Khatri v Cooperatieve Centrale Raiffeisen-Boerenleenbank BA

On a summary-judgment application, the court may determine the construction of a written contract where the relevant background facts are undisputed and there is no reasonable basis to suppose that fuller investigation would affect the result. A bonus clause using language of eligibility and a formula for the bonus due created an enforceable entitlement. A general power to review or remove the formula did not permit removal of that entitlement for the current performance year.

A contractual variation requires conduct that unequivocally indicates acceptance. Continued work and acceptance of ordinary salary do not establish acceptance where the alleged change has no immediate practical effect and the conduct remains consistent with the existing contract.

The claimant was employed by the respondent bank as a derivatives trader. In March 2008, the parties agreed a salary increase, a guaranteed bonus, and a formula-driven performance-related bonus for 2008. In July 2008, after the claimant was told that his role was at risk of redundancy, the bank sent him an unsigned letter which purported to replace the formula-driven bonus with a discretionary scheme and imposed restrictive covenants.

The claimant continued to perform the same proprietary-trading work. He later claimed the formula bonus after generating substantial profit. Penry-Davey J refused summary judgment: [2009] EWHC 2606 (QB). The central issues were whether the March terms conferred an enforceable formula bonus and whether the claimant had accepted their variation by conduct.

1. Appeal allowed. The Court granted the claimant summary judgment for the formula-driven bonus claim. Lord Justice Jacob gave the reasons, with which Longmore and Rix LJJ agreed.

2. The applicable summary-judgment principles did not require a trial. Applying Nigeria v Santolina Investment [2007] EWHC 437 (Ch), a realistic defence must have real substance and the court must avoid a mini-trial. However, construction of a written contract may be determined summarily where the relevant factual matrix is not genuinely disputed and there are no reasonable grounds to think that fuller investigation could affect construction. The bank’s proposed factual-matrix issues did not meet that standard.

3. The March 2008 letter gave the claimant a contractual right to a performance-related bonus calculated by the stated formula. Objective construction required the words to be read as a reasonable person with the available background knowledge would understand them, consistently with ICS v West Bromwich [1998] 1 WLR 896. References to eligibility, a formula for the bonus due, and payments due were language of entitlement. The bank’s retained right to review or remove the formula concerned future bonus arrangements; it did not reserve a power to remove the entitlement for 2008.

4. The July letter did not vary the contract. Under Rigby v Ferodo [1988] ICR 29 and Solectron Scotland v Roper [2004] IRLR 4, continued employment accepts a proposed variation only where the employee’s conduct is only referable to acceptance. The claimant did the same work for the same pay, did not sign the proposed terms as requested, and his conduct was consistent with the original contract. The new terms were wholly disadvantageous because they removed the bonus entitlement and imposed restrictive covenants.

5. The Court also noted that a contractual discretionary-bonus power is constrained by rationality and fairness, applying Horkulak v Cantor Fitzgerald [2004] EWCA Civ 1287 and Keen v Commerzbank [2006] EWCA Civ 1536. That point formed part of the contractual background, rather than the basis of the result.

• Court of Appeal (Civil Division) — Allowed the claimant’s appeal and granted summary judgment: [2010] EWCA Civ 397.
• High Court, Queen’s Bench Division — Penry-Davey J refused the claimant summary judgment on 12 October 2009: [2009] EWHC 2606 (QB).