Court of Appeal analyses proper interpretation of discretionary bonus clauses

In Horkulak v Cantor Fitzgerald International the Court of Appeal gave a detailed analysis of the interpretation of 'discretionary' bonus clauses in employment contracts.

Mr Horkulak's employment contract provided for him to be paid a 'discretionary' bonus, the amount of which was performance-related and was to be mutually agreed between him and Cantor (albeit that the final decision in this regard rested with his employer). The damages the High Court awarded were largely made up of 'discretionary' bonus payments, which it held would have been made to Mr Horkulak pursuant to the clause in his employment contract, had he not been dismissed.

The Court of Appeal found that the objective purposes of the 'discretionary' bonus clause in Mr Horkulak's contract of employment were to reward him for his past efforts, to motivate him and, as any bonus payment was subject to the precondition that he should be employed by Cantor at the time, to ensure future loyalty. For these reasons, and in view of the fact that bonuses are a significant part of the remuneration structure in the financial markets sector, the Court of Appeal held that the clause had to be read as giving Mr Horkulak a contractual benefit, such that Cantor would have breached his employment contract if it exercised its discretion in an irrational or arbitrary manner.

Although the Court of Appeal found that the High Court's general approach with regard to the construction of the 'discretionary' bonus clause in Mr Horkulak's employment contract was correct, it reduced the amount of the damages awarded to him to take into account mitigation of loss and ordered a redetermination of the issue of quantum by the High Court.

This case adds weight to earlier High Court cases that bonus clauses, even if expressed to be completely 'discretionary', have to be operated in a justifiable manner. The obligation on employers is to consider the question of a bonus in a rational and bona fide manner.

If you require any advice in relation to bonus schemes and the likely impact of this decision on your own schemes or contractual documentation, please contact Simon Jeffreys at [email protected] or on +44 (0)20 7367 3421 or Anthony Fincham at [email protected] or on +44 (0)20 7367 2783