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Exercising Discretion

The High Court has dismissed a claim for breach of contract brought by an employee against his employer, a bank, relating to a bonus payment that he received. Mr Patural claimed that in paying him a bonus of €1,275,685, which equated to around 1% of the profits that he had generated that year, the bank had acted irrationally and perversely and had breached his contract of employment.

Patural v DG Services (UK) Limited

Mr Patural was employed by DG Services (UK) Limited (“the bank”) as a derivatives trader. Under his contract of employment he was entitled to be considered for a “discretionary incentive award” which was to be determined in a manner broadly consistent with that applied to his peers, and taking into account any other factors that the bank decided were relevant in a given year.

In 2009 he was awarded a bonus of €1,275,685, which was around 1% of the profits which he had generated that year. He was told that a material factor in the exercise of the bank’s discretion was the losses that the bank had made in other areas and that other derivative traders were receiving reduced awards on this basis.

It transpired that two of Mr Patural’s colleagues in fact received bonuses of €38million and €84million, representing around 8% and 11% of the profits that they had generated respectively. Mr Patural argued that the bank breached its obligation to treat him consistently with his peers; acted irrationally and perversely; and breached the implied term of mutual trust and confidence.

The bank argued that decisions regarding discretionary awards were heavily influenced by the overall performance of the bank and individual departments. It also considered individual performance, the strategy of the business and the need to incentivise and ensure that particular traders were retained. It also pointed out that the colleagues referred to were paid bonuses according to contractual formulas which were individually negotiated and agreed with them.

Decision

The High Court dismissed Mr Patural’s claim. It accepted that his colleagues’ bonuses were higher because of the formulas contained in their contracts of employment, which was different to Mr Patural’s discretionary bonus. It found that there were sound reasons for the bank’s decision not to include those employees in the discretionary bonus award scheme but to reach agreement with each of them that they would be paid guaranteed bonuses on a formula basis.

The Judge commented that Mr Patural had no more than a “mere expectation” regarding his bonus, and that no promise was made as to whether there would be a bonus of any particular size.

Comment

The key feature of a non-contractual bonus scheme is that the employer is under no obligation to award a bonus at all. However, case law has shown that the courts have become willing to find that bonus schemes expressed to be non-contractual may give rise to contractual rights. Employers need to exercise care when drafting bonus clauses and making decisions about whether bonuses are to be paid.

Whilst the employee in this case was unsuccessful, mainly due to the contractual rights of the colleagues that he was comparing himself to, discretion on the part of the employer isn’t absolute. It doesn’t mean that the employer can exercise discretion in any way it sees fit. Employers have an implied obligation not to exercise discretion perversely or irrationally.

This area often causes headaches for employers and for that reason we will be covering this topic in detail at our Employment Law Update Seminars in April 2016, where we will share best practice and tips on dealing with bonuses and other employee benefits.

If you would like any advice on bonuses, employee benefits or contractual terms or if you have any other employment law or day to day HR queries please contact Joanne Holborn, Tom Scaife or Caroline Rayner on 01228 552600 or 01524 548494.

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