Robert Gagliardi v Evolution Capital Management LLC

A contractual discretion to award a performance-related bonus must be exercised for the purpose stated in the contract. Where the contract defines the relevant measure by reference to revenue contributions, the employer cannot withhold the bonus for unrelated complaints or an unresolved investigation. A target range may prescribe the permissible range of a discretionary award rather than confer an absolute power to award nothing. A pro-rata clause may preserve entitlement where employment ends before the bonus date, unless the employee was terminated for contractual cause. The court may assess the bonus itself where the rational exercise of the discretion permits only one outcome. An employer may also be estopped from excluding profits generated through a trading vehicle which it allowed and encouraged the employee to use.

The claimant was employed as a US portfolio manager under a Delaware-law employment contract. His remuneration included a signing bonus, salary, an IPO bonus and a discretionary bonus targeted at 10–15% of profit generated by the defined business. Before the named master fund became operational, he traded through an existing share class, generating substantial profits. The defendant later terminated his employment without cause and paid the IPO bonus but awarded no discretionary bonus, relying principally on a pending SEC/DOJ investigation and subsequently advanced complaints about risk limits, compliance, conduct and reputation.

The claimant claimed breach of contract and the defendant counterclaimed for repayment of salary and the IPO bonus. The issues included construction of the bonus provisions, the effect of the pro-rata clause, estoppel, the proper exercise of contractual discretion, damages and the adequacy of the counterclaim.

1. Construction. Under Delaware law the contract was construed objectively from its four corners. The discretionary bonus was based on the claimant’s individual revenue contributions and the profit generated by the business. “Profit” meant trading profit net of the specified expenses, not management or performance fees received by the investment managers. The 10–15% target range governed the assessment where profit and revenue contributions existed; it did not give the defendant an absolute discretion to award nil.
2. Eligibility and pro-rata entitlement. The requirement to be an employee in good standing was to be read with the pro-rata clause. It meant, in substance, that the claimant was not excluded unless terminated for contractual Cause. Since he was dismissed on notice and not for Cause, he was entitled to good-faith consideration of a pro-rated discretionary bonus for his 2021 contributions. The defendant could not defer payment while waiting for the investigation’s outcome.
3. A1 share class and EARMF. The contract’s express definition of the Business referred to EARMF. Nevertheless, the defendant was quasi-estopped and equitably estopped from excluding the profits generated through the A1 share class. It had encouraged the claimant to trade there before EARMF became operational, treated the vehicles as a continuation, and paid the IPO bonus on that basis.
4. Exercise of discretion. The implied term of trust and confidence required outcome and process rationality. The defendant could consider the claimant’s revenue contributions, but not unrelated post hoc complaints. The only genuine contemporary concern was the SEC/DOJ investigation, which did not prove wrongdoing and did not justify a nil award or termination for Cause. The decision was therefore irrational and in breach of contract.
5. Remedy and counterclaim. Applying the contractual purpose, the claimant’s 97% revenue contribution required an award at the top of the range. The court assessed the bonus at 15% of US$35.9 million, namely US$5,385,000, with interest from 3 April 2022. The counterclaim for repayment of salary and the IPO bonus failed. The allegations concerning confidential information were inadequately pleaded and third-party regulatory findings could not prove wrongdoing against the claimant.