Talk is not so cheap for employers

A CoA decision against Commerzbank is a warning that common law contractual rules are alive and kicking

Owers

Last month 104 former Commerzbank bankers met with resounding success when the Court of Appeal (CoA) dismissed the bank’s challenge to a decision that it was contractually committed to providing its employees with a minimum bonus pool because it had provided oral assurances to them in this respect.

Commerzbank now has to pay almost €50m in total to the bankers, in one of the biggest bonus disputes arising from the credit crunch. [The bank has since publicly stated that it would not appeal the ruling at the Supreme Court.]

At first glance, this may seem a harsh decision that increases employers’ risk when making group announcements, because the oral assurances given in this case overrode the bank’s handbook, which made it clear that the amount of any bonus award was at the “absolute discretion” of the bank. However, on closer examination of the facts of this case, it becomes easier to see how the court reached its decision by relying on common law contractual principles.

It is well established law that contracts do not have to be made in writing, provided they contain the key elements of offer, acceptance, consideration, and intention to create legal relations.

Even though the minimum bonus pool announcement was made orally, at a “town hall” meeting, the court held that these elements were present and the promise should therefore be treated as contractually binding, particularly as it was given in the context of an existing employment relationship.

It is interesting that this reliance on the common law contractual principles has produced a favourable result for the UK employees, whereas their colleagues in Germany, Italy, Japan and the US have not been so successful.

The case is not alone in protecting employees when promises are made by an employer. In the matter of Hagan v ICI, in the build-up to a TUPE transfer, oral assurances were given to employees about their future terms of employment, which turned out to be incorrect. The High Court found that the employer had an implied contractual duty to ensure that information given to employees was accurate.

Similarly, in Robert Whitney v Monster Worldwide Ltd, the CoA held that a “no detriment” final salary pension guarantee was legally binding even though it had evolved over time and was not set out in a single document.

So, when an employer is advising employees of rights or benefits, whether in writing or orally, such communications must be undertaken with care and clarity so as to ensure that it is clear exactly what is being offered and what conditions (if any) attach to the potential rewards.

If employers are to avoid diluting the incentivising effect that such communications are intended to have with numerous caveats, it is paramount that they should satisfy themselves in advance that they are in a position to provide the benefits they are offering, or else risk potential claims from employees, whether individually or as a group. As Commerzbank discovered, making such promises and not following through, can prove expensive.