Brogden & Anor v Investec Bank Plc

A contractual bonus formula must be interpreted in its contractual and commercial context. Where the employer has explained that a performance measure will be calculated using its established accounting method, the employee is entitled to have it calculated in that way.

A contractual discretion arises only where the contract confers one. General controls on the exercise of contractual discretions therefore have no application where the contract prescribes the calculation method. Earlier discretionary payments may be ex gratia and need not create an expectation that the employer will repeat them.

Andrew Brogden and Robert Reid appealed against the dismissal of their claim that Investec Bank Plc had failed to pay bonuses due under their employment contracts.

The contracts provided for bonuses calculated by reference to economic value added generated by the equity derivatives business. The appellants argued that this required account to be taken of the wider economic benefit to the Bank from deposits raised through investment bonds. The Bank calculated the bonuses by reference to the internal profit and loss account of the relevant trading desk.

Leggatt J dismissed the claim, holding that the Bank had a discretion in assessing economic value added and had not exercised it irrationally or in bad faith. The central issue on appeal was the proper construction of the bonus formula and whether it gave the Bank a contractual discretion.

1. Appeal dismissed. Lord Justice Moore-Bick delivered the judgment and Lord Justice Christopher Clarke agreed. The order of Leggatt J was correct, although the Court of Appeal reached that conclusion for different reasons.
2. The phrase referring to economic value added generated by the equity derivatives business meant the economic value added of the SED desk, calculated by the method normally used by the Bank for each business unit. The parties’ discussions and the Bank’s established accounting systems formed part of the relevant contractual context.
3. The contracts did not confer a discretion on the Bank in the established legal sense. The appellants had a right to have the SED desk’s economic value added calculated by the disclosed method, namely revenue less costs and the cost of capital, calculated before tax. The Bank’s corresponding obligation was limited accordingly.
4. The fact that the desk’s internal result depended partly on the rate credited by Central Treasury did not alter the contractual formula. The desk had originally been intended to operate as a trading desk, and the appellants had not renegotiated the bonus basis after developing retail investment products.
5. The authorities concerning limits on contractual discretions, including Braganza v BP Shipping Ltd [2015] UKSC 17, were not applicable because the contracts did not give the Bank such a discretion. Earlier increases in the bonus pool were ex gratia payments. They did not create a reasonable expectation that the Bank would repeat them or impose an obligation to do so.

1. Court of Appeal (Civil Division): dismissed the appeal against the order below, for reasons differing slightly from those of the judge.
2. High Court of Justice, Queen’s Bench Division, Commercial Court: Leggatt J dismissed the claim for breach of contract: [2014] EWHC 2785 (Comm).