The Court of Appeal has confirmed that a verbal announcement of a guaranteed €400m bonus pool was legally binding. The Court also held that even if the commitment had not been legally binding, the employer's subsequent attempt to introduce a right to substantially reduce the bonus pool was a breach of the implied term of trust and confidence.
Dresdner Kleinwort Limited and Commerzbank AG v Richard Attrill & Ors and Fahmi Anar & Ors
In March 2008, Dresdner announced a plan to spin off its investment banking business from its commercial banking division. This led to increased staff turnover. In May 2008, the Financial Services Authority ("FSA") placed Dresdner on the "Firm Watch List" and told it that it would remain on the list until mitigation measures were put in place. Dresdner decided to address the staff turnover issue by announcing a guaranteed bonus pool for the year.
Dr Jentzsch, the Dresdner CEO, announced at a "Town Hall" meeting in August 2008, streamed live over the company intranet, that a bonus pool of €400m was being guaranteed. Employees were told that the bonus pool would be distributed "in the usual way", and that it would be paid out no matter what Dresdner's financial circumstances were. The fact of the guaranteed bonus pool was deliberately cascaded to employees by management, and details of it were repeated in FAQs posted on the intranet, and in an email from the Head of HR in October 2008.
In December 2008, Dresdner employees were sent their bonus award letters. Those letters included a Material Adverse Change ("MAC") clause, providing that provisional bonus awards would be reviewed if Dresdner's financial position deviated materially from its forecasts for November and December. Employees were nevertheless assured that the bonus pool remained in place, and Dr Jentzsch stated that it was very unlikely that the bank would seek to rely on the clause.
In February 2009, immediately following the completion of the sale of Dresdner to Commerzbank, Dr Jentzsch was removed and the Bank decided to reduce the investment banking staff's bonuses by 90%. A number of employees brought claims for breach of contract.
The High Court upheld the employees' claims. Dresdner appealed.
Court of Appeal
Was the announcement legally binding?
In short, yes:
- The employees argued that the announcement amounted to a variation of their contracts of employment. The Dresdner employment handbook stated that unilateral changes to terms and conditions "can be made by a member of the Human Resources Department and must be communicated to you in writing. When the change affects a group of employees, notification may be by display on notice boards or company intranet".
- The Court found that these sentences could be read disjunctively and that, therefore, changes affecting groups of employees did not need to be made by HR, it was sufficient that they were displayed on notice boards or on the company intranet. The August transmission of the Town Hall meeting satisfied the requirement that the notification be on display on the company intranet, even though the transmission had been viewable in real time only.
- Dresdner argued that the announcement was not apt for incorporation into employees' contracts of employment because it was an announcement of a bonus pool, rather than individual entitlements. The Court rejected this argument on the basis that a guaranteed minimum bonus pool was a substantial benefit to all those who might be eligible for the award. The Court also rejected the argument that the announcement was too uncertain to be a contractual obligation as it did not provide sufficient detail of matters such as whether the bonus would be paid in cash or shares. It found that any problems regarding certainty were addressed by the fact that the fund was to be dealt with "in the usual way".
- Dresdner had also argued that the announcement could not be contractually enforceable because there had been no intention to create legal relations. Again, this was rejected by the Court. It held that an intention to create legal relations will readily be found where a promise is made in the context of a pre-existing legal relationship, such as an employment relationship. The natural inference would be that any promise about terms of employment would take effect in the same way as other contractual terms. Other factors which reinforced this conclusion included that the word "guaranteed" had been used; the context was the urgent need to retain staff and address the FSA's concerns; the announcement had been made by no less a person than the CEO; and the promise related to pay, "the most fundamental obligation" of the contract of employment.
- As the change had been made by unilateral variation, there was no need to show that the employees had done anything to accept the offer of a guaranteed bonus pool. However, the Court considered that, even if there had not been a unilateral variation, Dresdner had implicitly dispensed with any need for the claimants to communicate acceptance of the offer.
Was the MAC clause a breach of the implied term of trust and confidence?
The Court of Appeal also found that the introduction of the MAC clause amounted to a breach of the implied term of trust and confidence. The High Court had found that the clause had been introduced not because of genuine concerns about the financial status of the business, but as a result of pressure from Commerzbank, which was purchasing the business. This had been done largely because of perceived reputational damage caused by high investment banking bonuses generally and the taxpayer funded bail-out of Commerzbank in particular. This could not amount to a proper reason for the employer to break its promise to its employees.
On the facts of the case, the decision is perhaps not surprising. Dresdner had made a promise about bonuses in order to achieve stability in the workforce. It took the benefit of the promise and then sought to avoid making the payments. Courts have always been reluctant to allow employers to renege on bonus commitments once employees have 'earned' the bonus.
A novel part of the decision, however, was the use of the right to change terms and conditions unilaterally - included to improve the employer's position - to side-step the need to find some of the usual legal requirements to change a contract, (acceptance of the offer). In light of this decision, employers should review existing contracts of employment and handbooks to ensure that the power to make unilateral changes to terms and conditions can be exercised effectively only in a clearly defined way, and cannot be inadvertently triggered.
The case also highlights the need for caution in giving employees any reassurance as to bonus, where the bonus is intended to be discretionary. Even where the commitment relates to the overall bonus pool, rather than individual entitlements, it can create a legal obligation. Indeed, the case highlights the readiness of the courts to give contractual effect to any promise about terms and conditions and shows a reluctance to allow employers to rely on technical legal arguments to avoid this.