Reinhard v Ondra LLP & Ors

This judgment is supplemental to my main judgment in this matter handed down on 14 January 2015 (“the Judgment”). I refer to paragraph numbers of the Judgment in the format “Judgment [xxx]”. I adopt for the purposes of this judgment the terms defined in the Judgment save that I shorten “the April 2000 Draft LLP Agreement” to “the April Draft”. This judgment is written to deal with the following matters left open for further argument in the Judgment:

As a follow-on from i), I have also been addressed on the consequences should Mr Reinhard be found to be a member.

The question here is essentially one of the construction of the Contract. I identified the issue in Judgment [375] to [380]. The real choices, it seemed to me, were between these options:

Ondra argues in favour of the Employment construction. Mr Reinhard argues in favour of the Membership construction.

I should put some more flesh on the Membership construction. The contractual provisions relating to remuneration (salary and bonuses) and payment in lieu of notice are to be given effect as part of Mr Reinhard’s entitlement as a member. The obligation of Mr Reinhard to earn those rewards is to work the hours provided for in clause 5 of the Contract.

Since clause 1 of the Contract and the provisions of clause 5.5 of the April Draft provide for termination of the purported employment contract and the purported membership interest respectively, Ondra can bring the relationship to an end (i.e. the membership relationship under the Membership construction) by service of a notice in accordance with clause 5.5. I ignore the difference between a 3 month notice under clause 1 and a 90 day notice under clause 5.5(C)(i). If a 90 day notice is served under clause 5.5, it will bring the whole relationship to an end, and thus terminate Mr Reinhard’s right to remuneration under clauses 1 and 12. There might be some argument about the effect of clause 1 of the Contract (requiring 3 months’ notice) if Ondra was to serve a 60 day notice under clause 5.5(C)(ii) but that does not arise in the present case. If Ondra was entitled to serve a notice having immediate effect under clause 5.5(C)(iii), that would almost certainly be in a situation where clause 15 of the Contract could be invoked so that there is no real tension, in relation to that, between the express terms of the Contract and the terms of the April Draft.

If Ondra were to serve a notice purportedly under clause 1 of the Contract, that would be effective to bring about an end to Mr Reinhard’s obligations to provide his services under clause 5 of the Contract and an end to his right to receive remuneration under clauses 7 and 8. Service of such a notice would not operate to terminate his actual membership since notice under clause 5.5 of the April Draft would be required to achieve that result. That, at least, is the basis on which I expressed my (provisional) view in Judgment [381].

Mr Howe’s case is that the Contract creates only an employment relationship. But if that is wrong, he would not accept that the Membership construction as I have just articulated it is correct. His case, if it is necessary to go that far, is that the single relationship of membership will be terminated by a notice under clause 1. His argument in effect is that such a notice brings to an end the provisions of the Contract contained in its express clauses other than clauses 3 and 4; that brings to an end the fundamental provisions of the Contract with the result that the whole Contract is at an end. He does not put his argument precisely that way, but that, as I see it, is its substance. I would only add at this stage that this approach does not seem to me to match, as closely as the Membership construction as I have described it, the position which would have obtained had it been possible for a membership relationship and an employment relationship to subsist together. Had that been possible, clearly separate notices under clause 1 of the Contract and clause 5.5 of the April Draft would have been necessary.

Neither party has suggested that some other construction should be adopted and I have not myself thought of any preferable construction which is to be preferred.

Mr Howe raises a preliminary issue in relation to the correct approach to the Contract. He submits that it is not now open to Mr Reinhard to assert, and not now open to me to find, that he was not an employee of Ondra. This is because he has pleaded, and pursued to final judgment, a number of claims based on the contention that he was an employee and I have determined those claims on that basis. Accordingly, he is precluded from now seeking to assert otherwise.

Mr Howe’s submissions need to be tested against the hypothesis that the Membership construction is in fact correct. It is only if the way in which Mr Reinhard’s case was put forward and the way in which I expressed my conclusions are inconsistent with that hypothesis that Mr Howe’s argument can succeed. If everything which was put forward on Mr Reinhard’s behalf, and all of my findings are consistent with that hypothesis, then it is clearly open to him to argue that the hypothesis is correct. I therefore propose to identify what it is that I actually did decide.

At Judgment [344] I explained what I was about to do, namely to state my conclusions on construction in the first instance ignoring the LLP Act and then to turn to the impact of the Act on what I described as my provisional conclusions. My provisional conclusions are found in Judgment [359] where I concluded that Mr Reinhard was to become a member and that this would occur at the commencement of his employment. I used the word employment because, at that stage of the judgment, I was ignoring the effect of section 4(4) so that the possibility of being both an employee and a partner existed. Next, I concluded at Judgment [364] (although this was a finely balanced conclusion) that membership was being offered on the terms of the April Draft.

At Judgment [375ff] I considered the impact of section 4(4), setting out the options of which I had thought at Judgment [375] but noting in [382] that there might be other solutions which the parties would say better reflected the moulding that needed to be carried out. It is therefore perfectly apparent that I had not, by this stage of the Judgment, made any decision that Mr Reinhard was in fact an employee or that he was in fact a member. The rest of the Judgment is to be read subject to the final resolution of the correct interpretation of the Contract. This is reflected in my conclusions at Judgment [539 iii)] where I reserved my decision on the effect of section 4(4) on the matter of construction. The conclusions stated in Judgment [539 v) and vi)] reflect both the Employment construction and the Membership construction which I considered to be the realistic constructions (see Judgment [377]) and were also consistent with option iii). If, after hearing further argument, I were to decide that another option, for instance option ii) a) were correct, then my conclusions in Judgment [539 v) and vi)] might be wrong and I would need to review my decision which, as a matter of jurisdiction, I would be able to do notwithstanding that the Judgment has been handed down. As it happens, the competition is only between the Employment construction and the Membership construction so that this problem will not arise.

In Judgment [383], I rejected the suggestion that the grant of the additional 1% share could not be taken as admitting Mr Reinhard to membership and thus, in the light of section 4(4), bringing an end to his contract of employment. I was here addressing the argument – although I might have expressed myself more clearly – that even if Mr Reinhard did not become a member at the outset (in which case he would clearly have been an employee) he would have become a member (and therefore ceased to be an employee). I rejected that argument.

At Judgment [410ff] I considered Mr Reinhard’s claim for damages in relation to an alleged underpayment of bonus. My discussion proceeded on the basis that Mr Reinhard’s claim was based on a breach of Clause 8 of the Contract (which I set out in Judgment [411]). In these paragraphs, I referred on a number of occasions to Mr Reinhard’s employment and to the possibility of his dismissal or summary dismissal. These references were intended to reflect the wording of the Contract which used the language of employment. But if, in fact, the Membership construction is correct, the contractual provisions drafted in the language of employment are to be given some effect and one obvious course is to give them effect as contractual terms with the same economic effect as a payment of salary or bonus under an ordinary contract of employment. Given what I had said at Judgment [375ff] as recorded at paragraph13 above, I do not consider that I can sensibly be read as doing anything other than providing an analysis of the contractual position in the language of an employment contract with that analysis applying, mutatis mutandis, if the Membership construction is correct. Had I added a short paragraph to the effect that, if option b) ii) of Judgment [375] (ie the Membership construction) were correct, then the analysis would be precisely the same but replacing “employment” with “engagement as an active member” and “dismissal” with “termination of engagement”, the position would have been made clear. It is implicit, I consider, from what I said in Judgment [375ff] that this was what I was saying.

I make similar observations in relation to Judgment [473] and [474] on which Mr Howe relies. In those paragraphs, I referred to Mr Reinhard’s contract of employment and its termination. If the Membership construction is correct, these references can be taken, and can only sensibly be taken, as reference to the contractual terms which are drafted in the language of an employment relationship.

Mr Howe also relies on the fact that it was common ground that the contract of employment was terminated on 3 June 2011 and that from that date Mr Reinhard provided no services to Ondra. Indeed, this was the necessary basis, he says, for the claim to payment in lieu of notice. And so it is said that the Judgment is predicated upon the entitlement to a payment in lieu of notice arising on termination of the Contract by reason of the exercise of the right of Ondra to terminate the relationship by payment in lieu of notice. This means that the judgment for the payment in lieu of notice is necessarily inconsistent with Mr Reinhard’s only relationship with Ondra being one of membership which continued after 3 June 2011.

I do not agree with that. If the Membership construction is correct, all the provisions of the Contract which use the language of an employment contract are to be given, so far as possible, effect as contractual terms of the relationship between Mr Reinhard and Ondra. Mr Reinhard’s obligation to work for Ondra and the corresponding right to receive payment for that work – not by way of salary but by way of membership distributions - would be governed by the clauses of the Contract which were drafted in the language of an employment contract. It would not follow that the terms as to remuneration in the Contract would necessarily continue until termination of membership; those terms (in contrast with Mr Reinhard’s rights as a member to a 1% share) would only continue until terminated in accordance with the contractual terms. His rights to the contractual payments which would, in an employment context, be seen as salary, bonus and payment in lieu of notice would subsist as rights as a member but, once paid, Mr Reinhard would have no further claim to such payments following the termination of his role as an active partner.

There is thus a distinction between, on the one hand, terminating Mr Reinhard’s membership and, on the other hand, terminating particular provisions of the agreement between him as a member and Ondra. He could remain a member but cease to be entitled to particular rights (such as salary and bonus) following termination of those particular provisions; but in the same way as with a contract of employment, his exclusion from the affairs of Ondra without the appropriate period of notice would entitle him to drawings in lieu of notice.

But if that analysis is somehow flawed, the one thing which I did not decide, as I made clear, was the true construction of the Contract. Mr Howe cannot, in my judgment, spell out of anything else which I said in the Judgment an implicit finding that Mr Reinhard was in fact an employee. If Mr Howe has a complaint at all, it is that I have made a finding on breach which does not follow from the Contract if the Membership construction, rather than the Employment construction, is correct.

I do not, therefore, accept Mr Howe’s submission that the Judgment precludes Mr Reinhard from arguing in favour of the Membership construction. That, however, is not to say that Mr Reinhard is not precluded by his pleaded case, and by the way in which his case was presented, from now arguing in favour of the Membership construction. Indeed, Mr Howe contends that this is the position. To test that contention, let it be supposed that I had raised the construction issue at the hearing. Would it have been open to Mr Reinhard to raise the Membership construction as an alternative to his primary case that employment and membership could subsist side by side? Or would his pleaded case have precluded him from saying that he was not an employee?

As to that, the construction of the Contract is a matter of law. I am not bound by any concession or pleaded case about that issue. It would have been open to me, at the hearing, to seek submissions from both sides about the effect of section 4(4) on the hypothesis (which I eventually found to be the case) that ignoring that section, Mr Reinhard would have been both an employee and a member. I do not consider that Mr Reinhard would have been precluded, whatever his pleaded case, from presenting arguments to the effect that, if (contrary to his primary submission) he could not be both an employee and a member, he became a member and not an employee. And even if he was so precluded, it would certainly have been open to me to decide the issue.

Were I to decide that the Membership construction is correct, would it have been open to Mr Reinhard to rely on his arguments concerning damages, which Mr Callman articulated in the context of an employment contract, in the different context of simply breaches of terms of the Contract which took effect as part of the membership relationship with Ondra? I do not consider that this would have required Mr Reinhard to seek to amend his pleadings. In my view, he could have relied on those arguments without any amendment of the pleadings. In particular, paragraph 13(b) of the Re-Amended Particulars of Claim expressly pleads, as an alternative to the primary case, that Mr Reinhard obtained a status as “a pure member (ie a member but not an employee)”. The further detail of the primary case given in the Reply is not to be taken as a withdrawal of that alternative case. In any case, Mr Reinhard’s position was made clear in Mr Callman’s submissions in September 2014 following the decision in Clyde& Co v Bates van Winkelhof [2014] UKSC 32; [2013] ICR 730 (“Clyde & Co”).

Accordingly, I reject Mr Howe’s preliminary objections to my dealing with the issue of construction.

I considered the general approach to construction in Judgment [305] to [316] and do not need to repeat or add to what I said there. There is, however, a preliminary point which I need to identify concerning the approach to the issue of construction in the present case. It is whether the parties are to be taken to have appreciated, as I have held to be the case, that section 4(4) precluded Mr Reinhard from being both an employee and a member.

If they are to be taken as having appreciated the effect of section 4(4), then there is much which can be said, and which Mr Howe does say, in favour of the Employment construction. It can be argued that the language of the Contract is clear in demonstrating the intention to create an employment relationship and that the less extensive language on which the Membership construction needs to rely is to be given a meaning which is not inconsistent with the Employment construction. Since the parties are to be taken as appreciating the impossibility of Mr Reinhard being both an employee and a member, they are to be taken as intending that he should be one or the other, and not both, so that the question is which relationship they intended to adopt.

In contrast, if the parties cannot be taken to have appreciated the effect of section 4(4), then the Contract demonstrates two intentions which cannot stand together. In that case, the parties would have intended that Mr Reinhard should be both an employee and a member and did not intend a choice to be made. The meaning of the Contract is then clear but the law precludes full effect being given to its terms. In such a case, the search should, in my judgment, be for a construction which comes closest to achieving, in commercial terms, the result which would have ensued had it been possible for Mr Reinhard to be both an employee and a member.

In this context, I must be careful not to rely on the subjective understandings of the parties (as to which I cannot imagine that they had any idea that a person could not be both an employee and a member) but must apply an objective approach. The objective reader of the Contract at the date it was made would not have been able to say, I think, what section 4(4) meant: it took the decisions of the Court of Appeal in Tiffin and the Supreme Court in Clyde & Co to provide some clarification. The point had clearly been left open as recently as the decision in Kovats v TFO Management LLP [2009] ICR 1140 (“Kovats”) where judgment was given in April 2009. I have already concluded that, ignoring section 4(4), Mr Reinhard would have become both an employee and a member. An objective person in 2009 is to be taken to have known of the existence of section 4(4) but he cannot, I consider, be taken to have understood that it prohibited a person being both an employee and a member. He would have no reason to think that section 4(4) displaced the meaning which would otherwise be given to the words of the Contract. There is accordingly nothing, in my view, which would cause an objective person reading the Contract when it was made to conclude that the parties intended other than that Mr Reinhard should be both an employee and a member. I do not accept Mr Howe’s submission that the parties are to be taken to know the effect of section 4(4).

In my judgment, therefore, the correct approach to the interpretation of the Contract (that is to say, the effect of the words used in the context of inconsistent expressed intentions) is to give to the Contract the commercial effect which comes closest to reflecting all of its provisions.

Adopting that approach, many (perhaps most) of the submissions which have been made about construction are not to the point. The submissions have, in large measure, been directed at which aspect of the Contract predominates or best reflects the parties’ main intentions. I will consider these points in more detail later when I address, as I think I should, the position if my approach to construction is wrong and Mr Howe’s approach is correct so that the parties are to be taken to have known that Mr Reinhard could not be both an employee and a member. However, if my approach is correct, then I consider that the answer is relatively straightforward.

To adopt the Employment construction would mean that Mr Reinhard would have no membership interest. He would not be entitled to the 1% share which he would have had he been a member but instead would, at best, be entitled to a 1% share of profit by way of remuneration in addition to his other remuneration but that right would cease on the termination of his employment. In contrast, the Membership construction gives him everything which he would have been entitled to if he had in fact been a member, but it does not give him anything which he would not have been entitled to if it had been possible for him to have been both an employee and a member. It seems to me, therefore, that the Membership construction comes closer than the Employment construction to giving Mr Reinhard that which the Contract was intended to give him.

For that short reason, I prefer the Membership construction.

In reaching this conclusion I do not ignore the fact that, under the Employment construction, Mr Reinhard would have certain protections under employment law which are not available him under the Membership construction. Mr Howe makes the point that there is no basis for a presumption that all members of a workforce would voluntarily deprive themselves of their employment rights just to obtain a small equity interest in the LLP for which they worked. I do not disagree with the proposition that there should be no such presumption.

However, the fact that there is no presumption does not mean that, in the present case, the employment protection rights could not be of little significance to Mr Reinhard as compared with the rights which a membership share would give him. The relevant contract in any particular case must be construed in its context including the identity of the parties to it. In the present case, Mr Reinhard was to have an initial share which, in percentage terms, was small but which might become very valuable; he had the prospect of that share increasing. The trajectories on which he relied and which formed part of the matrix against which the Contract was made and is to be interpreted demonstrate the potential value of the share. His expectation, like that of Ondra itself, was that there would be a lasting relationship: clearly neither of them entered into the Contract intending to terminate it in the short-term. I was satisfied on the evidence that the offer of a share was an important part of Mr Reinhard’s decision to join Ondra. I do not consider that absence of the employment protection rights which he would have had if he had been an employee detract from my conclusion that the Membership construction comes closer than the Employment construction to giving Mr Reinhard that which the Contract was intended to give him.

But in case my approach is wrong, I now turn to consider the position on the assumption that the parties are to be taken as understanding that section 4(4) precluded Mr Reinhard from being both an employee and a member of Ondra.

It is helpful to have section 4(4) to hand, so I set it out again:

“A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.”

Mr Callman’s first point is that the correct way to apply section 4(4) is to decide first whether Mr Reinhard would have been a partner in a traditional partnership. If he would have been, the second part of the section applies and it follows that he cannot be an employee of the LLP (since he could not, in an English partnership, have been an employee of the partnership of which he was a partner).

That is a surprising submission. A person does not become a member of an LLP simply because there are present in his relationship with the LLP attributes which would make him a partner in a traditional partnership. Thus an employee of an LLP who, under his contract of employment, is remunerated almost exclusively by reference to profit and is given a senior management role does not thereby become a member of the LLP whereas those same payment arrangements might well constitute him a partner of a traditional partnership even if the payment is described as salary/bonus and the management role as senior executive officer. Conversely, if a person is a member of an English LLP, he cannot be employed by it unless the result of the contract said to give rise to the employment status is that he ceases to be a member. The position may be different in Scotland where it may be the case that a member of a Scottish partnership can be employed by it. It was this consideration which led Lady Hale, in Clyde & Co, to reject the approach which had been taken by Rimer LJ. Rimer LJ’s approach, like that of the EAT in Kovats, cannot stand with Lady Hale’s approach. I left open whether what she said was obiter or not. I now say that, in my view, it was a necessary part of her decision and that I am not bound by Rimer LJ’s approach. I do not, in any case, consider that what I have said earlier in this paragraph is inconsistent with Rimer LJ’s approach.

The correct approach is not, in my view, to start with the status which Mr Reinhard would have had if there had been a traditional partnership. Section 4(4) is concerned with the employment status of a person who is a member of an LLP. In deciding whether a particular contract creates an employment relationship or a membership relationship, I do not consider that one should start with a predisposition one way or the other. It would not be right to say that, because a particular provision in a contract would by itself create a membership relationship, that is the starting point and that, therefore, section 4(4) applies to preclude an employment relationship. There is no more reason to do that than to start with a particular provision which would by itself create an employment relationship and then to say that section 4(4) precludes a membership relationship. It seems to me that the correct approach (subject to the analysis which I have already conducted in paragraphs 25 to 28 above) is to weigh all of the competing factors and to determine whether the contract creates an employment relationship or a membership relationship given that it cannot, because of section 4(4), create both. That, and no more, is the impact of section 4(4) in this context.

In carrying out that exercise, however, it is to be remembered that although an LLP has its own legal personality separate from those of the members, it is essentially a vehicle for shielding persons who would otherwise be partners from the unlimited liability which goes with a traditional partnership. The parallel between the two structures – traditional partnership and LLP – is reflected in the passage from the judgment of Elias LJ quoted in Judgment [37]. It is true that a person does not become a member of an LLP simply because there are present in his relationship with the LLP attributes which would make him a partner in a traditional partnership (see paragraph 38 above). And it is equally true that a person can be a member of an LLP in circumstances where his role in the LLP would not be sufficient to constitute him a partner in a traditional partnership: for instance a person who would, in a traditional partnership, simply be a paid member of staff could be a member of an LLP. But where a contract between an individual and an LLP contains an ambiguity so that it is unclear whether it creates an employment relationship or a membership relationship, it is a legitimate tool in resolving the ambiguity, in my judgment, to assess what the relationship would have been had there been a partnership rather than an LLP. I do not say that the status (employee/member) in the case of an LLP necessarily follows the status (employee/partner) in the case of a traditional partnership, but I do consider that the parallel provides a helpful pointer to the correct answer.

I considered, in Judgment [45] and [46] whether Mr Reinhard would have been a partner in the notional partnership assumed by section 4(4) adopting Rimer LJ’s approach in Tiffin. I concluded that Mr Reinhard would clearly have been a partner of that notional partnership. The result is the same if Lady Hale’s approach in Clyde & Co is adopted. This, I consider, is a helpful pointer to the correct answer.

Mr Callman takes me to task about what I said in Judgment [377] where I said that, in favour of the Employment construction, the overwhelming “flavour” of the Contract was the creation of an employment relationship with the grant of a partnership share seen as part of the reward of that employment. He points out that, although the actual provision concerning membership is a single clause (clause 3), that clause incorporates the entirety of the April Draft. If one were to create a document which included all of the provisions of the Contract and those of that draft agreement, the taste would be very different.

On this particular point, Mr Howe submits that it is fallacious to have regard to all the terms of the April Draft in construing the Contract. He describes my conclusion as being that the Contract comprised an agreement to confer membership on the terms set out in the April Draft. It does not follow, he says, that the terms of that Agreement are to be treated as incorporated into the Contract or as overriding its express terms. The correct position, accordingly, is that, in addition to Mr Reinhard clearly becoming an employee, the parties intended, by clause 3 of the Contract, to confer additional benefits on him, namely membership of the LLP and that such benefit was to be conferred on the terms and conditions set out in a separate agreement. Unfortunately, it has transpired that this was not legally possible.

I do not agree with Mr Howe’s submission. I concluded that, ignoring the effect of section 4(4), the reasonable and objective person would have appreciated that Mr Reinhard was being offered (that is to say, before he signed the Contract) membership on the terms of the April Draft. He would have become a member on those terms and would have done so on the commencement of his employment had the dual role of employee and member been possible. The terms and conditions on which his membership was to be conferred were not set out in a separate agreement: they were set out in a separate document, namely the April Draft, (which was not itself an agreement) the terms of which formed part of the offer which Mr Reinhard accepted when he signed the Contract. Consider this parallel. Suppose that all the terms of the Contract relating to the purported employment relationship had been contained in a separate standard form document and that the Contract had simply stated that Mr Reinhard would become an employee on the terms and conditions set out in that standard form document. In those circumstances, quite clearly those terms and conditions are what need to be taken into account in construing the Contract. So too, in my view, once it has been decided, as I have done in the Judgment, that the offer of the initial share contained in clause 3 was a share determined in accordance with the terms of the April Draft, it follows that those terms must be taken into account in construing the Contract as a whole.

Once that is appreciated, there is force in Mr Callman’s criticism of my description of the flavour of the Contract. However, I was, in Judgment [377] intending only to identify arguments and it would have been more accurate of me to preface my remark by saying that “it can be argued that”.

Mr Callman refers to the use of what he calls labels. It is trite law that labels are not conclusive of the nature of the instrument or transaction in question. And so Mr Callman submits that the many references to employment, dismissal and the like are merely labels. What matters is the substance of the relationship so that the focus should be on whether any of the provisions of the Contract are incompatible with the true relationship being one of membership or determinative of the true relationship being one of employment. Mr Callman adopts what I said in Judgment [380] in favour of the Membership construction.

Mr Howe submits that the present case is not simply one of labelling. The parties have entered into a contract which expressly states the nature of the relationship as well as constituting the statutory statement of particulars of employment under the Employment Rights Act. It also includes provisions which, according to Mr Howe, are not apposite of anyone other than an employee, such as access to stakeholder pensions, accrual of holiday entitlement and statutory sickness pay.

As to labelling, I think that the real point which Mr Callman seeks to make is that the parties cannot, by the words they use, categorise a contract in one way when its substantive effect is different. Thus the owner of a freehold flat may allow another person to occupy it in return for payment. The parties might record their agreement in a document. If the rights and obligations created by that document give rise to the relationship of landlord and tenant, then the document is a lease or tenancy agreement notwithstanding that the parties call it a licence and use words which are apposite to a licence rather than a lease. I accept, of course, that where the rights and obligations to which a document gives rise are consistent with two interpretations, then the language which they have used may indicate the true nature of the transaction. But equally, if the rights and obligations to be derived from an agreement are consistent with only one legal categorisation (eg a lease) then the purported adoption of another legal categorisation (eg licence) is to be rejected.

Accordingly, it is appropriate, in my view, to consider the substance of the rights and obligations created by the Contract as a whole. If, in substance, the rights created are those typical of a member relationship, then the words which are apparently consistent only with an employment relationship will have to be rejected, and vice versa.

In terms of “violence to the language” of the Contract, Mr Callman submits, correctly, that both constructions stretch the language. I think that he accepts that the Employment construction does not stretch it to breaking point but he does say that less violence is done under the Membership construction pursuant to which salary payments are treated as adjustments to profit share. This is to be contrasted with what he describes as the major departure from the wording of the Contract under the Employment construction; this departure would result in the express wording of Clause 3 providing for a partnership (which I have already, in the Judgment, concluded means membership) share being given no effect. Thus, under the Employment construction, not only does Mr Reinhard obtain no membership interest at all, he does not even obtain a “shadow” financial interest which represents the totality of his 1% share whereas under the Membership construction he retains, in economic terms, the payments which he would otherwise have received as employment remuneration. This, in essence, is to make the same points as those which I have made in paragraph 31 above.

Mr Howe contends for a different answer, expressing surprise that Mr Callman makes the submission which he does, since, in order to decide that the Contract was not an employment contract, it would be necessary to disregard not only what the parties have repeatedly and expressly agreed was to be the nature of their relationship but almost the entire contents of the Contract.

Much of the force of that submission is taken away when the terms of the April Draft are taken into account as they must be, for the reasons which I have already given. Further, for reasons which, again, I have already given, it seems to me that the nature of the relationship must be established in the light of the obligations which the Contract creates rather than simply by reference to the parties’ own classification of that relationship.

In any case, I think that the issue of “violence to the language” is not at the heart of the dispute. An issue of “violence to the language” usually arises where words are to be read into, or omitted from, a provision, or where words are given what might be seen as a strained or even artificial construction. The rights and obligations of the parties are then to be ascertained in accordance with the construction thus arrive at. But in a case such as the present, the violence is of a rather different sort. Let me return to the lease/licence example. If the obligations created by the document are those of landlord and tenant, a lease is created notwithstanding that the language used is that of licence. It is not doing violence to the language in the same way to read the references to licence, licensee and licensor as references to lease/tenancy, lessee/tenant and landlord. The manufacture of a 5-pronged implement for manual digging results in a fork (see Lord Templeman’s famous remark in Street v Mountford [1985] AC 509). If the manufacturer refers to it in a catalogue as a spade, it remains a fork. But it is not to do violence to the language of the catalogue to read the reference to a spade as being to a fork; it is merely to identify the item to which the word is applied as what it really is; that is to say, to use its English name, a fork. And so too, if the substance of the single relationship is that of membership, then the use of words appropriate to employment is simply a misuse (just as the use of the word spade in the catalogue is a misuse of the word fork).

Mr Howe relies on Judgment [364]i) and iii)] where he refers to my having held that

It must be remembered that Judgment [364] was written in the context of my consideration of the Contract ignoring section 4(4). The impact of section 4(4) was clearly not dealt with. It was in the section of the Judgment dealing with the choice between the February 2009 LLP Agreement and the April Draft as the document governing the terms on which Mr Reinhard would become a member of Ondra. Judgment [364] was not intended to say anything about whether the Employment construction or the Membership construction is correct.

I did not, of course, mean in the first sentence of Judgment [364 i)] that the actual Contract was an offer of employment. It clearly was not: I was obviously, if I may say so, referring to the draft Contract. Further, I was not saying (and I do not think that, in its context, that paragraph can be read as saying) that the draft Contract was only an offer of employment and that it did not set out even by reference to the April Draft the offer of the membership terms. I was not, here, addressing the issue of “employment or membership” because at this stage I was ignoring section 4(4), so the relationships could co-exist. I was concerned with the duration of the membership interest: under the terms of the April Draft, Ondra would have been able to terminate (giving an appropriate Exit notice) Mr Reinhard’s membership if it were to decide to terminate his employment. In contrast, under the February 2009 LLP Agreement, Mr Reinhard would have been able to retain his share. My point was that the latter result would have been inconsistent with the employment relationship and the fact that Mr Reinahrd’s share really went with his employment.

Entirely different considerations apply when it comes to deciding whether the single relationship which is permissible was an employment relationship or a membership relationship. In that context, the provisions of the April Draft are important and are to be treated as forming part of the Contract.

Mr Callman has gone through the whole of the Contract making detailed submissions about most of its clauses, considering the effect of each clause as a membership clause or its compatibility with membership status. Mr Howe has done the same thing. I do not propose to go into the detail of each of their respective submissions although I take everything which they said (in their skeleton arguments, in Mr Callman’s further written submissions in reply and in oral submissions) into account. I mention the main submissions briefly starting with Mr Callman:

Mr Howe has a different take on these provisions. I do not disagree with his submission – it is obviously correct – that the Contract consistently uses the language of an employment contract. However, subject to the matters set out in the sub-paragraphs below, I agree with Mr Callman that the express wording of the relevant clauses of the Contract can be given effect without any difficulty as if they were clauses of a membership agreement replacing the references to employment and dismissal with references to the termination of active engagement in the membership business and termination of that engagement; termination of the actual membership interest would then be effected in accordance with the terms of the April Draft. The provisions in relation to which special comment is needed are these:

In favour of the Employment construction, I identified one factor (see Judgment [377]) as being the inapposite use of the language of partnership. Mr Callman has made a number of submissions about this which are encapsulated in paragraphs 50 to 54 of his skeleton argument. I am now entirely persuaded that the use of the language of partnership rather than membership does not damage his case.

Mr Callman relies on the evidence given by Mr Reinhard about his role in Ondra including his management functions. It is said that these are entirely consistent with a membership relationship and do not reflect the hierarchical master/servant relationship which a contract of employment entails. The essence of a contract of employment, he submits, is that it is a master and servant hierarchical structure with an element of control. There are two comments to make about that submission. First, I consider that Mr Reinhard’s role was consistent with his being an employee just as it was consistent with his being a member. His management role did not entail that he should necessarily be a member. Secondly, evidence of how the Contract was implemented in practice is not relevant or admissible to its construction.

For his part, Mr Howe submits that it is clear that, while he worked at Ondra, Mr Reinhard’s position was that of employee subject to the direction and control of his employer, Ondra. This is shown by the express terms of the Contract and the evidence of his actual duties. Mr Howe places particular reliance on clause 6 (see Judgment [8]) which obliged him to carry out “such duties as may be required by Ondra from time to time” and to comply with Ondra’s “instructions”. Standing by themselves, those provisions point strongly to an employment relationship and, had they appeared in a contract referring expressly to the relationship as one of employment with no contra-indication, the position would be clear and it would be unarguable that there was anything other than an employment contract. But there are contra-indications, namely clause 3 and the effective incorporation of the April Draft. If it is asked whether the provisions of clause 6 are inconsistent with a membership relationship, my answer is that they are not. It would be unsurprising to find terms of this sort imposed on a junior equity partner in a traditional partnership and for my part I would be unsurprised to find them imposed on a junior member of an LLP.

Whilst submitting, correctly in my view, that post-contractual conduct is not relevant, Mr Howe nonetheless takes a forensic swipe at Mr Reinhard by saying that Mr Reinhard’s duties were those of an employee and not of a part-owner. He had more autonomy than a more junior employee but he was nonetheless a junior member of the teams in which he worked and was subject to the direction and control of the team leaders. I do not recollect any evidence to that effect unless by ‘team leader’ it is intended to refer to one of the Founding Partners. As to direction and control, the Contract provided at clause 2 that he would report to them, not to some other line manager.

Mr Callman also prays in aid the arrangements between the other Junior Partners and Ondra under the March 2010 LLP Agreement. Apart from one aspect, I do not consider that that Agreement is relevant to the construction of the Contract. First, it cannot, as a matter of principle, be correct for the construction of the Contract to be affected by the terms of a later contract between different parties. Secondly, the March 2011 LLP Agreement comprises the totality of the agreement between the other Junior Partners and Ondra with their pre-existing contracts of employment being expressly abrogated. In contrast, the April Draft contains only some of the terms of the overall contract between Mr Reinhard and Ondra. It is precisely the inclusion of the other terms of the Contract that gives rise to the issue of construction in the first place. The only relevance of the March 2010 LLP Agreement is, so it seems to me, that it demonstrates that the sort of remuneration to which Mr Reinhard was entitled under the Contract is capable of being provided as part of a membership arrangement and that Ondra itself appears to have been willing, in the case of the other Junior Partners, to provide remuneration in that way. Accordingly, I do not derive any assistance from the March 2010 LLP Agreement apart from the relevance which I have just mentioned.

One of Mr Howe’s less significant arguments in support of his main case as expressed in his skeleton argument related to clause 4 of the Contract, which provided that Ondra would be prepared to review Mr Reinhard’s “initial ownership %” if, in effect, he could not obtain satisfactory compensation from Goldman Sachs on his departure from them. It is said that this provision became moot because he was in fact able to leave Goldman Sachs on good terms. However, the fact that clause 4 became moot does not mean that it is irrelevant. If Mr Reinhard had been unsuccessful in his negotiations with Goldman Sachs, he would have been entitled to invoke clause 4. Clause 4, it seems to me, does have to be taken into account in assessing the true meaning of the Contract taken overall.

Mr Howe also suggests that part of Mr Reinhard’s case effectively seeks to rely on his subjective intention when it is said that he would not, apart from his understanding that he would obtain an enduring share, have entered into the Contract. That is not a fair representation of Mr Callman’s argument. The evidence was that Mr Reinhard understood he would be obtaining an enduring share (whatever that might mean). In fact, what he would obtain, were it not for section 4(4), would be a share to which he would be entitled so long as he worked at Ondra (I ignore the theoretical possibility that his membership interest could have been terminated but that Ondra might have offered him a contract of employment). Although his membership interest could be brought to an end, it had a real value not only in terms of a share of profit while he was working at Ondra but also the potential for a share in the event (however unlikely) that Ondra was sold to a third party. The objective and reasonable person reading the Contract with that knowledge and with the knowledge that Mr Reinhard was leaving a well-remunerated job at Goldman Sachs to join a start-up would have appreciated that there was something in the Contract which made it attractive to Mr Reinhard and would have appreciated, in the light of the trajectories and other information provided to him, that obtaining a membership interest was an important element of the package. That, I think, is the point which Mr Callman is making; it is, in my view, a valid point.

In my judgment, taking all of these arguments and considerations into account, the Membership construction is to be preferred. It will be apparent from what I have said in relation to each argument how I regard their strengths and weaknesses. Without pointlessly rehearsing them again, the balance comes down in favour of the Membership construction. I attach considerable weight to the fact that clause 3, in my view, effectively requires the terms of the April Draft to be brought into account when assessing the construction of the Contract as a whole. When that is done, the substance of the rights and obligations of the parties overall – taking account of the express terms of the Contract and the provisions of the April Draft – are more closely reflected by the Membership construction than the Employment construction. The language of employment in the Contract must give way to the substance of the rights and obligations overall. I find support for that view when considering what Mr Reinhard’s status would have been if we were dealing with a traditional partnership rather than an LLP. In those circumstances, for the reasons already given in the Judgment and this judgment, Mr Reinhard would have been a partner and not an employee. For the reasons already given, that is a pointer – and on the facts of the present case in my view a strong pointer – to the conclusion which I have reached.

Adopting the approach to construction which I consider to be correct, namely that the parties are not to be taken to have understood the effect of section 4(4) to be that Mr Reinhard could not be both an employee and a member, the Membership construction is clearly to be preferred. But even if the alternative approach is correct, the result is the same although the position is not as clear as under the approach which I favour.

As a matter of terminology, I was wrong in the Judgment to refer to a notice served by Ondra terminating Mr Reinhard’s membership in accordance with the terms of the April Draft as a Withdrawal Notice. I should have referred to an Exit Notice and will do so in this judgment. References to clause 5.5 are to that clause of the April Draft but should where appropriate be taken also as references to the same provision of the March 2010 LLP Agreement which it is possible superseded the former so far as concerns Mr Reinhard.

A document purporting to be an Exit Notice was served on 15 January 2015. It is not accepted as valid by Mr Reinhard (although its re-service on 2 March 2015 is accepted as a valid Exit Notice). This is because, although clause 5.5(C) provides for Ondra to “have the right exercisable with the written consent of all the Founding Partner” to serve an Exit Notice, as a matter of fact, one of the Founder Members was unable to provide his written consent until shortly after the notice was served on Mr Reinhard. Mr Howe submits that this makes no difference to the validity of the notice. He says that the requirement that the consents of the Founding Partners should be in writing is permissive only, and merely provides a means by which Ondra can put proof of the consents beyond doubt. But if the consents were in fact given, it is irrelevant whether they were in writing or not.

He relies on Yates Building Co v Pulleyn (1975) E.G. (CA). In that case, a notice of acceptance was to be sent by registered post or recorded delivery. It was not so served but was sent by ordinary post. It arrived, however, in due time. It was held to have been validly given. This was because, in the light of the object of the requirement, it was inserted for the benefit of the person (the buyer) giving the notice so that he could be sure of his position. If he sends his letter by registered post or recorded delivery he has proof of postage and the time of posting. But if it is sent by ordinary post, the buyer will have no sufficient proof so that if the seller proves he never received it or received it late, the buyer fails. But, according to Lord Denning, none of those reasons apply when the seller does receive it in time; so long as he gets it in time, he should be bound. It is not entirely clear why the provision was said to be solely for the benefit of the buyer. It might be though that that seller, the recipient of the notice, would be equally concerned about certainty and should not need to prove that a document was not received, or was received late, when it was not sent in the agreed way. Be that as it may, the Court of Appeal clearly saw the provision as for the (exclusive) benefit of the buyer. Mr Howe says that the same principle applies in the present case.

Mr Callman submits that this is not the position in the present case. On its face, the wording of clause 5.5(C) makes it plain that the right is only exercisable with “written consent”. He submits as follows:

In my judgment, Mr Howe is right on this point. It seems to me that the purpose of the requirement for written consent is inserted for the benefit of Ondra in the same way that the requirement for service by registered post in Yates was for the benefit of the buyer. If any dispute were to arise between Ondra and a Founding Partner as to whether consent had been given, Ondra would quickly be able to resolve that dispute in its favour by producing the written consent. But so far as Mr Reinhard is concerned, the requirement for written consent in the present case fulfils no more purpose that than the requirement for service by registered post so far as the seller was concerned in Yates. In this context, Mr Reinhard is not, it is to be noted, entitled to require copies of any written notice. Mr Reinhard will not know whether a notice which he receives purportedly served pursuant to clause 5.5(C) has in fact been served with the written consent of the Founding Partners or, indeed, even with their consent at all. It is not, therefore, to my mind easy to see why the requirement for written notice can be said to have been included in the April Draft for (even partly) Mr Reinhard’s benefit.

In my judgment, the 15 January 2015 Notice was a valid Exit Notice and can be relied on by Ondra if a valid Exist Notice had not already been served or if Mr Reinhard’s membership interest had not already come to an end.

The Notice of 15 January 2015 was served without prejudice to Ondra’s contentions that Mr Reinhard was not a member at all (a contention which I have now rejected) and that even if he was (as I have held to be the case) various other documents and events were or gave rise to a valid Exit Notice. These alternative Exit Notices are said to be found in letters dated 3 June 2011 and 21 June 2011 either separately or together.

It was common ground, as I noted at Judgment [475], that the Contract terminated on 3 June 2011. However, what I said there was clearly said on the basis that there was a contract of employment and was implicitly subject to the point which I had left open as to the effect of section 4(4). It would be more accurate to say that it was common ground that the contract of employment (if any) created by the Contract was terminated on 3 June 2011. Translating that to the context of the Membership construction, those elements of the contract which were to be found in the clauses of the Contract other than clause 3 and 4 terminated on 3 April 2011. But that is not to say that the other provisions of the overall contract were terminated: it was not necessarily the Contract as a whole which was terminated.

Conceptually this is not difficult to grasp. Thus imagine that section 4(4) had not precluded Mr Reinhard from being both an employee and a member with his employment relationship being found in the terms of the Contract other than clauses 3 and 4 and his membership relationship being found in the terms of the April Draft. In those circumstances, a notice under clause 1 of the Contract would be needed to bring an end to his employment and a notice under clause 5.5 of the April Draft would be needed to terminate his membership. There might be reasons why Ondra would want to terminate one, but not the other, of those relationships. The question here is essentially one of construction of the Contract.

There is nothing conceptually difficult, therefore, in that part of the Contract as a whole relating to the aspects dealt with in the clauses of the Contract other than clauses 3 and 4 being terminated separately from the aspects dealt with via clauses 3 and 4.

Notwithstanding that, to my mind, straightforward conceptual analysis, Mr Howe runs an argument to the following effect:

I do not agree with that line of reasoning. The common ground is that the 3 June 2011 letter brought to an end what the parties thought, at that time, was the employment relation arising from the Contract excluding clauses 3 and 4. There was no consideration of the effect of the letter on the separate rights arising under clauses 3 and 4. It was not until the Judgment, in any case, that it was established (subject of course to any appeal) that the terms of the April Draft were also part and parcel of the overall relationships. If the letter brought to an end altogether Mr Reinhard’s obligation to work, and thus brought to an end his obligations under clause 6.1 of the April Draft, it does not necessarily follow that it was effective to give rise to a termination of his membership interests because it is to be treated as an Exit Notice or for some other reason. The acceptance of the letter, referring only to clause 1 of the Contract, as terminating the obligation to work could be seen as a variation of clause 6.1 of the April Draft or as a waiver of the requirement for Mr Reinhard to work for Ondra just as easily as it could be seen as an Exit Notice. The point is that section 4(4) has an impact on the interpretation of the Contract as a whole and necessary adjustments have to be made to what would otherwise be the natural interpretation of the Contract.

Mr Howe puts his argument another way. He says that the rejection of his line of reasoning could only be based upon an argument that the Contract created a set of mutual rights and obligations which existed independently of the rights and obligations of membership and which could be terminated without affecting the continuation of the rights and obligations of membership. Such a conclusion would be inconsistent with the Judgment that the Contract was either one of membership or one of employment - but not both.

I do not agree with that line of reasoning either. It is correct, in the light of the Judgment, that there can be only one relationship. If that relationship is one of membership, then the (apparent) employment provisions and the (actual) membership provisions form part of the overall arrangements concerning membership and there is no reason, conceptually as explained above, why separate parts of those overall arrangements should not be dealt with independently. It is not necessary to find a set of mutual arrangements existing separately from the rights and obligations of membership.

That is not to say that, on the facts and having regard to all of the surrounding circumstances, the 3 June 2011 letter did not amount to an effective Exit Notice. Before I address that point, I deal with one other argument raised by Mr Howe. He notes that the provisions concerning the service of an Exit Notice are capable of being waived or modified by the affirmative vote of the Members holding a majority of the Voting Interests under clause 7.2 of the April Draft. He submits that the Founding Partners (who together held such a Voting Majority) affirmatively voted to terminate such relationship as then existed. Mr Reinhard’s consent was required, but it is submitted that he gave such consent by consenting to the termination of the Contract.

I reject that argument for these reasons. First, there is no evidence that the Founding Partners did in fact consider any waiver, change, amendment or alteration of the terms of the April Draft let alone that they voted to do so. It is not implicit in the 3 June 2011 letter that this is what in practice they were intending to indicate. Secondly, Mr Reinhard did not consent to any such waiver etc. Rather, he accepted the reality that his working relationship with Ondra was over and accepted (a) that he would no longer work and (b) would no longer receive salary and bonuses. But, as I said at Judgment [225] and [226], Mr Tory did not tell Mr Reinhard that his share was being taken away; nor did he say that Mr Reinhard would no longer be a member. I stated that Mr Reinhard did not agree to the removal of his share. I conclude that, even if my first reason is wrong, Mr Reinhard did not give the consent which is required by clause 7.2(B).

To return to the effect of the 3 June 2011 letter on the footing that the Contract created only a membership relationship, the analysis turns on whether or not it is correct to treat the parties as understanding that section 4(4) precluded a dual relationship. I have held in relation to the Contract that they are not to be treated as having that understanding; I see no reason to think that the position had changed by the time of the 3 June 2011 letter. In those circumstances, I reject the suggestion that the 3 June 2011 letter can be treated as an exercise of the power to give an Exit Notice. That is not to say that, in its context, the 3 June 2011 letter was not effective to bring about an end to Mr Reinhard’s obligations to work for Ondra. Mr Reinhard accepted the reality that his time at Ondra was at an end and that he would no longer be paid his salary and bonus. In terms of legal analysis, it can be said that there was a waiver by Ondra of the requirement for Mr Reinhard to work. That was not a matter of prejudice to Ondra since it could give an Exit Notice and bring about an end to Mr Reinhard’s share, and thus to any right to future dividends, at the end of the notice period.

An alternative analysis is that Mr Reinhard was not discharged from his obligations under clause 6.1 of the April Draft. However, if that is right, he must have retained his share and been entitled to receive any dividend in respect of the 2% share to which he was then entitled.

It is to be noted that the 3 June 2011 letter purports to terminate employment as of that date with a payment in lieu of notice. The notice was clearly intending to exercise a right which Ondra had. That right can only have been the right of termination found in clause 1 of the Contract read together with clause 15 which enabled Ondra to effect an immediate termination of what was expressed as an employment relationship with a payment in lieu of notice; it cannot have been an exercise of the power to serve an Exit Notice because, absent gross misconduct (which had not been established at that time), there was no right to bring about an immediate end to Mr Reinhard’s membership in relation to which a 90 day notice was required. Putting the 3 June 2011 letter in the context of the membership relationship, it is saying that Mr Reinhard’s obligations to work (at least under the express clauses of the Contract excluding clauses 3 and 4) is at an end (with the result that his right to remuneration under the express clauses of the Contract is at an end); it is not, in my judgment, saying that Mr Reinhard’s membership was being put to an immediate end – since there was no power to do so – nor can it be interpreted as a 90 day notice to do so.

On the basis that the parties are not to be taken to have understood the effect of section 4(4), to treat the letter as an effective Exit Notice would not reflect the agreement which the parties thought they had made but could not in fact have made as closely as holding that it was not an effective Exit Notice. Accordingly, I do not consider that the 3 June 2011 letter constituted an Exit Notice or was otherwise effective to terminate Mr Reinhard’s membership.

If, contrary to my approach, the parties are to be taken to have understood when they entered into the Contract (and so too on 3 June 2011) that the effect of section 4(4) was to prohibit the dual relationship, then there is more scope for Mr Howe’s contentions. The express provisions of the Contract and of the April 2009 Draft LLP must be read together. Thus clauses 1 and 15 of the Contract must be read together with clause 5.5 of the April Draft and clause 6 of the Contract must be read with clause 6 of the April Draft. The two sets of provisions must be made to gel so that it can be argued that a notice under clause 1 of the Contract is to be seen as terminating the entire membership relationship bringing about an end to the obligations under clause 6 of the April Draft as well as those under clause 6 of the Contract and being treated as a notice having the same effect as an Exit Notice.

I do not consider that that is the correct analysis. One significant flaw in it is that it does not provide Mr Reinhard with the continuing rights to dividends during the 90 day period required for an actual Exit Notice. It might be said that the provisions for payment in lieu should be extended to cover such dividends, but that, in my view, would be stretching the language of the Contract and the April Draft together beyond breaking point. Instead, the result is that the 3 June 2011 letter did not take effect as an Exit Notice or otherwise terminate Mr Reinhard’s membership interest even if the parties are to be taken to have appreciated the effect of section 4(4).

Accordingly, in my judgment, the 3 June 2011 letter does not constitute a valid Exit Notice whether or not the parties are to be treated as having understood at the date of that letter the effect of section 4(4).

I do not consider that the letter dated 21 June 2011 adds anything to the debate. For the same reasons, this letter, too, is ineffective as an Exit Notice.

The earliest valid Exit Notice is the Notice dated 15 January 2015.