Cantor Fitzgerald International v Horkulak

A discretionary bonus clause in an employment contract may confer a real contractual benefit even where payment and amount are expressed to be discretionary. Its construction depends on its purpose and context. Where it forms part of a remuneration structure designed to reward, motivate and retain an employee, the employer must make a bona fide and rational decision. It may not act arbitrarily, capriciously or perversely.

If breach prevents the exercise of that discretion, damages require the court to decide what the contractual decision-maker would rationally have decided. The court need not select the lowest rational award where the contract prescribes a single decision-making process rather than a choice between alternative performances.

The claimant was a senior managing director employed under a fixed-term contract. The contract provided a basic salary, a guaranteed bonus and an annual discretionary bonus. He resigned after conduct by the employer’s chief executive was found to have constructively dismissed him.

Newman J, on 31 July 2003, awarded damages of £892,000, including compensation for discretionary bonuses which he found would have been paid had the claimant remained employed. The employer’s counterclaim was dismissed. Its appeal against liability had been refused, so this appeal concerned quantum only.

The central issues were whether the discretionary-bonus clause could found damages, the correct counterfactual assessment of any bonus, mitigation of loss, and the adequacy of the judge’s reasons for the bonus figures.

1. The appeal was allowed in part. The court upheld the conclusion that the contractual bonus provision could give rise to damages. It rejected the substantive challenges to the finding that a bonus would have been payable, but reduced the salary-loss award by £41,667 for a two-month failure to mitigate. A further £75,000 reduction was conceded. The bonus quantum was remitted to Newman J for redetermination, and the final form of order was deferred.

2. The use of “may” did not make the discretionary bonus a merely voluntary payment outside the contract. In its employment context, the clause was intended to reward performance and future loyalty. It therefore had contractual content and required a bona fide and rational exercise of discretion as to payment and amount. A decision could not be arbitrary, capricious or perverse.

3. Lavarack v Woods of Colchester [1967] 1 QB 278 did not compel an assumption that no bonus would be paid. That case concerned a different future arrangement to which the dismissed employee was not party. It did not govern a claim based on an existing contractual bonus scheme whose discretion had to be exercised rationally.

4. For damages, the court first had to assess whether the employee would have remained and performed sufficiently to merit a bonus. It then had to put itself in the shoes of the contractual decision-maker and decide the result of a rational and bona fide process. It was not required to choose the lowest sum within a range of rational outcomes, because this clause prescribed one decision-making process rather than alternative modes of performance.

5. Payments to comparably senior employees could assist as a broad check on the likely range of remuneration. They created no contractual right to parity. The trial judge’s stated reasons for the two bonus figures were nevertheless insufficient, requiring remittal rather than a full retrial. Under Civil Procedure Rules rule 52.10, the same judge could redetermine quantum on the existing evidence, subject to any further directions.

• Court of Appeal (Civil Division). In [2004] EWCA Civ 1287, the court allowed the quantum appeal in part. It reduced damages for mitigation and conceded earnings, and remitted the discretionary-bonus assessment because the reasons were inadequate.
• High Court, Queen’s Bench Division (Newman J). On 31 July 2003, the judge found that the claimant had been constructively dismissed, awarded damages totalling £892,000, and dismissed the employer’s counterclaim. Permission to appeal against liability was later refused; the appeal before the Court of Appeal was confined to quantum.