Andrew Brogden and Another v Investec Bank Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Leggatt |
| Judgment Date | 06 August 2014 |
| Neutral Citation | [2014] EWHC 2785 (Comm) |
| Docket Number | Case No: 2012 Folio 1185 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 06 August 2014 |
[2014] EWHC 2785 (Comm)
Mr Justice Leggatt
Case No: 2012 Folio 1185
IN THE HIGH COURT OF JUSTICE
Royal Courts of Justice
Strand, London, WC2A 2LL
John Cavanagh QC & Amy Rogers (instructed by Doyle Clayton Solicitors) for the Claimants
Jonathan Nash QC & Scott Ralston (instructed by Sidley Austin LLP) for the Defendant
Hearing dates: 15–18, 21–24, and 29 July 2014
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
| Section | Para number |
| A. INTRODUCTION | 1 |
| The bonus clause | 2 |
| The dispute | 4 |
| The arguments in brief | 6 |
| Witnesses | 9 |
| B. FACTUAL BACKGROUND | 12 |
| The claimants join Investec | 13 |
| The Structured Equity Derivatives business | 15 |
| Investec retail structured products | 17 |
| EVA | 24 |
| Bonuses for 2008/2009 | 26 |
| Bonuses for 2009/2010 | 28 |
| Bonuses for 2010/2011 | 31 |
| C. THE ISSUES | 33 |
| Accord and satisfaction | 33 |
| The rate issue | 35 |
| Other issues | 38 |
| D. WAS THERE AN ORAL AGREEMENT? | |
| The alleged oral agreement | 39 |
| The claimants' evidence | 42 |
| The Bank's evidence | 47 |
| The claimants' credibility | 49 |
| No documentary evidence | 52 |
| Inconsistent conduct | 54 |
| Possible discussions | 60 |
| The claimants' own evidence does not support their case | 66 |
| Conclusion | 68 |
| Other matters allegedly agreed | 69 |
| E. INTERPRETATION OF THE BONUS CLAUSE | 73 |
| The applicable legal principles. | 74 |
| The meaning of EVA | 75 |
| Good faith and rationality | 91 |
| Discretion and its limits | 95 |
| The allegations of bad faith and irrationality | 102 |
| F. THE RATE ISSUE | 104 |
| The claimants' case | 105 |
| Discussion | 107 |
| Reasonable expectations | 115 |
| G. OTHER ISSUES | 118 |
| Reserving for kick out products | 119 |
| Adjustments to the Funding Gap Reserve | 123 |
| The 'profit payaways' issue | 133 |
| The 'early bird' issue | 142 |
| H. CONCLUSION | 149 |
A. INTRODUCTION
On 10 April 2007 Mr Andrew Brogden and Mr Robert Reid, the claimants in this action, entered into contracts of employment with the defendant, Investec Bank (UK) Ltd ("Investec" or "the Bank"). They joined Investec as, respectively, the Head and Deputy Head of Equity Derivatives. The claimants' contracts of employment provided in each case for a basic salary of £120,000 per annum but the main part of their remuneration was expected to consist of bonus. An important consideration for the claimants in deciding to join Investec was that their bonuses were not discretionary but a matter of contractual right.
The bonus clause
Mr Brogden's contract provided for a guaranteed bonus of £6,200,000 payable in his first year of employment. This amount was payable on the condition that Mr Brogden's employment with the Bank was not terminated by reason of his resignation or gross misconduct at any time before 30 June 2011 – in which event the full amount would be repayable. The bonus clause in the contract further provided as follows (with underlining added):
"In your second financial year of operation starting on 1 April 2008, the bonus calculation will be based on an EVA formula calculated as 40% of the EVA generated by the Equity Derivative business. The bonus pool available for distribution to members of the team will be calculated after deduction of NI.
In the third financial year starting on 1 April 2009 and thereafter the bonus calculation will be normalised based on a formula calculated as 30% of EVA generated by the Equity Derivative business. The bonus pool available for distribution to the members of the team will be calculated after deduction of NI, an amount for Head Office and an amount for TSF support.
The proportion of the available bonus pool to be distributed to each member of the team in any year will be determined by you following consultation with David Van Der Walt.
The bonus pool will be paid to members of the team on or before 23 June in each year and no part of the bonus pool in each financial year will be deferred."
The bonus clause in Mr Reid's contract of employment was identical to the clause in Mr Brogden's contract, save that Mr Reid's guaranteed bonus payable in his first year of employment was £3,800,000.
The dispute
Any hope that agreeing a contractual formula for bonus would result in certainty has not been fulfilled. In the second and each of the two subsequent years of the claimants' employment there was disagreement about the amount of their bonus entitlement. For the financial year 2008/2009, and again for the financial year 2009/2010, the disagreement was amicably resolved and Investec agreed to pay bonus amounts which the claimants accepted. However, at the end of the financial year 2010/2011, no such agreement was reached. According to the Bank's calculation, the performance of the structured equity derivatives business was such that the claimants were not entitled to any bonus for that year. The claimants on the other hand contended that they were entitled to a bonus pool of over £8 million. In June 2011 the Bank made discretionary bonus payments of £150,000 to Mr Brogden and £100,000 to Mr Reid, while maintaining that no bonus was contractually due. The claimants had reached the time when under the terms of their bonus clause they were free to leave without penalty, and they did so. By a letter dated 20 July 2011, Mr Brogden resigned from his employment with Investec. Mr Reid followed him on 3 August 2011.
In this action begun on 2 September 2012 the claimants seek damages from Investec for breach of contract in failing to pay bonuses which they say should have been paid to them for the financial year 2010/2011. According to the particulars of claim, the sums which Mr Brogden and Mr Reid should have been paid are, respectively, £3.6 million and £2.7 million.
The arguments in brief
I have underlined the key contractual language in the bonus clause quoted in paragraph 2 above. It can be seen that the description of the bonus formula is on any view elliptical. It is the claimants' case that, in addition to their written contracts of employment, there was an oral agreement made before they joined the Bank that certain ground rules would be applied in calculating the amount of their bonus pool. Further and alternatively, the claimants contend that these ground rules can be identified by interpreting the bonus clause in their contracts in accordance with the ordinary and well established legal principles applicable to the interpretation of contracts in English law. They rely in particular on the point that "EVA" is agreed to be an acronym for "Economic Value Added" and argue that the contractual language, properly interpreted, requires the parties – and, if they cannot agree, the court – to work out the true added economic value generated by the equity derivative business. The claimants also argue that, if and to the extent that the Bank had any discretion in relation to the calculation of EVA, the Bank had a duty to exercise that discretion rationally and was in breach of that duty.
Investec adamantly denies that any oral agreement was made as alleged by the claimants. Its case, in brief, is that the Bank has an established method for calculating bonuses which was explained to the claimants before they joined and which is part of the background against which their contracts of employment are to be construed. The Bank contends that, construed against this background, the words "EVA generated by the Equity Derivative business" mean the amount calculated as such "EVA" by the Bank. For 2010/2011 no bonuses were payable because Investec calculated that such EVA was nil.
The litigation has been conducted acrimoniously and each side has levelled accusations of dishonesty or bad faith against the other. The claimants' pleaded case includes allegations that the Bank acted in bad faith and deliberately manipulated or adjusted the inputs to the EVA calculation in order to reduce the claimants' bonuses. For its part, the Bank in its written opening submissions for the trial described the oral agreement alleged by the claimants as a dishonest fiction and accused them of making a "contrived and dishonest claim".
Witnesses
At the trial Mr Brogden and Mr Reid gave evidence on their own behalf. The Bank called three witnesses of fact: Mr Van Der Walt, who was responsible for recruiting the claimants and at the time was Head of the Bank's Capital Markets Division (he is now CEO of Investec); Mr John Barbour, who at the time was the Head of Central Treasury; and Mr Kevin McKenna, who was the Chief Operating Officer of the Capital Markets Division and is now the Bank's Chief Operating Officer.
Each side also adduced expert evidence from an expert in accountancy. The claimants' expert was Mr Steven Brice and the Bank's expert was Mr Hugo Watson-Brown.
The issues relating to the bonus calculation have been referred to cryptically as the "rate" issue, the "kick out" issue and the "early bird" issue. To render these issues intelligible I must first describe more of the relevant factual background.
B. FACTUAL BACKGROUND
Before they joined Investec, Mr Brogden and Mr Reid were employed by Abbey National Plc and then, following its takeover, by Santander. In 2006 they were running a successful equity derivatives business at Santander.
The claimants join Investec
In the later part of 2006 Investec decided to recruit a new equity derivatives team. A previous attempt to set up such a business within the Bank had not been successful. With the assistance of head hunters, Investec...
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