[2015] CSIH 66


Lady Paton

Lady Dorrian

Lord Drummond Young




in the cause



Pursuer and respondent;



Defenders and reclaimers:

Pursuer and respondent:  Clark, QC;  Richardson;  Pinsent Masons

Defenders and reclaimers:  Napier, QC;  Hardman;  Maclay Murray & Spens LLP

11 September 2015

[1]        Until May 2011 the pursuer was employed by 3i PLC (“3i”) in various positions, ultimately as head of the company’s global growth capital portfolio and as a member of its growth leadership team.  3i is part of the same group of companies as the defenders and another company, 3i Group PLC, which is the holding company of the group.  It was the practice of the 3i group to set up limited partnerships in which senior employees became partners, contributing their own funds, which were then invested by the limited partnership.  The intention was to reward the employees for their services to the 3i group and to provide them with performance incentives in their work for the group.  During his employment the pursuer became a partner in seven such limited partnerships and invested approximately £350,000 of his own money in those partnerships.  The management of the partnerships was carried out by the defenders, who are sued in their capacity as managers of the seven limited partnerships.  When an employee leaves the 3i group, he is entitled to retain his investment in the limited partnerships unless he is classified as a “competing leaver” in terms of the partnership agreements;  in the latter event the employee is only entitled to a restricted payment for his share in each such limited partnership.  When the pursuer left, 3i informed him that he was a competing leaver.  The result was that 3i proposed to return him a sum of approximately £90,000, which was the value of his share in the partnerships at the time when he left. 

[2]        The pursuer has brought the present action to challenge that decision.  He seeks a declarator that he is an ordinary leaver and not a competing leaver in terms of the limited partnership agreements, together with an accounting in respect of the sums that would be due to him under the limited partnership agreements if he were classified as an ordinary leaver.  The critical question is accordingly whether the pursuer was a “competing leaver” in terms of the limited partnership agreements.  The Lord Ordinary answered that question in the negative, and granted declarator that that he was an ordinary leaver.  The defenders have reclaimed against that decision.


[3]        The Lord Ordinary made detailed findings of fact, and these have been incorporated by the parties into a joint minute of admissions.  The following narrative is based on that joint minute.


The pursuer’s involvement with 3i and the limited partnerships
[4]        The pursuer was employed by 3i between 1989 and 2011.  He joined as a trainee investment controller and was steadily promoted to more senior positions.  During his employment he acquired experience in both of the types of private equity investment carried out by 3i, growth capital and buyouts.  The distinction between these is that in a growth capital investment the investor provides funds in return for a minority stake in the equity of a company, whereas in a buyout the investor takes a controlling stake in the company.  Until 2005 the pursuer was involved in the completion of many buyouts.  His last role as a dealmaker involved investing £32 million in a company called SLR, in 2008.  In the same year he became the first head of the global growth capital portfolio at 3i.  In 2009 he became a member of the growth leadership team and the growth capital investment committee.  One of the witnesses, Mr Kevin Dunn, the general counsel and company secretary of 3i, described the pursuer as “an experienced and influential investor”.  He sat on the boards of various companies in which 3i held investments. 

[5]        Investment companies commonly provide incentives for their employees in a form known as “carried interest”.  To receive carried interest, a member of a fund’s management team must become a member of the carried interest partnership and sign a limited partnership agreement.  Each individual employee contributes a small percentage of the fund’s initial capital.  The participating employees are also usually required to make a further investment, through the limited partnership, in any company in which the funds that they manage makes an investment.  When the fund disposes of an investment, it returns a proportion of the amount realized to the investors, including the carried interest partners.  In order to retain investment teams, limited partnership agreements specify that an employee’s right to receive carried interest will depend upon the circumstances in which he leaves his employment.  As already narrated, between 2004 and 2011 the pursuer entered into seven limited partnership agreements.

[6]        The pursuer tendered his resignation to 3i on 3 May 2011.  He joined another company, Business Growth Fund PLC (“BGF”), in June of that year as its head of investments.  Prior to his departure from 3i he had meetings with the human resources director and the chief executive.  They both told him that he would be classed as a competing leaver and would therefore lose his right to share in profits from his limited partnership agreements.  The pursuer was disappointed to receive this information, as a few days previously he had had a discussion with his immediate superior and had understood that he would be entitled to receive his carried interest.  The final decision to class the pursuer as a competing leaver was taken by the defenders’ chief executive, but he acted on the advice of Mr Dunn.  In evidence, Mr Dunn explained that he had little information about BGF at the time, and that he derived his knowledge of that company from its articles of association and its embryonic website. 


History of 3i
[7]        In 1929 the government asked Lord Macmillan to chair a committee to consider how best to promote the development of trade and commerce within the United Kingdom.  Members of the committee included the economist John Maynard Keynes and the politician, later Foreign Secretary, Ernest Bevin.  Its report, published in 1931, identified an absence of funding for small and medium sized enterprises (“SMEs”).  This came to be known as the “Macmillan gap”.  Action to provide for such funding was taken in 1945, when the then government established the Industrial and Commercial Finance Corporation (“ICFC”) to achieve that purpose.  ICFC subsequently changed its name to Investors in Industry and latterly it has been known as 3i.  Since its inception, 3i has provided finance to a wide range of companies.  It has moved away from investing in SMEs, and instead it focuses on providing finance to potentially high-growth and quoted companies.  It closed its venture capital business, which involved more risky investments, in about 2008.  At present it carries out three “business lines”, namely private equity, infrastructure and debt management. 

[8]        Until 2009, 3i funded its growth capital investments from its own capital assets.  Following the 2008 financial crisis, however, it established a growth capital fund to raise funds externally to contribute towards making such investments.  All of 3i’s documents relating to that fund state that it will make investments in a range from €25 million to €150 million (a concept known as “banding”).  That information is known to investors, companies in which investments are made, staff and shareholders.  In the case of investors, it is contained in a document known as the Private Placement Memorandum, which was described in evidence as 3i’s contract with investors.  In about March 2010 3i distributed an “Eligibility Guide” to all of its investment staff, setting out the criteria that they had to apply in making investments;  this included the financial banding of €25 million to €150 million.  That document was prepared in a format that enables staff to have it easily to hand.

[9]        In the last five years 3i has only made one growth capital investment in the United Kingdom.  It invested £27 million (€32.8 million) in a company known as Go Outdoors in 2011.  3i’s accounts for 2013 state that its strategic priority is to cut down staff and to focus on “harvesting” existing investments.  It aims to make five to seven high-level investments each year in the global areas in which it operates.  Its goal is to secure a return of approximately 15 to 20%.


History of BGF
[10]      After the financial crisis of 2008 the government wished to stimulate the economy by encouraging entrepreneurs.  It was concerned about the lack of funding for SMEs.  It accordingly asked Mr Chris Rowlands, a well-known figure in the investment world, to convene a panel to review the position.  Mr Rowlands gave evidence, which the Lord Ordinary described as helpful.  He had worked for many years at 3i;  when he retired in March 2009 he was a member of its executive team and its group investment committee, and he was chairman of 3i Asia.  Mr Rowlands’ panel published its report, known as the Rowlands Report, in November 2009.  It concluded that the market gap for finance for SMEs is “permanent, not just short-term and cyclical, and exacerbated by recession”. 

[11]      As part of its review, the panel investigated the role of 3i.  It considered that 3i had played an important role in attempting to fill the Macmillan gap, but that it had “gradually shifted away from its initial focus on small businesses to the larger and more commercially viable MBOs/MBIs”.  In oral evidence, Mr Rowlands stated that the business community had mourned 3i’s departure from the lower end of the market.  His panel recommended that the government should intervene to ensure that growth capital was available in the band between £2 million and £10 million.  That amounted to government intervention to fill the vacuum left by the departure of 3i from that part of the market.  That finding clearly implies that 3i had moved away from that sector of the market by the time of the Rowlands Report. 

[12]      BGF was launched in May 2011 to provide growth capital funding of between £2 million and £10 million to UK SMEs.  It is prevented from taking a controlling interest in any company, and accordingly it does not fund buyouts.  Originally BGF invested in companies with a minimum turnover of £10 million, but that has now been lowered to £5 million.  By the date of the proof BGF had made 64 investments, all within the specified band.  It aims to secure a return of approximately 8%.  It could provide growth capital funding above £10 million, but only by way of “top-up” finance.  It would not provide initial funding above £10 million.


Further findings by the Lord Ordinary
[13]      In addition to the findings of fact that have been incorporated into the joint minute, the Lord Ordinary made a number of further important findings, largely of an inferential nature.  First, he stated that he was satisfied that there had been no actual competition between BGF and 3i.  With regard to investments, 3i had only been involved in one UK transaction since the pursuer’s departure.  The pursuer had given evidence that, apart from the investments that BGF had made to date, it had also considered hundreds of other potential investments, but 3i had not been interested in any of them. 

[14]      Secondly, in relation to competition for funds, the Lord Ordinary held that there was no competition because BGF was funded by five clearing banks while 3i was funded by external investors and shareholders.  That is a finding that is in our opinion clearly justified on the evidence; BGF was created under government auspices to implement the recommendations of the Rowlands Report, and in that way the co-operation of the clearing banks was achieved.  Thus there is no need for BGF to raise funds on capital markets. 

[15]      Thirdly, reference had been made in submissions to competition for staff.  On this matter the Lord Ordinary concluded that there was no evidence of any competition for staff, because 3i had been shedding rather than recruiting staff.  That accords with the evidence narrated at paragraph [9] above.  The Lord Ordinary notes that in evidence Mr Rowlands indicated that he thought that 3i had lost hundreds of staff.  On the question of staff, the Lord Ordinary stated that he would be slow to hold that the pursuer was a competing leaver because of the outside chance of competition for staff; the contractual provisions under consideration were mainly directed at investments and investors rather than staff. 

[16]      Fourthly, the Lord Ordinary found that BGF did not operate in the same sector as 3i.  He described 3i as “generally a buyout company that operates at the higher value end of buyout transactions, often abroad”.  When it had made an investment it provided intense services to the company in which the investment had been taken, with the intention of securing a higher return.  That is in our opinion clearly in accordance with the evidence, which disclosed that 3i would become involved in the management of its investments, usually taking seats on the board.  By contrast, the Lord Ordinary found, BGF invested in SMEs in the United Kingdom; it only took a minority shareholding;  and it managed its investments with a light touch.  Once again that finding was clearly justified on the evidence. 

[17]      Fifthly, the Lord Ordinary found that BGF had been set up expressly to address the gap left by 3i’s departure from the lower end of the market.  That is in our opinion an important finding, as it indicates that the genesis of BGF in May 2011, at the same time as the pursuer left employment with the defenders, was to operate in an area of investment that was not covered any longer by 3i.  The Lord Ordinary notes that in his evidence Mr Dunn accepted that it was unlikely that the two companies would compete.  Mr Dunn added that it was not beyond the bounds of possibility that BGF would be sitting across the table from 3i in considering an investment.  The Lord Ordinary, however, expressly stated that he did not accept that rider.  Thus it is apparent that the Lord Ordinary rejected a submission that actual competition between 3i and BGF would be likely. 


Terms of the limited partnership agreements
[18]      The limited partnership agreements all contain a definition of the expression “competing leaver” in Schedule 3, which deals with leaver and new investing partner arrangements.  In all but the first (that relating to UK Private Equity 2004-06), the definition, so far as material to the present case, is in the following terms;  in that definition “Manager” means 3i Investments PLC or its successor as manager of the partnership and “Associate” means, in general terms, a member of the 3i group:  a competing leaver is

“any Ordinary Leaver… who,… at the time of or within 24 months of becoming an Ordinary Leaver:


(a) takes or is understood to be intending to take employment in a competitive capacity with, or provides competitive services to, a competitor of the Manager or any of its Associates; 



and for these purposes


(A)       without limiting the foregoing, the taking of employment with, or the provision of services to, any business or fund which is deemed to be a competitor pursuant to (B) below (other than where such employment or provision of services is with or to a part of such business not directly or indirectly involved in any relevant operations) shall be deemed for the purposes of (a) above to be taking employment in a competitive capacity or providing competitive services (as the case may be;


(B)       without limiting the foregoing, any business or fund wherever located in the world shall be deemed to be a competitor if such business… or fund operates or is intended to operate or is likely to operate (whether in whole or in part) in any geographical area(s) and investment product sector(s)/business line(s) (taken together) in which the Manager or any of its Associates operates or, as at the Leaving Date in respect of such Ordinary Leaver, is proposing to operate within the next 12 months;




(C)       ‘relevant operations’/’operates’/’operate’ shall mean making, dealing in, managing or advising as to unquoted equity investments whether for the relevant business’s own account as principal or as agent, trustee, manager or adviser on behalf of any other person(s).”


[19]      The structure of the definition is accordingly that subparagraph (a) of the main part of the definition makes use of the general concept of competition, referring to “employment in a competitive capacity” or “competitive services” with a “competitor”.  By itself, this would indicate that actual competition must be demonstrated to render an employee a competing leaver.  Nevertheless the main part of the definition is supplemented by the further explanation contained in subparagraphs (A) and (B).  The latter is a deeming provision to the effect that a business is to be treated as a competitor if it operates or may operate in any geographical area and “investment product sector(s)/business line(s)” in which the defenders operate.  Much of the argument focused on the significance of the phrase just quoted.  Finally, it should be noted that the definition in the first limited partnership agreement, that relating to UK Private Equity 2004-06, contains a definition that differs in that it does not include the words “/business line(s)” in paragraph (B).  Mr Dunn gave evidence that those words were added to reflect the fact that 3i had begun using that terminology.  Before the Lord Ordinary, parties were agreed that the difference in wording was not material for present purposes, but the defenders now contend that it was, a matter that we discuss subsequently. 


Principles of contractual construction
[20]      The general principles of contractual construction are well established.  These are stated by Lord Clarke in what is now the leading case, Rainy Sky SA v Kookmin Bank, [2011] UKSC 50;  [2011] 1 WLR 2900, at paragraphs 14 and 20-30, and in Scotland in Grove Investments Ltd v Cape Building Products Ltd, [2014] CSIH 43, at paragraphs [9]-[11].  In summary, the contract must be construed in context and in accordance with the purposes that it is intended to achieve.  In the words of Lord Clarke in Rainy Sky:

“the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant.…  [T]he relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract” (paragraph 14).


[21]      Furthermore, where a contractual provision has two possible meanings, in choosing between them the court should choose the meaning that best accords with commercial common sense.  In Rainy Sky Lord Clarke states: 

“If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” (paragraph 21).


In accordance with such an approach, it is significant that contracts are entered into by parties for their mutual benefit, to achieve common objectives.  For that reason they should be construed in such a way that the benefits enjoyed by each party and the burdens imposed on each party are not excessive or disproportionate: Grove Investments, at paragraph [11]. 


Lord Ordinary’s decision
[22]      On the basis of the findings of fact that have been narrated, particularly those set out at paragraphs [13]-[17], the Lord Ordinary concluded that the pursuer was not a competing leaver for the purposes of the limited partnership agreements.  He adopted a contextual and purposive approach to construction, and stated that the court should adopt the meaning of words that best accords with commercial common sense.  On that basis, the purpose of the competing leaver provisions was not to impose a blanket ban on joining competitors, but was to prevent damage to 3i’s business;  consequently commercial common sense suggested that an employee should be classified as a competing leaver if he took a position with a rival that might cause such damage.  Furthermore, if the definition of “Competing Leaver” were given an unduly wide construction, as contended for by the defenders, that would produce an excessive or disproportionate burden on the pursuer. 

[23]      The critical expression in the limited partnership agreements was “investment product sector”.  This was not trade jargon or otherwise a term generally used in the investment industry;  Mr Rowlands had said that he was not familiar with it, although he knew and understood the individual words.  As to what amounted to a sector, the word might be defined as an area or portion that is distinct from others, but that could relate to the type of economic activity or to banding.  The Lord Ordinary thought that there was a clear difference between a company that only offered investments between €25 million and €150 million and another that only operates between £2 million and £10 million.  He considered that the whole thrust of the evidence, including the defenders’ witness, Mr Dunn, was that banding was an important differentiating factor.  No investment company operated at all levels of the market, and each published information about its investment strategy.  Any change in strategy would necessarily be published.  Until that happened, the company had no mandate to go beyond its advertised banding. 

[24]      On that basis, the Lord Ordinary indicated that he was satisfied that there had been no actual competition between BGF and 3i;  the critical finding of fact is that narrated at paragraph [13] above.  Nor had there been any deemed competition within the meaning of subparagraph (B) of the competing leaver clause.  BGF and 3i operated in sectors that were perceived as different.  They operated at different banding levels;  much of 3i’s investment was abroad;  and the two companies adopted different attitudes to involvement in the management of the companies in which they invested.  Furthermore, BGF had been set up to address a perceived gap in 3i’s coverage of the market. 


Arguments for defenders
[25]      The defenders now contend that the Lord Ordinary erred in law in a number of respects.  In summary, these are as follows.  First, it was appropriate to give a wide meaning to competition in the circumstances of the case.  The purpose of the limited partnership agreements was to provide incentives for 3i’s management by sharing profit with them.  Consequently a number of parties were interested in ensuring that managers contributed their skills and maximized profit, and remain committed to doing so.  Managers who left limited partnerships early left the remaining partners to manage the investments and undertake the work required to bring the investments to a successful conclusion.  Secondly, the Lord Ordinary had given insufficient weight to the deeming provision in subparagraph (B) of the definition of competing leaver.

[26]      Thirdly, the notion of actual competition should be construed broadly;  all enterprises engaged in private equity business were capable of competing with each other, for deals, for funds and for staff.  The differences in banding did not preclude competition between 3i and BGF for individual deals.  Furthermore, there was no evidence to suggest that BGF was prohibited from providing growth capital funding by way of a contribution to a consortium of enterprises engaged in private equity business.  That could mean involvement in deals above £10 million.  Fourthly, the Lord Ordinary was said to have misconstrued the provisions relating to deemed competitors.  The contractual provision should be construed by reference to the circumstances that existed at the date when each of the contracts was concluded.  The limited partnership agreements had been concluded over a period from 2004 to February 2011, but 3i did not limit the financial range of its investments until it established a Growth Capital Fund in March 2010.  Thus only the last limited partnership agreement would be subject to the limited financial range of investments.  Fifthly, the expression “investment product sector/business line (taken together)” cannot be given a meaning if its wording is taken literally, but sense can and should be made of it by construing it as a reference to the totality of all of the different parts of 3i’s business at the date of the contract.


Construction of the limited partnership agreements

Context and purpose
[27]      The question before the court turns on the construction of the expression “Competing Leaver” as used in Schedule 3 to each of the limited partnership agreements.  The context in which that definition occurs is that of a limited partnership whose general partner is a subsidiary company of 3i and whose limited partners include external investors and the carried interest partners, who comprise 3i directors and employees such as the pursuer.  Participation in the limited partnership enables the employees in question to share in the dividends and capital growth obtained from investments of the 3i group, thus rewarding them for their services and providing them with an incentive to good future performance.  The purposes of the agreement as a whole are accordingly providing a vehicle for investment by 3i group and outside investors, and providing a reward and incentive to senior staff.

[28]      If one of the employee limited partners leaves 3i’s employment, that may clearly have an adverse impact on the limited partnership, because that employee will no longer be able to take part in the management of the partnership’s investments.  Nevertheless, leaving 3i’s employment is not the criterion for denying the employee the right to participate in the growth of the partnership assets;  if for example an employee accepted a lectureship in a university, or simply retired, he would be treated as an ordinary leaver.  The criterion is rather that of a “competing leaver”, and the definition of that concept indicates in our opinion that competition with 3i is a crucial element.  It is the existence of this element of competition with 3i that is the reason for excluding the employee from future growth of the limited partnership.  Thus the purpose of the definition is to exclude employees who leave the 3i group and go to work for a competitor with that group. 


Deemed competition:  “investment product sector” and “business line”
[29]      The definition makes use of the concepts of actual competition (in the opening part of the clause) and deemed competition (in sub-paragraphs (A) and especially (B)).  We heard some debate on the reason for including deemed competition.  In our view it can be said that there are two reasons.  The first is to remove an element of uncertainty from the notion of actual competition.  The second is to reflect the way in which markets operate.  Two firms operating in what is clearly the same market (or the same market sector) may never in fact compete on a deal, but the fact that they are in the same market means that they are potential competitors, and the existence of such potential competition has an effect on the whole market.  Thus sub-paragraph (B) is aimed at the concept of competition in the manner in which it operates in real markets. 

[30]      The critical phrase used in sub-paragraph (B) is “investment product sector(s)/business line(s) (taken together)”.  It was agreed that the expression “investment product sector” is not a term of art;  Mr Rowlands stated that he was not familiar with the expression, although he understood each of the individual words..  The Lord Ordinary referred to the general meaning of the words: “sector” meant an area or portion that is distinct from others.  We agree that that is an appropriate definition of the word.  Its origins lie in the field of geometry, but it has come to denote a division or section, especially as applied to economic operations.  The expression “business line” is perhaps more general.  In a commercial context the word “line” can be taken to denote trade in or stock comprising a particular product, which may of course include a service such as investment management.  On that basis, we do not consider that the expression “business line” adds anything of significance to “investment product sector”.  If anything, “line” is the more particular word, indicating a single product rather than a range of products, as would normally be comprised in a “sector”.

[31]      For the defenders it was submitted that the phrase “business line” could be given a clear meaning in relation to 3i’s business.  Two items of evidence were cited in support.  First, the Private Placement Memorandum for the 3i Growth Capital Fund stated that 3i invests across Europe, Asia and North America “through three dedicated, specialist business lines being Growth Capital, Buyouts and Infrastructure”.  That, it was submitted, indicated that “business line” was meant to comprise the whole of 3i’s growth capital business, if that is the area in which the employee worked.  Thus any form of growth capital investment would be covered.  It appears to us, however, that this is to take the use of the expression in the Private Placement Memorandum out of context.  In that document it is used to denote the three broad areas in which 3i carried on business.  That is a concept internal to 3i.  It is not the same as the general notion of a business line used in discussing economic activity in a market.  Secondly, counsel referred to Mr Rowlands’ witness statement, which discusses the notion of a “business line” as used within 3i;  he stated that it essentially describes the way in which 3i runs its business.  Those business lines were buyouts, venture capital (which was closed and sold), infrastructure and growth capital, essentially the categories that are used in the Private Placement Memorandum.  As with the latter document, that appears to us to be a specialized, internal meaning, denoting the division of 3i’s activities.  The expression “business line” in the limited partnership agreements, by contrast, is used in the context of competition, which inevitably points to the external markets in which the 3i group operates.  That is a different context.  The expression “business line” is in our opinion flexible, and its meaning is therefore highly dependent on context.  In those circumstances we are of opinion that the internal use of the expression within 3i does not affect the analysis in the last two paragraphs.


Time at which those expressions are to be assessed
[32]      The next question is determining the time at which the notion of an investment product sector or business line, and the possible existence of competition, is to be assessed.  In our opinion this must be the date at which the employee leaves employment with the 3i group.  For the defenders it was submitted that each contract must be construed at the time at which it was concluded.  Consequently the investment product sector referred to in sub paragraph (B) must be the sector in which the manager and its associates, the 3i Group, carried on business at that time, and not at the later time when the employee left his employment.  In our opinion this construction would be contrary to commercial common sense.  The consequence would be that the effect of the restrictions on competing leavers would be a hostage to future events.  For example, 3i might change its investment activities in a major way, and an employee might subsequently leave and join a company that was clearly a competitor to 3i’s new activity, in banding and every other respect.  If the defenders are correct, the employee would not be a competing leaver, because the relevant activities of the 3i group would have been determined at the earlier date when the limited partnership agreement was concluded.  In our opinion the intention of the definition was clearly that issues of competition and the like should be determined at the time when the clause operates, not when the contract is concluded.  Anything else would render the clause arbitrary and unpredictable in its effectiveness. 

[33]      For this reason we would reject an argument presented for the defenders to the effect that 3i did not limit the financial range of its investments until it established the Capital Growth Fund in 2009.  It was said that the earlier limited partnership agreements should be construed without any reference to the limit adopted in 2009.  To do that would in our opinion fundamentally distort the operation of the agreement, in that the existence or otherwise of competition at the time when an employee left would be gauged against the activities of 3i at an earlier date.


[34]      The argument for the pursuer rests on the proposition that, in determining whether he has joined a competitor, regard must be had to banding.  This refers to the levels at which investment companies make investments.  The evidence disclosed that in the Private Placement Memorandum, described as 3i’s contract with investors, and the eligibility guide issued to investment staff in about March 2010, it was indicated that 3i’s Growth Capital Fund would make investments in a range from €25 million to €150 million.  In the case of BGF, when it was launched in May 2011 the intention was to provide growth capital funding of between £2 million and £10 million, and BGF could not take a controlling interest in a company and therefore did not fund buyouts.  Those financial limits are clearly quite distinct, as the Lord Ordinary held.  He further held that the whole thrust of the evidence, including that of Mr Dunn, was the banding was an important differentiating factor among investors;  no company operated at all levels of the market, and each published information about its investment strategy, including banding.  Interested parties would require that information to assess both risk and return, and any change in strategy would be published.  Those statements by the Lord Ordinary were based on his general findings of fact, which were not challenged.  The statements themselves were not challenged to any significant extent.  In our opinion they clearly justify the proposition that banding is an important differentiating feature in the investment market.

[35]      Perhaps the clearest indication of the importance of banding is found in the Rowlands Report itself.  That report identified a gap in the investment market in the band between £2 million and £10 million.  Following the Macmillan Report, 3i and its predecessors had provided funding for SMEs in that band, but in later years 3i had moved away from SMEs to provide funding for larger companies.  The evidence disclosed the economic advantages of doing this:  in summary, making a large investment takes broadly as much work as making a small investment, and the returns should be greater.  Regardless of the reasons, however, 3i’s documents disclosed that it would operate in the financial banding of €25 million-€150 million.  That resulted in the deficiency identified by the Rowlands panel.  The existence of that deficiency indicates very clearly in our opinion that the band between £2 million and £10 million is a different market from the band where 3i operates.  That was the fundamental reason for the recommendation that gave rise to the creation of BGF.  It is accordingly the strongest of evidence that BGF does not operate in the same market as 3i.

[36]      No doubt it can be said that the boundaries of a sector defined in terms such as £2 million-£10 million are not clear.  Nevertheless the inability to draw a precise line does not mean that no distinction exists; it is merely an indication that difficult cases may exist in the area of the boundary.  On the Lord Ordinary’s findings, this is not such a case.  The findings in fact narrated above at paragraphs [8]-[9], [11]-[13] and [16]-[17] clearly justify the conclusion that BGF and 3i operate in different markets.  Thus it cannot be said that there is competition, in any significant sense, between 3i and BGF.  The foregoing applies both to the existence of competition at a general level and to the concepts of “investment product sector” and “business line” as used in sub-paragraph (B) of the definition of competing leaver.


Actual competition
[37]      The initial part of the definition of competing leaver, in particular subparagraph (a), covers employees who leave 3i to join actual competitors.  The Lord Ordinary stated that he was satisfied that there had been no actual competition between BGF and 3i.  3i’s investments had only involved one transaction in the United Kingdom since the pursuer’s departure;  by contrast BGF had made a substantial number of investments in the United Kingdom and had considered hundreds of other potential investments.  3i had not been interested in any of these.

[38]      For the defenders it was further argued that 3i and BGF competed in obtaining funds and staff.  That submission was rejected by the Lord Ordinary, and in our opinion he was correct to do so.  So far as funds are concerned, the 3i group raises funds on ordinary financial markets, through shareholders and investors in specific funds, including those held by the limited partnerships.  BGF, by contrast, is funded by five clearing banks.  In his witness statement Mr Rowlands indicates that BGF was set up following the report of his panel, and that the company had neither the time nor the confidence to raise growth capital funds merely for the United Kingdom as there had not been a great deal of interest in the United Kingdom growth capital market, which was considered a relatively risky type of investment.  Consequently the funds were raised from clearing banks. 

[39]      As to staff, the Lord Ordinary found that 3i had been shedding rather than recruiting staff, on a considerable scale.  Consequently he rejected the contention that there was any competition in relation to staff;  a theoretical possibility existed, but such competition was unlikely.  For our part, we are doubtful whether competition in recruiting staff was within the contemplation of the definition of competing leaver.  Within the financial services industry certain skills are widely marketable;  these include the ability to pick investments, to secure the proper management of companies in which shares are held, and in due course to realize investments.  Those are the skills that the pursuer had, together no doubt with the other senior employees of 3i.  Throughout the investment industry, however, those skills are self-evidently in demand.  If, therefore, competition for staff were relevant to the notion of a competing leaver, it might be said that 3i were in competition with a very large part of the financial services industry, including companies that could not on any rational basis be described as in competition with 3i: for example a life company or investment trust that invested in publicly quoted companies and bonds.  In that event there might be a serious question about whether the restrictions in the competing leaver clause were contrary to public policy, but it is unnecessary to take that issue further.


Deemed competition
[40]      We are equally of opinion that it cannot be said that there was any deemed competition between 3i and BGF.  For the reasons already stated we consider that the different banding within which 3i and BGF operate means that it cannot be said that the latter company

“operates or is intended to operate or is likely to operate… in any… investment product sector(s)/business line(s) (taken together) in which the Manager or any of its Associates operates on… is proposing to operate within the next 12 months.”


For this purpose, the Rowlands Report’s identification of a gap in the market in the £2 million-£10 million band, the failure of 3i in its later years to fill that gap, and the creation of BGF specifically to meet the problem of funding in that area are of fundamental importance.

[41]      A specific argument presented on behalf of the defenders was that BGF could lend outwith the £2 million-£10 million band by using a range of devices.  They could, for example, participate in a consortium which collectively provided a large amount by way of growth capital.  If a company wished to raise more than £10 million it could take £10 million from BGF and the remainder from a bank or other source of finance.  Furthermore, BGF could make an investment outside the £2 million-£10 million range provided that the overall average in its portfolio was not greater than £7.5 million.  In any of those events, it was submitted, BGF could find itself in competition with 3i.  We were not, however, referred to any evidence that said transactions actually took place, or even that they had been considered by BGF as a practical possibility.  Furthermore the reasons for setting up BGF were to provide funding within a specific banding, to achieve the public purposes that had been identified in the Rowlands Report.  Against that background, we consider that it should not be presumed, without actual evidence, that BGF would disregard or circumvent the very reasons for its existence.

[42]      Counsel for the defenders submitted that the concepts of actual and deemed competition found in the definition of a competing leaver in the limited partnership agreements should be given a wide construction.  A wide definition would discourage members of a limited partnership from going off to find other work.  That was in the partnership’s interests, because if one partner left the work required to be done by those remaining and the partnership would have lost the expertise of the departing partner.  It was also encouraging for investors to have the prospect of continuity.  That is no doubt true so far as it goes.  Nevertheless, as we have already observed, it is not in every case where an employee/limited partner leaves the partnership that the competing leaver provisions will come into operation.  Those provisions rely on the concept of competition.  Competition is a well understood economic concept.  Enterprises are in competition if they look for business within the same market, the market in large measure being defined by the concept of cross‑elasticity of demand.  That in our opinion was the concept of competition that is contemplated by the competing leaver provisions.  Whether 3i and any other company, including BGF, operate in the same market is a question of fact.  We can see no advantage in seeking to give the concept of competition a larger scope than it would normally bear.

[43]      Yet a further submission for the defenders was that the Lord Ordinary had construed the limited partnership agreements as if they were restrictive covenants in a contract of employment between the pursuer and the defenders;  he had failed to have regard to the fact that seven limited partnerships were involved, in each of which several 3i employees were partners.  On that basis it was submitted that the notion of an excessive or disproportionate burden on the pursuer was irrelevant.  We cannot agree with this submission.  The Lord Ordinary plainly construed the limited partnership agreements as they were.  The notion of an excessive or disproportionate burden, used in Grove Investments, is of general application to commercial contracts.  The fundamental point is that a contract is a cooperative enterprise intended to provide mutual benefits.  For that reason a contract should be construed in such a way that the benefits that may objectively be expected from the contract accrue to both parties and, correspondingly, that one party is not subjected to an excessive or disproportionate burden.

[44]      Finally, the defenders placed some reliance on the decision of Lord Glennie in Greck v Henderson Asia Pacific Equity Partners (FP) LP, [2008] CSOH 2, where it was concluded that a provision similar to the dealing provisions in the present limited partnership agreements had been included to avoid the uncertainty of knowing whether the business that the employee was joining was or was not a competitor.  The clause in that case was construed in such a way that the pursuer, the employee, was held to be a “Bad Leaver”, the equivalent of a competing leaver in the present case.  Nevertheless, that clause was in different terms from the present clause.  It provided that a leaver should be deemed to have joined a competitor if the competitor’s business included making, dealing in, managing or advising as to unquoted equity investments whether for its own account or otherwise.  That definition was accordingly focused on specific and widely drafted investment activities; the present clause, by contrast, relies on notions of actual and deemed competition by reference to the activities of 3i.  That appears to us to be a fundamental difference.


[45]      For the foregoing reasons we are of opinion that the Lord Ordinary reached the correct conclusion for the correct reasons.  We will accordingly refuse the reclaiming motion and remit to the Lord Ordinary to proceed as accords;  the quantification of the pursuer’s claim remains in issue.