Pease v Henderson Administration Ltd

Where a contract requires a party to achieve a stated result but does not prescribe the mechanism, construction in its factual and commercial context may show that no particular mechanism is mandated. Ordinarily, the obligor may choose a method of performance that achieves the contractual result.

A transfer of all assets of an investment sub-fund to an otherwise empty sub-fund in a different umbrella OEIC may, in substance, transfer the same fund under new management. A scheme of arrangement which achieves that result can therefore satisfy an obligation to permit replacement of the fund’s manager.

The respondent was employed as a fund manager under a contract which entitled him, on resignation, to replace the relevant Henderson group company as manager of a European Special Situations fund. If he did so, he was required to procure payment to Henderson of 50% of the management fees generated during the following 12 months.

The fund was established as a sub-fund of an umbrella OEIC rather than as the stand-alone OEIC contemplated when the contract was made. On the respondent’s departure, its assets were transferred by a scheme of arrangement to a newly established sub-fund under a different umbrella OEIC. That new fund was managed by the respondent’s new management company.

The High Court, [2018] EWHC 661 (Ch), held that Henderson had not permitted the contractual replacement and dismissed its counterclaim. Henderson appealed on the construction of clauses 3.6.1 and 3.6.2.

Disposition

1. The appeal was allowed unanimously. The court set aside the finding that Henderson had breached clause 3.6.1 and upheld its counterclaim under clause 3.6.2. Subject to agreement, quantum was remitted to the High Court for an account.

2. Per Nugee J, with whom Henderson LJ and the Chancellor agreed, the parties had to proceed on the agreed basis that the contractual references to a European Special Situations OEIC applied to the ESSF. The resulting question was what it meant to permit replacement of the manager of that fund.

3. A sub-fund was not a separate legal entity. It was a distinct collection of assets belonging to the umbrella OEIC and administered on the terms applicable to that sub-fund. The transfer of all ESSF assets into an otherwise empty receiving sub-fund therefore transferred, in substance, the same fund to a different OEIC, under a different name and management.

4. The contractual language required Henderson to permit replacement of the manager of the ESSF. It did not require it to permit replacement of the authorised corporate director of the entire umbrella OEIC. That latter construction would have created substantial practical and regulatory difficulties for the other fund remaining under the umbrella.

5. Applying the contextual and iterative approach to construction stated in Arnold v Britton [2015] UKSC 36, Wood v Capita Insurance Services Ltd [2017] UKSC 24 and re Sigma Finance Corp [2009] UKSC 2, the clause specified the result but not the means. Henderson could choose a method that achieved the required replacement.

6. The scheme of arrangement did so. It placed the same fund under the management of Crux and a new authorised corporate director. Henderson had therefore performed clause 3.6.1, and the condition for the respondent’s obligation under clause 3.6.2 was met.

• Court of Appeal (Civil Division): Allowed Henderson’s appeal, set aside the finding of breach of clause 3.6.1, upheld its clause 3.6.2 counterclaim, and remitted quantum if not agreed.

• High Court (Chancery Division): In [2018] EWHC 661 (Ch), held that Henderson had breached clause 3.6.1, awarded nominal damages, and dismissed Henderson’s counterclaim.