Case of the week: Employment
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Where an employer, with the interests of staff retention in mind, made a clear and unequivocal oral promise in a general, non-mandatory employee meeting to pay guaranteed performance-based bonuses, its announcement created a contractual obligation.
Where an employer, with the interests of staff retention in mind, made a clear and unequivocal oral promise in a general, non-mandatory employee meeting to pay guaranteed performance-based bonuses, its announcement created a contractual obligation. Neither the collective nature of the announcement, the informal venue nor the absence of express acceptance by the employees prevented it from being “the stuff of contractual obligation”.
Judgment for claimants
The claimants, who were employees and former employees of Dresdner Kleinwort, sought payment of bonuses which they maintained were outstanding to them.
Dresdner Kleinwort was a service company in the global investment banking division of the Dresdner Bank Group.
On 18 August 2008, pending a takeover by the second defendant Commerzbank, the workforce was told that a “guaranteed” minimum bonus pool would be allocated to individuals according to performance “in the usual way”.
In December 2008, a letter to each employee confirmed that a discretionary bonus for 2008 had been provisionally awarded at a specified sum, subject to a “material adverse change clause” – the ‘MAC clause’. That day, employees were reassured at a further staff meeting that the MAC clause was unlikely to be invoked.
In January 2009, after the acquisition of Dresdner Bank Group by Commerzbank, the MAC clause was invoked and the claimants were told that their bonus awards would be cut by 90 per cent.
The issues were: the context in which the term “guaranteed” had been used at the 18 August meeting; whether the 18 August announcement and/or any subsequent statements made on behalf of Dresdner Kleinwort gave rise to a contractual obligation; whether the MAC clause had been introduced in breach of contract and, if not, whether Dresdner Kleinwort was entitled to rely on it.
Judgment for claimants
On the evidence, the overwhelming probability was that the announcement to the claimants on 18 August had simply been that of a guaranteed minimum bonus pool rather than an announcement that the pool had been securely funded.
The announcement indicated that the pool would remain “no matter what” and particular reference had been made to the transfer of ownership to Commerzbank.
The announcement had been in clear and unequivocal terms so as to be capable of giving rise to a legally binding obligation.
The purpose of the bonus pool had been to stabilise the workforce at a time of great uncertainty.
The fact that the announcement did not create an expectation of receiving a particular share and did not contain details of the time or form of payment did not deprive the announcement of contractual effect. The collective nature of the announcement, and the fact that it had been communicated in an informal forum where attendance was voluntary, did not prevent it from being “the stuff of contractual obligation”.
In any event, the announcement amounted to an offer capable of acceptance and there had been an implied waiver of the requirement to respond. Absent any such waiver, acceptance of an offer that was advantageous to the workforce could have been inferred by the continued discharge by them of their contractual obligations.
Dresdner Kleinwort conceded that if the announcement on 18 August gave rise to a binding obligation, it had not been entitled to introduce the MAC clause into the bonus letters.
On the evidence, the clause had been created as a means of enabling Dresdner Bank to go back on its promise rather than for the much more limited purpose for which, on its proper construction, it could be used.
The court construed the MAC clause on the facts and evidence, finding that its requirements had not been met in a number of respects.
For the Anar claimants
Andrew Hochhauser QC and David Craig, Essex Court Chambers
Mark Levine and Daniel Naftalin, partners, Mishcon de Reya
For the Attrill claimants
Nigel Tozzi QC and Kate Livesey, 4 Pump Court
Clive Zietman, partner, Stewarts Law
For the defendant Dresdner Kleinwort
Thomas Linden QC, Matrix Chambers
Martin Chamberlain and Oliver Jones, Brick Court Chambers
Nicola Rabson, partner, Linklaters
Clive Zietman and Mark Levine
The judgment in this case is interesting for a number of reasons and all employers should take note of the findings reached by the court.
While the claim was based on a verbal announcement made to the entire workforce of the bank, the judgment is a useful reminder of the basic principles required for the formation of any contract.
The formation of a contract is complete once the basic principles are satisfied – namely, offer, acceptance, consideration and the intention to create legal relations.
The case highlights both the need to anticipate events at the time a contract is formed and the difficulty of doing so.
Once an obligation becomes contractually binding it cannot later be reneged upon simply because events transpire that were not anticipated at the time the contract was formed.
With the workforce having performed all that was required from them under the contract, the subsequent support provided to Commerzbank by the German government following the collapse of Lehman Brothers was not sufficient in this case to allow the bank to breach its side of the contract.
In the banking world, perhaps more than in any other sector, verbal promises – usually about remuneration and promotion expectations – are often made to employees both before and during employment.
There can be no safe assumption by employers that such promises do not carry binding contractual force. In the Commerzbank case the bank took a somewhat casual view of the promises it made to the entire workforce, believing, it seems, that the promises made carried no contractual force. The court disagreed.
Although this case concerned bankers there is no doubt that the principles could easily apply more widely and could certainly be relevant to industries outside the financial services sector.
Employers in all fields should avoid casual promises and be more cautious than ever with the promises they make.
It should also provide a stark reminder that promises that are intended to be legally binding should be made clearly and unequivocally in formal, written documents.
Finally, one of the striking features of the case was that the court attached considerable significance to the fact that the promises made by the bank to its employees were echoed in promises made to
It goes without saying that any employer who is regulated by the FSA should be meticulous in its dealings with that organisation, ensuring that it acts with complete openness, honesty and integrity at all times.
Clive Zietman (left), partner, Stewarts Law, and Mark Levine, partner,Mishcon de Reya