English Courts Rule on Dresdner Employees' Rights to Bonus Pool, Contributed by Ben Trust and Tim Sales, Nabarro LLP
In early 2009 bankers at Dresdner Kleinwort Ltd (DK) found their bonuses dramatically slashed following the sale of Dresdner Bank AG (DBAG) to Commerzbank AG (Commerzbank). Earlier this year the Court of Appeal in London granted two groups of bankers (Bankers) permission to continue their claims against DK/Commerzbank for the additional bonus amounts that the Bankers believe they are due.
The Bankers’ claims were issued in September and November of 2009. On 28 January 2010 DK/Commerzbank issued an application seeking summary dismissal of the Bankers’ claims on the grounds that the Bankers had no real prospect of success and there was no other reason why the claims should be disposed of at trial. The judge summarily dismissed the Bankers’ claims in part, deciding that:
- An oral announcement stating that there would be a guaranteed minimum bonus pool of €400 million, to be allocated to individuals on a discretionary basis according to individual performance, did not create any enforceable contractual rights on which the Bankers could rely; but
- Claims based on letters sent to each of the Bankers stating that a discretionary bonus for 2008 had been provisionally awarded (subject to specified arrangements) raised issues of fact which should go to trial.
Both the Bankers and DK/Commerzbank appealed the High Court judge’s decision to the Court of Appeal.
The Bonus Pool
In 2008, speculation was rising as to the potential restructuring of DBAG. In order to alleviate concerns, from both inside and outside the bank, regarding staff defection, the board of DBAG decided to formally communicate the 2008 bonus pool to the entire DK staff base.
On 18 August, there was a “town hall” meeting where the chief executive of DK announced that:
- A guaranteed minimum bonus pool of €400 million had been created for distribution to DK front and middle office staff for the 2008 financial year;
- There was potential for the size of that pool to be increased if revenue exceeded targets; and
- Individual bonus allocations from the bonus pool would be made in the usual way and would be communicated to employees in December 2008.
The bonus pool of €400 million was confirmed on a number of subsequent occasions, including on the intranet of DBAG.
On 19 December, a letter was sent to each of the Bankers informing them that: “a discretionary bonus for 2008 under the arrangements given below has been provisionally awarded at €[X].” The pertinent part of the arrangements was that: “the provisional bonus award stated above is subject to review in the event that additional material deviation in Dresdner Kleinwort’s revenue and earnings, as against the forecast for the months of November and December 2008, are identified during the preparation of the annual financial statements for 2008″ (emphasis added).
At a town hall meeting the same day DK’s chief executive stated that: “nevertheless I remain confident that in the end we will deliver on the overall bonus pool amount for [DK] and the individual promises made to each of you.”
The acquisition of DBAG by Commerzbank was completed on 12 January 2009. On 17 February, the board of DBAG met and discussed the bonus decisions taken by Commerzbank and the bonus pool for DK. On 18 February, the new DK chief executive sent an e-mail to all employees stating: “bonus awards for all front and middle office employees who received a letter in December stating their provisional award, which was subject to Dresdner Kleinwort’s financial performance targets, will be cut by 90% pro rata to the stated provisional amount.”
The first part of the Bankers’ claims was that the statements made by the chief executive and other senior employees of DK between 18 August 2008 and 18 December 2008 gave rise to contractually binding promises that:
- There was a guaranteed minimum bonus pool of €400 million; and
- Bonuses for 2008 would be paid from the pool to eligible employees, including the claimants, regardless of DK’s performance.
After providing a helpful summary of the law applicable to applications for summary judgment,i the Court of Appeal overturned the High Court’s decision, disagreeing with the four cumulative reasons given by the High Court. Of particular interest are the Court of Appeal’s findings that:
- Although the High Court put weight on the “informality” of the announcement at the town hall meeting on 18 August 2008, the Court of Appeal held that it was not informal in the sense of being casual. The use of the town hall meeting as the means to communicate the announcement was approved by the board of DBAG and the employee handbook expressly recognised that changes to employees’ contracts may be notified on the intranet.
- There is no reason why a promise of a guaranteed minimum bonus pool cannot be contractually binding even though individual employees cannot at that time point to an entitlement to a specific bonus payment out of it.
- There is no conceptual uncertainty as to those with whom the alleged contract was made or those who were entitled to share in the guaranteed minimum pool.ii Problems in clearly identifying all persons who may be entitled to a bonus is no reason summarily to dismiss the contractual claim of those who can be identified.
The Court of Appeal also determined that neither of DK/Commerzbank’s additional points (i.e., the lack of acceptance by the Bankers and the absence of any consideration) were suitable to be determined summarily. In particular, the Court of Appeal held that the continued work of the employee is, at least arguably, adequate consideration for the establishment of the guaranteed minimum bonus pool.
In relation to the second part of the Bankers’ claims, that the letters sent on 19 December 2008 gave rise to legally binding obligations to pay the amounts specified, DK/Commerzbank accepted that their appeal should be dismissed as the Court of Appeal had overturned the High Court’s decision on the first part of the Bankers’ claim. The Court of Appeal went further, confirming the High Court’s decision that, amongst other things, it was not appropriate to decide summarily the meaning and application of the words “additional material deviation.” These points, and others, could only be decided at trial following disclosure of documents by DK/Commerzbank.
Following the Court of Appeal’s ruling, in the absence of settlement this case will now proceed to trial. The underlying issues in the action have therefore not yet been borne out. However, even at this early stage in the proceedings it is clear that lessons can be learned.
The main lesson is the stark reminder that the precise words used, in writing or in oral communication, are extremely important in the context of relationships governed by a contractual framework. With hindsight, this dispute may, potentially, have been avoided if the terms of the announcement at the town hall meeting on 18 August 2008, and in the 19 December 2008 letters had been different.
Should the Bankers win at trial, businesses that operate discretionary bonus schemes will need to consider very carefully how to balance the need to retain staff with the need to be able to amend the size of bonus pools and individual bonuses in order to take account of financial pressures in these continuing difficult economic times.
Ben Trust is a partner in the commercial dispute resolution team at Nabarro LLP. Ben acts for a number of quoted and unquoted companies, public bodies and other institutions. He has a broad practice and experience in both commercial litigation and arbitration, including financial services litigation, commercial fraud, professional negligence, and technology disputes. Much of his experience includes cross-border or international issues. Telephone: +44 (0) 20 7524 6234; E-mail: email@example.com.
Tim Sales is an associate in the commercial dispute resolution team at Nabarro LLP. He advises on all aspects of commercial disputes and the available routes for seeking resolution. Tim has a broad practice, which includes commercial, technology, financial services and judicial review. Tim has experience in the Competition Appeal Tribunal, High Court, Court of Appeal and ADR. Telephone: +44 (0) 20 7524 6162; E-mail: firstname.lastname@example.org.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
© 2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.