair or unjust to allow the CICA’s decision to stand.

• Privy Council — In [2016] UKPC 9, dismissed Ennismore’s appeal on construction, varied the CICA’s costs order and ordered costs of the Board appeal against Ennismore.
• Court of Appeal of the Cayman Islands — On 16 April 2014, allowed an appeal from Foster J’s decision. The principal judgment was delivered by the President, with the other members agreeing; Conteh JA also delivered a short judgment.
• Foster J — On 7 February 2012, reflected in an order dated 16 February 2012, construed the clawback agreement as allowing recovery without requiring a reduction in Ennismore’s performance fee.