In its decision in the matter of Liontrust Investment Partners LLP (& Others) -v- Flanagan (2017) EWCA Civ 98, the Court of Appeal considered (amongst other issues) the proper interpretation of a notice provision incorporated into an LLP Agreement and Side Letter. Its reasoning highlights: (1) the importance of ensuring that a contract’s notice provisions are carefully prepared, and; (2) the utility which commercial common sense/commercial background may play when interpreting contractual provisions.
On 20th August 2012, Liontrust issued Mr Flanagan with a letter which confirmed: “The notice period of your compulsory retirement under clause 18.1.3 of the LLP Agreement (as amended and clarified by your Side Letter dated 4 October 2011…) is six months….Please accept this letter as such notice. You will cease to be a Member with effect from 4th October 2013”.
Mr Flanagan challenged the validity of this notice, contending that the notice period was miscalculated. He reasoned that, when the LLP Agreement was read together with the Side Letter of 4th October 2013, he was entitled to 6 months’ notice, such notice to expire no earlier than 24 month anniversary of his becoming a member of Liontrust. The notice served by Liontrust had, however, given him notice of more than one year. It was therefore alleged to be invalid (albeit for affording too much notice).
The Court of Appeal was therefore tasked with ascertaining the answer to this question: was the reference in the side letter to the notice period prescribed by clause 18.1.3 of the LLP Agreement to be read as 6 months exactly, or as at least 6 months?
Upholding the decision of the High Court, the Court of Appeal dismissed Liontrust’s appeal and affirmed that the notice served by Liontrust on 20th August 2012 was invalid. A notice period of exactly 6 months was required; no more, no less.
In reaching its conclusion the Court of Appeal reasoned:
- In some contexts, the requirement to provide 3, 6, or 12 months’ notice will be interpreted as meaning not less than the specified period of notice;
- However, in each case a court must consider the specific contractual arrangements, the terms of which will be read through the lens of the relevant factual background, including the arrangements’ objective commercial purpose;
- The High Court had been mistaken to refrain from considering matters of commercial common sense. Indeed:
- Although the “importance of the language used by the parties to contract should not be undervalued…” [per para. 39], commercial common sense may help establish how matters were perceived when the contract was concluded;
- In Wood -v- Capita Insurance Services Ltd (2017) UKSC 24, the Supreme Court re-affirmed that the process of interpreting a contract is “a unitary exercise in which each suggested interpretation is checked against the provisions of the contract and its commercial consequences”;
- In this instance, commercial common sense (or at least the commercial context of the parties’ agreement) established that the parties had concluded “….a tailor-made arrangement to cater for the merger of two businesses”. It was “….designed to accommodate the needs [of the parties]…in the early period of their relationship and in relation to the new business which Liontrust was keen to acquire…”
- Moreover, the advantage to the managers of being subjected to a minimum two year term would be “entirely illusory if they could be retired…without cause” and immediately put on garden leave.
Whether and, if so, to what extent commercial common sense (as opposed to known commercial facts which form part of the factual background to the agreement) may guide the courts’ interpretation of a contract remains an ever-evolving debate.
In this case it was clearly of some importance to the Court of Appeal, but that may be because the Court concluded [para. 38] that there was a measure of ambiguity between the Side Letter and Clause 18.1.3 of the LLP Agreement. Where ambiguity is found, commercial common sense may be used to prefer one interpretation over another.
Consequently, contracting parties are reminded that:
- To avoid being required to account for the commercial common sense of their position, contractual obligations (including notice provisions) should be carefully constructed and clearly expressed;
- Where side letters are intended to accompany principal contractual documents, the relationship between the documents should be clearly defined and checked. For example, is the side letter intended to establish a minimum requirement, or an exact requirement?
- To avoid actions (e.g. termination) proving invalid, contractual notice provisions (including any contractually prescribed terms of service) should be abided by.