Mr Patural was employed on the basis that, in addition to receiving a fixed salary, he would also be entitled to receive a discretionary bonus in accordance with the terms of his appointment letter. The appointment letter stated that he was eligible to be considered for an annual discretionary incentive award, details of which were specified in the employer's handbook. The handbook stated that bonus would be subject to a number of factors, including, but not limited to, the employer's performance, the specific contribution of its component business units, the individual's personal contribution and the need to retain the individual in employment with the employer going forward. The handbook specifically stated that employees had no contractual entitlement to receive a discretionary incentive award annually and that any such award would be at the absolute discretion of the employer.
Even if a bonus scheme is stated to be discretionary, it is commonly argued by employees that they have an implied contractual right, by reason of custom and practice, to receive a bonus where the bonus has been paid on a regular basis.
In this case the dispute focused on the amount of the bonus award made to Mr Patural, rather than no bonus payment being made. Mr Patural claimed that it had been implied to him that financial traders should expect a discretionary bonus of between 5% to 10%, with 10% being expected in a good year. However, in respect of both 2008 and 2009, Mr Patural was awarded a bonus of approximately 1% of the profits that he generated. This was in comparison to two colleagues who received bonuses equating to 8% and 11% respectively of the profits that they had generated. However, a distinguishing factor was that both of these colleagues were entitled to receive guaranteed bonuses, calculated based on a specified formula. Mr Patural claimed a breach of his contract of employment by his employer on a variety of grounds, including the implied term to act in good faith and not in a manner which was perverse or irrational regarding the amount of bonus awarded.
The High Court rejected Mr Patural's claim and held that, on the facts, the employer had good reason to award the two colleagues a guaranteed bonus based on a specified formula, as opposed to the discretionary bonus to which Mr Patural was entitled. It also rejected the argument that the employer had acted irrationally in only awarding Mr Patural a bonus of 1% of the profits that he had generated. Essentially, it held that the hurdle to be overcome was that no rational employer would have paid him a bonus of that amount, and, in these circumstances, the High Court held that this could not be shown.
This is good news for employers as it appears that there would be a high threshold to be overcome in order to persuade a court that the level of the discretionary bonus payment was irrational or perverse in circumstances where it was dependent upon many factors, including fluctuating financial conditions.
One interesting development in this area is the case of, Braganza v BP Shipping Ltd, which was decided recently by the Supreme Court and which related to a death in service payment under a contract of employment. This case considered the extent to which the reasonableness of an employer's decision-making process may be scrutinised. The Supreme Court's found that the employer's decision not to make the death in service payment (on the grounds that the employer believed that the employee had committed suicide) was unreasonable. This goes further than the current test - i.e. whether the decision was perverse/irrational. It is noteworthy that the Supreme Court indicated that the personal nature of an employment contract may justify a more intense scrutiny of an employer's decision than would otherwise be the case. Reference was made to Braganza in the Patural case but the High Court in Patural declined to apply the principles in Braganza to the bonus situation in Patural. It is likely though that the point will be explored further in subsequent bonus cases.