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14 May 2013
In Dresdner Kleinwort Limited v Attrill ( EWCA Civ 394) the Court of Appeal upheld a ruling of the High Court that an announcement made orally to staff of Dresdner Kleinwort (DK) on behalf of the board amounted to a contractual commitment to a minimum bonus pool and that, despite deteriorating financial circumstances, DK was obliged to maintain the bonus pool for distribution among staff.
In early 2008 negotiations for the sale of DK to Commerzbank commenced. These negotiations became known to DK's staff. A number of individuals left the bank and others suggested that they were considering resigning. The Financial Services Authority (FSA) also became involved, placing DK on its watchlist as a result of these actual and anticipated defections. In response to this, the chief executive officer (CEO) of the investment arm of the bank, Dr Jentzsch, made an announcement over live video link on the bank's intranet system that a 'guaranteed' minimum bonus pool had been created for employees. This was followed by an email on October 20 2008 from the global head of human resources (HR) at DK providing further information on the operation of the bonus scheme.
As the acquisition process continued, discussions began in and around November to December 2008 regarding the retention of the bonus pool and the desirability of honouring the statements previously made by Jentzsch. These discussions were partly motivated by the fact that Commerzbank had recently accepted funding from the German government. As a result of these discussions, the DK board resolved to introduce a material adverse change (MAC) clause into the bonus letters to be sent out on December 19 2008. On the same day, Jentzsch made a further announcement saying the he "remained confident" that DK would deliver the bonus pool.
Not long after this announcement, the Commerzbank acquisition completed and on February 17 2009 the decision was taken at an extraordinary general meeting to invoke the MAC clause and reduce the bonus pool by 90%.
A group of employees brought legal action to enforce what they asserted was a contractual commitment to provide the balance of their bonuses. In 2012 the High Court ruled that the employees had been wrongfully denied their contractual entitlement to certain discretionary bonuses.
The Court of Appeal upheld the High Court's decision that DK's promise of a share of the allocated bonus pool could amount to a binding contractual commitment with individual employees who may have been entitled to a share of that pool. There would have been such a commitment if:
Clause 1.4 of the employment contract stated:
"The Company reserve the right to vary the terms and conditions described in this handbook and the terms and conditions of your employment generally. Such changes can only be made by a member of the Human Resource Department and must be communicated to you in writing. When the change affects a group of employees, notification may be by display on notice boards or Company Intranet."
The construction of the clause was strongly disputed. In analysing the clause at first instance, the High Court accepted a submission from DK that as the clause allowed changes adverse to an employee to be made, it should be read strictly. It also agreed with DK that HR involvement was required even in the case of a group notification. Accordingly, the High Court rejected the submission that the announcement on August 18 was of itself enough to constitute an effective variation of the contract.
However, the High Court went on to find that the combination of the August 18 announcement and the October 20 communication together satisfied the requirements of the clause. The October communication constituted confirmation by the global head of HR of the variation in relation to discretionary bonuses; it referred back to the August 18 announcement and was an endorsement of that announcement satisfying the requirements of Clause 1.4. Compliance could therefore be achieved by a combination of communications.
The Court of Appeal considered that the second and third sentences of the clause were intended to be read disjunctively, as there would be no point in indicating that group communications may be made by notice board or intranet if every change had to be effected by personal written communication. Consistent with that analysis, and contrary to the conclusion of the High Court, the Court of Appeal did not consider that group changes need to be either made or notified by a member of the HR department if the notice board or intranet option is used.
Even if HR involvement had been required, the Court of Appeal accepted that it would be satisfied in this case, as the original August oral communication was made with the approval of the board of the remuneration committee and the HR director was a member of that board; it would be artificial to require any other formal approval or endorsement by HR.
Accordingly, the Court of Appeal concluded that the variation was effected in accordance with Clause 1.4.
Intention to create legal relations
The High Court had found that there was a clear intention to create a legally binding obligation, given the use of the word 'guaranteed' in the announcement and the fact that DK's objective had been to stabilise the workforce and address the FSA's concerns. It could hardly have achieved this if the steps taken had not been intended to create a binding obligation. The fact that the announcement had been made over the bank's intranet and at a staff meeting did not undermine this; rather, in doing so, DK was merely using a quicker, more effective way of communicating with a large number of staff. While not every staff member would have seen the announcement in 'real time', it was clear that they had learned of the announcement very soon afterwards.
The High Court also concluded that the fact that the total amount of the bonus pool was not dependent on the number of employees who eventually received a distribution (ie, it was a fixed amount that would be paid out irrespective of DK's financial performance by year's end) did not affect the finding of a binding legal obligation. Such practice was common for the bank; each year it took such a risk in order to retain its staff.
In appealing the decision, DK sought to differentiate between unilateral statements and bilateral negotiations. DK argued that where a bilateral statement is made, the court should not assume that the burden of proof regarding intention to create legal relations fell on DK (as the party seeking to establish that there was no such intention), although DK accepted that this would be the case in bilateral negotiations.
The Court of Appeal rejected this submission. It made no difference whether the communications were bilateral or unilateral. Where a term is introduced into a pre-existing contractual relationship, there will be a strong presumption that it is intended to be legally binding; the onus will still be on the party asserting that there is no intention to create legal relations to establish that fact. The Court of Appeal also considered that the natural inference would be that any promises made to staff relating to the terms of their employment would take effect in the same way as other contractual terms.
DK also sought to argue that the High Court should not have had regard to the concerns of the FSA or its board when considering this matter, as these were unknown to the employees at the material time, and that the court should focus simply on how a reasonable recipient of the promise would have understood the offer.
Although it appeared to the Court of Appeal that these matters were in fact within the knowledge of the employees, it considered that the evidence would be admissible even on the assumption that it was not known to the employees when the offer was made. If the recipient of a unilateral promise would, in light of all circumstances known to him or her, reasonably understand the promise to be intended to be legally binding, the other party should not be allowed to escape liability by relying on evidence unknown to the recipient to establish that there was no such intention. Similarly, an offeror arguing that it had no contractual intention cannot rely on evidence unknown to the offeree to show lack of legal intent.
The Court of Appeal therefore concluded that there was an intention to create legal relations.
It therefore follows that even if there was no unilateral change pursuant to Clause 1.4 of the contract, there was in any event a binding contractual obligation to pay bonus payments in the usual way, at least to the limits of the guaranteed fund.
On appeal, DK continued to contend that the relevant term was inappropriate for incorporation into the individual contract of employment. The second and related point was that the term was too uncertain.
The Court of Appeal could see no reason why a promise of a guaranteed minimum bonus pool could not be contractually binding even though individual employees could not, at the time, point to an entitlement to a specific bonus payable out of it.
Further, the fundamental principles of the scheme were entirely clear and the fact that there were some loose ends did not constitute a degree of uncertainty necessary to defeat the parties' intention that the agreement should be capable of enforcement.
It is interesting to note that the oral announcement in this case did not concern the individual bonuses to be paid, but dealt only with the overall size of the bonus pool to be distributed. Nonetheless, it was held to be a statement capable of creating a binding contractual obligation.
This decision provides some guidance as to the circumstances in which an oral statement can suffice to give rise to binding contractual obligations and makes clear that where such a statement is made in the context of a pre-existing contractual relationship, there will be a strong presumption that the statement is intended to be legally binding.
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