Kennedy v Dresdner Kleinwort Wasserstein

An employer operating a discretionary bonus scheme must exercise its discretion rationally and without perversity. The court will assess the decision by reference to the employee’s contractual role, the basis on which the business records and attributes profit, and the employer’s evaluation of performance. A trader participating in a managed trading book cannot ordinarily claim credit for profits arising from aggregate risk management where that responsibility belongs to designated risk managers. A contractual formula bonus is calculated according to the agreed accounting mechanism, including properly allocated operating costs. The claims failed because the 1999 calculation did not produce a higher entitlement and the 2000 bonus decision was neither irrational nor perverse.

The claimant, a former senior foreign-exchange options trader, claimed additional bonuses for 1999 and 2000. For 1999, his contract provided for a bonus calculated at 2 per cent of the business’s net operating profit. For 2000, he was entitled to be considered for a discretionary bonus, subject to the implied contractual term that the discretion would not be exercised irrationally or perversely, in accordance with Clark v Nomura International plc [2000] 1RLR 766.

The central issues were the proper calculation of net operating profit for 1999, whether profits from a series of barrier trades could be attributed to the claimant for 2000, and whether the bonus awarded was irrational or perverse.

1. Disposition. The claims for additional bonuses for 1999 and 2000 were dismissed.

2. 1999 formula bonus. The contractual mechanism required the bonus to be calculated by reference to net operating profit in accordance with the employer’s prevailing accounting principles and practices. Properly allocated indirect expenses and mark-up could be included. On the evidence, the relevant net operating profit would have produced a bonus of approximately £110,000, so the claimant had already received more than the contractual calculation required.

3. 2000 discretionary bonus. The court accepted that the employer was required to exercise its discretion rationally and without perversity, applying the principle stated in Clark v Nomura International plc [2000] 1RLR 766. The claimant was a trader within the foreign-exchange options desk, not a proprietary trader. The risk managers controlled the aggregate book and its continuing hedging. Consequently, profits or losses from carry, spot positioning, hedging and related currency positions could not be attributed to particular trades or to the claimant, save for the identifiable trading edge on the barrier transactions.

4. The 53 barrier trades did not generate or establish profits approaching US$17 million for which the claimant was entitled to credit. At most, the evidence supported credit for approximately US$1.75 million of edge, with some uncertainty as to the claimant’s individual contribution. The decision to award no more than the guaranteed bonus of £125,500 was therefore not irrational, perverse or unreasonable.

The court found that the claimants’ asserted attribution of the book’s wider risk-management profits was artificial and inconsistent with the claimant’s contractual and operational role.