Commerzbank Ag v Keen

Factual and Procedural Background

The appeal concerns an application by Company A (the Bank) for summary judgment against Plaintiff, a former employee, relating to discretionary bonus payments for the years 2003, 2004, and 2005. The initial application was dismissed by Judge Morison in the Commercial Court on 7 April 2006, who held that Plaintiff had a properly arguable claim for damages for breach of contract regarding the discretionary bonus provisions. Directions for trial, including expert evidence on compensation, were given.

The trial was scheduled for March 2007, to coincide with Plaintiff's other claim against Company A concerning withheld shares awarded conditionally as part of bonuses for 2003 and 2004. Company A conceded that this share claim had a real prospect of success and should proceed to trial. The Bank obtained permission to appeal on 3 July 2006.

Plaintiff was employed by Company A from November 2002 until redundancy in June 2005, ceasing work around 12 May 2005. He managed a proprietary trading desk (SS2) within the Investment Banking Division at the Bank's London branch. The SS2 desk was closed in June 2005 following redundancy consultations, and Company A ceased proprietary trading thereafter.

Plaintiff's employment contract included eligibility for a discretionary bonus scheme, subject to Company A's discretion regarding the award, amount, timing, and form of any bonus. Factors influencing the discretion included Company A's performance, the performance of the business area, Plaintiff's individual performance, strategic objectives, and employment status at the payment date. The contract expressly provided that no bonus would be paid if the employee was not employed or was under notice to leave at the payment date.

Plaintiff received substantial bonuses for 2003 and 2004 but was not awarded any bonus for 2005 as he was not employed at the payment date in March 2006.

Legal Issues Presented

1. Whether Plaintiff has a real prospect of success in establishing that Company A breached the implied term in the employment contract by exercising its discretion irrationally or perversely in relation to the discretionary bonus awards for 2003 and 2004.
2. Whether Company A was in breach of contract by refusing to pay a discretionary bonus for 2005 based on Plaintiff not being employed at the payment date, and if this contractual provision is subject to the reasonableness test under section 3 of the Unfair Contract Terms Act 1977.
3. Whether the discretionary bonus contractual term regarding employment status at the payment date falls within the scope of section 3 of the Unfair Contract Terms Act 1977, considering if Plaintiff dealt as a consumer or on Company A's written standard terms of business.

Arguments of the Parties

Appellant's Arguments (Company A)

• The discretionary bonus scheme granted Company A wide discretion, limited only by an implied term not to exercise discretion irrationally or perversely.
• There was no contractual obligation to follow the line manager's recommendation or to award bonuses commensurate with the success of the trading desk or to create a bonus pool at all.
• The bonus decisions for 2003 and 2004 were rational, supported by explanations including Company A's overall losses and the discretionary nature of the scheme.
• Plaintiff bore the burden to prove the exercise of discretion was irrational or perverse, which he could not meet.
• The contractual term requiring employment at the payment date for bonus eligibility was clear and not subject to challenge under the Unfair Contract Terms Act 1977.
• The judge erred in not granting summary judgment since the bonus claims lacked real prospects of success, and the share claim's existence was irrelevant.

Appellee's Arguments (Plaintiff)

• Plaintiff contended that the exercise of discretion by Company A in awarding bonuses for 2003 and 2004 was irrational or perverse, particularly for failing to consider the exceptional profit and the line manager's recommendation for a larger bonus pool.
• He alleged that no rational employer would have reduced the bonus pool to the extent Company A did.
• Plaintiff argued that the contractual provision denying bonus if not employed at payment date was caught by section 3 of the Unfair Contract Terms Act 1977 and was unreasonable.
• He maintained that the discretionary bonus was designed to reward past performance and that employment status should be a factor in deciding the amount, not a bar to payment.
• The refusal to pay a bonus for 2005 despite the profit made by the trading desk was irrational.

Table of Precedents Cited

Court's Reasoning and Analysis

The court emphasized that its role on appeal was limited to assessing whether there was a real prospect of success for Plaintiff's bonus claims to justify a trial. The court recognized the wide discretion granted to Company A under the employment contract regarding discretionary bonuses, subject only to an implied term that discretion not be exercised irrationally or perversely.

Regarding the 2003 and 2004 bonuses, the court found that Plaintiff had not demonstrated a real prospect of proving irrationality. The Bank's decisions were not irrational on their face, and the burden of proof on Plaintiff was high. The absence of direct evidence identifying decision-makers or explaining bonus calculations was noted, but the court found no compelling basis to conclude the decisions were perverse.

On the 2005 bonus claim, the court held that the contractual term requiring employment at the payment date for bonus eligibility was clear and not ambiguous. Plaintiff was not entitled to a bonus for 2005 as he was not employed at the payment date. The court further analyzed whether the Unfair Contract Terms Act 1977 applied to the relevant contractual provision. It concluded that the Act's section 3 did not apply because Plaintiff did not deal as a consumer with Company A regarding his remuneration, and the provision did not constitute a standard term of business.

The court thus rejected Plaintiff's contention that the contractual term was unfair or unreasonable under the 1977 Act.

Both Lord Justice Jacob and Lord Justice Moses agreed with the reasoning, emphasizing that the court must not substitute its own judgment for Company A's discretion and that failure to provide reasons or identify decision-makers, while potentially evidential, does not establish irrationality without other supporting features.

Holding and Implications

The court ALLOWED THE APPEAL by Company A, setting aside the earlier order and granting summary judgment in favor of the Bank. Plaintiff's claims for breach of contract relating to discretionary bonus payments for 2003, 2004, and 2005 were dismissed.

The direct effect is that no trial will be held on these bonus claims, significantly shortening the upcoming trial related to Plaintiff's other claim concerning shares. The decision clarifies the limits on judicial intervention in employer discretion over discretionary bonuses and affirms the narrow scope of the Unfair Contract Terms Act 1977 in the context of employment remuneration contracts. No new legal precedent was established beyond the application of existing principles to the facts.