Nylon Capital LLP fails to stay claims by Barclays Bank PLC in the High Court

25/05/2010

The High Court recently dismissed an application by Nylon Capital LLP ("Nylon") to stay legal proceedings initiated by Barclays Bank Plc ("Barclays").

In 2004, Alan Burnell set up Nylon, a limited liability partnership hedge fund formed in England whose affairs were governed by an LLP Agreement. Barclays invested £250 million of "seed capital" into Nylon's flagship funds (the "Funds"). In late 2009, Barclays gave notice to withdraw its investments in the Funds and consequently, Burnell instructed Nylon's accountants to determine the amounts due to each party under the LLP agreement and in particular, the amounts due from Barclays with respect to its share of the expenses of Nylon under the LLP Agreement, which Burnell considered that Barclays was liable to pay. These expenses were assessed at £10.6 million.

In the course of the exchange of witness statements between parties, Burnell indicated that Barclays was also obliged to contribute its profits from its investments in the Funds to Nylon.

Barclays sought a court declaration that it was not obliged to (1) contribute to or reimburse Nylon for the abovementioned expenses or (2) contribute any of its profits to Nylon from its investments in the Funds.

Nylon applied to stay both claims in the High Court pending settlement of the dispute by way of an expert determination procedure provided by the LLP Agreement.

The relevant ADR provision in the Agreement provided, inter alia, that:

"...In the event of any dispute regarding (i) the amount of any profit or loss allocations due to a Member pursuant to Clause 9 or (ii) any payment due to an Outgoing Member under Clause 17, then if such dispute has not been resolved within 30 days following any determination by the Managing Member under Clause 9.2 or allocation under Clause 9.3, or any calculation or valuation made or required under Clause 17, any affected party may refer the matter or matters in dispute to a partner in an independent firm of internationally recognised chartered accountants agreed upon between them, or failing such agreement within 7 days to be selected at the instance of any party by the President for the time being of the Institute of Chartered Accountants of England and Wales. The parties shall use their respective best endeavours to procure that the accountant delivers his decision within such time as may be stipulated in the terms of reference.

Nylon submitted a number of arguments in support of its application for the stay:

"First, it applies to "any dispute" of the relevant description. Second, the requirement that such dispute has arisen "regarding" the matters described in the ensuing descriptions envisages something less than a direct connection. Third, the words in parentheses in paragraph (B) emphasise the breadth of application of the clause in that the dispute may relate to the interpretation of the LLP Agreement or the jurisdiction of the expert. Fourth, that paragraph and paragraph (D) both recognise the ability of the expert to seek and act on legal advice. Fifth, the quality of expert envisaged... and the obligation of the parties to co-operate with him both indicate that the scope of [the clause] is not subject to any implied limitation."

The High Court rejected Nylon's arguments because the clause only applied to "any dispute regarding...the amount of any profit or loss allocations due to a Member pursuant to Clause 9".

The Court accepted the arguments supporting the overall breadth of the clause but held that the relevant dispute must have some connection with an allocation of profit pursuant to clause 9 before it was triggered.

Accordingly, Nylon's application to halt legal proceedings was dismissed as there was no issue that required reference to an expert for determination and thus there was no reason to interfere with the normal progress of the claim.

The dispute will now potentially go to a full trial.

(Barclays Bank Plc v. Nylon Capital LLP [2010] EWHC 1139 (Ch))

Contact: xiaohanguo@city-law.net

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