Keen v Commerzbank AG

JurisdictionEngland & Wales
JudgeLord Justice Mummery,Lord Justice Jacob,Lord Justice Moses
Judgment Date17 November 2006
Neutral Citation[2006] EWCA Civ 1536
Docket NumberCase No: B 6/ 2006/ 0915
CourtCourt of Appeal (Civil Division)
Date17 November 2006
Between:
Commerzbank AG
Appellant
and
James Keen
Respondent

[2006] EWCA Civ 1536

Before:

Lord Justice Mummery

Lord Justice Jacob

and

Lord Justice Moses

Case No: B 6/ 2006/ 0915

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE QUEEN'S BENCH DIVISION

COMMERCIAL COURT

MR JUSTICE MORISON

2005/1013

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr Andrew Hochhauser QC & Mr David Craig (instructed by Linklaters) for the Appellant

Mr Robin Knowles QC & Mr Richard Leiper (instructed by Ferguson)) for the Respondent

Hearing date: 10 th October 2006

Lord Justice Mummery

The appeal

1

On 7 April 2006 Morison J dismissed an application in the Commercial Court by Commerzbank AG (the Bank) for summary judgment under Part 24 CPR in relation to a claim against the Bank by Mr James Keen, a former employee, for damages for breach of contract (a) by under-payment of discretionary bonuses for the years 2003 and 2004 and (b) by non-payment of a discretionary bonus for the year 2005. The judge held that Mr Keen had a properly arguable claim against the Bank in respect of each of the three years for damages for breach of the discretionary bonus provisions in his contract of employment: see [2006] EWHC 785 (Comm). He gave directions for trial, including a provision for expert evidence on compensation.

2

Unless this appeal succeeds the trial of the bonus dispute will take place in March 2007 at the same time as the trial of Mr Keen's other claim against the Bank (the share claim) relating to the withholding of shares awarded conditionally as part of the bonus for the trading years 2003 and 2004. The Bank accepts that the share claim has a real prospect of success and that it should go to trial. The trial is fixed for 6 to 8 days.

3

The Bank obtained permission to appeal from this court on a renewed application on 3 July 2006.

4

The Bank submits that the bonus claims should be summarily dismissed as having no real prospect of success. This would considerably shorten the length of the trial next March, saving time, trouble and costs all round.

Background

5

Mr Keen was employed by the Bank for less than 3 years, from November 2002 until he was made redundant on 10 June 2005. Mr Keen says that he does not accept that redundancy was the true reason for his dismissal. He actually stopped working for the Bank on about 12 May 2005. He was the manager of the proprietary trading desk known as Special Situations 2 (SS2) in the Bank's Investment Banking Division at its London Branch. Mr David McCreadie, the Bank's Global Head of Brokerage, was his line manager.

6

The SS2 desk was closed in June 2005 following a redundancy consultation exercise. The Bank did not continue proprietary trading after that.

7

In addition to a basic annual salary of £120,000 and a benefits package, Mr Keen was eligible to participate in a discretionary bonus scheme as set out in an offer letter dated 27 September 2002 in the following terms.

"You are eligible to participate in the [Bank's] discretionary bonus scheme. The decision as to whether or not to award a bonus, the amount of any award and the timing and form of the award are at the discretion of the [Bank]. Factors which may be taken into account by the [Bank] in deciding whether or not to award a bonus and the amount of any bonus include

• The performance of the [Bank]

• The performance of your business area

• Your individual performance and your contribution to the [Bank's] performance and the performance of your business area

• The strategic objectives of the [Bank]

• Whether you will be remaining in the employment of the [Bank]

No bonus will be paid to you if on the date of payment of the bonus you are not employed by the [Bank] or if you are under notice to leave the [Bank's] employment whether such notice was given or received by you.

Bonus may be reduced for any period of absence in excess of one month whether through illness, maternity leave or any other reason other than absence on holiday."

8

It was a straightforward term of his employment that the decision to award additional remuneration was in the discretion of the Bank: as to whether it is awarded at all, the amount awarded and the form and timing of the award. Some of the factors relevant to the exercise of the discretion are listed, but the Bank is not precluded from taking other reasonably relevant factors into account. Further, it was agreed that eligibility for additional remuneration is limited to those who, at the date of payment of the bonus, are in the employment of the Bank and not under notice to leave.

9

Mr Keen was awarded bonuses of almost € 3m for the years 2003 (€ 2.8m awarded in March 2004) and 2004 (€ 2.95m awarded in March 2005). This made Mr Keen the 4 th most highly paid employee of the Bank's global banking operation in 2003, and the 3 rd most highly paid in 2004.

10

He was not awarded any bonus for the year 2005, as he was not employed by the Bank at the payment date of the bonus for that year (March 2006).

11

I will deal first with the breach of contract claims for the years 2003 and 2004.

A. The 2003 bonus

12

It was pleaded that it was an implied term of Mr Keen's employment contract that the Bank would not exercise any discretion it had in relation to his bonus award irrationally or perversely. The implied term is admitted. As will be seen from the authorities binding on this court, an employer's discretion in an employment contract is, like the statutory discretion of a public authority in public law, subject to an obligation that it should not be exercised irrationally or perversely.

13

The dispute is whether Mr Keen has a real prospect at trial of establishing a breach of the implied term by the Bank. He contends that the exercise of discretion by the Bank in relation to the 2003 bonus was in breach of contract, as it was irrational or perverse not to pay him a much bigger bonus. In particular, the Bank failed to take account of the P & L performance of SS2, which was extraordinarily good, and of Mr McCreadie's recommendation of a much larger "bonus pool" for SS2, from which a higher bonus would have been paid to Mr Keen. He contended that no rational bank in the City, faced with the performance of SS2 and the recommendation of Mr McCreadie, would have "reduced" the bonus pool in the way the Bank did. Mr McCreadie's recommendation was in line with what Mr Keen was led to expect and it was what would be a rational award in this very special pool of employment.

14

He alleges that SS2 made a profit of € 41.5m that year; that his line manager recommended a bonus pool for SS2 of between 15 and 18% of that profit; and that the Bank decided instead on a reduced bonus pool of 10% of profit, from which he, as manager of the SS2 Desk, allocated bonuses to himself (70% of the pool) and to others in the pool. He contends that a rational employer would have decided on a bonus pool in the range of 15–18% of profit and loss.

15

The Bank's response is that there was no contractual obligation on its part to accept Mr McCreadie's recommendation as to the size of the bonus pool; that it took his recommendation into account; that in 2003 the Bank and its Investment Banking Division made losses; that Mr Keen's claim was based on a fundamental misunderstanding of the bonus process; that the manner in which the bonus was calculated was a matter for the Bank; that it was under no obligation to create a bonus pool at all; that it had given a rational explanation for its decision on the size of the bonus pool; that the burden of proof was on Mr Keen to establish that the Bank had exercised its discretion in a way in which no reasonable employer would have done; and that there was no real prospect of him discharging the burden of proof at trial.

16

As pointed out by Mr Robin Knowles QC in his careful submissions on behalf of Mr Keen, the evidence in support of the Bank's response is in witness statements, which were not made by the individual responsible for the decision on the size of the bonus pool. They were made by an in-house lawyer, Mr John Benson, who was not personally involved in the relevant decisions on the size of the bonus pool.

17

Further, Mr Knowles observed that the evidence does not identify who in the Bank made the decision as to the size of the bonus pool for SS2 nor have there been produced contemporaneous documents evidencing the way the discretion of the Bank was exercised or explaining how the actual bonus figure for the pool was decided on or why the Bank rejected the recommendations of Mr McCreadie.

B. The 2004 bonus

18

Mr Knowles made similar submissions on behalf of Mr Keen in relation to the 2004 bonus. The response of the Bank was similar.

19

SS2 made a profit of € 57.5m for the calendar year 2004. Mr McCreadie's recommendation was for a bonus pool amounting to 17.5% of that profit. The Investment Banking Division made a loss in 2004. The Bank decided on a bonus pool of slightly less than 10%.

C. Judgment below on 2003 and 2004 bonuses

20

The judge dismissed the Bank's application for summary disposal of Mr Keen's claims. He added that, as he had decided that the matter should proceed to trial, the less that he said about the strengths and weaknesses of the parties' arguments the better.

21

The judge also pointed out that the fact that there was going to be a trial anyway on the share claim enhanced the case in favour of dismissing the summary judgment application.

22

He gave the following reasons for allowing the bonus issue for the years 2003 and 2004 to go to trial.

23

First, the Bank had not produced any compelling evidence on the making of the bonus decisions for either year. It was unclear who had made the decision and on what basis. The witness statement of the Bank's in-house lawyer contained "very...

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