City bonuses continue to generate litigation. Gillie Scoular and Amanda Brown look at the lessons to be learnt
Bonuses and the exercise of an employer’s discretion
The head of a trading desk at Commerzbank has recently taken his dispute about his annual bonuses to the Court of Appeal. He claimed that the bank had been in breach of his contract when allocating him bonuses of nearly €3 million for the years 2003 and 2004, because these amounts were less than his line manager had recommended. The Court of Appeal said this claim had no chance of success. In order to succeed he would have needed to show that the bank had acted irrationally in failing to award him more, which it said he would find impossible to demonstrate. The bank was however criticised for failing to explain the reasoning behind the bonus allocation for the years in question until the litigation had started, a lesson that other employers should take on board.
Bonuses and leaving employment
Another issue which arose in the Commerzbank litigation was whether the bank was entitled to rely on a clause in the employee’s contract which disqualified him from receiving a bonus altogether if he was not in employment at the date it was payable. On the face of it this clause was clear. But could the bank rely on it, given the provisions of the Unfair Contract Terms Act 1977, which renders certain contractual terms unenforceable if they are not reasonable? The Court of Appeal decided that UCTA did not apply to employment contracts at all, so it did not need to consider the reasonableness issue.
Surprisingly this is the first time the Court of Appeal has considered UCTA in the context of employment contracts. Employers will be relieved that there is now nothing to prevent them limiting or excluding the entitlement of departing employees to bonuses, but they need to bear in mind that clear drafting is essential, as any ambiguity is likely to be resolved in the employee’s favour.
Bonuses, targets and co-operation
If an employer ties the award of a bonus to specific sales targets, does it have any obligation to help the employee to achieve them? This issue arose in a case brought by another City trader against Barclays. He was aggrieved because he had been dismissed while he was working on a trade which, if completed, would have meant he would have achieved his sales target. A high court judge has ruled that the issue of whether the bank owed the employee a duty of co-operation to help him achieve his target should go to trial. He also ruled that it was arguable that the bank could not terminate his employment in order to avoid paying the bonus.
Although this ruling was made at a preliminary stage in the litigation, it is still of value as a counterpoint to the Commerzbank case. The lesson from this and previous cases (including one where the employers were in breach of contract for awarding no bonus at all) is that while a court will be slow to interfere with the genuine exercise of a discretion, it will not allow an employer carte blanche to evade paying a bonus, for example by dismissing an employee or making life so difficult that he resigns.