“[10] The steps in the CAP in outline were as follows: (1) Mr Gerko calculated a “Pre-Retention Amount” for each individual member of HFFX. In essence, this was an amount that Mr Gerko would have allocated to the member if there had been no deferral scheme. (2) Mr Gerko was required to allocate to GSAM at least 30% of [the] Pre-Retention amount (Clause 10.3(D) of the LLP Deed). In practice the first£100,000 of each member’s profit allocation was made in cash and 50% of the rest was deferred. (3) Mr Gerko was empowered (with GSACS’s consent) to make recommendations to GSAM in prescribed form as to investment of profits paid to it, the contribution of proceeds of such investments to HFFX as Special Capital, and reallocation of Special Capital to other members. (4) Mr Gerko duly made recommendations. Those reflected the proportions deferred for the various individual members participating in the CAP. (5) GSAM duly invested profits paid to it and contributed sums as Special Capital. It then reallocated Special Capital to individual members. (6) Upon reallocation members could withdraw Special Capital. They argue no income tax was payable by them on withdrawal.”
“The Partnership has been established in order to enable certain former employees of the Corporate Member, each being members of the HFFX Trader Group (defined below), to exercise greater autonomy over their compensation; to provide the opportunity for promotion to partner status within the Partnership and to facilitate internal governance rights for the HFFX Trader Group.”
“(D) Fourthly… there shall be allocated to the Retention Member an amount equal to the higher of: (1) 30% of the Pre-Retention Amount for all Individual Members; or (2) such other amount as the Managing Member may determine for purposes of incentivisation of Members or as may be required by applicable law or regulation.”
“… such sum as the Managing Member would potentially have allocated to such Member in any financial year of the Partnership pursuant to clauses 10.3(E) and 10.3(F) had there been no allocation to the Retention Member pursuant to clause 10.3(D)…”
“For the avoidance of doubt, no individual Member shall have any right or entitlement to or interest in any Pre-Retention Amount. Such sum shall be calculated by the Managing Member solely for the purpose of calculating the allocation to the Retention Member under clause 10.3(D) and shall be confidential to the Managing Member.”
“Any of the Members may with the prior agreement of the Managing Member, and the Retention Member shall at the direction of the Corporate Member, make further contributions of capital…in cash or in specie (“Special Capital”)… Any contributions of Special Capital that are made to the Partnership pursuant to this clause 11.9(A) shall be credited (in the case of an in specie contribution, in the amount agreed between the relevant Member and the Managing Member) to the relevant Member’s Special Capital Account and shall be subject to the provisions as to withdrawal and reallocation set out in this clause 11.9…”
“Subject to the provisions below, any Member who for the time being has Special Capital credited to his Special Capital Account (provided that such Special Capital has remained in such Member’s Special Capital Account for at least one month) may, in his sole and absolute discretion, decide that all or part of the interest of such Member in any Special Capital (and accordingly in any Investment Assets acquired with such Special Capital) should be reallocated to any other Member or Members…so that such other Member or Members will, following such reallocation, become beneficially entitled to the relevant part of such Special Capital (and the relevant part of any Investment Assets acquired with such Special Capital and any proceeds of the realisation of any such Investment Assets) and shall give notice of any such decision to the Managing Member. On the making by any Member of any reallocation there shall be a deemed transfer of the relevant proportion of the Special Capital used to acquire the relevant Investment Assets and the amount of Special Capital deemed transferred shall be deducted from the Special Capital Account of the Member that contributed the same and shall be credited to the Special Capital Account of the Member to which such Special Capital has been reallocated. Within 30 days of the making of an allocation of profit to the Retention Member under clause 10.3(D), the Managing Member may, with the prior consent of the Corporate Member, make recommendations in writing to the Retention Member in the form set out at Schedule 6 as to the investment of such profit (after meeting tax and other liabilities) in shares in the Funds, the contribution of the proceeds of such shares into the Partnership as Special Capital and the reallocation of such Special Capital to other Members. Following the making of such recommendations, the Managing Member may notify each Member of the fact that a recommendation has been made in respect of them in the form set out at Schedule 7. The Managing Member may make further or alternative recommendations to the Retention Member from time to time with the prior consent of the Corporate Member. For the avoidance of doubt, the Retention Member shall be under no obligation to follow the recommendations of the Managing Member and shall have absolute discretion as to how it applies any profit allocations it receives from the Partnership.”
“The Partnership may make further recommendations or may modify its recommendations to the Retention Member to take into account such matters relating to your performance or conduct or the performance of the Partnership or GSA or other events or circumstances in subsequent years as it is required to take into account under any law, regulation, rule, order or directive (including, without limitation, any regulation, rule or order of the FSA) applicable to the Partnership, GSA or any Member (whether in their capacity as Member or as Secondee of GSA). In certain limited circumstances, set out at clause 11.9(B) of the Deed, [GSAM] shall be restricted from reallocating Special Capital to you, in which case the value of the Award shall be reduced in common with potential awards for all other members of the Partnership, on a pro rata basis.”
“687 Charge to tax on income not otherwise charged (1) Income tax is charged under this Chapter on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act. …”
“[121] In Cunard, the trustees of a will were directed to hold the residuary estate of the testatrix on trust to pay the income to her sister during her life, with power to supplement the income from capital if the income alone was insufficient to enable the sister to live in the same degree of comfort as she had during the testatrix’s lifetime. This power was exercised by the trustees, and the sister was then assessed to income tax under Case III of Schedule D and to surtax on the whole of the payments made to her, including the supplements from capital. The main argument for the taxpayer was that ‘the payments in question, having been made out of capital at a time when the residue had not been ascertained, were not [her] taxable income’: see 130-131. The leading judgment was delivered by Lord Greene MR, with whom Morton and McKinnon LJJ agreed. After holding that the will, properly construed, authorised the application of capital in this way from the date of the testatrix’s death, and not merely from the date when the administration of the residuary estate was completed, Lord Greene continued, at 132: ‘The payments, therefore, in my opinion, were properly made and at the moment of payment became income of the recipient, Miss McPheeters … [her] title to the income arose when the trustees exercised their discretion in her favour and not before. At that moment a new source of income came into existence [my emphasis]. The payments came to Miss McPheeters under the express terms of the will and not by virtue of what I may call the quasi-interest enjoyed by a residuary legatee pending completion of administration …’ [122] Lord Greene went on to deal with further arguments that the payments were not taxable under Case III of Schedule D because (a) they were not annual payments, and (b) they were discretionary and therefore voluntary payments which the taxpayer could not claim as of right (see 133). The answer to the first point was that the payments were capable of recurrence on a yearly basis, even if they varied in amount, while the second argument also failed for the reasons which Lord Greene gave at 133-134: ‘It was suggested, however, that the Rule does not extend to mere voluntary payments. But the payments here were of a totally different character. They were not voluntary in any relevant sense, but were made in the exercise of a discretion conferred by the will out of a fund provided for the purpose by the testatrix. It is true, of course, that the trustees had an absolute discretion whether to make a payment or not. But the question whether they should do so is one which they were bound to take into their consideration. … The money, when received by Miss McPheeters, was received by her through the joint operation of the will and the exercise of their discretion by the trustees.’ [123] Cunard was relevantly a case about Case III of Schedule D, but there is no reason to suppose that what Lord Greene said is not equally capable of application for the purposes of Case VI or section 687 . I therefore see no difficulty in holding that a source for the final PIP awards may be found in the exercise by the corporate partner of its discretion whether or not to follow the recommendations of the Board and make the awards, especially as it is common ground that the discretion was not unfettered and had to be exercised in accordance with the principles of the Braganza case.”
“Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.”
“It is pertinent to observe that, in cases of this kind, the implication of the term is not the application of a ‘good faith’ doctrine, which does not exist in English contract law; rather is it as a requirement necessary to give genuine value, rather than nominal force or mere lip-service, to the obligation of the party required or empowered to exercise the relevant discretion. While, in any such situation, the parties are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising the discretion, it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion. Thus the courts impose an implied term of the nature and to the extent described.”
“…the clause is one contained in a contract of employment in a high-earning and competitive activity in which the payment of discretionary bonuses is part of the remuneration structure of employers. In this case, the objective purpose of the bonus clause on the evidence…was plainly to motivate and reward the employee in respect of his endeavours... Further, the condition precedent that the employee should still be working for CFI and should not have given notice or attempted to procure his release, demonstrates that the bonus was to be paid in anticipation of future loyalty. In such a case, as it seems to me, the provision is necessarily to be read as intended to have some contractual content, i.e. it is to be read as a contractual benefit to the employee, as opposed to being a mere declaration of the employer’s right to pay a bonus if he wishes, a right which he enjoys regardless of contract.”
“…not voluntary payments in any relevant sense. They were payments made in fulfilment of a testamentary disposition for the benefit of the children in the exercise of a discretion conferred by the will.”
“…once it is established that the payment was an income receipt rather than a capital receipt and that it was paid pursuant to a binding contract in return for some kind of service then there is no need to go further to inquire into the extent of the services in fact provided.”
“It is a well established principle deriving from the nature of income tax as an annual tax, that a receipt or entitlement arising in a year of assessment is not chargeable to tax unless there exists during that year a source from which it arises... The principle is conveniently expressed in Whiteman and Wheatcroft on Income Tax, 2nd ed. (1976), p. 21, paras. 1-28, as follows: ‘most types of income are classified by reference to the source from which they come. From this it was held to follow that if a taxpayer ceased to possess a particular source of income, he could not be taxed on delayed receipts from that source unless these were referable to, and could be assessed in respect of, a period during which he possessed the source.’”
“An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term. The precise formulation of that term has been variously expressed in the authorities. In essence, however, it is that the relevant party will not exercise its discretion in an arbitrary, capricious or irrational manner. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so…”