Factual and Procedural Background
This appeal concerns the construction and application of a discretionary bonus clause in the employment contract between the Plaintiff, a senior managing director in a financial services company (Company A), and the Defendant, a bond and money-broking firm (Company B). The Plaintiff resigned alleging constructive dismissal due to intolerable conduct by a senior executive of Company B. The trial judge found for the Plaintiff on wrongful dismissal, awarding damages largely based on lost bonus payments which would have been payable under the bonus clause had the Plaintiff remained employed for the full term. The Defendant’s counterclaim for repayment of a previously paid bonus was dismissed. The appeal focuses solely on the quantum of damages, as permission to appeal liability was refused.
Legal Issues Presented
- Whether the existence of a wholly discretionary bonus clause entitles the Plaintiff to damages for unpaid bonuses following wrongful dismissal.
- The appropriate measure of damages for loss of discretionary bonuses, including whether the damages should reflect the minimum sum the employer would have been obliged to pay or a more generous assessment.
- Whether the judge’s factual findings regarding the level of bonus likely to have been paid and the Plaintiff’s failure to mitigate damages were justified on the evidence.
- Whether the Defendant should receive credit for earnings by the Plaintiff post-dismissal.
Arguments of the Parties
Appellant's Arguments
- The Defendant argued that the discretionary bonus clause did not create an obligation to pay any bonus, and thus no damages should be awarded for unpaid discretionary bonuses, relying on the principle in Lavarack v Woods.
- Alternatively, the Defendant contended that the measure of damages adopted by the judge was unduly favorable to the Plaintiff, applying a test of simple reasonableness rather than the stricter test of irrationality or perversity in exercising discretion.
- The Defendant submitted that the judge’s assessment of the bonus amounts lacked evidential foundation and was flawed by reliance on the Plaintiff’s expectations and comparisons with other senior managing directors, despite evidence that bonuses were individually assessed.
- It was also argued that the Plaintiff failed to satisfy the condition precedent of using best endeavours to maximise revenue due to issues with travel and entertainment costs and substance abuse, which should have reduced or negated bonus entitlement.
- The Defendant challenged the judge’s refusal to reduce damages for the Plaintiff’s failure to mitigate, particularly regarding the relapse into substance abuse and delayed re-employment.
- Finally, the Defendant maintained that credit for post-dismissal earnings should be applied, although this point was conceded by the Plaintiff on appeal.
Respondent's Arguments
- The Plaintiff argued that the discretionary bonus clause was a contractual benefit requiring the employer to exercise discretion rationally and in good faith, entitling him to damages for loss of bonus payments had he remained employed.
- The Plaintiff submitted that the judge correctly applied the legal principles from relevant authorities, including cases recognizing an implied term requiring rational exercise of discretion in employment contracts.
- It was maintained that the Plaintiff would have met the criteria for bonus payments and that the judge’s assessment of the quantum was reasonable and supported by evidence, including the remuneration of comparable senior managing directors.
- The Plaintiff contended that the relapse into substance abuse was part of a continuum flowing from the Defendant’s breach and thus did not constitute a failure to mitigate damages.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Lavarack v Woods [1967] 1 QB 278 |
Damages for wrongful dismissal assessed on the basis of the most beneficial performance of the contract to the employer; damages cannot confer benefits not contractually owed. |
The court distinguished this case as the Plaintiff’s contract included a discretionary bonus clause, creating an obligation to exercise discretion rationally and in good faith, thus permitting damages for loss of bonus. |
| Clark v Nomura International Plc [2000] IRLR 766 |
Discretionary bonus clauses impose a contractual obligation to exercise discretion rationally and in good faith, with a 'contractual straitjacket' limiting discretion to individual performance. |
The court applied this principle, holding the employer’s discretion must be exercised rationally and not arbitrarily, rejecting the Defendant’s argument that the discretion was unfettered. |
| Clark v BET Plc [1997] IRLR 348 |
Discretion to increase salary annually must be exercised reasonably and in good faith; breach occurs if discretion is exercised capriciously or perversely. |
The court adopted the stricter test of irrationality or perversity, not mere unreasonableness, in reviewing the exercise of discretion in awarding bonuses. |
| Reda v Flag Ltd [2002] IRLR 747 |
An express power to dismiss without cause is not circumscribed by the implied term of trust and confidence. |
The court held this principle did not apply to the exercise of contractual discretion regarding bonuses, which must be exercised rationally and in good faith. |
| Gan Insurance v Tai Ping Insurance [2001] EWCA Civ 1047 |
Contractual discretion must be exercised honestly and not arbitrarily, capriciously or unreasonably. |
The court applied this principle to the employer’s discretion under the bonus clause. |
| Paragon Finance plc v Nash [2001] EWCA Civ 1466 |
Contractual discretion to set interest rates is not unfettered; must not be exercised dishonestly, capriciously, or arbitrarily. |
Supported the court’s approach that discretion in employment contracts must be exercised within rational limits. |
| Mallone v BPB Industries Ltd [2002] EWCA Civ 126 |
Absolute discretion in share option schemes is subject to the requirement that no reasonable employer would make a perverse or irrational decision. |
The court endorsed the application of the irrationality test in assessing discretionary contractual decisions. |
| Paula Lee Ltd v Robert Zehil Ltd [1983] 2 All ER 390 |
Where a contractual obligation allows a choice among reasonable modes of performance, damages are assessed on the least onerous to the defendant. |
The court considered this principle but distinguished it as the bonus clause here imposed a single method of decision, not a choice among alternatives. |
| Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 |
Damages assume defendant would perform obligations in the way least onerous to itself, but this does not apply when obligations require bona fide and rational exercise. |
The court found this principle analogous and applicable to the contractual bonus clause requiring rational exercise of discretion. |
| English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409 |
Requirement for courts to provide adequate reasons for decisions on damages. |
The court held the trial judge’s reasoning on quantum was inadequate and required clarification or redetermination. |
Court's Reasoning and Analysis
The court began by affirming the trial judge's finding of liability for wrongful dismissal and focused on the quantum of damages related to the discretionary bonus clause. The court distinguished the instant case from Lavarack v Woods, noting that the Plaintiff’s contract contained an express discretionary bonus clause, imposing an obligation on the employer to exercise discretion rationally and in good faith. The court rejected the Defendant’s submission that the discretion was unfettered and that no damages were payable for unpaid bonuses.
Drawing on authorities such as Clark v Nomura and Clark v BET, the court endorsed the application of a test requiring the employer’s discretion to be exercised rationally and not arbitrarily, capriciously or perversely. It rejected the notion that the employer could exercise discretion simply for its own benefit without contractual constraint.
The court acknowledged the difficulty in assessing the quantum of damages due to the absence of a fixed formula or clear contractual criteria for bonus calculation. The trial judge’s approach of assessing what bonus the Plaintiff would probably have received, considering the criteria articulated by the employer's witness and the remuneration of comparable senior managing directors, was upheld. The court found no error in considering the Plaintiff’s reasonable expectations and comparisons with peers, provided the discretion was not assumed to be exercised irrationally.
Regarding mitigation, the court found the trial judge’s conclusion that the Plaintiff’s relapse into substance abuse was part of a continuum flowing from the Defendant’s breach was unsupported by the medical evidence. The court allowed the appeal on this ground and ordered a reduction in damages for loss of salary accordingly.
The court also noted the trial judge’s failure to provide detailed reasons for the quantum awarded, especially for the discretionary bonuses, and considered this a legitimate ground for concern. However, rather than ordering a full retrial, the court directed that the issue of quantum be referred back to the same judge for redetermination on the existing evidence, allowing for further submissions or limited further evidence if necessary.
Holding and Implications
The court UPHELD IN PART AND ALLOWED IN PART the appeal on quantum. It confirmed that damages for loss of discretionary bonuses are payable where the employment contract imposes an obligation to exercise discretion rationally and in good faith. It rejected the Defendant’s argument that no damages arise from discretionary bonuses absent a contractual obligation to pay. The court found the trial judge’s quantum assessment was not clearly erroneous but suffered from inadequate reasoning and reduced the damages for loss of salary due to failure to mitigate.
The court ordered that the quantum issue be remitted to the trial judge for reconsideration and clarification based on the evidence before him. This avoids the need for a full retrial and balances the interests of both parties.
No new precedent was established beyond the application and clarification of existing principles relating to the exercise of contractual discretion in employment bonus schemes and the assessment of damages for wrongful dismissal.