The subject of remuneration in the financial world and in particular, the level of bonuses and severance packages, is fuelling much public debate. Courts in both Utrecht and Amsterdam have recently given judgments on severance packages and bonuses at ABN AMRO. These judgments show that there are differences of opinion among judges about the extent to which undertakings given in respect of severance packages and bonuses should be honoured.

Undertakings to ABN AMRO employee I

(Sub-district court, Amsterdam, 29 December 2008, JAR 2009/26 and RAR 2009/55)

In a case decided by a sub-district judge in Amsterdam on 29 December 2008, the issue was whether the judge was bound by a severance package that had been agreed between ABN AMRO and one of its employees, and by other agreements, when determining the amount of severance pay to be awarded to the employee.

The relevant employee had worked for ABN AMRO since 1 January 1983. In November 2007, he was appointed to the management board for a term of four years. At that time, he was given an undertaking that in the event of the premature termination of his employment contract he would receive severance pay based on what is known as the sub-district court formula. This formula is AxBxC, where A equals the employee's years of service, B equals the gross monthly salary and C is the correction factor. The correction factor is usually set at 1, but may be adjusted upwards or downwards if the employer or, as the case may be, the employee, is at fault with regard to the termination.

In this case the parties agreed that the correction factor would be set at 1.4. The parties also made agreements about a loyalty allowance, an introductory bonus and guaranteed bonuses for 2007 and 2008. After the State of the Netherlands acquired shares in ABN AMRO in October 2008, it nominated the former Minister of Finance for appointment to the position held by the employee.

Subsequently, the employee and ABN AMRO agreed to terminate the employment contract by mutual consent with effect from 30 December 2008. However, a dispute arose between the parties about the agreements that had been made, which represented a sum of over EUR 18 million in total. ABN AMRO was only prepared to pay the employee a sum of EUR 2,433,000 (i.e. one year's salary plus an average bonus), as it considered the contractually agreed level of compensation to be unacceptably high from a social point of view.

The judge held, first of all, that it would not be appropriate for her to rule on the level of remuneration received by the employee as a management board member, or on the social acceptability of the same. She could only assess what amount of severance pay, bonus and loyalty allowance could be deemed reasonable and fair for the employee.

The judge went on to hold that although the severance pay (EUR 8,346,769) could be considered inordinately high in absolute terms, it was reasonable and acceptable when the factors on which it was based were considered (i.e. the length of the employment (26 years), the employee's age (52 years), the salary level and a C factor of 1.4)). ABN AMRO was also held to be bound by the other undertakings. Therefore, the basic premise was that the agreements made between the parties should be honoured.

However, the employee had filed a counterclaim in which he requested payment of only EUR 8 million. In view of this the judge awarded this amount, stating that she saw no reason to reduce the compensation even further. Unfortunately, she did not express an opinion on whether she would still have considered the claim to be reasonable if the employee had persisted with the claim for the agreed amount of over EUR 18 million.

Undertakings to ABN AMRO employee II

(Sub-district court, Amsterdam, 7 October 2009, LJN: BJ9678)

On 7 October 2009 another judgment on bonuses and severance packages at ABN AMRO was rendered, again by a sub-district judge in Amsterdam. On this occasion, however, the result was entirely different.

The employee had been a member of ABN AMRO's management board for some time and had left the bank on 1 June 2009. The employee claimed that he was entitled to a severance package amounting to approximately EUR 6.2 million and a bonus for 2008, which ABN AMRO refused to pay. The employee submitted, in brief, that before ABN AMRO was taken over by the RBS, Santander and Fortis consortium, its severance policy had been to offer managers who were being made redundant compensation on the basis of the sub-district court formula, with a correction (C) factor of 1.4. According to the employee, he had been given an undertaking by the consortium and later by RBS that this policy would be continued. The employee was of the opinion that ABN AMRO was not free to renege on the undertaking that had been given. He also claimed a bonus for 2008, the amount of which was yet to be determined.

First of all, ABN AMRO denied that binding undertakings had been given to the employee. In addition, the bank was of the opinion that it was entitled to apply its new severance policy. It had offered the employee a sum of approximately EUR 2.5 million on the basis of the new policy. This new policy was introduced after the State had acquired shares in ABN AMRO (and Fortis) and after conditions in this regard had been set by the Minister of Finance. In addition, the bank felt that it had to take account of changing public and political opinion on levels of bonuses and severance packages. Bonuses were a matter for assessment by the bank's supervisory board, which had decided that no bonuses would be granted to senior management for 2008.

The Amsterdam judge held that the employee was, in principle, entitled to rely on the undertakings given to him in 2008 about a EUR 6.2 million severance package. However, according to the criteria of reasonableness and fairness, it was unacceptable for the employee to demand that the undertakings be honoured. This was because ABN AMRO had got into difficulties, because the government's assistance to the bank was subject to conditions in the form of influence over employees' pay and because public opinion on bonuses and severance packages had become more critical. The judge held that the employee had not adduced sufficient evidence to show that the harm he had suffered as a result of the termination of the employment contract justified a payment of EUR 6.2 million.

The judge also held that the bank's supervisory board was entitled to determine the bonuses for 2008. In this regard, the board had taken a consistent line and had not awarded a bonus to any comparable employee.

The employee's claims were therefore dismissed.

The outcome of this judgment was unexpected in view of the previous judgment, rendered on 29 December 2008, by another Amsterdam sub-district judge (see above under "employee I"). The employee argued that there were parallels with the previous case and, in vain, invoked the principle that agreements once made should be honoured and that the amount of the compensation (or its social acceptability) were not matters on which the court could rule.

Undertakings to ABN AMRO employee III

(Sub-district court, Utrecht, 9 October 2009, LJN: BK0260)

Two days later the the sub-district court of Utrecht arrived at a very different conclusion in a case based on almost identical facts. In this case, it was held that although there were unforeseen circumstances these were not of such a nature that it would be wrong for the employee, according to the criteria of reasonableness and fairness, to expect the undertakings that had been given to be honoured unchanged.

To define the twin concepts of "reasonableness and fairness" the judges referred to Article 3:12 of the Dutch Civil Code. This article provides that in determining what is reasonable and fair, the court should take account of generally accepted principles of law, prevailing legal views in the Netherlands and the public and individual interests involved in the case. In this specific case it was therefore necessary to determine whether it was reasonable and fair to change the undertakings that had been given. The judges held that this was not the case.

According to the Utrecht judges, the credit crisis had not had such an impact on the bank's economic or financial position that it was necessary to fear for the viability of its operations. Nor could political and public opinion on severance packages justify not honouring the agreement between the employee and ABN AMRO.

Conclusion

Employers who have made agreements with employees about bonuses or severance packages are in principle bound by them, regardless of the credit crisis. Nor does the current public debate on levels of executive pay enable employers to get out of the agreements they have made with employees. The judgment of the sub-district judge in Amsterdam who attached great value to public opinion, and allowed this to prevail over the agreements that had been made, appears to be an exception. [As] the employee in question has apparently lodged an appeal, it remains to be seen whether this judgment will be upheld by the Court of Appeal.