Construction of Bonus Clause

[Thanks to James English of Samuel Phillips solicitors for preparing this case summary]

In Dresdner Kleinwort Limited & Commerzbank AG v Attrill & Ors, the Court of Appeal considered an employer's discretion to refuse to pay out pay out a bonus pool of 400m euros to 104 investment bankers

Dresdner Bank was sold by Allianz to Commerzbank in 2009. In the period of uncertainty before the sale, there were fears of a 'mass exodus' of staff and the collapse of the business. The situation was so serious the FSA became involved. In order to address this, the Chief Executive announced a guaranteed minimum bonus pool of 400m euros for the investment bank. Within days of the sale being announced, Lehman Brothers collapsed and (according to the evidence) 'enquiries were made left, right and centre to find any excuse to avoid having to pay out.' The bank introduced a 'material adverse change' (MAC) clause into the bonus letters, stating that the bonuses would be adjusted if revenue suffered, which in the end they were.

The Court of Appeal had to consider whether the announcement of the bonus pool created a binding obligation to pay and whether the MAC clause was a breach of the implied duty of trust and confidence. The judgment (delivered by Elias LJ) makes a number of interesting points on unilateral offers and the intention to create legal obligations.

To begin with, the court considered the bank's express power to unilaterally vary the contract. Since this allowed the bank to make changes adverse to an employee, it had to be read strictly. However, in this case the employees argued that this power had been used (because, if so, there was no need for the offer to be accepted). Despite upholding this strict approach, the court found that the power had been exercised.

As for the intention to create legal obligations, this had to be addressed objectively. The bank sought to argue that whilst the authorities which suggested the burden of proof lay with the party who asserts there was no such intention dealt with bilateral contracts, this was a unilateral offer. However, since this offer was made in the context of a pre-existing legal relationship, the onus remained on the party denying such an intention. In addition, the court went on to hold that it was permissible to take into account matters known to the employer but not the employees at the time the offer was made. Although it was right to focus on what the recipient of the offer would have reasonably understood, the bank could not take advantage of a rule designed in part to prevent one party concealing evidence from the court which is inconsistent with their assertion. Finally, given the 'striking absence' of evidence to support the employer's case on the issue of reasonable and proper cause, the finding that the MAC clause had undermined trust and confidence was upheld.