Mallone v BPB Industries Ltd

A contractual power described as an absolute discretion remains subject to the requirement that it must not be exercised irrationally or perversely. The question is whether any reasonable employer could have exercised the discretion in that way. Honesty and good faith do not necessarily establish rationality.

A discretion to determine the proportion of share options retained on termination may extend to mature as well as immature options. When dealing with mature options, however, the decision-maker must recognise that they are vested property rights, granted for past performance and retained through continued service. Cancelling all such options because of later performance concerns and compensation payable on termination may be irrational where the employee was not dismissed for misconduct.

The claimant was formerly managing director of an Italian subsidiary of BPB Industries plc. When his employment ended because of concerns about his performance, a committee of BPB's directors purported to cancel all his options under its Senior Executive Share Option Scheme. Some options had passed the three-year vesting period, while others had not.

A deputy High Court judge held that the Scheme did not permit cancellation of the mature options. Alternatively, cancellation of those options was irrational. He awarded £100,636 plus interest. BPB appealed on the construction of rule 5(b)(iii) and the lawfulness of the discretion's exercise. A possible further issue was whether the committee had acted prematurely while the claimant retained offices in other group companies.

1. Appeal dismissed unanimously. Lord Justice Rix delivered the judgment, with which Lord Justice Waller and Mr Justice Wilson agreed. BPB succeeded on construction but failed to displace the judge's alternative finding that the mature options had been cancelled irrationally. The damages award of £100,636 plus interest was therefore upheld.

2. Rule 5(b)(iii) covered both mature and immature options. The rule referred generally to an “Option”, expressly contemplated a proportion of 36/36 and prohibited a numerator exceeding 36. Those features showed that its proviso included options held for at least 36 complete calendar months. The directors therefore had power in principle to determine a lower proportion for mature options.

3. An “absolute discretion” under a contract is not unfettered. Applying the irrationality or perversity standard discussed in Clark v Nomura International plc [2000] IRLR 766, the court asks whether any reasonable employer could have exercised the discretion in that way. The court does not substitute its own preferred decision. An employer may act irrationally despite acting honestly and without an improper purpose. Irrationality is therefore not confined to dishonesty, caprice or conscious arbitrariness.

4. The discretion remained a power to determine the “appropriate proportion”. The Scheme rewarded past performance and encouraged future loyalty. After three years, an option vested and constituted a property right. A committee considering mature options had to recognise that character. Although poor performance during or after vesting might justify some reduction, an employee not dismissed for misconduct should not without adequate reason be treated as though summarily dismissed for misconduct.

5. The committee made no distinction between mature and immature options, gave no contemporaneous reasons and had apparently decided upon total cancellation before its meeting. It did not address the claimant's strong performance when the options were granted or the service through which they vested. His later performance concerns did not amount to misconduct, and compensation under Italian law represented separate legal rights. The finding that no reasonable employer could have cancelled all the mature options was justified.

6. Lord Justice Rix considered that the committee probably also acted prematurely because the claimant retained group offices until January 1996. In the absence of a valid discretionary determination, the rule's default fraction could operate. As that issue was procedurally and substantively controversial and had not been fully argued orally, the court did not rely on it.

1. Court of Appeal: The appeal was dismissed unanimously. The court disagreed with the deputy judge's construction of rule 5(b)(iii), but upheld his alternative conclusion that cancellation of the mature options was irrational.
2. Queen's Bench Division: Mr Christopher Symons QC, sitting as a deputy High Court judge, held that the directors lacked power to cancel mature options. Alternatively, their cancellation was irrational. He awarded the claimant £100,636 plus interest. No citation for this decision is stated.