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Challenging bonus discretion post-Braganza: two recent decisions

22 June 2016

The case of Braganza v BP Shipping Ltd [2015] UKSC 17 established that courts may look into the process that is undertaken by employers when reaching decisions that involve the exercise of discretion.  Prior to Braganza, when determining the reasonableness of an exercise of bonus discretion, the courts have tended to focus on the outcome. Two recent cases, Patural v DG Services (UK) Ltd [2015] EWHC 3659 (QB) and Hills v Niksun Inc [2016] EWCA Civ 115, are the first to consider Braganza-based arguments in a bonus/commission context where employees were challenging the process behind their awards as well as the awards themselves. 

Breach of contract claims challenging inconsistent discretionary bonus awards

Patural (P), a trader at DG Services (UK) Ltd (DG), was awarded discretionary bonuses of approximately 1% of his profits in 2008 (worth EUR 1.3 million) and 2009. He sued DG for breaches of contract after discovering that his colleagues, M and B, had received significantly higher bonuses in 2008 – approximately 8% (EUR 38 million) and 11% (EUR 84 million) of the profits that they had generated. 

Of significance in the Braganza context was P's claim that DG had breached the implied term to exercise its discretion in his case in good faith and in a manner that was not irrational or perverse. P relied on Braganza, in which the Supreme Court applied the public law concept of Wednesbury reasonableness – which focuses on both the decision-making process and the decision itself – to employment relationships. He argued that the bonus decisions in his case were irrational and/or perverse, taking into account the profits he had made and the sums awarded to M and B, and that there had been no meaningful or rational analysis of the amounts that should be paid.

Insufficient evidence to establish breach of implied terms

The High Court allowed DG's summary judgment application on the basis that there was no reasonable prospect of P's claims succeeding and no other compelling reason to proceed to trial.

P had failed to overcome the high evidential bar set by the Court of Appeal in Commerzbank v Keen AG [2007] ICR 623 requiring him to demonstrate an "overwhelming case" of irrationality in DG's award decision. On the evidence, DG's decision to pay M and B on a guaranteed formulaic basis and to distinguish them from P was rational, in particular to incentivise them not to leave. Furthermore, P had pleaded the Braganza aspect of his claim insufficiently as he had not alleged a Wednesbury error in the process adopted by DG, only irrationality in relation to the outcome (ie the second limb of Wednesbury). P's other claims alleging breach of an express term and of the implied term of trust and confidence also failed.

As an aside, Singh J expressed caution about applying Wednesbury reasonableness in a private law context, stating that the fundamental basis of public law is that public bodies only have those powers given to them by law, and that they must behave in the public interest, while private companies do not necessarily have the same duties.

Claim for underpaid commission where contractual discretion reserved

Mr Hills (H) was employed as Niksun Inc's regional sales manager in the UK. His contract provided that his participation in commission plans would be at Niksun's absolute discretion and that compensation would be set at a level which "is fair and reasonable under the circumstances, and is in the best interest of Niksun". H negotiated a large deal from the UK office, but the U.S. office was also involved in negotiations. Niksun decided to allocate only 48% of the commission to the UK office (and, in turn, to H) and the rest to the U.S. office. H sued Niksun for breach of contract for underpaid commission, alleging that it had failed to exercise its discretion rationally or reasonably when deciding what amount of commission was "fair and reasonable".

In light of the contractual provisions, the nature of the deal and the evidence of H's manager (which included an assurance given that the UK would be "looked after" in terms of commission for the deal), the County Court judge concluded at first instance that it would not be "fair and reasonable" to award the UK team any less than two-thirds commission.

Claim successful on account of lack of evidence as to decision-making process

The Court of Appeal upheld this finding. In Vos LJ's opinion, post-Braganza, once H had demonstrated that there were grounds for concluding that Niksun's decision was not reasonable, the evidential burden shifted to Niksun to show that its decision was reasonable. Niksun had produced no evidence as to the decision-making process nor had it called evidence from the decision‑maker. In these circumstances, the judge could not assume that the decision was taken rationally without knowing what was actually taken into account. Otherwise, as had been argued, "the commission level might have been picked by throwing darts at a dart board – or perhaps by tossing coins".

The relevance of Braganza in future bonus case law

Singh J's note of caution about the application of Braganza in a private context suggests that some courts may be reluctant to apply public law principles to bonus claims. After all, the facts of Braganza were different; they did not relate to the exercise of an employer's discretion but to a factual judgment made by the employer as to the cause of an employee's death, in turn determining whether an exclusion clause precluded the payment of death-in-service benefits to his widow.

However, the Court of Appeal did not add a similar caveat in finding in favour of the claimant in the Hills ruling, and it seems that Braganza does leave the door open for courts to take a more interventionist approach to an employer's decision-making process. Employers should therefore be ready to defend process‑related arguments. 

Managing the risk of bonus litigation

Bonus litigation will no doubt continue to be a risk area for employers given the often large amounts at stake and the existence of commercially savvy and well-resourced claimants. Braganza-based arguments will give claimants more ammunition to challenge discretionary bonus decisions, although the evidential hurdle of "irrationality" that they face remains high.

In practice, from an employer's perspective, the overlay of Braganza principles – requiring the courts to consider the bonus decision-making process as well as the outcome – may not significantly increase the risk of successful claims, given that a process that takes irrelevant considerations into account would in any event be unlikely to lead to a reasonable outcome. 

However, to ward off Braganza-based arguments, the Hills decision demonstrates how important it is for employers to adduce evidence of rationality in relation to the decision-making process. Where the burden of proof has shifted to the employer, the absence of such evidence will enable a judge to substitute his or her own view of reasonableness for that of the employer. A paper trail showing an objective and rational exercise of discretion in bonus decisions will be the most effective form of evidence, and is therefore vital at every stage of the decision-making process.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710