Barclays Bank Plc v Nylon Capital Llp
| Jurisdiction | England & Wales |
| Judge | Lord Justice Thomas,Lord Justice Etherton |
| Judgment Date | 18 July 2011 |
| Neutral Citation | [2011] EWCA Civ 826 |
| Docket Number | Case No: A3/2010/1413 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 July 2011 |
[2011] EWCA Civ 826
Master of the Rolls
Lord Justice Thomas
and
Lord Justice Etherton
Case No: A3/2010/1413
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
THE CHANCELLOR OF THE HIGH COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Nigel Tozzi QC and Mr James Potts (instructed by The Khan Partnership LLP) for the Appellant
Mr Graham Dunning QC and Mr Nigel Dougherty (instructed by Allen & Overy LLP) for the Respondent
Hearing date: 13 June 2011
The issue on this appeal is whether the court should stay proceedings brought for a declaration as to the interpretation of an agreement on the grounds that the issue falls within the expert determination clause of the agreement. It is necessary first to set out the facts.
The LLP agreement
In 2004, Mr Alan Burnell, who had worked for the claimants (Barclays) as head of its European rates business, established two hedge funds incorporated in the Cayman Islands. The hedge funds appointed Nylon Capital (Cayman) Ltd to be their manager and that company appointed Nylon Capital LLP (the LLP), the defendant to these proceedings, as the investment manager. Under the agreements, the hedge funds were obliged, in line with industry practice, to pay the manager a fee of 2% per annum of the net asset value of the funds and a performance fee of 20% of any increase in the funds' value in any particular quarter. Those fees were in turn paid by the manager to the LLP.
As Mr Burnell had been an employee of Barclays, Barclays helped the hedge funds get started by providing an initial capital investment of £250m on the terms of investment agreements to which it is not necessary to refer. Barclays also became a partner in the LLP along with Mr Burnell and other Nylon companies. At the material time the operation and management of the LLP were governed by an agreement known as the Amended and Restated Limited Liability Partnership Agreement (the LLP agreement) made between Mr Burnell, Barclays Bank, two Nylon companies and other parties; the parties to the agreement are referred to in the agreement as Members. It is the interpretation of that agreement which has given rise to the present dispute.
The disputes between Barclays and Mr Burnell on behalf of the LLP
The origins of that dispute began when Barclays gave notice to withdraw its investment in the hedge funds on 2 December 2009 followed by three further notices which resulted in the complete withdrawal of its funds. The circumstances of the withdrawal by Barclays have given rise to a dispute between Barclays and the hedge funds which has been subject to arbitration before the London Court of International Arbitration. What happened in that arbitration is not material to the present dispute. Nor is the petition which Mr Burnell presented under s.994 on 10 April 2010 in the Chancery Division of the High Court alleging unfairly prejudicial conduct by Barclays in relation to the operation of the LLP.
What is material, however, is that on 8 February 2010, Mr Burnell asked a firm of accountants, PKF, to calculate and report on the amounts due to or from parties under the LLP agreement, and in particular the amounts due to and from Barclays. PKF, in its report, assessed at approximately £10.585m, that part of the expenses of the LLP attributable to Barclays' investment in the funds. Mr Burnell on behalf of the LLP contended that Barclays should pay this amount. This was disputed by Barclays.
Clause 26.2 of the LLP agreement provided:
"Governing Law
This agreement and the rights of the Members shall be governed by and construed in accordance with English law and the Members hereby submit to the exclusive jurisdiction of the English courts."
On 17 March 2010, Barclays issued in the Chancery Division a Part 8 claim form in which it sought a declaration that it was not liable to contribute to or to reimburse the LLP for any of the LLP's expenses. In its acknowledgement of service the LLP indicated that it would seek a stay of the claim pending the resolution of the dispute under Clause 26.1 which provided for expert determination in terms which I set out at paragraph 18 below.
After an exchange of witness statements, the matter came on for hearing before the Chancellor on 12 May 2010. It had become clear before the hearing before the Chancellor that there was no longer any dispute in relation to Barclays' obligation to pay expenses in the circumstances explained by the Chancellor at paragraph 19 of his judgment. It is not necessary therefore to set out any further details of that dispute. The Chancellor made a declaration that Barclays was not under any independent and free-standing obligation to the LLP to pay the costs and expenses of the LLP.
The dispute in relation to profits
However, in the course of the hearing, Barclays were given permission to amend their claim form to seek a declaration that they were under no obligation to pay to the LLP Barclays' profits on its initial capital investment in the hedge funds, as there was a dispute between the parties in relation to that issue. It is therefore necessary to explain the nature of that dispute and the grounds on which the LLP applied for a stay of the proceedings relating to that dispute.
Clause 9 of the LLP agreement made provision for the allocation of profits as between the Members of the LLP. Clause 9.1 provided for the Managing Member (Mr Burnell) to procure that accounts were drawn up in accordance with the provisions of Clause 9 and generally accepted accounting principles and then audited. In each accounting period, audited accounts had been produced for the LLP. The accounts for the year ended 30 November 2005 (the first after the initial accounting period) showed that the sole income of the LLP was management fees; there was no reference to income derived from Barclays' initial capital investment or any other form of capital profit. All the subsequent accounts showed the same position.
Clause 9.2 provided for the determination of the allocation of profits amongst the Members:
"The Managing Member [Mr Burnell] shall following the end of each financial year by reference to the Partnership Accounts drawn up in respect of that financial year by the Partnership determine the allocation of the profits amongst the Members in accordance with the provisions of Clause 9.3 and, having regard to anticipated, current or foreseen liabilities and expenditure of the partnership and the need to maintain a minimum level of financial resources, determine what proportion of such profits as have been so allocated shall be retained in the partnership or made available for drawing by Members."
Clause 9.3 then set out the principles of allocation:
"Subject to Clause 9.4 (in relation to capital profits) and Clause 9.6, the profits of the Partnership in respect of each financial year of the Partnership shall be allocated amongst the Members as follows:
(A)-(B)…..
(C) Thirdly, there shall be allocated to the Investor Member [Barclays] an amount equal to 19.5% of the Third Party Profit.
(D)…..
(E) The remainder of the profits, being the remainder of the Third Party Profit and the BB Investment Profits, shall be allocated to the Corporate Member, the Second Corporate Member, the Managing Member and Executive Members in such proportions as the Managing Member shall in his absolute discretion determine, or as he may have agreed with any Member, including to the Corporate Member in relation to the provision of the HR Services."
It was contended by the LLP, principally by reference to Clauses 9.3(C) and (E) and the definition sections of the LLP agreement, that all the profit Barclays had made on its initial capital investment in the hedge funds should also be brought into account for the purposes of allocation under Clause 9.
Under Clause 9.3(C), the Third Party Profit has to be calculated. This is defined as:
"'Third Party Profit' means the net profit attributable in any financial year to the management of funds or other managed accounts other than the BB Investment and any other profits (not being BB Investment Profits) of the Partnership after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or Associate of any Member, save for amounts allocated to the Corporate Member pursuant to Clause 9.3(B) or paid under Clause 8, and provided that no amounts allocated to the Investor Member or the Corporate Member as capital to its Capital Contribution Account pursuant to Clause 9.3(A)(1) or Clause 9.3(A)(2) (respectively) shall be treated as costs or expenses of the Business)."
To arrive at the Third Party Profit it is necessary to have regard to the BB Investment (defined in the LLP agreement as "the sum of £250m to be provided by Barclays") and the BB Investment Profits which are defined in the definition provisions as referring to the profit derived from the BB Investment:
"'BB Investment Profits' means the net profit attributable in any financial year to the BB Investment after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or the Associate of any Member, save for amounts allocated to the Corporate...
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