Unfair Contract terms act and Unreasonable Bonuses

The Court of Appeal has handed down an important decision in Commerzbank AG v Keen. It is important for two reasons.

First, section 3 of the Unfair Contract Terms Act 1977 does not apply to employment contracts. The point arose because the employer, a City bank, relied on a clause providing that the employee had to be in employment as at the date of the bonus to receive any bonus. The employee argued that such a clause amounted to an unreasonable exclusion clause seeking to avoid paying remuneration on a 'value received' basis for work done during the year.

At paragraph 101 of the lead judgment of Mummery LJ it says that as a matter of principle and construction it cannot be argued that under a term for remuneration (in this case a bonus payment), the employee "deals as a consumer" with their employer for the purposes of s3 of UCTA. To extend s3 to payment provisions in respect of personal services rendered by an employee would be inappropriate, artificial and unconvincing. The terms were not the standard terms of the business of banking, rather they were the terms of remuneration of certain employees of the Bank. Mummery LJ described the existing EAT authority on this point, Bridgen v American Express as "not entirely satisfactory" and "not binding on this court."

Secondly, and importantly, Mummery LJ also considered (at paras. 58-60) the hurdles an employee must surmount to show that a bank's discretionary bonus decisions were irrational or perverse. The burden was on the claimant to establish that no rational bank in the City would have paid him a bonus of less than his line manager recommended. He would also be expected to present independent evidence, expert or otherwise, supporting his claim.

Kommerzbank AG v Keen