Bonus discretion post-Braganza
The Supreme Court decision in Braganza v BP Shipping Ltd has opened up another way in which employees can challenge the exercise of an employer's discretion.
The case concerned a claim for death-in-service benefits by the wife of a ship's engineer who had disappeared during a voyage. The contract provided that death-in-service benefits would be withdrawn if the death resulted from the employee's wilful act, in the employer's opinion.
The manager who decided that the benefits should not be payable relied upon a report that had been prepared to investigate the incident for the purpose of recommending improvements to BP's systems. That report concluded that suicide was a possible reason for the disappearance but that adverse weather conditions could also have been responsible. The widow's claim for breach of contract succeeded at first instance but was reversed by the Court of Appeal. The Supreme Court allowed the appeal and reinstated the original decision that the death-in-service benefits were payable.
The Supreme Court's decision was significant because it carried public law concepts regarding the scrutiny of administrative decisions into the employment arena. It held that there is an implied term in employment contracts that a contractual discretion must be exercised lawfully and rationally "in the public law sense" and consistently with its contractual purpose.
The rational exercise of discretion involves the application of two principles: (i) the decision-maker must take into account relevant factors and ignore irrelevant factors; and (ii) the decision must not be so outrageous that no reasonable decision-maker could have come to that conclusion.
Cases concerning the exercise of an employer's discretion in respect of discretionary bonus payments have tended to focus on the outcome rather than the process, with employees arguing that the decision itself is so unreasonable that no reasonable employer could have reached it.
The full implications of the Supreme Court's decision have yet to be clarified. However, there have already been two cases in which claimants have introduced a Braganza argument when challenging their employer's decision-making regarding variable compensation.
Patural v DB Services (UK) Ltd
In Patural v DB Services (UK) Ltd a trader challenged his discretionary bonus award by comparing himself to two employees who had received higher guaranteed bonuses. The claimant's contract provided that he would be eligible for an annual discretionary incentive award to be "determined in a manner broadly consistent with that applied to [his] peers at similar levels of compensation and taking into account any other factors that the Company determines are relevant in a given year for each business."
The claimant's manager explained that a material factor in determining the level of his bonus payment was the losses that had been sustained outside the money market derivatives desks and that all members of the money market derivatives desks had been treated in a similar way, with a greater reduction being applied according to seniority.
The claimant received 1 percent of the profits that he had generated whereas the individuals on guarantees received 8 and 11 percent according to the contractual formula that applied in their case.
The High Court examined the express and implied contractual terms. The reference to a comparison with peers at a similar level of compensation did not mean that the claimant could compare himself to any peer and envisaged that some people might be on guarantees.
The employer had retained a wide contractual discretion and the claimant could not show that no rational bank would have acted in the way that it did. The two individuals were on guarantees for sound commercial purposes, one of them being of such influence that there were rumours that he had "saved the bank" in 2008.
The claim was struck out as having no reasonable prospect of success. Although the matter was raised in submissions, the claimant was not assisted by the Braganza case because it had not been pleaded. His arguments about irrationality had focused on the outcome rather than the employer's process. However, the High Court acknowledged that post-Braganza, the rationality of the employer's decision-making process and its outcome could be scrutinised.
Hills v Niksun Inc
The impact of the Braganza was also explored by the Court of Appeal in Hills v Niksun Inc, a case which concerned commission payments. Mr Hills' contract provided that he would participate in such plans as his employer "may in its absolute discretion determine" and "on such terms, and subject to such events" as the employer determined.
The commission plan reserved the employer's right to determine what level of compensation was "fair and reasonable." It also contained detailed guidance as to how commission would be split having regard to the point of influence (where major control of the account resided), the point of sale and the point of installation for the relevant deal.
The dispute concerned a client contract for the Asian and Pacific market that Mr Hills had worked on in conjunction with U.S. colleagues. The employer decided that the United States. was the relevant point of influence and awarded Mr Hills a commission payment of 48 percent.
Mr Hills claimed that he should have been entitled to 100 percent. As part of his claim, he relied upon Braganza, arguing that the decision-maker had to show that it had not reached an irrational conclusion and that all relevant and no irrelevant matters had been taken into account.
The High Court examined the contractual provisions and the nature of the deal, concluding that the UK rather than the U.S. was the point of influence. It also considered the evidence of Mr Hills' manager who explained that he had been told by his U.S. manager that Mr Hills would be "looked after". He had understood that assurance to mean that Mr Hills would receive the "lion's share" of the commission (around two thirds).
In the light of the contractual provisions, the nature of the deal and the evidence of Mr Hills' manager, the High Court concluded that his commission should be increased.
The Court of Appeal upheld that finding. It was argued on behalf of Mr Hills that post-Braganza, the employer had the burden of demonstrating that its decision was reasonable. The Court of Appeal felt that this was an over-simplification. However, it held that once Mr Hills had shown that there were grounds for concluding that his employer's decision was not reasonable, the burden shifted to the employer to prove that it was reasonable. Niksun had failed to produce evidence about how its decision had been reached and did not call the U.S. manager who had given the assurances about the level of commission Mr Hills could expect to receive.
The Court of Appeal said the absence of any evidence as to the way the decision was taken was problematic: "The judge could not decide that the decision was taken rationally unless he at least knew what was actually taken into account. Otherwise, as was suggested in argument, the commission level might have been picked by throwing darts on a dart board-or perhaps by tossing coins".
In some respects, the decision in Hills is fact-specific. At first instance the Judge noted that the contractual provisions were not like "bankers' bonus cases", where the employer reserved a "general discretion". The contract provided that the discretion had to be "fair and reasonable" and the commission plan contained detailed guidance as to how commission would be split.
Mr Hills had a reasonable expectation that he would receive the "lion's share" of the commission due to discussions that had taken place between his manager and the US manager. However, the case does show the way in which the Supreme Court's decision in Braganza adds another layer to the analysis of an employer's exercise of their discretion.
Claimants can argue that where an employer's decision-making creates an unexpected outcome, that decision must be supported by convincing evidence. The process that the employer has adopted to reach their decision as well as the decision itself will be scrutinised. We can expect more Braganza-inspired arguments to be raised in the future.