Aberdeen v Hermes: New claim offers insights

In the usual way for private asset investments, the LP investor, acting in this case via Aberdeen City Council, adhered to a Limited Partnership Agreement (or LPA) which cross refers to a Private Placement Memorandum (or PPM). Under English law, limited partnerships act via their general partner, here the first defendant (the GP), rather than in their own name, with the result that the core constitutional document of the underlying fund consists of a contract between the GP (with responsibility for the management of the fund) and the investors in the fund (each being limited partners). Accordingly, there is a direct contractual nexus as partners between the GP and each LP in the form of the LPA.

Under a LPA a GP will generally make various contractual commitments to the limited partners, breach of which will, if such breach causes loss, give raise to the potential for a damages claim in contract potentially actionable by each LP.

In the NESPF case, the contractual obligations which it is asserted the GP breached are (i) an obligation to ensure that the Manager devoted as much of its time and attention, and deployed such experienced staff as was reasonably required for, the proper management, operation and administration of the Fund¹, and (ii) an obligation to procure that the Manager (appointed by the GP on behalf of the Fund) operated and managed the Fund in accordance with the LPA and the applicable investment management agreement (or IMA)².

In the author's experience, contractual obligations on a GP to procure Manager adherence to the LPA and IMA are not usual. More usual is a lesser obligation of a supervisory nature. Even so, it will be seen that the claim against the GP depends on findings of failures by the Manager. If the failings by the Manager are made out, then the Court would need to deal with the alleged "inference" of breach by the GP. However, if the Manager is not in breach, then the claims against the GP would almost certainly fall away. Against the GP, what NESPF seeks is its share of the Fund's losses (38.1%) alleged to have been caused by the GP's alleged breaches. If NESPF has such a claim, then other LPs may also.

<sup>1. Particulars of Claim para 17.1
2. Particulars of Claim para 17.2</sup>

While NESPF has a contractual nexus as LP to the GP, and so the ability to bring a claim in contract versus the GP, the main complaints as to failings in the case concern alleged failings of the Manager. NESPF’s difficulty, however, is that while the Fund, acting via the GP, is party to a contract with the Manager (the IMA), the LPs are not, such that the Manager does not owe the individual LPs direct contractual duties. It is for that reason that the claim makes clear that the claim against the Manager (but not the GP) is brought “derivatively”¹.

What that means is that NESPF is seeking to bring the claim against the Manager on behalf of the Fund as a whole, such that if the claim were to be both permitted to be brought, and successful, the damages ordered would be payable to the Fund, and NESPF would benefit, also derivatively, by reason of that payment, along with the other LPs².

Derivative claims under English law are only permitted to be brought in "special circumstances" and as an exception to the general rule in the case of a limited partnership that a partnership claim can normally only be brought by the partnership itself acting via its general partner³. So, NESPF's claim can be thought of as having two parts; one against the GP for failing to take action against the Manager (which is what is said to give rise to "special circumstances⁴"), and then the Fund's claim versus the Manager which NESPF maintains the GP ought to have brought.

The expectation is that, when the Defence is filed, it may well assert that the "special circumstances" test (which has a number of limbs) has not been met. That would be expected to be an argument made by the GP on behalf of the Fund. That could give rise to an early hearing which can essentially be viewed as a permission, or preliminary issue, hearing to determine whether or not NESPF can satisfy the Court that this is one of the rare occasions in which a limited partner should be permitted, as an exception to the general rule, to pursue a claim on behalf of the Fund as a whole and in the interests of all LPs.

In Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson PFI Secondary Fund II LP & Others⁵ a group of 22 limited partner investors satisfied the Court that "special circumstances" did exist in that case because i) the GP in that case would not institute proceedings itself against the manager (the GP being, as is common in a fund context, a manager owned entity), and ii) because removing the GP (a remedy available to LPs by vote) was commercially unattractive and would damage the interests of the fund⁶.

<sup>1. Particulars of Claim paras 9, 27, 84 and 85.
2. There are a number of other LP investors in the Fund and many of them are other local authority pension funds. None of the others have joined the claim, though the derivative claim is effectively asserted on behalf of all the LPs.
3. For companies, the Companies Act 2006 introduced new procedures where a shareholder member of a company wishes to bring an action on behalf of the company and avoid the usual rule that where a company suffers loss, only the company can sue for that loss, not a member shareholder looking to make good a diminution in the value of its shareholding (being merely a reflection of the company’s loss). Limited Partnerships are not caught by the Companies Act 2006 procedures, to which common law principles on derivative actions still apply.
4. NESPF’s case on “special circumstances” is set out in para 85 of its Particulars of Claim.
5. [2012] EWHC 3259.
6. It is likely for this reason that we see pleaded in para 85 of the Particulars of Claim the relationship between the GP and Manager and that the GP cannot be expected or trusted to prosecute the Fund’s claims with care and rigour, and that the possibly of removing the GP (and replacing the GP with a general partner who would sure the Manager) cannot be viewed as an adequate alternative remedy.</sup>

What the Henderson case also confirms, is that where an LP pursues a derivative action in the limited partnership's name, supplanting the GP, and so managing a partnership asset (being the claim), that constitutes "management" under the Limited Partnership Act 1907, such that the LPs taking that action on behalf of the fund would, if they proceeded, be liable as if they were the GP for the period of the claim, and would lose the benefit of limited liability protection (to the value of their capital contribution). In the Henderson case it is thought that second part of the Court's ruling was sufficient to dissuade the LPs in that case from pursuing a derivative claim they would otherwise have had Court permission to pursue.

While it is the author's experience that LP investors can and do miss the potential consequences for their own potential liability were they to follow through on the claims they threaten, it seems unlikely NESPF can have got to the point of actually issuing proceedings without such an appreciation. Possibly NESPF may be reconciled to the consequences. However, for a pension fund insisting its investment appetite was conservative to then take on unlimited liability risk in respect of a fund with at least one troubled long-term investment, that may seem surprising. Possibly NESPF have some basis upon which they will seek to avoid the liability jeopardy apparent from Henderson. If they fail, however, the actions they have taken may mean such jeopardy has already been realised.

In any event it would seem likely that in the context of any permission hearing, the GP would (possibly supported by a counterclaim for a declaration as to loss of limited liability protection) seek the reverse direction to that sought by the LPs, but refused, in the Henderson case¹.

^{1. In the Henderson case, the 22 (out of 27) LP investors sought a declaration from the Court that should they proceed with the claim they would not lose their limited liability protection. That declaration was refused, and the Court spelled out the jeopardy the 22 LPs would take on should they determine to proceed as the Court had indicated they had permission to do. NESPF has not sought such a declaration.}

The test the Manager was required to meet as set out in the NESPF’s claim is unlikely to prove controversial. More controversial will be its application in practice, and the role of hindsight.

The Manager is said to have held itself out as being an infrastructure specialist manager with a dedicated and experienced infrastructure team and previous windfarm investment experience. NESPF's case is that the Manager should then be judged by the standard of care and skill of a reasonably competent investment manager with such expertise and experience. That is put in terms of an implied term in the IMA in the absence of express provision. In other IMAs an express provision, typically in broadly similar terms, is sometimes included. The test, whether express or implied, tends to mirror the tortious duty of care which would typically underpin a negligence claim. In the NESPF claim, the mismanagement claim in the Particulars of Claim appears to be put solely in contractual negligence, not tort.

The approach taken is, in summary, as follows:

• To identify the risks that in the event materialised based on what are alleged to have been facts and matters that should have been known to a Competent Manager
• To allege that such risks, whether by reason of knowledge, experience or due diligence, were risks on which a Competent Manager would have carried out or commissioned robust sensitivity analysis based on different electricity price scenarios and different factual scenarios within a financial model
• To infer that was not done on the basis that, had it been, no Competent Manager would have proceeded with the investment, and on the basis of inference from statements the Manager made to investors during the period 2019 and 2022, and / or
• Alternatively to infer that no Competent Manager would have proceeded without putting in place better risk mitigation measures.

Within what is alleged, is a sub-claim that a Competent Manager should and would have included in its modelling, scenarios in which electricity prices "deviated significantly from historical performance"¹, and also have combined those scenarios with a range of what are said to be realistic risks (from nuclear outages, increases in fossil fuel prices, electricity price shocks in neighbouring countries and, so the types of risk as are typically disclosed as Risk factors in PPMs), and including such risks being realised in combination.

Of course, standing at a point in time (said to be the first half of 2019) and projecting forward for future risks using financial models based on then available data and degrees of statistical likelihood, may identify "statistically remote" circumstances that do subsequently transpire. The degree of remoteness acceptable to a manager will likely vary with the product, judgement and experience and may also be influenced by other actual or intended investments in the fund portfolio; so a risk with one asset may be offset by compensating exposures elsewhere within the portfolio (whether actual or intended); that being one of the reasons for holding a portfolio diversified across multiple assets.

English law recognises that there is not normally liability for reasonable errors of judgement, and it makes allowance for difficulties in circumstances in which judgements are made; the test is not one of what a Competent Manager would have done with the benefit of hindsight, or of whether, with the benefit of hindsight, it can be seen that a number of Competent Managers all made the same or similar mistakes. Legally speaking being in good company with other Competent Managers (even if hindsight reveals they all made the same or a similar mistake), is generally an indicator that the Competent Manager test was not breached at the time the decision (stripped of hindsight) was made. Nor will it be enough for NESPF to show that there were Competent Managers who did appreciate precisely the risk that materialised and who avoided similar investments because of that risk; so, producing an expert who says "I would not have made this decision for X, Y and Z reasons", is not enough.

NESPF does not say different; its case is that the Ventus Portfolio investment in 2019 was “an investment which no competent infrastructure investment manager would have made, whether as a Core Portfolio investment or at all.” For NESPF, that presents the challenge that if, at the time, other Competent Managers were competing for / bidding for this investment opportunity, or making sufficiently similar ones, or if competent infrastructure finance providers were conducting due diligence on financing such investments and approving them, then that will form part of the evidential framework in which the Court makes its assessment; hindsight should (to the extent ever practicable) be excluded.

An imbalance in the case, and typical of situations where the possibility of such claims are contemplated, will be that of the imbalance in access to information and documentation. The LP investor will have the PPM setting out the Manager's investment process including, for example, its approach to the identification and mitigation of risk. Whereas the GP and Manager will have the detail in the form of the financial models in fact used, the assumptions underpinning them as well as, very possibly, investor reactions and thoughts to the investment at the time it was made. From our own experience with energy and energy transition assets (and the loans financing them), the investment process will normally include financial modelling with parameters, for example, for future energy prices within bands of expected statistical likelihood. During the energy crisis prices will almost certainly have moved to the remote likelihood extremes of models prepared not long previously. That crisis led, in many jurisdictions, to government interventions.

NESPF's case is not, however, that the Manager ought to have anticipated Covid-19 and/or the invasion of Ukraine. Rather it is that the Manager ought to have recognised that the baseload PPA model for windfarms in the relevant region of Sweden had an inbuilt vulnerability which, no matter how unlikely the events that in fact subsequently exposed that vulnerability were, ought to have precluded the investment in the first place as unsuitable for the Fund (and certainly its Core Portfolio), such that the remoteness of likelihood of Covid-19 and the invasion of Ukraine cannot properly be considered an excuse or justification.

^{1. Particulars of Claim para 60}

The Fund had a 20-year term, the project life for the Ventus Portfolio was, as the Particulars of Claim detail, 25 to 30 years. NESPF remains a limited partner investor and may well remain one for the remainder of the Fund term, longer if that term is extended.

The claim was issued in August 2025 in respect of an investment first made in August 2019, 6 years previously. While the valuation of the Ventus Portfolio had fallen significantly as at end September 2025, it had not been sold and there had been no crystallisation event. Presumably based on future management and events the current value could go up or down, or indeed both (and possibly multiple times). The Particulars of Claim are silent on the performance of the remainder of the Fund. Potentially on the basis of the claim as framed, the remainder of the Fund portfolio, even on an end September 2025 valuation basis, may compensate in part or whole for the 30 September 2025 paper loss. Even if that is not the case, then over the remainder of the term of the Fund, the potential presumably remains for any overall loss on the Ventus Portfolio to be compensated for elsewhere in the portfolio and over time (so 2037, possibly longer). Presumably NESPF's answer to those points will be that it has lost confidence that will ever be the case and seeks compensation now, either from the Manager for the benefit of the Fund as whole, or from the GP for the benefit of NESPF. At least in theory the Fund might then hold both the damages and the Ventus Portfolio. An argument can be anticipated that NESPF and the Fund should wait and see what happens, and whether a loss, and if so, what loss, ultimately eventuates.

One difficulty with that is legal: claims for breach of duty need to be brought within a defined limitation period, and if they are not, the claimant may be too late. The coincidence of the claim being issued the day before the six-year anniversary of the first investment suggests that may well have been a factor here¹. That would in theory have been a matter capable of being addressed contractually in the form of a standstill agreement (effectively a contractual agreement to suspend the operation of limitation periods).

Another dynamic in a continuing partnership is fees and carry. At the threat stage, leverage for a discussion on fees/carry may well be part of the equation.

^{1. Although the LPA is a deed, meaning the limitation period would be 12 years for contractual breach, at the time the Claim Form was issued the claim was expressed in negligence, to which a 6 year limitation period would normally apply.}

The private asset industry in the UK is in the midst of a regulatory review of its approach to the management of conflicts of interest. It is the conflict of interest which NESPF asserts the GP has when considering whether the Fund has a valid claim against the Manager (both being part of the same group) that is the basis for asserting its entitlement to bring a derivative claim.

In the UK, the threat of a derivative action tends not to result in an outbreak of multiple representations by multiple counsel, but the potential conflict of interest needs to be recognised and managed, normally with guidance from Fund counsel. It can also be a useful exercise to identify within the particular structure where independent, or more independent, voices and perspectives may be. They may have a useful role to play. Also, the LPAC / Advisory Board may, as defined by the LPA, have a role to play.

There may also be the potential for conflicts on the investor side. Pension funds in particular tend to operate and make investment decisions through intermediaries, and when an investment has turned sour in valuation terms, the dynamic between the intermediary who advised on the investment and the fund is a potential driver of disputes escalating into proceedings. Another potential factor when dealing with long-term assets can be changes in key personnel. Understanding such dynamics, on both sides, may be an important part of finding a way forward.

LP fund structures typically have a structure whereby, whatever limitations on liability have been agreed in the LPA, dovetail with the indemities the fund typically provides. What that tends to mean is that, so long as that liability threshold is not crossed, key service providers to the fund, including the GP and the manager, will benefit from indemnities from the fund.

When a claim is threatened against a GP or manager, that indemnity provision will be potentially engaged. The manager in a threatened claim scenario may be slow to call upon the indemnity, and quicker to notify insurers, the usual sequence being to look to insurance first. However, in the context of a threatened derivative action in particular, a reality is that an unsuccessful derivative action against the manager (i.e., one which the manager is successful in defending) may entitle the manager to full indemnification for its costs and expenses (and possibly also the GP) at the expense of the fund. That possibility may be a factor for the Court when deciding whether to give permission for a derivative action. If the LP pursuing the derivative action is permitted to do so, but is unsuccessful, the indemnity arrangements may well have the consequence (subject to the extent of insurance cover) of inflicting costs and expenses indirectly onto fellow LPs.

In the NESPF case, the limitation of liability position (and possibly also the indemnity position) can be expected to feature (even if in a low-key way) in the defence phase. Whether for LP investors considering a potential claim, or GPs / managers facing one, understanding the position can be important. It may also be relevant to the permission phase of the Court process.

As against the Manager, the starting point for NESPF's claim on behalf of the Fund is the difference between the aggregate contributions made by the Fund to the Ventus Portfolio (being £104.2m) and the current value (put at £17m as of 30 September 2025). Both figures will be subject to update if and as the case proceeds.

To that NESPF have added the asserted loss of return the Fund would have made on the same £104.2m had the Manager not invested in the Ventus Portfolio, but in one or more assets that met the Core Portfolio criteria. The best estimate put on that figure is 7.5% to 10% per, a figure which coincides with the gross IRR of the Core Portfolio investments specified in the PPM. That additional level of damages is sought on a compounded annually basis. The Particulars of Claim do not reference the performance to date of the Core Portfolio (excluding the Ventus Portfolio).