“clause and effect” – contract issues in employment law

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  1. The bonus claim is now a staple of employment litigation. Where once bonuses were a relatively small percentage of overall remuneration packages and/or expressed and understood to be payments made at the inviolable discretion of the employer, bonuses may now be worth many times the value of base salary and there is a well-established judicial inclination to regard employers as bound to exercise their discretion in favour of payment. With such large sums at stake and the existence of commercially sophisticated, well-resourced claimants, it is no surprise that bonus litigation is so prevalent. Also, since such litigation is generally “all or nothing”, settlement may be harder to achieve than in cases where quantum is more uncertain.

  1. Yet if bankers and their bonuses are viewed by the public with the sort of affection generally reserved for Ashley Cole and Heather Mills, the courts have proved insulated from such concerns and have continued to rule in favour of claimants in many bonus cases. If there is little natural sympathy for rich individuals seeking to get richer at times of economic hardship, there is even less judicial sympathy for employers who use the language of discretion to avoid paying bonuses which they have led their employees to expect will be paid. As Jacob LJ put it in Khatri (see below) in awarding summary judgment for the claimant:

“I reach this conclusion with no regret. If banks decide to reward their employees by means of purely discretionary bonuses then they should say so openly and not seek to dress up such a bonus with the language of entitlement qualified by a slight phrase which does not make it absolutely clear that there is in fact no entitlement at all. If you are to give with one hand and take away with the other, you must make that clear.”

  1. This paper does not identify trends in bonus claims, save, perhaps, the overarching trend that the courts are increasingly receptive to claimants’ arguments that they have some form of entitlement under apparently broad discretionary bonus clauses. Indeed, in only one of the cases analysed in this paper has an attempt to claim a pure bonus payment failed completely. But the cases turn on their own facts, or their own contracts, to such a great extent that any attempt to draw wider lessons should be undertaken with caution.

  1. It is for that reason that this paper addresses recent cases in their chronological order rather than trying to separate them according to their themes.

Small and others v. Boots Co [2009] IRLR 328 (EAT – Slade J)

  1. It is slightly odd to start the case analysis with reference to a case which is unusual for two particular reasons: first, it was an ET claim; second, the claimants were warehousemen who could not have been further removed from the financial services industry.

  1. Cs were warehousemen employed by Boots until their undertakings were transferred to Unipart in 2005. They were re-transferred to Boots in 2007. At Boots, they had always enjoyed performance-related bonuses. (Evidence was led that such bonuses had been paid in all but 2 years since 1967.) Prior to transfer, Unipart had declared their commitment to providing a similar scheme, but that did not occur, and the Cs were not paid performance bonuses whilst employed there. Upon their re-transfer to Boots they brought claims for their bonuses in 2005-2007.

  1. The ET dismissed the claims. In particular, the judge held:

    1. in the original contracts with Boots, there was no contractual entitlement to a performance-related bonus, and that the contractual and other documentation made clear that the payment of any bonus was “discretionary”;

    1. the parties’ course of dealing was only relevant to whether the discretionary bonuses were given contractual force by a variation (which he found was not the case);

    1. Unipart’s assurances in relation to the scheme that they would implement were insufficient to give rise to an independent contractual commitment to make such payments to the Cs (this argument was being run in case the primary contention, that there was a contractual entitlement to performance-related bonus, failed).

  1. The EAT held that the ET had erred by determining the question of whether Cs had any contractual entitlement to a bonus by simply regarding the use of the word “discretionary” as determinative. The ET had failed to recognise that the extent of the employer’s discretion in relation to a bonus scheme is relevant to the determination of whether and to what extent the scheme has contractual content. So, the use of the term “discretionary” in a bonus scheme may be attached to the decision whether to pay a bonus at all, its calculation, when it should be paid, or other factors. Merely use of the word “discretionary” does not mean that a bonus scheme is non-contractual.

  1. As to the course of dealing, the EAT held that the ET had been wrong to disregard what it described as “the invariable practice of making payments over many years” in deciding whether the discretion to pay bonuses was to be construed as having contractual effect.

  1. Accordingly, the case was remitted to the ET for the question of contractual entitlement to be reconsidered.

  1. It is not difficult to see the force of the EAT’s observations in relation to the course of dealing. But the force of the ET’s analysis of the contractual documentation should not be underestimated. Perhaps the ET should not have been quite so dismissive of the Cs’ arguments, but given that the terms and conditions (to take but one document) stated that “After a qualifying period of service, there are additional discretionary benefits, such as bonuses….However, they are not intended to be contractual”, one wonders what a contract would have to say in order for a bonus to be truly discretionary.

  1. There are two other points of some significance in the case:

    1. the EAT left undisturbed the ET’s findings that Unipart’s statement during the pre-transfer consultation period that it was “committed to providing a scheme for staff” did not create a contractual promise. Whilst this case is different from that of Attrill (see below), it is instructive that in that case, the Court of Appeal had no difficulty in regarding an employer’s unilateral announcement of its intention vis-à-vis the size of a bonus pool as creating contractual entitlements;

    1. the EAT addressed the question of jurisdiction; it confirmed that the ET would only enjoy jurisdiction for a claim for unlawful deductions from wages if the Cs could show that they were entitled to a quantified bonus; in the context of this case, it became common ground that if, under the transfer provisions, Unipart’s obligation was merely to provide a “substantially equivalent scheme”, then the amount of Cs’ entitlement (if any) would be unquantified and would not fall within the jurisdiction of the ET under ERA, s.23.

Fish and another v. Dresdner Kleinwort Ltd [2009] IRLR 1035 (QBD, Jack J.)

  1. This case is the first of two arising out of Dresdner’s promises of bonuses to staff in its investment banking division in mid-2008, just before the banking crisis. It was a transparent attempt by the defendant to plead its own poverty/the general injustice of bankers getting rich as a basis for avoiding its contractual obligations.

  1. A brief chronology is as follows:

    1. in the first part of 2008, an agreement was reached for Commerzbank AG to purchase Dresdner Bank from Allianz SE;

    1. following the development of concerns that key employees would leave Dresdner, a bonus pool of €400m was announced to employees in June 2008 as a means of ensuring employee loyalty;

    1. on 18 August 2008, Dresdner sent each C a letter informing them what their precise bonus would be for 2008; the combined bonuses of the 4 Cs was €8.35m;

    1. following the global downturn, the 4 Cs were told on 18 November 2008 that they would be made redundant; each signed a termination agreement which provided, amongst other things, for payment of the bonuses which had been notified in the letters of 18 August; there were a number of unremarkable conditions attached to the payment, mostly consisting of being available for work if required;

    1. the termination date was 3 months from Commerzbank acquiring Dresdner on 12 January 2009;

    1. following the purchase, Commerzbank better appreciated Dresdner’s disastrous financial position and determined that all 2008 bonuses should be vastly reduced, even where they were being paid to soon-to-be-ex-employees. Accordingly, Commerzbank refused to pay the bonuses as part of the severance payments.

  1. The defence, according to the judgment at para.23, was as follows:

“It is said that Dresdner Bank AG and Dresdner Kleinwort (its investment banking division) suffered the financial disaster which I have outlined at a time when the claimants were members or acted as members of the executive committee responsible for its management and that the [banking] disaster was not appreciated when the payments were agreed. It is said that in these circumstances it is the duty of the claimants to give up what would otherwise be their rights. The primary issue on these applications for summary judgment is whether that defence has any foundation in law.”

  1. The claimants applied for summary judgment. The defendants argued that the claimants, either by reference to their employment, or by virtue of being fiduciaries, had an obligation to act at all time in the best interests of Dresdner; and that it was in the best interests of Dresdner that these individuals should give up their bargains, regardless of their own interests. It was not alleged that the Cs had caused the financial disaster or that they had in any way acted in breach of contract themselves.

  1. Entirely unsurprisingly, the Court gave short shrift to Dresdner’s arguments: even assuming that the duty to act in the best interests did exist in the manner formulated by the bank, that implied duty could not be used to cut down the whole benefit of a contract freely and properly entered into between the employer and the employee.

GX Networks Ltd v. Greenland [2010] IRLR 991 (CA)

  1. This case is the first of two CA cases heard in the space of a fortnight in April 2010 in which employers who sought to rely on contractual clauses apparently granting wide-ranging discretion in terms of payment of bonus and commission discovered that the Court was employee-friendly in circumstances where the employees had been treated shoddily.

  1. C was a sales account manager for the installation of broadband hardware. Her contract provided for salary and two types of commission: first, “performance commission” was to be paid on the achievement of a target, and could be up to 100% of the basic salary; second, “overperformance commission” was payable on new business which exceeded the employee’s target and was three times the performance commission. Targets were set by negotiation and it was common ground that these could be adjusted upwards or downwards by the employer at the end of each quarter. The “overperformance commission” could be capped, according to a clause which provided as follows:

“The sales director has the discretion to cap an individual’s Q4 bonus at 100% if required although such cases will be by exception only and require HR and Finance agreement.”

  1. In 2007, C’s salary was £37,980. After negotiation, her sales target was adjusted upwards to £450,000. D later suggested that this was the result of C’s inept forecast, but it appears that C was not inept in her primary job, as her sales revenue was greater than £1.3m. This entitled her to overperformance commission of £163,503.

  1. This sum was far greater than the employer had contemplated a sales manager might possibly earn and it considered ways to reduce C’s payment:

    1. It was common ground that D could have adjusted the target upwards, so reducing the overpayment commission. Whether it could have done so to entirely eliminate payment of the overpayment bonus is a moot point – the Court would surely have imposed some fetters on the employer’s ex post facto ability to adjust the target upwards. But D deliberately decided not to adopt this course because it feared that it would be demotivating to C.

    1. Instead, D decided to cap her commission at 130%, meaning that C would get some overperformance commission but not as much as £163, 350. It relied on the clause cited at para.19 above.

  1. The question in issue was whether and when D was entitled to cap C’s commission under the “by exception” clause. The judge at first instance found that the discretion to cap was actually unfettered, but went on to find for C on the basis that the discretion had not been exercised reasonably.

  1. The CA affirmed the original decision on different grounds. It held that the “by exception” clause did not introduce an unfettered discretion: if the employer had an unfettered discretion to remove or reduce the overperformance commission, that would completely undermine a major plank of the agreement between the employer and employee – it would simply be a discretionary bonus scheme. On the contrary, the “by exception” caveat would be strictly construed: it must mean “in exceptional circumstances”.

  1. The Court proceeded to determine for itself whether exceptional circumstances existed in this case. The only factor that could possibly be described as exceptional was the fact that C had achieved unusually good sales in late 2007. Since the scheme was designed to encourage and reward effort and success, it could not be said that an unusual degree of success should be treated as an exceptional circumstance justifying capping the very award that was being offered. Accordingly, there were no exceptional circumstances justifying the exercise of the power.

  1. Smith LJ observed that the capping clause was poorly drafted and indicated that, but for some concessions as to its meaning made on behalf of C1, she would have held either:

    1. that the clause was void for uncertainty; or

    1. that it was intended only to eliminate overperformance commission in certain exceptional circumstances e.g. where there had been serious misconduct by the employee or where the employer was in dire financial straits.

Khatri v. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715 (CA)

  1. C was a proprietary derivatives trader who, following a very successful 2007, was dissatisfied with his discretionary bonus. As a result, he renegotiated the terms of his contract so that he had two bonuses:

    1. a “Guaranteed Bonus” of £50,000 payable if C remained in employment on 31 March 2009 and refundable if C voluntarily resigned or was dismissed for cause within the next 12 months;

    1. a “Performance-Related Bonus”; this was “subject to your individual revenue generation” and was followed by a contractual table setting out a formula for calculating the performance-related bonus in relation to that revenue. It stated: “the above table is applicable to your 2008 bonus. The bank maintains the right to review or remove this formula-linked bonus arrangement at any time” [emphasis added].

  1. In mid-July 2008, C was told that he might be made redundant, but this was followed by a letter stating that he was not redundant and a new role had been found for him working as a trader in Global Financial Markets. On 24 July 2008, he received a further letter setting out new terms and conditions which retained the Guaranteed Bonus but converted the Performance-Related Bonus into a discretionary bonus; he was also made subject to restrictive covenants. C was asked to sign the letter to signify his acceptance, but he did not do so and was not chased for it. Also, apart from reporting to a new manager, C continued to perform exactly the same job as before.

  1. The difficult trading environment had improved significantly by October 2008 and C made it clear that he did not accept that the 24 July 2008 letter was effective to deprive him of his Performance-Related Bonus. He was made redundant in January 2009 and the bank refused to pay him that bonus. C applied for summary judgment in respect of that bonus which he had calculated as being in the value of €1.6m. The High Court refused the application for summary judgment, and he appealed.

  1. Continuing to resist summary judgment, the bank argued as follows:

    1. that the Performance-Related Bonus was not a guaranteed bonus at all, unlike the “Guaranteed Bonus”; the Court held that the headings describing the two bonuses were not drawing a contrast between a bonus to which C was entitled and one which was essentially discretionary; the contrast revealed nothing about whether the Performance-Related Bonus was “guaranteed” in the sense of being made a definite entitlement;

    1. the clause provided that the bank could review or remove the formula “at any time”, which was what the bank had done. The Court held that this did not confer an open-ended discretion on the bank to change the bonus provisions as it wished. Instead, bearing in mind the factual matrix, it made better sense to read the clause as a whole as saying “this bonus formula applies for this year, but it may be changed in future”. Thus construed, the formula applied for the 2008 year. It is easy to see why the court reached the conclusion that it did – plainly, D’s treatment of C left much to be desired. But it is not easy to see why the court strove to give “at any time” a meaning that is, in my respectful view, quite unnatural. According to the CA, “at any time” (in that particular contract) means “any time but now or in the next 12 months”.

    1. The bank also contended that C had consented to a variation by continuing to work after the 24 July letter, or that it was arguable that he had done so. But the Court observed that C had not signed the letter as he had been requested to do, that he had not been chased to do so, and that he had continued to work in precisely the same role as he had worked in prior to 24 July. Applying the test developed by Elias J in Solectron Scotland v. Roper [2004] IRLR 4, the Court asked whether “the employee’s conduct, by continuing to work, [was] only referable to his having accepted the new terms imposed by the employer?”. In this case, it would be “quite wrong” to infer from all of the circumstances that C had accepted changes to his contract (especially since those changes were all to his disadvantage).

  1. Accordingly, summary judgment was granted in favour of C. The reader is invited to consider Lord Justice Jacob’s trenchant remarks at para.39 of the judgment, cited above at para.2. If there is one lesson that can be drawn from the current round of bonus litigation, this is it: banks and other employers should not try to be too clever with their contractual drafting – if a bonus is intended to be truly discretionary, then the employer must say so.

Rutherford_v._Seymour_Pierce_Ltd_[2010]_IRLR_606_(QBD_–_Coulson_J)'>Rutherford v. Seymour Pierce Ltd [2010] IRLR 606 (QBD – Coulson J)

  1. This case turns on a short point: where there is a discretionary bonus clause and the employee leaves his employment prior to the payment date is there an implied term (at least in City cases) to the effect that in order to be entitled to be considered for an award, the eligible employee has to be employed by and/or not under notice of termination as at the date of payment?

  1. Here, C was summarily dismissed on ostensible grounds of poor performance on 28 November 2007, although in ET proceedings, D conceded that the dismissal was unfair for procedural reasons (C should have been given notice). Had C remained in employment, his bonus would have been paid in December 2007.

  1. Here, the Court held that there was no basis for implication of the term into the contract: it was not necessary in order for the contract to operate satisfactorily. Interestingly, given the later judgment of the Court of Appeal in Locke, it was held that the clause would have been “manifestly unreasonable” because it would allow D the unfettered right to sack an employee the day before the bonus was distributed, solely in order to avoid paying that bonus, which “could not be right”.

  1. As to the suggestion that the clause “went without saying”, which was apparently a separate argument relied upon by D, it was held that the very fact that it was expressly included in contracts entered into by newer employees of D was excellent evidence that it did not go without saying.

  1. Finally, no expert evidence was called as to the practice in the City of London generally, and certainly there was no evidence before the Court to support the argument that it was “notorious, invariable or certain”. At its highest, the term was a mere trade custom.

  1. This was a claim for damages and because D had not considered C for a bonus at all in circumstances where, the court found, he was entitled to one, the court’s task is: to assess, without unrealistic assumptions, what position the employee would have been in had the employer performed its obligations. This requires the court to put itself in the position of the employer, but to exercise its otherwise unfettered discretion reasonably; accordingly, the court must not assume that the discretion would have been exercised so as to give the least possible benefit to a claimant if such an assumption is unrealistic on the facts.2

  1. In this case (which actually concerned a quarterly bonus), C’s predecessor had received £75,000 for that quarterly bonus in 2005 and 2006. C, who had previously been in a more junior role, had received £50,000 in those two years. The Court held that he should be awarded £70,000, taking into account a drop in commission earnings by C’s team over the relevant period.

Locke v. Candy & Candy Ltd [2011] IRLR 163 (CA)

  1. This is a rare example of a recent bonus case in which a legal doubt was resolved in favour of the employer, although the margins were fine, as the Court of Appeal dismissed C’s appeal from the Master’s decision to strike out his claim by a 2-1 majority.

  1. Strictly speaking, this is not a bonus case at all, but a case about the level of a payment in lieu of notice (‘PILON’), but the claim was pleaded as a claim for a bonus and it is appropriate to deal with it here in that context.

  1. C’s employment began on 17 September 2007. Under clause 4.2 of his contract of employment, he was eligible for a discretionary annual bonus. The clause also provided for a guaranteed bonus of £40,000 after 6 months’ employment and a further guaranteed bonus of £160,000 after 12 months’ employment. The last sentence of cl.4.2 stated:

“You must be employed by the company in order to receive the bonus.”

  1. The contract provided for 6 months’ notice of termination after the first 6 months’ employment. Clause 7.5 provided that “The company reserves the right to make a payment in lieu of notice”. The clause did not set out the measure of the PILON.

  1. In the face of economic difficulties, D tried to renegotiate the contract but C was unreceptive. On 8 September 2008, D summarily dismissed C and stated that it would pay him 6 months’ salary by monthly instalments as a PILON under cl.7.5. It is important to note that this obviously a deliberate ploy to keep C from his bonus.

  1. C claimed for his unpaid bonus. He contended that in the absence of further definition of PILON, that clause should be regarded as entitling D to dismiss summarily but only upon payment of all sums that would have been paid to C had he received notice i.e. salary + guaranteed bonus.

  1. D accepted that in the absence of further definition, the PILON would indeed entitle C to payment of all sums that would have been received by him in his notice period. But it was open to the parties to agree to the PILON being more or less than that sum. In this case, D argued that the effect of the last sentence of cl.4.2 was to regulate the PILON so that the guaranteed bonus was not payable if C was not employed i.e. the PILON should be restricted to salary.

  1. Jackson LJ, dissenting, noted that it would be unjust if C was deprived of the expected fruits of his labour. He held that it would be odd if the last few words of cl.4.2 regulated the PILON in cl.7.5. This is reminiscent of the CA in Khatri. He indicated that he did not think much of D’s argument that the last sentence of cl.4.2 could have no other purpose than to regulate cl.7.5 (arguments against surplusage have only weak interpretative effect). He came up with a somewhat unconvincing alternative meaning for that clause related to making it clear that there could be no pro rata apportionment of the bonus payment.

  1. The majority (Pill and Arden LJJ, both Chancery Division judges3) accepted D’s contention that the contract needed to be construed holistically and that the parties had indeed agreed that the bonus could only be paid whilst C was employed. Accordingly, as he was no longer employed, then the PILON need not include the guaranteed bonus.

  1. The margins in Locke were obviously very narrow. The contract was poorly-drafted. But the decision is a useful reminder that the construction of a contract is not necessarily a predictable exercise and that much may depend (whether in the bonus context or other contexts) on the temperament of the judge(s) hearing the claim. The construction favoured by the majority here, or at least the effect of that construction, was described by Coulson J as “manifestly unreasonable” in Rutherford, albeit in the context of an attempt to imply the term.

Humphreys v. Norilsk Nickel International [2010] IRLR 976 (QBD – HHJ Richard Seymour QC)

  1. Another contentious pro-employer bonus decision, this case concerned a performance bonus which was to be assessed by the management board, depending on C’s performance. The relevant clause provided:

“The Company shall pay to the Executive a Performance Bonus…The amount of the Performance Bonus will be assessed by the management board and depending on the performance level decided upon by the management board, the Executive will be entitled to the following Performance Bonus:”

  1. There was then a table, with a range of ratings from 1 (“unsatisfactory”) to 6 (“outstanding”) according to how C had met his “agreed objectives”. C, who was D’s chief economist, had been assessed at 4, 4 and 5 in the 3 years prior to 2008, although how these ratings had been reached was a matter of confusion even after the full hearing of the claim because in the event there had been no agreed objectives.

  1. D’s performance collapsed in 2008. It had turned a profit of more than $5,276 million in 2007, but posted a loss of $555 million in 2008. C’s forecasts for the price of nickel were substantially inaccurate (he overestimated the price by more than 50%, although his opinion was shared by other economists at the time).

  1. C’s contract of employment expired on 28 February 2009, which was the date that, under his contract, the performance bonus would have been payable. He wrote to ask what bonus he would be paid. It was apparent that D had not thought to consider this question until it received C’s correspondence. Eventually, it wrote to C to say that his performance had been assessed as “unsatisfactory” and that he was therefore not entitled to a bonus. D cited C’s inaccurate nickel price forecast.

  1. C claimed that he should have been assessed at grade 5 and sought payment of £572,000 on that basis: the formula in the contract provided that scale of payments according to the grade, and that was the value of the award for a “5” rating.

  1. D submitted that the bonus clauses provided for subjective assessment of C’s performance by D, and were not amenable to independent objective verification.

  1. The Court’s first finding was that the contract, properly construed, left it entirely to the employer to determine the level of performance. In other words, it was an entirely unfettered discretion: the subjective assessment of the management board was the final word on the fact and level of the bonus. This is a somewhat surprising conclusion, out of kilter with other bonus authorities. It is true that it would be difficult for a court to step into the employer’s shoes and perform the assessment required, but that does not mean that it is impossible.

  1. The Court’s more convincing second ground for disposing of the claim was that if the first ground was wrong, then the burden fell on C to demonstrate that the decision to grade him at “1” was irrational, and he had failed to discharge that burden. It appears from the report that C failed to impress as a witness and this may go some way towards explaining why the Court was so ready to find that a grading of “1” was justified in circumstances where nobody had complained about C’s performance throughout the year. The difference between a “1” rating and a “5” rating was, of course, very great – it might have been thought that the case would have ended up in the middle. But in the end, the Court concluded that even if C “cannot be blamed for failing to predict the financial crisis…why should he be paid a substantial bonus for failing to do so?”. The Court was very heavily influenced by the losses experienced by D, even though these were not said to be C’s fault.

  1. This is a difficult case. C might not have excelled himself, but how could it be said that his performance was unsatisfactory just because the markets moved in wholly unpredictable ways? The contract provided that the bonus would be calculated on individual performance, not the performance of the group, though those factors must overlap to a certain extent.

  1. What Humphreys shows is that in cases where a decision has been made to consider the employee for a bonus, it is extremely difficult for an employee to show that the discretion was exercised irrationally. That has always been the case and nothing in the more recent authorities changes that.

Attrill and others v. Dresdner Kleinwort and others [2011] EWCA Civ 229

  1. This is the second and larger piece of bonus litigation arising out of the Dresdner to Commerzbank sale. There are 104 claimants all of whom were employed by Dresdner when it was sold by Allianz to Commerzbank. The question in this case is whether the claimants have any argument that there is a contractual obligation to pay them a specific sum rather than the much lower sum than their employer actually paid, or offered to pay, them.

  1. The following are the salient facts:

    1. In order to secure employee loyalty, the chief executive of Dresdner announced a bonus pool of €400m at a “Town Hall” of the employees at all Dresdner’s principal offices on 18 August 2008. The chief executive announced that this would be allocated to individuals on a discretionary basis according to individual performance. The announcement about the size of the bonus pool was then repeated in a number of internal announcements throughout the late summer 2008.

    1. On 19 December 2008, each C received a bonus letter setting out the bonus which would be paid to them, although the letter stated that it was “provisional” and was “subject to review in the event that additional material deviations in Dresdner Kleinwort’s revenue and earnings…are identified during the preparation of the annual financial statements…”.

    1. On 12 January 2009, Dresdner Kleinwort was sold to Commerzbank and the previous chief executive was replaced.

    1. A review by the new executive team concluded that the bonus pool established in 2008 was unsustainable and needed to be reduced.

    1. Accordingly, on 18 February 2009, the new chief executive sent an email to Dresdner front and middle office employees informing them that the bonuses announced in the bonus letters of 19 December 2008 would be reduced by 90%. This resulted in a saving of €222m for Dresdner

  1. Cs claimed the unpaid 90% of the bonuses as communicated to them on 19 December. They argued that the Town Hall announcement created a binding obligation that there would be a bonus pool of €400m, that the calculation of the bonuses would be notified in December and that the award would be made in cash in January 2009. They relied on the 19 December letters for the calculation of the bonus payable to each employee, but attacked them for having introduced (in breach of contract, they alleged) the suggestion that the determination was provisional and subject to change if there was a material deviation from Dresdner’s anticipated revenue. Finally, they argued that there was no material deviation in any event.

  1. Ds sought summary judgment. In a hearing before Simon J., the Court dismissed the claims based on the Town Hall announcement on the ground that it did not create any enforceable contractual rights on which Cs could rely; the announcement was too informal, unspecific and uncertain to create legal relations. He held that the claims based on the December 2008 bonus letters should proceed to trial.

  1. It appears to have been common ground that the contracts provided that each C was eligible to be considered for payment of a bonus but that whether an award is made and its amount were at the absolute discretion of D.

  1. Cs’ appeal was successful. The critical points were as follows:

    1. Although the Town Hall announcement was informal, it was not “casual”. Further, the employee handbook specifically permitted contractual changes affecting groups of employees to be made via the company intranet.

    1. As to the absence of any allocation of a specific amount to individual employees, the judge had held that it would be impossible to calculate how much an individual claimant should be awarded merely on the basis of an overall pool. The Court of Appeal held:

“These are points going to the claim as a whole. They do not seem to me to be determinative in relation to [the claim based on the Town Hall meeting]. The essence of the Town Hall meeting…was that it quantified and qualified one uncertainty in the bonus procedure, namely the size of the bonus pool…[T]o set up a guaranteed minimum bonus pool of a specific amount was, and was intended to be, a substantial benefit to all those who might be eligible for the future award of bonuses and an inducement to stay. I see no reason why a promise of a guaranteed minimum bonus pool cannot be contractually binding even though individual employees cannot at that time point to an entitlement to a specific bonus payable out of it. At the very least each of them would be entitled to nominal damages for its breach.” [Per Morritt V-C, at para.29]

It seems to me that the Court failed to confront the essence of the dispute here. On the one hand, one can readily see that an employer should not be permitted to announce a guaranteed bonus pool in order to retain employees and then renege from that guarantee at bonus time. But the arguments about the difficulty of calculating individual entitlements are formidable. This is not the same sort of case as Clark v. Nomura International Plc [2000] IRLR 766 where there was a single claimant. Here, there are 104 interleaved claims, all seeking a share of the same bonus pot. How is a court to determine the distribution? The Court of Appeal provides no answer. Indeed, its suggestion that each claimant would be entitled to nominal damages is an acknowledgement that there are serious difficulties with this aspect of the claim. Nominal damages are unlikely to be greeted with enthusiasm by the claimants, and would be an inadequate sanction for the employer.

    1. As to uncertainty, the judge had found that after the Town Hall announcement, there would have been uncertainty about who qualified for a bonus. The hope was that the announcement would result in all the employees staying, but what if half of them left? Would the remaining employees still be entitled to a share of €400 million? What if all but one left? What about employees joining after the Town Hall? The Court recognised the difficulties here, but held that they were insufficient to be determinative of the claim. In my view, the judge conflated two questions: who was entitled and how much they would be entitled to. As to the first, the class of entitled employees was not difficult to identify – those to whom the announcement had been made. But the question of how much each employee should be entitled to if employees left and joined, and, in particular, whether the bonus pool should remain unaffected by staff turnover, is far more difficult and was left wholly unanalysed by the Court.

    1. Finally, the banks had argued successfully before the judge that there was an absence of acceptance or consideration by the employees. The bonus pool had been announced and was designed to secure employee loyalty, but it was impossible to say that each employee’s conduct in continuing to work was “only referable to his having accepted the new terms imposed by the employer4, so any potential contractual bargain was incomplete. The claimants had argued that there is a distinction to be drawn between changes which are wholly advantageous to the employee (as in this case) and those which are not (as in Solectron and Khatri); they also argued that the circumstances permitted the court to infer that the bank had waived the requirement for acceptance. The Court simply stated that these points were not suitable for summary determination.

  1. The Court was impressed by Cs’ argument as to the big picture: the announcement of the bonus pool was designed to ensure employee retention; the evidence was that it was largely successful; few employees left after the announcement. But that big picture obscures the difficulty of proving the entitlement of any given employee to a particular sum, or indeed any sum. The task of the court that eventually decides this will, of course, be made easier when one takes into account the bonus letters themselves, but this remains a case to watch out for when it is eventually determined.



20 March 2011

1 The principal concession was that it would be appropriate in some (unidentified) exceptional circumstances for this clause to be operated so as to merely reduce the overperformance commission rather than eliminate it entirely.

2 See Clark v. BET plc [ 1997] IRLR 348

3 It is fair to point out that the Court of Appeal in Khatri was similarly composed of Chancery Division judges.

4 Per Elias J in Solectron

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