Financial institutions are well aware of the need for bonus schemes to be drafted very carefully to ensure that discretions are not fettered unintentionally. The recent High Court ruling in Attrill v Dresdner Kleinwort highlights the need to ensure that any oral assurances given are equally carefully considered. The fact that an oral promise relates to the size of a bonus pool rather than to an individual employee's award does not stop the promise from being contractually binding.

Any commitments on bonus pool should therefore refer expressly to circumstances that could lead to a reduction, such as a significant financial deterioration or reduction in number of eligible employees. The judge's (obiter) narrow construction of the material adverse change (MAC) clause in this case also highlights the need for such provisos to be drafted broadly.


In Spring 2008 negotiations started for the sale of Dresdner Bank from Allianz to Commerzbank. The resulting uncertainty over the future of the bank led many Dresdner investment bankers to defect or consider resigning. In order to stem the tide and to reassure the Financial Services Authority (FSA) - which placed the bank on its watch list due to the risk of substantial employee defections - the chief executive officer (CEO) of the investment banking subsidiary, Dr Jentzsch, announced a guaranteed minimum bonus pool for the 2008 bonuses at a staff meeting in August 2008.

Following the collapse of Lehman Brothers and the ensuing financial crisis, Commerzbank's attitude to honouring this commitment changed, due in part to concerns over the likely reaction to the payment of large bonuses when it had just accepted substantial funding from the German government. On December 19 2008 letters were sent to individual employees confirming their provisional bonus awards for 2008. These were subject to a MAC clause but Jentzsch stated that it was unlikely that the bank would seek to rely on the clause. Following completion of the sale, Jentzsch was replaced, the MAC clause invoked and the bonus pool was reduced by 90%.


Much of the argument in the case concerned the exact terms of the August promise, of which there was no formal written record. The judge ruled that Jentzsch had promised a minimum bonus pool to be allocated in the usual way, no matter what happened subsequently, and that this had been agreed by the parent company; he rejected the bank's argument that the guarantee was simply a promise of funding for a pool from the parent company. Further, although this had not been clearly stated, the announcement was directed only at front and middle-office staff, as back-office staff had their own separate bonus pools and reporting structure.

Crucially, the judge confirmed that the promise of a share in a pool is capable of amounting to a contractual commitment to individual employees entitled to be considered for a discretionary share of that pool. There would be such a commitment if in fact:

  • the promise was sufficiently certain;
  • there was an intention to create legally binding obligations; and
  • there was a valid variation under the terms of the contract or, if not, a valid offer which was accepted and for which consideration was given.

The judge considered that the promise of a minimum bonus pool was sufficiently certain, notwithstanding that it was usual practice for a very small percentage of bonus pools to be left unallocated for contingencies. There was also a clear intention to create a legally binding obligation, given the use of the word 'guaranteed' and the fact that otherwise it would not have achieved its intended effect of stabilising the workforce and assuaging the FSA's concerns. The use of an announcement at a staff meeting did not belie this contractual intent, given that it was chosen as the quickest and most effective way of communicating to all staff and in practice everyone knew of the announcement soon after the meeting. The fact that the amount of the pool was not dependent on the number of employees at the time of distribution (and therefore the entirety would be payable to one individual if only one remained), and that it was payable irrespective of the bank's financial position at the end of the year, equally did not prevent the finding of contractual intent – these were risks that the bank had chosen to take in order to achieve its aim of retaining staff.

The employment handbook expressly stated that unilateral changes to terms and conditions could only be made by a member of human resources (HR), and that if the change affected a group of employees, it could be notified by display on notice boards or on the company intranet. The judge considered that the transmission of the August announcement over the intranet using a live video link was sufficient to satisfy the second condition, and the first condition was satisfied by an email sent to staff from HR in October 2008 referring to the bonus pool already communicated by the CEO and giving further information about the bonus payment process, amounting to a confirmation of the change to terms by HR.

Even if there had been no unilateral variation in accordance with the contract, the announcement was an offer capable of acceptance, and in light of the fact that the employer did not ask for a response and the change was communicated to a group of employees, there was an implied waiver of the requirement to communicate acceptance of the offer, in the same way that an announcement of a pay rise to a group of employees need not be expressly accepted by each employee. This approach was important, given that the judge also considered that acceptance of a beneficial change to terms cannot be inferred simply from remaining in employment if there could be other reasons for the employees continuing there (eg, the difficulty of getting another job in the market at that time). However, remaining in employment did amount to consideration for the change.

As a result, the bank was not entitled to introduce the MAC clause in the bonus letters and was contractually required to pay the full bonus awards made in the December letters.

The judge also considered (obiter) that had there been no contractual obligation to pay the full awards, the introduction of the MAC clause would nevertheless have been a breach of the duty of implied trust and confidence in the circumstances.

The bank also failed to operate the clause properly, given that it provided for a reduction for individual awards only if there was a MAC in the financial position as against the forecast for November and December 2008, and only "if necessary". Given that the letter was sent on December 19, this was construed as meaning a change from the 'forecast' current as at the date of the letter (and not an earlier forecast as contended by the bank); and the requirement for necessity meant that a reduction could be made only if the bank had no other option (ie, if the bank was unable to pay the awards). There were further breaches in that the clause only permitted a review and reduction of individual awards by Jentzsch at a specific time, so that a reduction to the whole pool determined by someone else at a different date rendered the reductions invalid.

Although the judgment was based on an interpretation of contractual principles, also of relevance in the current landscape would be the potential application of the FSA Remuneration Code, in particular in circumstances where payouts could jeopardise the long-term sustainability of the financial institution.

Commerzbank has stated that its decision to reduce bonuses in the circumstances was justified and responsible, no doubt buoyed by the general public mood against bankers' bonuses. It will be interesting to see whether the Court of Appeal can be persuaded to rule that it was justified not just morally, but legally. The detailed judgment and findings of fact suggest this may be an uphill struggle.

For further information on this topic please contact Andrew Brown at Herbert Smith LLP by telephone (+44 20 7374 8000), fax (+44 20 7374 0888) or email ([email protected]).