Liontrust Investment Partners LLP & Ors v Flanagan

The Court of Appeal dismissed both the appeal by Liontrust and the cross-appeal by Mr Flanagan. The court held that the reference in the side letter to a "6 months" notice period for compulsory retirement under clause 18.1.3 of the LLP Agreement meant a fixed period of six months (not "at least six months"), when read in context with the compulsory initial term of 24 months and the contractual matrix. The court also held that the words "as a Reserved Matter" in clause 18.1.3 were part of that clause and therefore required a Management Committee resolution in accordance with the Reserved Matters procedure; accordingly the first two notices were ineffective. Finally, the court held that the 1 August 2013 notice removing and reconstituting the Management Committee was effective as against LIP and had removed Mr Flanagan from the Committee, so the Third Notice was effective. The judge's order requiring payment to Mr Flanagan of sums due under clause 6 on his retirement was therefore upheld.

This appeal concerned the construction of provisions in an LLP agreement and a side letter governing compulsory retirement, garden leave and the role of the Management Committee in a fund-management limited liability partnership. The petitioner/respondent, Mr Eoghan Flanagan, joined Liontrust Investment Partners LLP (LIP) after Liontrust acquired the business of Occam. His side letter provided for a compulsory initial term of 24 months and specified the notice period for compulsory retirement under clause 18.1.3 as "6 months". Liontrust decided to dispense with his services after the fund performed poorly and served a series of notices of compulsory retirement and placed him on garden leave.

The litigation raised three principal issues: (i) whether the phrase "6 months" in the side letter meant exactly six months or at least six months; (ii) whether a decision to require compulsory retirement under clause 18.1.3, described in parenthesis as "as a Reserved Matter", required a Management Committee resolution under the Reserved Matters procedure; and (iii) whether a 1 August 2013 notice from Liontrust Investment Services Limited reconstituting the Management Committee effectively removed Mr Flanagan from the Committee so that he was not entitled to notice of the meeting that approved the Third Notice.

The Court of Appeal accepted the judge's analysis. On (i) the court concluded that, read in context, "6 months" meant a fixed six-month period and that to construe it as "at least six months" would undermine the contractual balance created by the 24-month compulsory initial term and the commercial purpose of the side letter; a construction allowing immediate long garden leave would have produced an uncommercial result. On (ii) the court held that the parenthetical reference to "as a Reserved Matter" is part of clause 18.1.3 and therefore the Management Committee procedure for Reserved Matters applied; the First and Second Notices were accordingly ineffective. On (iii) the court concluded that the 1 August 2013 notice properly exercised LIS's contractual power to remove and appoint Management Committee members, and that LIP as the recipient of the notice must be treated as having the relevant background knowledge; the notice excluded Mr Flanagan from the reconstituted Committee and the Third Notice was effective. The appeal and cross-appeal were dismissed and the judge's order for payment to Mr Flanagan under clause 6 was upheld.

The Court of Appeal dismissed both the appellant's (Liontrust) appeal and the cross-appeal by Mr Flanagan. The court ruled that (a) the side letter's "6 months" notice for clause 18.1.3 is to be read as a fixed six-month period in the contractual context of a 24-month compulsory initial term, (b) the parenthetical phrase "as a Reserved Matter" in clause 18.1.3 requires a Management Committee resolution under the Reserved Matters procedure, rendering the First and Second Notices invalid, and (c) the 1 August 2013 notice validly reconstituted the Management Committee and removed Mr Flanagan from it, so the Third Notice was effective; the judge’s order for payment under clause 6 was therefore affirmed.

Appeal from the High Court of Justice, Chancery Division (Henderson J) [2015] EWHC 2171 (Ch) to the Court of Appeal [2017] EWCA Civ 985.