Brogden & Anor v Investec Bank Plc

A contractual bonus formula may require the employer to calculate the relevant performance measure using its established internal methodology. The court will not substitute an objectively preferred accounting method where the contract and commercial context show that the employer’s normal system was intended to apply.

Where one party must assess a matter affecting both parties and reasonable judgment is required, the assessment may constitute a contractual discretion. It must be exercised in good faith, for proper purposes and rationally. The court will not intervene merely because another accounting treatment is arguable.

The claimants were senior employees of Investec’s structured equity derivatives business. Their employment contracts provided for bonuses calculated by reference to a percentage of the economic value added generated by that business.

They claimed damages for the 2010/2011 financial year, alleging that an oral agreement or the proper interpretation of the bonus clause required the use of institutional market interest rates. They also challenged the accounting treatment of kick-out products, profit payaways and early-bird deposits. Investec denied liability and maintained that its established EVA methodology produced no contractual bonus entitlement.

1. The claim failed. The claimants had no contractual entitlement to a bonus for 2010/2011.
2. No binding oral agreement had been made requiring Investec to use an institutional market rate when calculating bonus. The alleged discussions were unsupported by contemporaneous documents, inconsistent with the claimants’ conduct during their employment and, even on their own evidence, concerned the rate payable by Central Treasury rather than the methodology for calculating bonuses.
3. The expression “EVA generated by the Equity Derivative business” was construed objectively in its contractual and commercial context. “EVA” meant the amount calculated using Investec’s established method for measuring the performance of business units: revenue less costs and the cost of capital, calculated before tax. The clause did not require the court to construct an independent measure of economic value from first principles.
4. The calculation of EVA involved substantial judgment and materially affected the claimants’ contractual entitlement. It therefore constituted a contractual discretion subject to implied requirements of good faith, proper purpose and rationality. The claimants’ allegation of bad faith was unsupported and had not properly been put to the witnesses.
5. Investec’s use of the Central Treasury rate was not irrational. The SED desk raised funds for Investec and competed with other internal funding sources. It was not necessary to treat it as an independent market participant or credit it with a hypothetical wholesale borrowing cost.
6. The adjustments to the Funding Gap Reserve were permissible. The treatment of profit payaways was at least one which a reasonable accountant could adopt. The claimants also failed to prove that early-bird deposits had not benefited the desk by reducing its overdraft with Central Treasury.

The claim was dismissed.