The Court of Appeal has ruled on a case involving bonuses in the financial services sector.
The High Court had found that the appellants' bonus entitlement was subject to the bank's discretion.
It is established law that a discretion conferred by a contract on one party to make decisions that affect both parties must be exercised honestly and in good faith and not arbitrarily, capriciously or irrationally. The High Court found that the bank had not acted irrationally when it calculated the appellants' bonus pool as nil.
The Court of Appeal upheld the High Court's decision but on different grounds.
The court concluded that this was a case about construction of contractual terms rather than the exercise of discretion. The court identified specific findings of fact made by the judge at first instance.
Those findings determined the construction of the bonus clause. It followed that the bank's decision not to pay a bonus was simply the result of the exercise of the bonus clause as properly construed, rather than the exercise of a contractual discretion.
The ratio for the court's decision turns on the facts of the case and so will be of limited wider relevance than the High Court's decision.
Nevertheless, the case remains a useful reminder that, unless a bonus clause is explicit as to the method of calculation, costly litigation might ensue. (Brogden and another v Investec Bank plc  EWCA Civ 1031.)
This article was originally published on www.practicallaw.com on 25 October 2016 and is reproduced with the permission of Thomson Reuters.
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