Liontrust Investment Partners LLP & Ors v Flanagan

Contractual notice provisions must be construed as part of the agreement and in its commercial context. A specified notice period may mean exactly that period where the surrounding agreement, including a minimum initial term and garden-leave rights, shows that the parties intended a genuine period of mutual commitment. A notice that does not comply with the contractual conditions is invalid when served; it does not become valid merely because the contractual minimum would later have elapsed. Where an agreement describes a decision as a Reserved Matter, that wording must be given effect unless the context makes it inapplicable. The decision-maker may therefore be required to obtain the contractual approval or resolution even if the agreement also identifies who initiates the decision. The reasonable-recipient test for unilateral notices is applied to the contractual recipient with the relevant background knowledge.

Mr Flanagan was a member and fund manager of Liontrust Investment Partners LLP under an LLP agreement and side letter. Liontrust served notices requiring his compulsory retirement and placed him on garden leave after the fund he managed was closed. The first notice was served more than six months before the earliest contractual retirement date. The second notice was served without a Management Committee resolution. A third notice was preceded by such a resolution, but Mr Flanagan argued that he remained a Committee member and should have received notice of the meeting.

Henderson J held that the first two notices were invalid but that the third was effective, and ordered contractual payments to Mr Flanagan. Liontrust appealed on the notice-period and Reserved Matter issues. Mr Flanagan cross-appealed on the composition of the Management Committee. The central questions were whether six months meant precisely six months and whether the third notice had been approved by a properly constituted Committee.

1. Appeal and cross-appeal dismissed. The first and second notices were invalid, while the third notice was valid and effective. Liontrust was liable for the fixed and variable allocations due under the LLP agreement.
2. The side letter’s reference to a six-month notice period, read with clause 18.1.3 and the 24-month compulsory initial term, meant six months and not a longer period. The contractual context showed that the minimum term was intended to benefit both Liontrust and the Occam managers. Allowing Liontrust to retire a manager without cause and place him on garden leave almost immediately would deprive that term of much of its commercial content.
3. Commercial common sense formed part of the unitary construction exercise. The language of the agreement remained important, but the rival interpretations had to be tested against the agreement and their commercial consequences. The court applied that approach in construing the side letter and clause 18.1.3.
4. A notice’s validity generally had to be ascertainable when served. The first notice purported to have immediate effect and was not a valid notice under the contract. The court expressed no concluded view on a notice stated to take effect at a future date.
5. The words “as a Reserved Matter” in clause 18.1.3 were part of the operative provision. They required a Management Committee resolution before an effective notice could be served, even though the initial decision was taken by LIS. The wording was a variation of the usual Reserved Matter procedure, not an error to be disregarded.
6. LIS’s 1 August 2013 notice removed the existing Committee members and appointed the members listed in it. Applying the reasonable-recipient approach in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd, the contractual recipient was LIP, a separate legal person, and it was treated as having the relevant background knowledge. Mr Flanagan was therefore no longer a Committee member from 1 August 2013 and had no entitlement to notice of the later meeting.

• Court of Appeal (Civil Division): appeals from the decision of Henderson J, reported at [2015] EWHC 2171 (Ch). Both the appeal and cross-appeal were dismissed.