Commerzbank Ag v Keen

An employer exercising a contractual discretion over bonuses must act rationally and in good faith. The court cannot substitute its own assessment of the appropriate bonus. An employee challenging an award must establish at least a prima facie case that it fell outside the range open to a reasonable employer.

The implied duty of trust and confidence will generally require reasons and identification of the decision-maker. In a claim based solely on irrationality, however, their absence is evidential rather than determinative.

A contractual term governing pay for an employee’s services falls outside section 3 of the Unfair Contract Terms Act 1977. In relation to such remuneration, the employee neither deals as a consumer nor contracts on the employer’s written standard terms of business.

A bank sought summary judgment against a former employee’s claims for larger discretionary bonuses for 2003 and 2004 and a bonus for part of 2005. Morison J dismissed the application in the Commercial Court: [2006] EWHC 785 (Comm).

The employee alleged that the earlier awards were irrationally low when compared with his trading desk’s profits and his line manager’s recommendations. For 2005, he challenged a term excluding payment unless he remained employed on the payment date. He also argued that the term was controlled by section 3 of the Unfair Contract Terms Act 1977.

The central issues were whether any bonus claim had a real prospect of success and whether the statutory control of exclusion clauses applied to an employment term governing remuneration.

1. The appeal was allowed and summary judgment granted. The employee had no real prospect of proving that the bank irrationally or perversely exercised its bonus discretion for 2003, 2004 or 2005. Morison J’s order was set aside and the bonus claims were dismissed.

2. The contractual discretion was very wide. The court’s task was confined to determining its legal limits and whether the bank had exceeded them. It could not substitute its own view of the proper bonus. Proving that no rational bank would have made the challenged awards imposed a very high burden, particularly where remuneration depended on discretionary judgment in fluctuating market and labour conditions. The profitable desk and the line manager’s unexplained recommendations did not establish a prima facie case of irrationality.

3. The implied duty of trust and confidence will generally require an employer to explain a bonus decision and identify the decision-maker. Moses LJ clarified that, where the pleaded claim concerns irrationality rather than breach of that duty, missing reasons or an unidentified decision-maker are only evidentially significant. The employee must first identify some feature tending to show perversity. The bank had in any event explained that the employee was highly paid and that the bank or relevant division had suffered losses.

4. The 2005 eligibility term clearly provided that no bonus was payable unless the employee remained employed on the payment date. He was not employed when bonuses were paid. A damages claim might arise if employment were terminated shortly before payment in order to defeat the bonus, but no such allegation was made here.

5. Section 3 of the Unfair Contract Terms Act 1977 did not control the eligibility term. The focus was the particular term, not whether employment contracts could ever fall within the Act. In respect of pay for work personally rendered, an employee does not deal with the employer as a consumer. Nor are remuneration provisions a bank’s written standard terms of business: its relevant business is banking, not entering employment contracts. Jacob LJ agreed with both judgments, and Moses LJ agreed with Mummery LJ while adding observations on reasons and irrationality.

1. Court of Appeal (Civil Division): Allowed the bank’s appeal, set aside Morison J’s order, granted summary judgment and dismissed the claims concerning the 2003, 2004 and 2005 bonus decisions: [2006] EWCA Civ 1536.
2. Commercial Court: Morison J dismissed the bank’s application for summary judgment and directed the bonus claims to proceed to trial: [2006] EWHC 785 (Comm).