Keen v Commerzbank Ag [2006] EWHC 785 (Comm)

[2006] EWHC 785 (Comm)Case No 2005/1013
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 07/04/2006
Before
THE HON MR JUSTICE MORISON
Between
James KeenClaimantCommerzbank AGDefendant
Mr Robin Knowles QC and Mr Richard Leiper (instructed by Ferguson) for ClaimantMr Andrew Hochhauser QC and Mr David Craig (instructed by Linklaters) for DefendantHearing Hearing dates: 23 March 2006
Judgment
[1]This is an application by the defendants for summary judgment, under Part 24 of the CPR. As such, it is not an occasion for a mini-trial. The question at issue is whether I am persuaded that the claimant’s claim has no real prospect of success and that there is no other compelling reason why the case should be disposed of at a trial.[2]The claim arises out of the claimant’s employment by the defendant bank [the Bank] between 4 November 2002 and 10 June 2005. The terms of his contract of employment are contained in a letter of appointment dated 27 September 2002, and accepted by the Claimant by signature dated 1 October 2002, and an Employee Handbook. If there is any conflict between the two contractual documents the terms of the letter prevail.[3]The Claimant was employed as the manager of a proprietary trading desk [the Desk] known as special situations 2 [‘SSII’] in the Bank’s Investment Banking Division. His annual salary was £120,000, but, as is common in the City with trading desks of all types, the major portion of his remuneration was in the form of an annual bonus. He reported to the London Head of Brokerage who was a Mr McCreadie. There is no suggestion in this case that the claimant was other than extremely successful at his job, and he and his small team earned substantial profits for the Bank.

The pleaded claim

[4]The bonus provisions are set out in the letter. “You are eligible to participate in the Bank’s discretionary bonus scheme. The decision as to whether or not to award a bonus, the amount of any award and the timing and form of the award are at the discretion of the Bank. Factors which may be taken into account by the Bank in deciding whether or not to award a bonus and the amount of any bonus include:-• The performance of the Bank• The performance of your business area• Your individual performance and your contribution to the Bank’s performance and the performance of your business area• The strategic objectives of the Bank• Whether you will be remaining in the employment of the Bank. No bonus will be paid to you if on the date of payment of the bonus you are not employed by the Bank or if you are under notice to leave the Bank’s employment whether such notice was given or received by you. Bonus may be reduced for any period of absence in excess of one month whether through illness, maternity leave or any other reason other than absence on holiday.”[5]In the Handbook, an employee may be sent on ‘gardening leave’ and during that period “You shall continue to receive your full pay and benefits during any such period.”[6]In determining the amount of bonus, the Bank were required to exercise a discretion and in so doing would take into account the Claimant’s performance. “Further it was an implied term of the Claimant’s employment contract that it would not exercise any discretion it had in relation to the Claimant’s bonus award irrationally or perversely.”[7]There are three heads of claim: each relates to a different year. The first claim is in respect of the calendar year 2003. The Desk accrued a profit of approximately €40 millions. Mr McCreadie recommended to Mr Rock, the Managing Director of the Investment Bank, a bonus pool for the Desk of between 15% and 18% of that figure. Effectively, the Bank decided on a pool of around 10%. The claimant alleges that the Bank’s exercise of their discretion was in breach of contract and unlawful because: “(a) That exercise was irrational and/or perverse: no rational bank in the City faced with the performance of SSII (and thereby the Claimant) and the recommendation of Mr McCreadie would reduce the bonus pool in this way (b) The Defendant failed to take any or adequate account of the performance of SSII (and thereby the Claimant) and of Mr McCreadie’s said recommendation.[8]The second claim is in respect of the bonus for the calendar year 2004. The profit made by the Desk for that year was €57.5 millions; Mr McCreadie’s recommendation was a pool amounting to 17.5% of the profit and the Bank decided on a pool of slightly less than 10%. The same matters are pleaded as showing that this decision was perverse and unreasonable.[9]The third claim relates to the bonus which the claimant earned between January 1 2005 and the effective date of termination of his employment. He says that between 1 January 2005 and 12 May 2005, when he left the bank’s premises at their insistence, never to return, the Desk’s profit was €46.5 millions yet the Bank has decided to give him nothing for that period. The Claimant alleges that that decision was obviously irrational and perverse; a [or perhaps the pleader means ‘every’] rational employer would have decided on a bonus pool of 17.5% of €46.5 millions, namely €8,137,500.[10]In their Defence, the Bank asserted that they were under no obligation to pay any bonus at all and that it was entitled but not obliged to take into account the Claimant’s individual performance. The implied term was admitted. They alleged that the claims in relation to the bonus for each of the three years “stand no reasonable prospect of success”. In relation to the 2003 year, they say that the true figure for the Desk’s ‘profit’ is €36,458,904 [rather than €40 millions] and the net profit figure was €31,600,000. They say that the bonus pool for the Desk was not determined as a percentage of the Desk’s net profit, but that if it were, the pool for the four employees working on that Desk was 12.66% of net profit. For that year, the claimant received €2,238,670 and shares from the pool amounting to a total overall bonus award of €2,800,000 for that year. This bonus, together with his salary meant that the claimant was one of the Bank’s highest paid employees. There was no obligation on the Bank to accept the recommendation of Mr McCreadie. “The Defendant took into account in determining the size of the bonus pool the fact that, for the 2003 year, the [Bank] made a loss of €2.32 billion and its Investment Banking Division made a loss of €32 million (on a net profit basis).” Later, it is pleaded that “The [Bank] took account of the performance of SSII and the Claimant. Mr McCreadie’s recommendation as to the bonus pool was considered, but rejected, which was neither perverse nor irrational.”[11]In relation to the 2004 year, the Bank contends that the net profit was approximately €35,150,000 and that the distribution by way of bonus was 15.22% of net profit. They say that the Claimant received an overall bonus, including shares in the pool, of some €2,950,000 making him one of the highest paid employees at the bank for that year. The say that they were not obliged to follow Mr McCreadie’s recommendation for that year but that they took into account “..the fact that, for the 2004 year, the [Bank] made a profit of €393 million and its Investment Banking Division made a loss of €279 million (on a net profit basis).”[12]They make the same plea for this year as they did in relation to the previous year namely that “The [Bank] took account of the performance of SSII. Mr McCreadie’srecommendation as to the bonus pool was considered, but rejected, which was neither perverse nor irrational.”[13]As to the 2005 year of account, the Bank rely upon what they say is an express term of the contract that no bonus would be paid to the Claimant if he was not employed by the [Bank] on the payment date of any bonus award and that the payment date for paying bonus for 2005 was March 2006 and he is not, therefore, entitled to any bonus.[14]In their Reply, the Claimant challenges the Bank’s interpretation of the contract for the 2005 year and asserts that “On the true construction of the Claimant’s employment contract, and in the events that happened, the termination carried out by the [Bank] of the Claimant’s employment did not entitle the [Bank] to avoid paying a bonus in respect of the performance the [Bank] had received from the Claimant in 2005.”[15]In any event, the Claimant contends that the Unfair Contract Terms Act 1977 applied, as the Claimant contracted with the Bank as a ‘consumer’ within the meaning of sections 3 and 12 of the Act, alternatively “on the [Bank’s] written standard terms of business”. It is the Claimant’s pleaded case that the words of the letter relied on by the Bank rendered a contractual performance substantially different from that which was reasonably expected of it or to render no performance at all of its obligation to allow the Claimant to participate in its discretionary bonus scheme and do not satisfy the requirement of reasonableness in sections 3(2) and 11(1) of the Act, and the Bank cannot rely on them.

The evidence

[16]The main points of significance in the evidence filed on this application are these:(1) The Claimant relies upon a number of remarks made and indications which he says were given to him as to how the bonus would be calculated, and it was not so calculated. These are not remarks which are said to amount to formal representations, but they are relied upon as supporting material in the claim that the discretion was exercised perversely in each of the two years of account in issue.(2) The Bank has filed no evidence from a decision maker and produced no documents which evidence the way their discretion was exercised. It appears to be their case that the decision about the size of the bonus pool was taken by the Board of the Bank. The evidence filed was from an in-house lawyer, Mr Benson. But in his second witness statement he sets out what the Bank took into account, in support of the averments in the Defence filed on the Bank’s behalf. Although in his first statement, Mr Benson gives as the source of his knowledge of the facts various individuals, the allegations that the Bank took various matters into account are unspecific in terms of their source. Thus, for example, Mr Benson asserts in paragraph 14(2) of his second witness statement that “.. the [Bank] took into account a number of factors in determining the size of the bonus pool …” And again, at paragraph 15 “The overall bonus pool for the Investment Banking Division was decided by the [Bank’s] board taking into account a number of factors …” [See also paragraph 17(3) “.. the [Bank] (as with other banks) had to and did take into account factors other than just the performance of a particular desk ..”]

The Parties’ submissions

[17]In a forceful submission on behalf of the Bank Mr Hochhauser QC submitted that(1) Instead of being content with the extremely generous awards that were made to him in 2003 and 2004 he now asserts that the decisions to make those awards were irrational and perverse, which, having regard to what he was paid, is incredible. He has to show that the discretion was exercised irrationally and perversely and has no credible case to advance in relation to those two years. The need to establish that the discretion was exercised perversely or irrationally was established in the case of Clark v Nomura International PLC [2000] IRLR 766 [paragraph 40]. This decision has been cited with approval in the Court of Appeal: Mallone v BPB Industries PLC [2002] ICR 1045 and Horkulak v Cantor Fitzgerald International [2005] ICR 402.(2) This is a different case from Nomura and Mallone: there, there was a nil award; here there was a huge award for each year. Essentially, it is a matter for the Bank and not for the Court to decide how the discretion should be exercised: see Lord Millett’s judgment in Reda v Flag [2002] IRLR 747, paragraph 91.(3) On the facts, Mr McCreadie’s recommendation for the 2003 year reflected the “aspirations of managers” and was a “first fly past”.(4) None of the discussions and statements relied on by the Claimant assist. They are not pleaded as contractual or as representations inducing the contract. In any event, the words ‘hedge fund standard’ or ‘hedge fund style’ are too vague to carry weight.(5) As to the 2005 year, the Claimant left his employment due to redundancy [the Desk was closed down as the Bank ceased to engage in proprietary trading] and was not employed at the bonus date in March 2006. A cut-off point of this sort is a common feature of bonus payments in the City. Reliance was placed on a decision of the EAT [Rimer J. presiding] Peninsula Business Services Ltd v Sweeney [2004] IRLR 49. There, the clause in question was “an employee has no claim whatsoever to any commission payments that would otherwise have been generated and paid if he is not in employment on the date when they would normally have been paid.” In their judgment the EAT said this:
“From the moment the employee signed the commission rules document, he could have had no expectation, reasonable or otherwise, of being paid post-resignation commission, since section B made it clear that he would not be entitled to such commission. In that respect, it was akin to the type of clause that Morland J and Judge Clarke respectively considered in Brigden and Brennan, namely ones that set out his entitlement and the limits of his rights. In our view it was not a contract term falling within section 3(2)(b) of the 1977 Act, and we hold that the tribunal was in error in deciding that it was. That being so, no question of the reasonableness or otherwise of section B under section 11 of the 1977 Act arises.”
[18]The references to ‘Brigden’ and ‘Brennan’ are references to Brigden v American Express Bank Ltd [2000] IRLR 94 and Brennan v Mills and Allen Ltd, an unreported decision of the EAT dated 13 July 2000. In Brigden, there was an interlocutory appeal against the striking out of a claim that a provision in a contract of employment was void and unenforceable under the 1977 Act. The clause in question was:
“An employee may be dismissed by notice and/or payment in lieu of notice during the first two years of employment without implementation of the disciplinary procedure.”
Morland J. held that the clause “although expressed in negative terms, is a clause setting out the claimant’s entitlement and the limits of his rights. In my judgment, it is not a contract term excluding or restricting liability of the defendants in respect of breach of contract or entitling the defendants to render a contracted performance substantially different from that which was reasonably expected of them or to render no performance in respect of any part of their contractual obligation.”[19]In the unreported decision, Mr Moss’ contract of employment provided for the payment of commission and provided that “Payment under this scheme is subject to your being in the employment of the company at the time of payment and not under notice whether given or received.”[20]In a minority judgment, Judge Peter Clark considered the application of the 1977 Act to these words. He referred to the decision in Brigden and the passage cited above and said:
“In my view, applying the same reasoning, the termination clause set out the applicants’ entitlement and the limits of their rights. They were entitled to anniversary renewals commission up to the termination of their employment (or, more strictly, the date of notice of termination) and no further. It does not fall within section 3(2)(b) [of the 1977 Act].”
[21]Thus, argued Mr Hochhauser QC, the clause in this case defines the right and is not properly to be regarded as an exception to a right already acquired. He invited me to rule on this issue now, reserving his position on the question whether the 1977 Act applies to a contract of service such as this.[22]For the Claimant, Mr Knowles QC submitted that:(1) There was no issue between the parties that in exercising their discretion whether to pay a bonus and, if so, how much to pay, the Bank had to act in good faith and not irrationally or perversely. At trial that issue would be decided on all the evidence, including the evidence of the decision maker(s) at the Bank. He pointed out the absence of any direct evidence from the Bank on this issue.(2) The fact that some bonus was paid does not mean that the decision is not realistically capable of being challenged. There is no difference in principle between a perverse decision to pay nothing and a perverse decision to pay not enough. Therefore, as the matter stood the claim made should be tried as the court did not have available to it enough evidence to show that the Bank’s decisions were obviously not perverse.(3) On the question as to the proper interpretation of the clause on which the Bank relies to refuse to make payment for the 2005 year, the position is not entirely straightforward. The first part of the clause gives the bank discretion as to the timing of an award. One of the factors which the Bank was entitled to take into account was whether the employee would be remaining in the employment of the Bank. Thus, looking at the clause as a whole, the employee has a right to participate in the discretionary bonus scheme. This entitlement continues throughout his employment even when, for example, it is known that he will not be remaining in the employment of the Bank and under the Handbook an employee “shall continue to receive [his her] full pay and benefits during any notice period”. By reference to the words on which the Bank relies, the Bank claims to be entitled to render no performance in respect of the bonus entitlement, and, specifically, to make no payment and thus the words on which the Bank relies falls within clause 3(2)(b) of the Act. In any event, the decision of the EAT in Brigden is wrong and should not be followed since it provides the proverbial coach and horses through the Act.(4) The core of a Trader’s remuneration is from his bonus.(5) There is going to have to be a trial in relation to the allocation of the bulk of the shares; the Bank having accepted liability in relation to part of that claim. The Court should not try and dissect the claim at this stage cutting out parts of it.

Decision

[23]Because I have reached the decision that this case should proceed to a trial of all issues, in a sense the less I say about the strengths and weaknesses of the parties’ arguments, the better. Nothing I now say is intended to tie the hands of the trial judge in due course.[24]In relation to the claims for bonus for the periods 2003 and 2004 I agree with Mr Knowles QC that the Bank has not adduced any compelling case as to the making of the bonus decisions for either year. It is not entirely clear who, under the scheme in force at the date of the contract, made the decision and on what basis. The witness statements of Mr Benson are carefully drawn and contain very little positive material. The Bank’s position appears to be that if it said nothing then the claim would be struck out. The logic of the position taken by the Bank is that it was not obliged to pay any bonus; it was not obliged to accept the Manager’s recommendation; there are no factors specified [unlike the Nomura case, for example] which the Bank are required to take into account; the Bank are not obliged to say how their decision was made; it is for the employee to show that the decision was perverse. In effect, this would mean that the decisions about bonus would be unchallengeable: if there were no specific criteria behind the decision, and no information as to exactly how the decision was made, how could the court conclude that the decision was irrational or perverse? The right to challenge the decision on grounds of irrationality or perversity is empty, at least where some bonus has been paid. This, despite the fact that it must have been the common intention of the parties that the Claimant would receive a bonus in some way commensurate with the success of his Desk.[25]In order to carry out an examination of how and why the decisions as to bonus were made, the court will need to look at the contemporary documents. Mr Hochhauser QC said that it was a common feature of the bonus system in the City that everyone who received one grumbled about it: no-one was ever satisfied with what they got. If this is correct, and I do not doubt what I was told, it is a symptom to an extent of the way bonus decisions are taken. So far as the Claimant is concerned, as I understand the evidence, he was simply told in March 2004 and 2005 what the bonus pool for the whole desk was to be; to be apportioned between the four traders as they themselves saw fit. It does not appear that there was any written statement showing how the bonus had been calculated, who by and when. He simply believes that what his manager recommended was fair and reasonable [and there is an issue of fact which I cannot determine as to the base figure on which bonus was calculated (if it was)] and he has been given no satisfactory explanation as to why that figure was reduced by the decision makers at the Bank That fact, together with the anecdotal material as to conversations about the bonus raises a claim which has some real prospect of success and which calls for an answer from the Bank. The fact that the Claimant was highly paid is of itself not of much significance unless the Bank’s decision makers had applied some kind of limit to the bonus.[26]Furthermore, the letter of appointment gave the claimant a right to participate in the discretionary bonus scheme. The wording of the contract suggests a scheme under which the bonus would be calculated and paid to him on an individual basis; instead the scheme was operated on a Desk basis; there was no individual calculation of bonus applicable to the Claimant, as I understand the evidence. This is not a point made in the pleadings but is one which inevitably will arise during the evidence. The third and fifth bullet points appear to be based on individual performance; yet a Desk based award would presumably be linked to the performance of others and not just of the Claimant. That will call for inquiry as to whether the Bank took account of the Claimant’s own performance and if so how.[27]I agree with Mr Knowles QC that the case in favour of dismissing the application is enhanced by the fact that there is to be a trial anyway.[28]As to the 2005 bonus, the two points on which the Claimant relies could, in a sense, be decided on this application, namely the proper construction of the bonus provisions and whether the statement that no bonus will be paid if an employee leaves before bonus payment day falls foul of the provisions of the 1977 Act. But there could still be arguments as to whether the Bank would be irrational if it were to decide that, regardless of the clause, the Claimant should be paid no bonus for the work he performed in 2005. Resolving the two issues would not necessarily resolve the claim.[29]If the Claimant had known that his Desk was to be closed down mid-year and that he would not, thereby, have been entitled to a bonus [the substantial portion of his remuneration package] I do not suppose he would have worked assiduously [or at all] during that period; he must have been working on the assumption and in the expectation that he would receive a bonus for the work he did. His Desk was successful in 2005 until it was closed down, through no fault of the employees there. The Bank have enjoyed the benefit of his success but have not paid for it. It seems to me arguable that the Bank had a discretion as to the timing of a bonus award [the second sentence] and that such discretion had to be exercised rationally. It seems to me arguable that by refusing to pay any bonus for 2005 the Bank’s decision was irrational.[30]On the 1977 Act, it would be unsatisfactory to resolve questions arising under it at this stage. It seems to me that the first question is whether the Act applies at all to contracts of employment. Mr Hochhauser QC, rightly, reserved his position on that matter at this interlocutory stage. It would be unsatisfactory to make any ruling on the application of the Act to this case without that point being before the court, since, if the Act did not apply, any further decision under it would be academic. In any event, the difference between a clause which excludes liability in respect of an accrued right on the one hand, and a clause which defines the ambit of a right on the other, is not easy to define. The decision of Judge Peter Clark in the EAT was a minority view, although it carries great weight. There is, I think, a respectable argument in this case for saying that the bonus was earned but was removed by the offending clause in which case, if the Act applies, the clause might be struck down as unreasonable. In my judgment, the point is better dealt with at a trial. If the court is going to have to look at ‘reasonableness’ it will be better equipped to do so after the evidence has been heard, including, possibly, expert evidence of the sort adduced in the Nomura case.[31]In my view this application should be dismissed. The Claimant has a properly arguable claim against his former employers in relation to the bonus arrangement for 2003, 2004 and 2005.[32]I will hear the parties on the form of the order and give further directions for trial, if appropriate. Unless there are genuine points of principle which need to be decided, it seems to me that a speedy mediation might be sensible.

Cited in 1 later judgment