Rutherford v Seymour Pierce Ltd

A term is implied into a contract only where the contract, read as a whole against its relevant background, would reasonably be understood to contain it. Necessity, obviousness and business efficacy are formulations of that single question. An alleged term excluding an employee from bonus consideration merely because employment ended or notice had been given was neither necessary nor reasonable, and was not established by usage or custom.

Where a contractual bonus discretion has not been exercised, the court must assess the position that would have resulted from a proper exercise of the discretion. Where it has been exercised, intervention is justified only for irrationality or perversity. A bonus decision cannot be manipulated by dismissal designed to defeat an otherwise earned entitlement.

The claimant was employed by the defendant investment bank from May 2003 until his summary dismissal on 28 November 2007. His contract provided eligibility to participate in a discretionary bonus scheme but contained no express condition requiring continued employment or absence of notice at the payment date.

The defendant alleged that such a term was implied and, alternatively, that the claimant was not entitled to a final-quarter bonus because of poor performance. The court considered whether the term existed, whether the claimant had been considered for a bonus, whether a reasonable exercise of the discretion would have produced a payment, and the appropriate amount.

1. Implied term. The alleged term was not implied. The contract could operate sensibly without an inflexible rule denying bonus consideration to employees who had left or were under notice. The term was also manifestly unreasonable because it could permit dismissal immediately before payment to avoid liability. It did not go without saying, particularly because the defendant later inserted equivalent wording expressly into other contracts.
2. The evidence did not establish any sufficiently notorious, invariable, certain or general usage or custom in the City of London. At most, the evidence suggested a trading practice, which was insufficient.
3. Bonus discretion. The contractual discretion was not exercised at all. The defendant’s decision-maker wrongly treated dismissal as automatically ending eligibility. The court therefore had to place itself in the position of the employer and assess what would have resulted from a reasonable exercise of the discretion, following Horkulak v Cantor Fitzgerald International and the approach in Clark v Nomura International.
4. The claimant was eligible to be considered for the final-quarter bonus. His performance during the earlier part of the financial year, his commission generation, his management responsibilities and the treatment of other directors supported that conclusion. Summary dismissal was not, by itself, a proper basis for refusing consideration.
5. The pleaded allegations of poor performance were rejected. They were unsupported, contradicted by the evidence or improperly expanded during the trial. The claimant’s performance and the commission generated demonstrated that, on a reasonable exercise of the discretion, he was plainly entitled to a bonus. Even applying the stricter irrationality or perversity test, the refusal would have been irrational and perverse.
6. The appropriate bonus was £70,000. The defendant was ordered to pay that sum within 14 days, with interest. The claimant obtained indemnity costs, including under CPR provisions relating to the defendant’s conduct and failure to make a reasonable offer, together with an interim payment on account of costs of £45,000.