Contractual discretion - Brogden and another v Investec Bank plc [2016] EWCA Civ 1031

What are the limits on a discretion conferred by a contract?

The facts

Investec recruited the claimant employees in 2007 to set up a desk trading in equity-based derivatives. In addition to their base salaries, the employees had contractual annual bonuses based on a percentage of the economic value added (EVA) generated by the desk.

The employees considered that the bonuses should be calculated by reference to the value to Investec of having access to the funds raised by the desk. Investec considered that the bonuses should be calculated by reference to the desk’s profit and loss account. For the year 2010/2011, the desk recorded a loss and Investec declined to pay the employees a bonus. The employees resigned and brought a claim against the bank.

At first instance, the Judge found that the employees had no right to a bonus for the year 2010/2011. Investec had a discretion as to the manner in which the bonus was calculated and the employees had not demonstrated that Investec had acted irrationally or in bad faith, so its decision could not be challenged.

The decision

The Court of Appeal upheld the Judge’s decision but for different reasons. The Judge had been right to find that the EVA generated by the desk meant the amount calculated using the method normally used by Investec to calculate the performance of each business. However, the Judge had been wrong to conclude that the bank had a discretion as to the manner in which the EVA was calculated. The employees had a right to have the EVA calculated in the manner which had been communicated to them. The manner of calculation was apparent from the outset and the employees had made no attempt to renegotiate.

The ex gratia bonus payments that had been made to the employees were not capable of giving rise to a reasonable expectation that Investec would act the same way in the future, nor did they create an obligation for it to do so.

Why is this important?

The Court of Appeal decided the dispute on the basis of contractual interpretation of the relevant bonus clauses and so did not consider this to be a case of contractual discretion. This is a reminder that clauses prescribing a specific method for the calculation of bonus payments are likely to be determinative. Ex gratia payments which increase the size of the bonus pool will not usually entitle employees to have their bonuses calculated via a different method.

Any practical tips?

If bonus clauses are to provide a calculation, ensure the method is clear (and consider including a worked example), and ensure the specified method is followed. If bonuses are to be discretionary, ensure that the relevant factors are taken into account and the discretion is not exercised irrationally.