Ennismore Fund Management Ltd v Fenris Consulting Ltd (Cayman Islands)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Clarke |
| Judgment Date | 19 April 2016 |
| Neutral Citation | [2016] UKPC 9 |
| Date | 19 April 2016 |
| Docket Number | Appeal No 0097 of 2014 |
| Court | Privy Council |
[2016] UKPC 9
Lord Neuberger
Lord Mance
Lord Clarke
Lord Carnwath
Lord Hodge
Appeal No 0097 of 2014
Privy Council
From the Court of Appeal of the Cayman Islands
Appellant
Mark Cunningham QC Rupert Coe
(Instructed by Simmons & Simmons LLP)
Respondent
Thomas Lowe QC
(Instructed by Sharpe Prtichard LLP)
Heard on 26 and 27 January 2016
This is an appeal from an order of the Court of Appeal of the Cayman Islands ("the CICA") made on 16 April 2014 in accordance with a judgment delivered on the same day. The court comprised Sir John Chadwick P and Mottley and Conteh JJA. The principal judgment was delivered by the President, with whom the other members of the court agreed, although Conteh JA delivered a short judgment of his own. The CICA allowed an appeal from an order of Foster J ("the judge") made on 16 February 2012, which reflected his judgment of 7 February 2012. The question in this appeal, as in the courts below, turns on what is the true construction of the relevant parts of an agreement known as a clawback agreement.
The background facts can be shortly stated. The Board will call the plaintiff "Ennismore" and the defendant "Fenris". Ennismore is a company incorporated in England and Wales. At the relevant time it was the investment manager of a Cayman Islands Fund, Ennismore European Smaller Companies Hedge Fund ("the ESCF") and an Irish mutual fund, Ennismore European Smaller Companies Fund ("the OEIC"). From about October 2006 Ennismore was also investment manager for a second Cayman Islands Fund, Ennismore Vigeland Fund ("the EVF"). Mr Arne Vigeland, who is an analyst and fund manager, was employed by Ennismore between November 2001 and July 2004. In May or June 2004 he relocated to Norway. Thereafter he continued to provide his services to Ennismore as a fund manager through Fenris, a company incorporated in Belize for that purpose, under the terms of a letter ("the Consultancy Services Agreement" or " CSA") dated 24 June 2004.
A substantial element in the remuneration paid by Ennismore to its fund managers comprised discretionary, or "bonus", fees based on the performance of the individual funds or portfolios for which each fund manager was responsible. A portion of the discretionary fees payable to each fund manager in respect of each year was held back and invested by Ennismore on the fund manager's behalf on the basis that the retained investments were subject to "clawback" by Ennismore in the event that the portfolios for which that fund manager was responsible under-performed in future years.
In 2007 and 2008, following a general collapse in financial markets, the funds, or portfolios, for which Fenris (or Mr Vigeland) was responsible (the "Fenris portfolios") suffered losses. The issue in these proceedings is whether, in the events which happened, Ennismore was entitled to exercise rights of clawback against investments which it had retained out of discretionary fees payable to Fenris in respect of earlier years.
The CSA required that Fenris would make available to Ennismore the services of one suitably qualified and experienced fund manager who would provide investment advice to Ennismore. The first fund manager was to be Mr Vigeland, whose task was to make recommendations to Ennismore concerning long and short equity investments, upon which Ennismore might act at its sole discretion. Neither Fenris nor Mr Vigeland was to have authority to commit Ennismore to the purchase or sale of any investments or to place orders with brokers on behalf of Ennismore. Mr Vigeland, as fund manager, was to monitor, on a continuous basis, investments made by Ennismore on the basis of advice received from him. Fees were to be agreed between the parties from time to time.
The CSA contained no provision for the payment of bonuses; but it is common ground that it was, at the time, the practice for Ennismore to pay annual performance bonuses to its fund managers and that, following the CSA, that practice extended to Fenris in respect of the services provided by Mr Vigeland. Thus for the year ending 31 December 2004 Mr Vigeland, through Fenris, earned a bonus of £786,000 in addition to his basic salary and pension contributions, half of which was invested through Ennismore's Employee Benefit Trust ("EBT") in funds managed by Ennismore. The practice was described in a letter dated 18 July 2005 from Ennismore to the shareholders in ESCF. The purpose of that letter was to propose a change in the fees which Ennismore charged to ESCF (the "Fund" and, together with OEIC, the "Funds") in its role as investment manager of the Fund; "and to give a few thoughts on the future of our business". The letter was signed by Gerhard Schöningh and Geoff Oldfield, who were the co-founders of Ennismore and (then) the holders of all its shares.
As the President noted in para 9, the change in the fees which Ennismore charged to the Fund as investment manager was explained in the second paragraph of the letter of 18 July 2005 as follows:
"With effect from 1 September, we propose that the annual management fee is increased from 1.5% to 2% and that the cash benchmark, applied before a performance fee is charged, is dropped and replaced by a high watermark only."
That charging structure is reflected in a document headed "Ennismore Fund Management Ltd: Ennismore European Smaller Companies Hedge Fund", which is undated but which the President held, from internal evidence, must have been issued in or about August 2006. In that document, under the heading "Fund Information", the charges paid by the Fund to Ennismore were summarised under three heads: (i) an annual investment management fee of 2% payable monthly; (ii) a performance fee; and (iii) administration fees, charged ad valorem on successive tiers of the NAV of the Fund. The performance fee was described in these terms:
"20% performance fee on value added. Any under-performance relative to the benchmark compounds and is carried forward indefinitely and must be recouped fully before a performance fee is charged. If applicable, the performance fee is paid annually in January for performance achieved in the previous calendar year."
In para 10 of his judgment the President noted that the letter of 18 July 2005 went on to explain that Ennismore's practice, in relation to the remuneration of its team of fund managers "was based around the principle of clawback" and then quoted this passage from the third paragraph:
"Each Investment Manager is allocated a fixed amount of equity and has full responsibility for running his or her 'book'. Our Investment Managers' remuneration is transparent, in that they earn a percentage of the fees that they generate on their book. Ennismore operates a 'clawback' system as a balance and check to the high degree of autonomy given to all Investment Managers. Only 50% of an Investment Manager's bonus is paid in cash, while the balance is re-invested in the funds and subject to a clawback for a three year period. Should an Investment Manager generate a negative value-added in any of the three years, this is 'clawed-back' from the reinvestment."
The letter added that increasing the fees would allow them to remain a highly attractive employer without sacrificing the clawback system and without re-opening the funds and that to date all their investment managers had chosen to re-invest the vast majority of their cash bonuses in the Funds.
The President then summarised the position as at December 2005. In doing so, at paras 11 and 12 he referred in detail to a spreadsheet entitled "Bonuses and Salaries 31 Dec 05" which was issued to all Ennismore fund managers, including Mr Vigeland, in early 2006. The Board does not discuss the spreadsheet here because it is not necessary to do so in order to resolve the issues between the parties. However the President noted in para 14 that in the letter of 18 July 2005 there was reference to the possibility that a fund manager might "generate a negative value-added" in one or more years but that that did not happen in the year 2005, as shown on the 31 December 2005 spreadsheet. The President nevertheless considered, by reference to the spreadsheet, what the position would have been if the performance of the portfolios for which one of the individual fund managers was responsible had been such that the value added by those portfolios had been negative: that is to say, if the value added by those portfolios had been less than a benchmark figure. In that event, as the President put it at para 16, if effect were to be given to the statement in the letter of 18 July 2005 that "should an Investment Manager generate a negative value-added in any of the three years, this is 'clawed back' from the reinvestment figure", it could have been expected that Ennismore would have sought to "clawback" an amount equal to the negative value added from funds retained (and invested) out of bonuses to which that fund manager had become entitled in the previous three years.
The President makes a number of references to a "benchmark figure" but it appears to the Board that the 18 July 2005 letter suggests that what was described as a high watermark replaced the notion of a benchmark figure. However, it is not necessary to focus on either because it appears to the Board that neither is material to the resolution of the issue of construction of the clawback agreement to which it now turns.
It is common ground that, until April 2006, the operation of the clawback system was not set out in any document having contractual effect between Ennismore and its fund managers, although, as the President said at para 17, it had been described in general terms...
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