GX Networks Ltd v Greenland

A contractual power to cap commission is not unfettered where the scheme calculates an employee’s entitlement by reference to agreed targets and sales. Restrictions on liability are strictly construed. Wording that a cap may be imposed by exception only means that it can be used only in exceptional circumstances. A management decision not to increase a target, forecasting errors that caused no difficulty, and unusually strong sales within an incentive scheme do not, on these facts, qualify. If exceptional circumstances were not determined below, the appellate court may assess that question itself. Absent such circumstances, the cap is outside the contract and earned commission remains payable.

GX Networks Ltd v Greenland arose from an employee’s claim for unpaid commission under a sales compensation plan. The employer accepted the arithmetical calculation of commission but relied on a contractual power allowing the sales director to cap the fourth-quarter bonus.

The Queen’s Bench Division, on 5 October 2009, awarded the employee £139,569.60 and costs. The employer appealed with permission. The central issue was whether the capping provision conferred an unfettered discretion, or whether it could be exercised only in exceptional circumstances, and whether the circumstances relied upon justified the cap.

The Court of Appeal unanimously dismissed the appeal. Lady Justice Smith gave the judgment, with Lord Justice Laws and Lord Justice Rimer agreeing.

1. The capping provision was poorly drafted, but it could not sensibly confer an unfettered discretion to remove or reduce commission calculated under the scheme. The scheme established target levels, required consultation in setting them, and provided a calculation for overperformance commission. An unfettered power to take away that entitlement would undermine a major part of the bargain.
2. The words by exception only meant that the capping power could be used only in exceptional circumstances. A provision restricting liability had to be strictly construed. The court proceeded on the accepted basis that the cap could reduce overperformance commission as well as eliminate it.
3. The trial judge had not decided the meaning of the phrase or expressly assessed whether exceptional circumstances existed. The Court of Appeal therefore made that assessment itself. The employee’s inaccurate forecasts caused no relevant difficulty because the employer understood the position when considering the target. The decision not to increase the target was a management choice made with knowledge of the facts, not an exceptional circumstance. Nor could unusually successful sales ordinarily justify capping the reward under a scheme designed to encourage and remunerate success.
4. No exceptional circumstances existed when the cap was imposed. The decision was therefore inconsistent with the employment contract, and the employee was entitled to her full earned commission. The trial judge’s conclusion was upheld, although on different reasoning.

• Queen’s Bench Division: His Honour Judge Shaun Spencer QC, sitting as a High Court judge, awarded the employee £139,569.60 and costs on 5 October 2009, and granted permission to appeal.
• Court of Appeal (Civil Division): The appeal was dismissed and the lower court’s result upheld on different reasoning: [2010] EWCA Civ 784.