Ennismore Fund Management Limited v Fenris Consulting Limited10

Summary: The Privy Council dismissed an appeal from the Cayman Island Court of Appeal (the CICA). The court upheld the decision of the CICA that the Claimant could only claw back a discretionary bonus paid to an individual fund manager if it could establish a causal link between the losses sustained by the funds for which that manager was responsible and a reduction in its own performance fee.

The claimant was Ennismore Fund Management Limited (the Claimant), a company incorporated in England and Wales that acted as the investment manager of two Cayman Island funds and an Irish mutual fund (the Funds.) The defendant was Fenris Consulting Limited (the Defendant), a company incorporated in Belize that provided fund management consultancy services to the Claimant under a Consultancy Services Agreement (CSA) dated 24 June 2004.

The CSA contained no provision for the payment of bonuses but it was common practice at the time for the Claimant to pay annual performance bonuses to its fund managers, including the Defendant. The bonuses were based on the performance of the individual funds or portfolios for which each fund manager was responsible. A portion of the bonus payable to each fund manager in respect of each year was held back and invested by the Claimant on the fund manager’s behalf on the basis that the retained investments were subject to clawback by the Claimant in the event that the portfolio for which that fund manager was responsible under-performed in the subsequent 3 years.

In 2006, the parties signed a clawback agreement to formalise the above arrangement.

In 2007 and 2008, following the global financial crisis, the funds for which the Defendant was responsible suffered losses. As a result, the Claimant attempted to invoke the clawback agreement to repossess assets it held on behalf of the Defendant.

The issue in these proceedings was whether the Claimant was entitled to exercise rights of clawback against investments which it has retained out of the bonus payable to the Defendant in respect of the three years prior to 2008. This proved complex as it was unclear under the clawback agreement what conditions were required to trigger the clawback. Lord Clarke noted that the clawback agreement itself did “not contain a sufficient statement of the conditions giving rise to clawback because there is no formula for the relevant calculation”.

As a result, the case turned on the construction of the clawback agreement, namely:

 “Whether clawback depended upon a reduction in Ennismore’s own performance fee or whether clawback applied if the individual fund manager’s portfolio generated a loss regardless of the effect on Ennismore’s performance fee.”

In determining this point, the court applied the principles of construction from Arnold v Britton11  and identified a section of the agreement that provided the formula to compute the clawback fees which was a percentage “of the reduction in the performance fee earned by the Company attributable to any net investment losses”. Its conclusion was based on the principle that a reasonable person in the position of the parties would have given the words in the agreement their ordinary meaning and come to this conclusion.

Therefore, the court upheld the decision of the CICA that the Claimant could only claw back a discretionary bonus paid to an individual fund manager if it could establish a causal link between the losses sustained by the funds for which that manager was responsible and a reduction in its own performance fee.