The Court of Appeal has dismissed an appeal from the High Court's ruling that Dresdner Kleinwort had contractually committed to a minimum bonus pool from which it could not renege, despite deteriorating financial circumstances. The Court of Appeal endorsed all of the High Court's reasoning, save that it construed the clause setting out how to vary employment terms even more strictly against the bank.

The ruling highlights the need to ensure that any oral assurances given to staff are carefully considered and that contractual commitments are not inadvertently created.  The fact that an oral promise relates to the size of a bonus pool, rather than to an individual employee's award, will not itself stop the promise being contractually binding.

Any commitments on bonus pool should expressly refer to any circumstances in which the employer wishes to have the right to reduce the pool, such as a significant financial deterioration or reduction in number of eligible employees.

Employers should also bear in mind the Court's view that, in the context of an existing employment relationship, there will be a very strong presumption that promises concerning employment terms are intended to be legally binding.  Employers wishing to displace this presumption will need to take extra care to clarify their intentions.  

Background

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 FSA, which placed the bank on its watchlist due to the risk of substantial employee defections, the 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 argument about the exact terms of the August promise, the High Court judge ruled that Dr Jentzsch had promised a minimum bonus pool "no matter what" happened subsequently, to be allocated "in the usual way".  The August promise was announced over the intranet using a live video link, and followed 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.

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

Contractual commitment

The Court of Appeal agreed with the judge 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 in fact if:

  • 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,
  • there was an intention to create legally binding obligations, and
  • the promise was sufficiently certain and was appropriate for incorporation into employees' contracts.

Variation

The employment handbook expressly stated that unilateral changes to terms and conditions "can only be made by a member of the Human Resources Department and must be communicated to you in writing. When the the change affects a group of employees, notification may be by display on notice boards or Company Intranet."

The judge considered that HR involvement was required even in the case of a group notification, but that the requirements were satisfied by the combined effect of the August announcement and the confirmation of the change to terms by HR in October. The Court of Appeal took a different view, ruling that the sentence dealing with group notification was to be read disjunctively and therefore group notifications did not need to be made by HR. Even had HR involvement been necessary, this was satisfied by the fact that the announcement was made with the approval of the Board of the Remuneration Committee, of which the HR Director was a member, as well as by the October email. Further, the August transmission was sufficient to be a "display on the intranet", even had it only been accessible live.

Even if there had been no unilateral variation in accordance with the contract, the Court ruled that the announcement was an offer capable of acceptance and that the employer had clearly dispensed with the need for any response to the offer, given there was no downside for the employees.  In any event, the nature of the promise, relating to a bonus pool available to a group of employees, was inconsistent with the idea of individual acceptance.

The Court found that the staff had given consideration for the promise by remaining in their jobs.

Aptness for incorporation and uncertainty

The Court of Appeal ruled that a promise concerning the size of a bonus pool was capable of being incorporated into individuals' contracts of employment, as it simply defined one of the contours regulating the exercise of the company's discretion to award a bonus.

The promise was also sufficiently certain notwithstanding the lack of detail as to how much could be held back for contingencies, whether fixed bonuses came out of the fund and whether the the bonus should be paid in cash or shares.  It was sufficient that the fund would be dealt with "in the usual way".

Intention to create legal relations

The High Court judge had found that there was 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 within a very short space of time 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 banks' financial position at the end of the year, equally did not prevent the finding of contractual intent – these were risks the bank had chosen to take in order to achieve its aim of retaining staff.

The Court of Appeal rejected an argument that, in relation to a unilateral contract, the judge should not have placed the burden of proof on the bank to show there was no intention to create legal relations. The Court considered that, where a change is being introduced into a pre-existing contractual relationship, there will be a very strong presumption that it is intended to be legally binding and the burden of proof will be on the party asserting a lack of intention. The natural inference will be that any promises made to staff relating to their employment terms will take effect in the same way as other contractual terms.

Further, the judge had not erred in taking into account issues such as the FSA involvement and Board approval for the August announcement, even if the employees had not been aware of these factors, as part of the context reinforcing the conclusion that the promise was intended to be legally binding. A promisor arguing that he had no contractual intention cannot rely on evidence unknown to the promisee to show lack of legal intent; neither can he exclude evidence suggesting contractual intent simply because the promisee was unaware.

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.

MAC clause

The Court of Appeal also agreed with the High Court judge (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 judge had been entitled to find on the facts that the MAC clause had been introduced because Commerzbank did not believe the promise should have been made in the first place and was sensitive to the hostile public perception. This could not be a reasonable and proper cause for Dresdner reneging on the bonuses.

At first instance, the judge had also ruled that the bank failed to operate the clause properly, given that it provided for a reduction for individual awards only if there was a material adverse change in the financial position as against the forecast for November and December 2008 and only "if necessary". Given that the letter was sent on 19 December, 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 only be made if the bank had no other option, ie, 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 Dr 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.

Given its earlier findings, the Court of Appeal declined to rule on this last point.