Keen v Commerzbank Ag

A contractual discretion to award a bonus must be exercised rationally and not perversely. The fact that some bonus was paid does not prevent a claim that the amount awarded was irrationally low. Where the employer gives little evidence of who made the decision, what was considered, or how the amount was calculated, the employee may have a real prospect of establishing a breach of the implied term. At the summary judgment stage, the court should generally examine the contemporary documents and leave disputed questions about the operation of the scheme to trial. Questions under the Unfair Contract Terms Act 1977, including whether a bonus clause defines the contractual right or removes an accrued right, may also require a full evidential hearing.

The claimant, a highly paid manager of the defendant bank’s proprietary trading desk, claimed bonuses for 2003, 2004 and part of 2005. He alleged that the bank had exercised its contractual discretion irrationally or perversely and had failed adequately to take account of the desk’s and his performance. The bank sought summary judgment under Part 24 of the Civil Procedure Rules, relying on the discretionary wording of the bonus scheme and, for 2005, on a clause making payment conditional on employment at the payment date. The claimant also relied on the Unfair Contract Terms Act 1977. The central issue was whether the claims had no real prospect of success or whether they required a trial.

1. The application for summary judgment was dismissed. The claimant had a properly arguable claim concerning the bonus arrangements for all three years.

2. For 2003 and 2004, the bank had not produced compelling evidence showing who made the bonus decisions, what factors were taken into account, or how the bonus pools were calculated. Its evidence did not adequately answer the allegation that the manager’s recommendations had been reduced irrationally or perversely.

3. The fact that the claimant received substantial bonuses did not determine the issue. There was no necessary distinction between an irrational decision to pay nothing and an irrational decision to pay too little. The court would need to examine contemporary documents and the evidence concerning the decision-making process. It would also need to investigate whether an ostensibly desk-based scheme properly took account of the claimant’s individual performance.

4. For 2005, it was arguable that the bank retained a discretion as to the timing of payment and that the discretion had to be exercised rationally. It was therefore arguable that refusing any bonus for successful work performed before the desk was closed could be irrational, notwithstanding the payment-date clause.

5. It was inappropriate to decide the issues under the Unfair Contract Terms Act 1977 summarily. The court had not been asked to determine whether the Act applied to contracts of employment. Further, the distinction between a clause defining the scope of a contractual right and one excluding liability for an accrued right was difficult to draw on the available material. The issue was better determined at trial, with the benefit of the evidence, and possibly expert evidence.