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Discretionary Bonuses and reasonableness

Since the case of Clark v Nomura International plc, it has been arguable that even where an employer attempts to reserve to itself an unfettered discretion regarding the payment of employee bonuses, there is an implied contractual obligation on the employer not to exercise that discretion irrationally or
perversely.

However, in the more recent case of Commerzbank AG v Keen, an employee sought to take this argument one step further. Keen argued that an express written contractual condition placed on an employee’s entitlement to receive a bonus payment should be unlawful, if it could be said to be unreasonable. Under the terms of his contract of employment, in order for Keen to receive a bonus payment, he was required to be employed by Commerzbank on the day on which the bonus was payable. The employee argued that the decision not to pay him a bonus, by virtue of the fact that he was not employed by the bank on the day on which the bonus was payable, was irrational and/or perverse. He also argued that the clause in the contract that conceivably prevented employees from receiving a bonus, in spite of the fact that they had worked hard to meet all other bonus criteria, was an unfair contract term. Under the Unfair Contract Terms Act 1977 (“UCTA”), insofar as a contractual term seeks to exclude a party’s liability under that contract, such a clause, if unreasonable, can be held to be void.

In reaching its conclusions regarding this case, the Court of Appeal (“CA”) held that the relevant part of UCTA does not apply to contracts of employment, unlike“consumer” type contracts. Therefore the legislation had no application in this case.

With regard to the allegation that the bank had acted irrationally and/or perversely, the CA said that to prove such an allegation would require an employee to present an “overwhelming case”, that convinced the court that no rational bank would have acted in this way. The weight of evidence that would be required to convince a court of such an argument was substantial.

This case is helpful in offering reassurance that it will be an exceptional case indeed, where an employee will succeed in convincing a court that the express bonus scheme rules set out by the employer, or the exercise of a discretion by that employer, will be “overruled” by the courts.

For further enquiries please contact Nick Hobden (view full profile) on 01892 701326 or email nick.hobden@ts-p.co.uk.

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