Humphreys v Norilsk Nickel International (UK) Ltd

An employer’s discretion under a discretionary bonus clause may be subject to a subjective contractual assessment. Where the contract leaves performance to the employer’s assessment and provides no agreed objective, the issue is whether the employer genuinely held the relevant view. The court will not substitute its own assessment. Alternatively, the exercise of the discretion is unlawful only if irrational or perverse, in the sense that no reasonable employer could have reached the conclusion adopted. Adequate performance of ordinary duties does not necessarily justify a bonus where the contractual scheme reserves additional payment for performance exceeding the required standard.

The claimant, an economist employed as chief economist by the defendant, claimed £572,000 under a performance-bonus clause in a fixed-term employment agreement. The bonus depended on the performance level decided by the Management Board, ranging from no bonus for unsatisfactory performance to specified higher payments for performance exceeding expectations. No agreed objectives had been established.

The defendant assessed the claimant’s 2008 performance as unsatisfactory, principally because his nickel-price forecasts were seriously inaccurate, and paid no bonus. The claimant alleged breach of contract and contended that the assessment was unjustified and irrational. The central issues were whether the clause required an objective assessment and whether the Board’s decision was irrational.

1. Construction of the bonus clause. In the particular contractual context, and absent agreed objectives, the expressions “satisfactory” and “unsatisfactory” required a subjective assessment by the Management Board. The relevant question was whether the Board genuinely held the view that the claimant’s performance was unsatisfactory. The principle was supported by Stadhard v Lee (1863) 3 Best & Smith 364 and Wishart v National Association of Citizens Advice Bureaux Ltd [1990] ICR 794.
2. The word “satisfactory” in this bonus scheme meant sufficiently satisfactory to justify an additional bonus. Merely performing the ordinary duties of employment adequately did not automatically entitle the claimant to the Grade 2 payment.
3. Control of contractual discretion. The general approach in Clark v Nomura International Plc [2000] IRLR 766, approved in Horkulak v Cantor Fitzgerald International [2004] IRLR 942 and applied in Commerzbank AG v Keen [2007] IRLR 132, was applicable. The court could not substitute its own view for that of the employer. The claimant had to show that no reasonable employer could have exercised the discretion in the manner adopted. The burden was particularly high where commercial judgment and fluctuating market conditions were involved.
4. The claimant had not established that the Board’s assessment was irrational. The Board did make an assessment, concluded that the performance was Grade 1, and genuinely relied on the substantial inaccuracies in the claimant’s nickel-price forecasts. Forecasting was an important part of his role, and the Board was entitled to decide the relative importance of the various duties.
5. The delay in deciding the bonus technically constituted a breach because payment was due by 28 February 2009, but it caused nominal loss only. The substantive claim for the bonus failed. The claim was dismissed.