Legal update: Bonuses – the element of discretion

30 September 2014

In the recent case of Brogden and another v Investec Bank plc, the Court considered the exercise of discretion in relation to bonus payments.

The Claimants’ contracts stated that their bonus payments would be based on “Economic Value Added”. There was a dispute about how EVA should be assessed. The bank maintained that EVA was assessed on the basis of the bank’s accounts, and although the preparation of such accounts involved questions of judgement, it did not involve the exercise of discretion. In other words, accounts could be prepared in different ways and using different models, but such was not the exercise of “discretion”. The significance of this argument is that an exercise of discretion is subject to implied constraints, namely that it must be exercised in good faith, for proper purposes and not in an arbitrary, capricious or irrational manner.

The Court found that where a contract gives responsibility to one party for making an assessment or exercising a judgement on an issue which materially affects the other party and about which there is ample scope for reasonable differences in view, then such a decision is an exercise of discretion and is subject to such implied constraints. This was the case here, and the bank was bound, in making its decision in relation to the relevant bonus pool, to do so in good faith and for proper purposes. On the facts, the Court found that the bank had acted in such a way, and so the Claimants were unsuccessful in their claims.

Employers can lessen the likelihood of disputes in situations such as this by agreeing in writing a detailed bonus formula. However even in such cases, it is likely that there will still be some element of discretion, and that discretion will be subject to the implied constraints, namely that it must be exercised in good faith, for proper purposes and not in an arbitrary, capricious or irrational manner.

For further information, please contact a member of the employment law team.

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