Cantor Fitzgerald International v Horkulak

This is the judgment of the court.

This appeal is concerned with the construction and application of a contractual ‘discretionary’ bonus clause in the employment contract of the claimant/respondent Steven Horkulak and the defendant/appellant Cantor Fitzgerald International (“CFI”), a well known bond and money-broking house, trading in bonds, equities and interest rate derivatives. The judgment under appeal is that of Mr Justice Newman dated 31 July 2003 when he found for the claimant upon his claim for damages for wrongful dismissal by CFI and awarded to the claimant damages totalling £892,000, largely made up of an award in respect of lost bonus payments which the judge held would have been made to the claimant pursuant to the bonus clause, had he served the full term of his employment contract. The counterclaim of CFI for repayment of a bonus payment previously paid to the claimant was dismissed. The appeal is as to quantum only, the application of CFI for permission to appeal against liability having been refused on 20 November 2003.

The grounds of the appeal are that the judge erred in treating the existence of the bonus clause, which was wholly discretionary, as entitling the claimant to any award of damages following his departure; alternatively that the judge erred in awarding damages on the basis of findings as to what the claimant would or was likely to have received had he remained in CFI’s employment. It is also asserted that, in any event, the award was excessive having regard to various factors which CFI would have been entitled to take into account when deciding what bonus should be paid. Finally, it is said that certain of the judge’s factual conclusions underlying his assessment of the level of bonus likely to have been paid and his refusal to reduce the damages for the claimant’s failure to mitigate were unjustified upon the evidence before him.

It is not necessary to go into detail in relation to the judgment on liability. Suffice it to say by way of introduction that the claimant occupied a senior management position working on interest rate swaps in money markets. Having first been employed by CFI as a director and broker of Deutschmark Interest Rate Swaps, on January 1997 he was promoted into a managerial role and on 17 August 1999, under a 3-year fixed-term contract running from 1 October 1999, he became employed as Senior Managing Director of Interest Rates Derivatives at a basic salary of £250,000 per annum with bonus clauses considered in more detail below. There were three other Senior Managing Directors; Mr Lynn, Mr LaVecchia and Mr Alcan. The four Senior Managing Directors were of equal status, reporting to Mr Lee Amaitis, the President and Chief Executive of CFI who would in turn report to Mr Lutnick the President of Cantor Fitzgerald Limited Partnership. The claimant resigned from his employment by solicitor’s letter dated 29 June 2000, giving as his reason the continued bullying, abusive and ultimately intolerable behaviour of Mr Amaitis. The claimant resigned in a state of high distress and anxiety which he attributed to his treatment over the previous six months at the hands of Mr Amaitis and, in his claim, asserted that his life as an employee had been rendered intolerable and that the behaviour of Mr Amaitis towards him amounted to constructive dismissal.

The lines of the defence were broadly that the abusive behaviour and in particular the bad language of Mr Amaitis were to a substantial extent admitted; however, it was asserted that they were common currency between Mr Amaitis and the claimant and in any event were largely induced by the frustration of Mr Amaitis at the repeated and serious shortcomings in the claimant’s performance. It was asserted that the claimant could not cope with the pressures, tensions and demands incidental to the job and that, in essence, he left, not because he was driven out by unlawful conduct on the part of the Mr Amaitis, but simply because he could not cope.

The judge rejected this defence in toto. The matter was somewhat complicated by the fact that, throughout his employment, the claimant was a heavy drinker. He was also a user of cocaine. In July 1999, about a year before his resignation, he consulted a doctor and his position improved. So far as his abusive habits were relevant to his performance, the judge dealt with their impact on the work of the claimant as follows:

“69.

In 1999 the claimant felt his addiction to alcohol and cocaine was out of hand and he sought help. He went to Dr McGilchrist in July 1999 … I do not accept his evidence that he completely overcame his addiction to cocaine in the time he suggested (by October 1999) but it is likely, and I find, that he had some success in curtailing it. He may have reduced his alcohol intake but he probably continued to drink heavily. The medical evidence does not support the conclusion that in June/July 2000 when he left Cantor he was addicted, but the claim he made to the doctors that he had been free of it for some six months is probably not true.

…

74.

I have concluded that Mr Amaitis began to have his doubts about the claimant’s ability to perform in late 1999. Such shortcomings as he perceived were not significant. The claimant’s heavy alcohol intake had probably reached levels where from time to time it impacted upon his work, but not so as to render him unfit to do the job. Once the seeds of doubt had been sown, I am satisfied Mr Amaitis did nothing to prevent their unrestrained development.

75…. Having considered the evidence in connection with Cantor’s complaints, including the occasions complained about by the claimant, the effect of it does not support the conclusion that he was failing in grave or serious respects, as opposed to fault being found with his judgment and availability whenever an opportunity arose. Important as these were to Mr Amaitis, they were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance. On an objective view of the relationship under the contract, it was under strain. The increase in tension probably increased the propensity of the claimant to cause annoyance to Mr Amaitis, but unless the differences were properly resolved and not exacerbated, it was inevitable the relationship would break down.

76.

In my judgment the contract broke down and the position of the claimant became intolerable because Mr Amaitis took every opportunity to vent his disapproval of the claimant, to the claimant and sometimes in the presence of others. He demonstrated by his outbursts that he had lost faith in him and gave him no chance to re-establish the trust and confidence which would recreate the ‘faith’.

77.

Far from having any discussion and giving advice he uttered intemperate, summary views in foul and abusive language. His solution seems to have been to frighten the claimant into performing according to the standards he required and to make it plain that any contrary view which questioned his authority would not be tolerated.

…

79.I have reached the firm conclusion that Mr Amaitis’ deliberate course of conduct from January 2000 to 28 June 2000 breached the implied term of trust and confidence in the claimant’s contract of employment. As a senior managing director, having responsibility for managing employees, his position became intolerable. The outbursts of Mr Amaitis to the claimant were bound to become common knowledge in Cantor. Without Mr Amaitis’ support, his authority to manage employees was severely undermined.”

In these circumstances, the judge found CFI liable.

When he first joined CFI, the claimant was employed under a contract of employment dated 17 January 1997 which provided for a fixed term of 3 years at a fixed salary of £200,000 per annum for the first and second years of service. It also provided for a ‘once only’ guaranteed loyalty bonus of £200,000 for the first year and £100,000 for the second year of his service. This contract was replaced before its full term by the contract of employment dated 17 August 1999 in relation to the post of Senior Managing Director, which he occupied at the time of his resignation. Under that contract the term of his employment ran for three years from 1 October 1999 with provision for automatic extension thereafter unless either party gave notice of termination to the other.

By clause 3(a) the contract provided for a salary of £250,000 per annum with a right to CFI to reduce that salary by not more than 25% if, in any consecutive 6-month period, 50% of the commission revenue generated by the Global Interest Rate Derivatives Business was less than the total revenue generated by the business as determined by the company in accordance with its current practices and accounting policies from time to time as determined upon a formula set out in the contract.

By clause 3(b)(i) the claimant was entitled to a ‘once only’ bonus of £100,000 (subject to deductions for tax and national insurance) within 7 days of his execution of the agreement and to a further guaranteed bonus of £100,000 in respect of the financial year to 30 September 2000 payable within 90 days of that year-end date, provided that he was still working for CFI and had not given notice to procure his release.

In addition, by clause 3(b)(ii), provision was made for payment of a discretionary bonus as follows:

“In addition the Company [CFI] may in its discretion, pay you an annual discretionary bonus which will be paid within 90 days of the financial year-end (30 September) the amount of which shall be mutually agreed by yourself, the Chief Executive of the Company and the President of Cantor Fitzgerald Limited Partnership, however the final decision shall be in the sole discretion of the President of Cantor Fitzgerald L.P. … It is a condition precedent to any payment hereunder that you shall at all relevant times exercise best endeavours to maximise the commission revenue of the Global Interest Rate Derivatives Business and that you shall still be working for and not have given notice to or attempted to procure your release from this Agreement nor have given notice to the Company in accordance with clause 11(h) on the date such bonus is due to be paid.”

The judge’s task when assessing the quantum of damages was to calculate the amount of the remuneration which, but for his dismissal, the claimant would have received in respect of the period of his continued employment with CFI up to 30 September 2002, after giving credit for any remuneration which the claimant earned during that period and subject to his obligation to mitigate his damage. In relation to mitigation, the judge found that, had the claimant been in a position to seek employment as from the date of his resignation, it would have taken him two to three months from the end of 2000 (i.e. until February or March 2001) to find new employment. However, the claimant did not in fact start other employment until 4 June 2001 because, soon after Christmas 2000, he relapsed into drinking and drug-taking which required treatment. Nonetheless, the judge made no reduction in the damages in that respect on the grounds that the relapse and treatment of the claimant’s condition followed the unreasonable refusal by CFI to respond to a letter from the claimant seeking a ‘fair financial resolution’ to the claim of the claimant and the claimant’s relapse was ‘part of the continuum flowing from the breach’.

The judge assessed the damages payable to the claimant under the relevant contractual provisions as follows. For the year to September 2000, he held (accepting CFI’s submission) that for the remaining two months, the claimant’s basic salary (£20,833 per month) would have been reduced by 25% (i.e. a total of £10,416) under clause 3(a); but that he would have received a guaranteed bonus of £100,000 and a discretionary bonus of £180,000. On this basis the total remuneration package for the year would have been as follows:

In respect of the year ending 30 September 2001, the judge awarded damages as follows:

“Basic salary - £250,000;

Discretionary bonus - £450,000.

Credit was given for £100,000 received by the claimant from his new employment. Total: £600,000”

For year ending 30 September 2001, the claimant had received £325,000 from his new employment i.e. some £75,000 more than his basic salary under his employment contract with CFI. There was thus no claim for loss of basic salary. Similarly, there was no claim for loss of the discretionary bonus because, pursuant to clause 3(b)(ii), the bonus was only payable if the claimant was still employed 90 days after the end of the year in respect of which it was payable. However, the judge rejected the argument of CFI that the claimant should give credit against his damages claim for the £75,000 excess of his new salary over his former basic salary on the grounds that “had he remained with Cantor, manifestly he would have earned more than £75,000”.

In awarding the sums of £180,000 (year ending 30.9.2000) and £450,000 (year ending 30.09.2001) as damages in respect of the discretionary bonuses which the judge held that the claimant would have received had he remained in CFI’s employment up to 30 September 2002, the judge rejected the argument for CFI that, because the bonuses payable were discretionary, no sums were due under this head. In this respect, CFI relied on the authority of Lavarack v Woods of Colchester [1967] 1 QB 278 in which the majority (Diplock LJ and Russell LJ) held that damages for wrongful dismissal could not confer on an employee benefits under a bonus scheme which the contract did not oblige the employer to confer, even though the employee might reasonably have expected his employer to confer them in due course. The majority rejected the view of Lord Denning MR that the court should simply calculate what the injured party might reasonably have expected to receive if he had continued in his old employment. The true question was “What would be the most beneficial performance of the contract to the defendants?”: per Diplock LJ at 293g-294d, approving and applying observations of Scrutton LJ in Abrahams v Reiach Herbert Ltd [1933] 2KB 536 at 553 and Withers v General Theatre Corporation Ltd [1933] 2 KB 536 at 551. [“A jury should not be asked to award damages on what the plaintiff might have expected, but … what would be the most beneficial performance of the contract to the defendants and … the damages should not exceed a basis calculated on that.”]

In rejecting CFI’s argument the judge said this:

“85.

Contrary to Mr Béar’s submission [Lavarack v Woods] does not govern the instant claim because the claimant had the benefit of a term in his contract which entitled him to receive a discretionary bonus, whereas Mr Lavarack was arguing that, had his contract survived, he would have been entitled,

“under some imaginary future new agreement which the defendants did not make with him but might have done if they wished” [Diplock LJ p297E]

The issue which arises for determination is, what would Cantor have been obliged to pay according to the provision entitling the claimant to a discretionary bonus? He is entitled to no more than that which Cantor would have been obliged to pay.

86.

In my judgment the two relevant cases which disclose the correct approach are Clark v Nomura International Plc [2000] IRLR 766, and Clark v BET Plc [1997] IRLR 348. Cantor was obliged to exercise its discretion reasonably in good faith. Had it refused to exercise its discretion at all or done so unreasonably or in bad faith, it would have acted in breach of contract.”

In calculating the discretionary bonus which would notionally have been awarded for the years 2000 and 2001 the judge said this:

“89.

The principal battleground has been joined over whether Mr Amaitis would have been obliged to award a bonus for 2000 or 2001. The claimant submits that his remuneration package for both years would have been similar to that awarded to other senior managing directors on other desks and in line with one who worked on the same desk and another who worked on the desk after the claimant left on 28 June 2000.

90.

In my judgment the claimant was not entitled to expect parity. He was entitled to a fair and rational assessment of his entitlement. For the purpose of the court looking at the position the payment to others was relevant to the probability of a bonus being paid to the claimant.

91.

Mr Amaitis set out the criteria for awarding a bonus in paragraphs 11-18 of his third witness statement, which because it contained profit figures and remuneration for others, remained confidential. His approach can be summarised as follows. The following factors would have been particularly important.

(i)

Whether employment costs exceeded 50% of revenue at the desk.

(ii)

A broker could normally expect 30-35% of his personal revenue and a discretionary bonus will make up the difference, if any, between salary and that figure.

(iii)

The bonus scheme can be used to ‘weed’ out non-producers.

(iv)

Travel and entertainment should be at 4%.

(v)

He looked for 20% bottom line profit on a desk.

92.

In my judgment certain basic facts about the claimant’s remuneration at Cantor need to be remembered. In each of 1997 and 1998 he received £400,000. In 1999 his salary was fixed at £250,000 with a guaranteed bonus for 2000 of £100,000 and he received a once for all bonus of £100,000, in total £450,000. I regard the submissions for the year 2000 to the effect that he would have had his fixed salary reduced and would only have been paid his guaranteed bonus, as envisaging a highly unlikely outcome.

93.

The London Interest Rate Derivatives desk was running at a significantly higher percentage than 50% for cost over revenue. The figures suggest at least 63% and perhaps higher. But there were factors which contributed to this, which were not in dispute:

(i)

that the New York figures were low when business had been poor;

(ii)

expensive fixed remuneration for ‘star’ brokers had been set in an attempt to improve the profitability.

Mr Amaitis would not have ignored these factors.

94.

The travel and expenses were over 4% but so were other desks. The other desks where bonuses were paid were not invariably achieving the strict letter of the criteria. Indeed the criteria were not fixed (as with the reduction in fixed salary) and the purpose of the bonus was to create an incentive without losing the disciplinary control which it could have. In my judgment the claimant would have received a discretionary bonus [assessed by the judge as £180,000 for year 2000].

95.

I reject the submission that had Mr Horkulak not been constructively dismissed he would have been dismissed within about three months after June 2000. Had Cantor not breached the contract of employment the capacity of the claimant to perform was not sufficiently affected by alcohol or cocaine so as to render him unfit for work. His excessive use of alcohol had a long history and he had, when necessary, taken steps to reduce it by seeing his doctor and a consultant. Even after the treatment he had received at the hands of Mr Amaitis in 2000 his condition as recorded by the Priory Hospital did not disclose a dependence equal to the 1999 level when he had managed to maintain his position and achieve promotion.”

In relation to the year 2001, the judge stated as follows:

“96.The claimant maintains that his remuneration package for 2001 would have been in the region of £900,000. In reaching this figure he urges that account should be taken of the total package of remuneration received by other senior managing directors, including any bonus in partnership units and share options. Where awarded, a discretionary bonus could be paid in partnership units. Other managers received housing and car allowances. I approach the figures by reference to the likely outcome from a fair and rational exercise of discretion and the expectation, engendered by his promotion to a senior level, that his remuneration would be substantially larger from year to year.

97.I do not accept that there is sufficient evidence to assume that had the claimant been in charge of the desk the 50% threshold would have been exceeded.

98.It is not disputed that 2001 was a better year for the desk. I see no ground for concluding that had the claimant remained in charge he would have failed to achieve improvement as well. The New York Interest Rate Options Desk showed a significant profit. There was a profit for the area (London, New York and Tokyo) but it was less than the 20% criterion. But Tokyo had not fared well.

99.Mr Amaitis suggests that the turnaround was due to better control of employment costs and travel and entertainment, which control the claimant would not have achieved. This conclusion is based upon an assertion that the claimant was so far behind the other managers in 2000 that the position would have continued. The figures justified a conclusion that he had problems, namely employment costs with high fixed remuneration and low returns in New York. Travel and entertainment control, by withdrawal of the corporate credit card, was taken by Cantor and it is likely to have contributed to an improvement. I have insufficient evidence to justify the conclusion that the claimant’s ability to gain control was so significantly less than the others that he would not have done so.

100.However, having regard to the nature of the evidential exercise and the element of uncertainty which is involved, I approach the conclusion by exercise of caution and moderation.

101.In my judgment having regard to the claimant’s level of responsibility it is highly likely that his remuneration package for the year 2001 would have been as follows:

fixed remuneration	£250,000
discretionary bonus	£450,000
total	£700,000

I have reached the figure of £450,000 by taking account of the following:

(i)

The claimant would have received total remuneration significantly over his previous year, namely £520,000;

(ii)

He would have met the principal criteria;

(iii)

His basic salary was set in 1999 at a lower threshold than others in an equivalent position and parity with the others was not a contractual right;

(iv)

A total package of £700,000 would have been less than the others – compared with some by a very large margin.”

The grounds of appeal fall under the following heads. (1) It is said that the judge took the wrong approach to the construction of the discretionary bonus clause to which he should have applied the principle as stated in Lavarack v Woods, awarding no damages in respect of unpaid discretionary bonus. (2) Alternatively, the judge in any event applied the wrong measure of damages by adopting an approach unduly favourable to the claimant. (3) It is said that there was a lack of evidence for the judge’s factual conclusions in relation to the level of discretionary bonus awarded. (4) It is also said that there was a lack of evidence for the judge’s conclusions on mitigation. (5) Finally, it is said that the judge wrongly failed to give credit to CFI for £75,000 of earnings by the claimant in 2002 from his new employer.

Point (5) has not been in issue on this appeal. It is a point on which the judge was not addressed in CFI’s closing submissions and, on handing down judgment, he treated his decision on the point as provisional. The point was subsequently conceded by the claimant.

So far as ground (1) is concerned, Mr Béar submits for CFI that the principle in Lavarack v Woods is directly applicable and should be treated as binding by this court. He submits that the cases of Clark v Nomura and Clark v BET relied on by the judge are distinguishable and that, in so far as they may appear to be in conflict with Lavarack v Woods they should not be followed. He accepts that, in deciding the effect of a ‘discretionary bonus’ clause in the context of a contract of employment, the court is engaged in a task of construction against the relevant contractual background, but submits that in this case the wording and effect of the clause are clear and there is no scope for a gloss upon them. The claim was not drafted in terms of the employee’s entitlement to a bonus (discretionary or otherwise). By use of the word ‘may’ no obligation to pay or even consider payment of a bonus arose.

Mr Béar relies upon the observations of Lord Millett in Reda v Flag Ltd [2002] IRLR 747 in which the Privy Council rejected an argument that an express power to dismiss without cause could be circumscribed by the implied term of trust and confidence in a contract of employment and held that an employer’s right to terminate a contract without cause at any time during the contract term was not subject to an implied requirement for reasonable notice. At paragraph 45 (p.753) Lord Millett said of the former implied term:

“In common with other implied terms, it must yield to the express provisions of the contract. As Lord Millett observed in Johnson v Unisys it cannot sensibly be used to extend the relationship beyond its agreed duration; and, their Lordships would add, it cannot sensibly be used to circumscribe an express power of dismissal without cause. This would run counter to the general principle that an express and unrestricted power cannot in the ordinary way be circumscribed by an implied qualification: see Nelson v British Broadcasting Corporation [1977] IRLR 148 (where it was sought to imply a restriction of location into a contract which contained an unqualified mobility clause). Roskill LJ said at p.151: ‘ … it is a basic principle of contract law that if a contract makes express provision … in almost unrestricted language, it is impossible in the same breath to imply into that contract a restriction of the kind that the Industrial Tribunal sought to do’.”

Mr Béar submits that the judge acted contrary to that principle in this case by, in effect, imposing an implied term upon the company to exercise discretion in favour of the claimant in a situation where the contractual language (“may in its discretion”) did not oblige it to do so. Mr Béar points out that in neither Clark v Nomura, nor the earlier case of Clark v BET, (a decision upon an upwards-only salary review clause) was the general principle stated in Reda v Flag Ltd considered; further, that the clauses considered in Clark v BET and Clark v Nomura were in very different terms from the instant case.

In the course of the argument as to the correct construction of clause 3(b)(ii) we have been referred to a wide range of cases well outside the field of employment, in which the court has been faced with the problem of whether and how far a discretion provided for in a contract which is prima facie of an unlimited nature should nonetheless be regarded as subject to an implied term as to its exercise and thus to review by the court. Before referring briefly to a number of these authorities concerning the exercise of a contractual discretion in a commercial context, it is right to bear in the mind the observation of Lord Hoffmann in Johnson v Unisys Ltd [2000] UKHL 13, [2003] 1 AC 518 that:

“35.

… At common law the contract of employment was regarded by the courts as a contract like any other. The parties were free to negotiate whatever terms they liked and no terms would be implied unless they satisfied the strict test of necessity applied to a commercial contract … But over the last 30 years or so the nature of the contract of employment has been transformed. It has been recognised that a person’s employment is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem. The law has changed to recognise this social reality …

36.

The contribution of the common law to the employment revolution has been by the evolution of implied terms in the contract of employment. The most far reaching is the implied term of trust and confidence. But there have been others.”

So far as commercial contracts are concerned, it has been rightly said that:

“… the authorities do not justify any automatic implication, whenever a contractual provision exists putting one party at the mercy of another’s exercise of discretion. It all depends on the circumstances …” Gan Insurance v Tai Ping Insurance [2001] EWCA Civ 1047 [2001] 2 All ER (Com) 299 per Mance LJ at 322(e)

However, a number of authorities collected and considered in the Tai Ping case at 322 – 323 make clear the willingness of the court to read into a discretion the requirement or implied term that

“Not only must the discretion be exercised honestly and in good faith but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably.”: see Abu Dhabi National Tanker Company v Product Star Shipping Ltd (The “Product Star”) [1993] 1 Lloyds LR 397 per Leggatt LJ at 404.

In that passage, Leggatt LJ properly observed that any analogy of approach with that adopted in the judicial control of administrative action must be applied with caution to the assessment of whether a contractual discretion has been properly exercised. However, in the Gan Insurance case, Mance LJ was not in doubt that

“What was proscribed was unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed.”

In a different context (the power of a mortgagee to set interest rates from time to time) Dyson LJ (with whom Thorpe LJ and Astill J agreed) recently endorsed this approach in Paragon Finance plc v Nash [2001] EWCA Civ 1466 [2002] 1 LR 685 at para 41. The court held that the power of a mortgagee to set interest rates was not completely unfettered and that, in order to give effect to the reasonable expectations of the parties, it was an implied term of each mortgage that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way in which no reasonable mortgagee, acting reasonably, would do.

It is pertinent to observe that, in cases of this kind, the implication of the term is not the application of a “good faith” doctrine, which does not exist in English contract law; rather is it as a requirement necessary to give genuine value, rather than nominal force or mere lip-service, to the obligation of the party required or empowered to exercise the relevant discretion. While, in any such situation, the parties are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising the discretion, it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion. Thus the courts impose an implied term of the nature and to the extent described.

Turning to the employment cases to which we have been referred, we refer first to Lavarack v Woods. That was a case which decided, and has since been more generally applied, on the broad basis that, where a defendant has an option of performing a contract in alternative ways, damages for breach of that contract must be assessed on the assumption that he will perform it in the way most beneficial (or least onerous) to him and not to the claimant: see McGregor on Damages (17^th ed) para 8-060 and authorities there cited. However, the underlying facts in Lavarack v Woods, as well as the terms in which the majority decision was expressed, do not render its ratio decidendi decisive in this case.

In Lavarack v Woods, the plaintiff claimed damages under a contract entitling him to “such bonus (if any) as the directors … shall from time to time determine”. He was dismissed in the second year of a five-year contract, at a time when a form of bonus scheme applicable to all employees of his grade was in place under which he received payments. Following his dismissal, in the third year of the contract period, the defendants ended the bonus scheme for all the remaining employees of his grade, and agreed with most of them to pay an increase in salary which was less than the total of their previous salary plus bonus. The Master assessed damages on the basis that the plaintiff would have received such an increase in salary had he remained in the defendant’s employment. However, the Court of Appeal held that damages for wrongful dismissal could not confer on an employee extra salary benefits which the contract did not oblige the employer to confer, even though the employee might reasonably have expected his employer to confer them on him in due course.

Lord Diplock observed:

“I know of no principle on which he can claim as damages for breach of one service agreement compensation for remuneration which might have become due under some imaginary future agreement which the defendants did not make with him but might have done if they wished. If this were right, in every action for damages for wrongful dismissal, the plaintiff would be entitled to recover not only the remuneration he would have received during the currency of his service agreement but also some additional sum for loss of the chance of its being renewed upon its expiry.” (p.20 d-f).

Lord Russell stated at 298(e):

“A plaintiff in an action for damages for wrongful dismissal can rely only on the fact that the defendant was obliged to carry out the contract sued upon. His prospects in terms of money or monies’ worth resulting from the carrying out of the contract may be conditioned by the estimated impact of external events on the results of the carrying out. But it has never been held that the plaintiff can claim any sum on the ground that the defendant might after the repudiation date have voluntarily subjected himself to an additional contractual obligation in favour of the plaintiff.”

Lavarack v Woods was not a case upon the true construction of a discretionary bonus clause. So far as that was concerned, Diplock LJ observed:

“In the present case, if the defendants had continued their bonus scheme, it may well be that on the true construction of this contract of employment the plaintiff would have been entitled to be recompensed for the loss of the bonus to which he would have been likely to be legally entitled under his service agreement until its expiry”

In relation to that observation, it must be noted that the bonus scheme which existed during the plaintiff’s employment, appears to have been one which was applied across the board to all employees of a similar grade to the plaintiff, whereas, when the bonus scheme was abolished, the salary of each of the remaining employees was negotiated and adjusted in accordance with the defendants’ view of each employee’s individual merits.

In Clark v BET,the relevant service agreement provided that ‘the executive’s salary shall be reviewed annually and be increased by such amount if any as the Board shall in its absolute discretion decide’. It also provided ‘In making their decision the board shall consider a comparative group of companies …’ Timothy Walker J held that:

“From the wording of the contract, in particular from the fact that the word ‘shall’ plainly governs ‘be increased’, it seems to me that there was here a contractual obligation on BET to provide, and a contractual right on Mr Clark to receive, an annual upward adjustment in salary. It is only the amount (if any) that is in the absolute discretion of the Board. In assessing the amount there is an obligation to consider figures from a comparative group of companies.

Accepting the principle that a defendant in an action for breach of contract “is not liable for not doing that which he is not bound to do” per Diplock LJ in Lavarack v Woods of Colchester [1967] 1 QB 278, 294 B-C, if the board had capriciously or in bad faith exercised its discretion so as to determine the increase at nil and therefore to pay Mr Clark no increase at all, that would have been a breach of contract. This is a case where BET have repudiated their obligation altogether and the question I have to decide on the facts is what position Mr Clark would have been in had BET performed this obligation: see the judgment of Banks LJ in Abrahams v Herbert Reiach Ltd [1922] 1 KB 477, the passage at p.480 with which Scrutton LJ agreed at p.481. Nor should I assume that any discretion would have been exercised so as to give the least possible benefit to the plaintiff if such an assumption would on the facts be unrealistic.”

In Clark v Nomura, the contract provided for a ‘discretionary bonus scheme which is not guaranteed in any way and is dependent upon individual performance’. In the face of rival contentions as to the meaning of ‘individual performance’ in this context, and on the basis of evidence from both sides that the most important aspect of a trader’s performance was his profitability, Burton J held that those last words of the clause imposed a ‘contractual straitjacket’ for the exercise of the employer’s discretion i.e. an obligation to pay a bonus by reference to the claimant’s “individual … contractual performance as a senior trader, with all its responsibilities” (para 36 p.775), and not upon other factors relied on by the defendants, namely “Nomura’s legitimate business needs and interests and the need (or the need as perceived by Nomura) to retain and motivate Mr Clark [or by implication, the lack of the need or wish to do so]” (para 37 p.774).

At the same time Burton J recognised that:

“… there may be relevant factors which have led the employer to dismiss the employee other than the simple desire to avoid paying a large bonus … which relate to some deficiency in the employee’s performance of his contract and which, while not justifying summary dismissal, nevertheless caused or contributed to a decision to dismiss. While it may be difficult to see how it could lead to a substantial reduction or total extinction of the bonus entitlement if the allegedly inadequate performance is not sufficient to justify summary dismissal, nevertheless the inadequacies in performance can and will fall to be considered on the assessment of the bonus … because they impact upon ‘individual performance’.” (para 38.2 p.774)

In relation to the exercise of the discretion generally and, in particular, to the question of good faith, Burton J said this:

“Quite apart from the additional contractual straitjacket for the discretion in this case, the employer’s discretion is in any event, as a result of the authorities, not unfettered, as both sides have accepted to be the law in this case. Even a simple discretion whether to award a bonus must not be exercised capriciously (United Bank Ltd v Akhtar [1989]IRLR 507 EAT, Clark v BET plc [1997] IRLR 348 and Midland Bank plc v McCann 5/6/1998 unreported EAT) or without reasonable or sufficient grounds (White v Reflecting Roadstuds Ltd [1991] IRLR 331 EAT and McClory v Post Office [1993] IRLR 159). I do not consider that either of these definitions of the obligation are entirely apt, when considering whether an employer was in breach of contract in having exercised a discretion which on the face of the contract is unfettered or absolute, or indeed even one which is contractually fettered such as the one here considered. Capriciousness, it seems to me, is not very easy to define: and I have been referred to Harper v National Coal Board [1980] IRLR 260 and Cheall v APEX [1982] IRLR 362. It can carry with it aspects of arbitrariness or domineeringness, or whimsicality and abstactedness. On the other hand the concept of ‘without reasonable or sufficient grounds’ seems to me to be too low a test. I do not consider it is right that there be simply a contractual obligation on an employer to act reasonably in the exercise of his discretion, which would suggest that the court could simply substitute its own view for that of the employer. My conclusion is that the right test is one of irrationality or perversity (of which caprice or capriciousness could be a good example) i.e. that no reasonable employer would have exercised his discretion in this way. I canvassed this provisional view in the course of argument with both counsel, and neither appeared to dissent, and indeed Mr Temple QC in his closing submissions expressly adopted and used the test of irrationality. Such test of perversity or irrationality is not only one which is simple, or at any rate simpler to understand and apply, but it is a familiar one, being that regularly applied in the Crown Office or, as it is soon to be, the Administrative Court. In reaching its conclusion, what the court does is thus not to substitute its own view, but to ask the question whether any reasonable employer would have come to such a conclusion.”

Burton J then dealt with the task of the court in assessing damages in a case of this kind before him:

“Of course, if and when the court concludes that the employer was in breach of contract, then it will be necessary to reach a conclusion, on the balance of probabilities, as to what would have occurred had the employer complied with its contractual obligations, or, as Timothy Walker J put it in Clark v BET plc, assess, without unrealistic assumptions, what position the employer would have been in had the employer performed its obligation. That will involve the court in assessing the employee’s bonus, on the basis of the evidence before it, and thus to that extent putting itself in the position of the employer; but it will only do it if it is first satisfied, on the higher test, not that the employer acted unreasonably, but that no reasonable employer would have reached the conclusion it did acting in accordance with its contractual obligations, and the assessment of the bonus then of course is by way of an award of damages.” (para 40 pp.774-775)

It is to be noted that, in that case, the judge went on to make his findings of breach and his consequent award of damages on the basis that, under the contract before him:

“the defendant had two contractual obligations, to assess the bonus dependent upon individual performance by the claimant, and not to do so irrationally or perversely (or capriciously). There is therefore room for abuse of the discretion, i.e. if in whole or in part discretion was exercised otherwise than ‘dependent upon individual performance’, quite apart from the general concept of perversity or irrationality or capriciousness to which I have referred above.” (para 41 p.775) (emphasis added)

Burton J found breach on the part of the company on the basis that he was satisfied that no rational company faced with the strong trading performance of the claimant in relation to the period in respect of which the discretion required to be exercised would have awarded a nil bonus. He found that such decision was “plainly perverse, irrational, and if such be necessary, capricious”.

He then went on to assess the figure which in his view would have been the sum awarded to the claimant had the defendant complied with its obligations.

The observations of Burton J in relation to the necessity for a rational exercise of discretion in a case of this kind were referred to with apparent approval by the Court of Appeal (per Rix LJ) in Mallone v BPB Industries Ltd [2002] EWCA Civ 126, [2002] ICR 1045 at para 37 p.1056. In that case, directors enjoyed what was contractually termed an ‘absolute discretion’ to determine the ‘appropriate proportion’ of the number of shares comprised in an option granted to the claimant under a company’s senior executive share option scheme. Despite the provision of a formula prima facie determinative of the figure, the directors had determined the claimant’s portion at nil. The Court of Appeal upheld the decision of the trial judge in favour of the defendant that the decision was one which “no reasonable employer could have reached” (see paras 38-42 pp.1058-9).

In our view, the judge was correct in his general approach to the construction of the bonus clause and to hold that the claimant was entitled, had he remained in the defendants’ employment, to a bona fide and rational exercise by CFI of their discretion as to whether or not to pay him a bonus and in what sum. It is correct, as Mr Béar has emphasised, that the contractual discretion is drafted in wider terms than those employed in the earlier cases. The use and positioning of the word ‘may’ attaches the discretion to the obligation to pay a bonus at all rather than to the assessment of the amount payable (cf Clark v BET plc) and it lays down no specific criterion of ‘individual performance’ (cf Clark v Nomura) and no prima facie formula for calculation (cf Mallone v BPB). Nonetheless, the clause is one contained in a contract of employment in a high-earning and competitive activity in which the payment of discretionary bonuses is part of the remuneration structure of employers. In this case, the objective purpose of the bonus clause on the evidence (supported by the evidence of Mr Amaitis in paragraph 8 of his third (confidential) witness statement) was plainly to motivate and reward the employee in respect of his endeavours to ‘maximise the commission revenue of the Global Interest Rate Derivatives Business’ of CFI. Further, the condition precedent that the employee should still be working for CFI and should not have given notice or attempted to procure his release, demonstrates that the bonus was to be paid in anticipation of future loyalty. In such a case, as it seems to me, the provision is necessarily to be read as intended to have some contractual content, i.e. it is to be read as a contractual benefit to the employee, as opposed to being a mere declaration of the employer’s right to pay a bonus if he wishes, a right which he enjoys regardless of contract.

It is of course the position that the contract in this case leaves at large the amount of such bonus or the rate at which it will be payable; there is no particular formula or point of reference for its calculation. It does however, provide for a process of attempted mutual agreement as between the employee, the chief executive and the president prior to the making of any final decision in the discretion of the president. This provision emphasises the obligation of CFI to consider the question of payment of a bonus (and amount) as a rational and bona fide, as opposed to an irrational and arbitrary, exercise when taking into account such criteria as CFI adopt for the purpose of arriving at their decision. Failure so to construe it would strip the bonus provision in clause 3(b)(ii) of any contractual value or content in respect of the employee whom it is designed to benefit and motivate. It would fly in the face of the principles of trust and confidence which have been held to underpin the employment relationship.

The judge was correct to find that application of the principle in Lavarack v Woods provided no rule of thumb applicable to discretionary bonus cases for reasons which I have already made clear. In that case the claimant was never party to the putative agreement in respect of which he claimed damages and the court reserved its position in respect of the outcome if the claim had been made for loss of bonus under the scheme applicable to the claimant during his employment, had it continued (see paragraphs 31-35 above). Nothing was said in Lavarack v Woods to suggest that, in respect of a claim for damages put upon the basis that the claimant would have received payments under a discretionary bonus scheme of which he was already a potential beneficiary, the court should assume that the employer’s discretion would be exercised against him in a case where such a decision would be irrational or arbitrary or one which no reasonable employer would make. The broad principle that a defendant in an action for breach of contract is not liable for doing that which he is not bound to do will not be applicable willy-nilly in a case where the employer is contractually obliged to exercise his discretion rationally and in good faith in awarding or withholding a benefit provided for under the contract of employment. Where the employer fails to do so, the employee is entitled to be compensated in respect of such failure: cf the observations of Timothy Walker J in Clark v BET plc quoted at paragraph 36 above.

In this context, we do not consider that the observations of Lord Millett in Reda v Flag Ltd are of assistance. That was a case in which the employer had an express power to dismiss his employees without cause and did so. The Privy Council confirmed the decision of the Court of Appeal of Bermuda that the appellants’ employment was lawfully terminated, albeit the motive was to prevent the appellants from participating in a stock option plan about to be introduced. It was held that the very nature of a power to dismiss without cause was that its exercise did not have to be justified and there was no room for the argument that the right to terminate was in such circumstances qualified by the implied term of trust and confidence, which term could not sensibly be used to circumscribe an express power of dismissal without cause. Again, the decision in Nelson v BBC referred to by Lord Millett (see paragraph 23 above) was a case where an employee had sought to argue that an express term of his contract which provided that he could be required to perform such duties as might from time to time be assigned to him, were subject to the implied qualification that he was employed only for the purposes of broadcasting to the Caribbean. It was held that, in the face of the unrestricted language of the contract, the court could not imply a restriction of the kind argued for. The decision in Nelson v BBC constitutes no authority for the proposition that, in respect of the exercise of a contractual discretion, the court should not imply an obligation that it be exercised rationally and in good faith.

In this case, the judge was in practice faced with two problems in assessing whether, and if so in what sum, compensation was payable in respect of loss of bonus under clause 3(b)(ii). First, he had to examine and reach a conclusion as to the probable quality and level of performance of the claimant over the remaining period of his contract. This in turn involved a decision (a) whether he was satisfied that the claimant would have stayed the course throughout the period or left before its end, whether for reasons of health or to take up other employment and (b) whether he would have performed his duties in a manner deserving of a bonus under the criteria applied by CFI when assessing an employee’s performance for the purposes of a bonus payment. It is clear from the structure and form of the judgment that the judge was so satisfied and we do not consider that grounds have been demonstrated to upset such finding.

The judge having found in favour of the claimant in this respect, his second task was to assess the amount of the bonus likely to have been paid, bearing in mind the flexibility afforded by the contractual language. Thus the exercise would not permit the judge simply to substitute his own view of what would have been a reasonable payment for the employer to make, but required him to put himself in the shoes of those making the decision, and consider what decision, acting rationally, and not arbitrarily or perversely, they would have reached as to the amount to be paid. We would reject the argument of Mr Béar, that the absence of specific contractual criteria left the defendants free to operate with ‘carte blanche’, in deciding whether or not to award a bonus. The judge was correct to embark upon his examination taking account of the criteria which Mr Amaitis stated would have been adopted by the defendants and which were listed by the judge at paragraph 91 of his judgment.

In this respect, it is Mr Béar’s further submission that, even if he fails in his primary submission that the principle stated in Lavarack v Woods provided the judge with a short cut to a finding of breach by CFI, and if the proper approach is that adopted in Clark v Nomura, the judge nonetheless misunderstood, or at any rate misapplied, that approach in two respects.

First, Mr Béar submits that it is evident that, in deciding that a discretionary bonus would have been paid in the claimant’s case, although the judge paid lip service to Clark v BET and Clark v Nomura, he proceeded to read and apply the words of Burton J as importing a test of simple reasonableness as opposed to the sterner test of irrationality: see paragraph 86 of the judgment as quoted at paragraph 17 above.

Second, and this submission goes to the quantum of the judge’s award, had the judge applied the test of rationality rather than simple reasonableness, he would and should have awarded such an amount as represented the minimum sum which it would have been open to a reasonable employer to award (which Mr Béar again submits was nil) as opposed to that sum which the judge thought reasonable on the basis of the criteria said to be applicable by Mr Amaitis. Mr Béar further submits that, in assessing the amount of bonus payable, the judge produced figures based on his own conclusions as to what was reasonable or fair in relation to the claimant (largely by reference to the levels awarded to the claimant’s reasonable expectations and the amounts paid to his co-employees) and essentially ignored the evidence of Mr Amaitis whose principal responsibility it was to decide whether or not a bonus should be awarded.

So far as Mr Béar’s first submission is concerned, we do not consider that the passage in paragraph 86 of the judgment upon which Mr Béar relies (“Cantor was obliged to exercise its discretion reasonably in good faith …”), demonstrates a misunderstanding or misapplication by the judge of the “irrationality” test as set out by Burton J in the passages cited above (see paras 40-41). Paragraph 86 of the present judgment does not stand alone. In paragraph 90 the judge put the matter on the basis that the claimant “was entitled to a fair and rational assessment of his entitlement”. Further, in paragraph 96 of his judgment (see para 19 above) the judge stated that his approach to the figures was by reference to the likely outcome from a “fair and rational exercise of discretion …”. These passages make clear to us that, in defining the contractual obligation, the judge approached the matter (as indeed he said he was doing) in precisely the same way as Burton J.

It should be noted, in any event, that the “irrationality” test was applied by Burton J in considering whether an actual decision to refuse a bonus (at a time when Mr Clark was still employed) involved a breach of contract. In the present case there was no decision; breach of contract has been established and the sole issue is the amount of damages. In that context the emphasis is slightly different. As Burton J said (see para 41 above), the court’s task then is –

“…to… assess, without unrealistic assumptions, what position the employer would have been in had the employer performed its obligation. That will involve the court in assessing the employee’s bonus, on the basis of the evidence before it, and thus to that extent putting itself in the position of the employer…”

In that passage, he was summarising the approach adopted by Timothy Walker J in Clark v BET plc (himself following Banks LJ in Abrahams v Herbert Reiach). In my view, the court is not required to undertake the unattractive task of setting a threshold of irrationality. If the company’s obligation was to make a fair and rational assessment, the court’s task is to decide how in practice it would have fulfilled that obligation. Thus we reject Mr Béar’s first submission.

So far as Mr Béar’s second submission is concerned, it is first pertinent to mention an unusual feature of the case in relation to the procedure adopted by the parties in respect of their evidence relating to the payment and quantification of the bonuses paid to their employees, in particular Mr Lynn, Mr LaVecchia and Mr Alcan, the three managing directors of equal status to the claimant, and one other employee, Mr Donahue. This procedure may well have accounted for the lack of detail set out by the judge in support of his calculation of the figures awarded to the claimant in respect of putative bonus payments.

At all stages in the proceedings the defendants were concerned to maintain confidentiality in respect of the financial documents relating to their business and performance which underlay the level of bonus payments, on the grounds inter alia that the documents sought and supplied were wide-ranging and revealed the year on year performance of four of the defendants’ desks, as well as the brokers’ and senior managing directors’ remuneration packages. Such information was said to be not only confidential both to the defendant and its employees but of ‘considerable commercial sensitivity’. It was said to be ‘information that could assist the claimant’s current employers and other competitors of the defendants in their trading and in their recruitment’. Following pre-trial directions made by Hooper J on 13 May 2003 for the supply and confidentiality of information in this respect and further directions by the trial judge, the matter was resolved, with the agreement of Newman J, by the preparation of a two-part confidential trial bundle containing (a) the large number of documents constituting the financial information relevant to the bonus issue and (b) the separate and ‘confidential’ witness statements of the claimant on the one hand and Mr Amaitis on the other relating to that issue and those documents. In the statement of the claimant, he addressed the documentation and the question of the bonus which he believed he would have received had he continued his fixed term period of employment. The statement of Mr Amaitis dealt with his approach to the payment of discretionary bonuses, which topic he covered in considerable detail setting out the factors taken into account, followed by consideration and exposition of the position and performance of the other managing directors, principally by way of differentiation of their position in relation to remuneration and bonus from that of the claimant. In the course of that statement there was considerable reference to figures, the percentages of costs in relation to revenue and the expectations of the defendants.

With the approval of Newman J, the parties agreed in the interests of commercial confidentiality that they would not refer to the figures in the confidential bundles in open court. By the same token, it seems clear that the judge treated his judgment as subject to the same constraints. Similarly, in the appeal before us, the defendants have sought (and the claimant has not opposed) that such approach be followed in this court. We were not asked formally to rule upon the matter in the course of the hearing; however, in the light of the broad nature of the submissions made by way of appeal, we find no difficulty in similarly dealing with the matter in this judgment.

In relation to the second submission, which concerns the judge’s assessment of quantum, the broad grounds of complaint are these.

(1) Minimum obligation. It is submitted that, at this point at least, having decided that bonus was payable, the judge was wrong not to apply the broad principle stated in Withers v General Theatre Corporation, approved in Lavarack v Woods (see para 16 above). This principle was apparently accepted by the judge in relation to quantum at paragraph 85 of his judgment (“He is entitled to no more than Cantor would have been obliged to pay.”): see para 17 above. In addition, at paragraph 87 of the judgment, the judge applied the principle of “minimum obligation” when considering CFI’s right to reduce the claimant’s basic salary under clause 3(a) of his contract (see para 9 above). However, in the subsequent paragraphs relating to payment of discretionary bonus (see para 18 above), the judge appears only to have asked, or at any rate answered, the question what bonus would probably have been paid, when (it is said) he should have sought to establish the minimum sum which the defendants might have awarded within their contractual obligation to act rationally and in good faith i.e. he should have looked at the bottom (least burdensome) of the range of decisions which might have been reached by the defendants in a bona fide and rational application of the criteria spoken to by Mr Amaitis.

(2) Inadequate reasons. It is submitted that the judge reached his decision on quantum without giving adequate supporting reasons justifying the amount of the bonus awards made. While he discussed his view of the criteria and whether the claimant had satisfied them in general terms, he did not explain how those criteria would or might have been applied so as to yield or justify the amount awarded.

(3) Incorrect reasons It is submitted that, to the extent that reasons were given, they were in part demonstrably incorrect in that:

So far as submission (1) is concerned, we have already indicated our view that, albeit the judge did not in terms set out the two-stage exercise to which we have referred at paragraph 50, it is clear that he was satisfied that, in the light of his assessment of the probable performance of the claimant during the period of his contract, upon any rational and bona fide exercise of the defendant’s discretion the claimant would have been entitled to a bonus payment for the years 2000 and 2001 in the sense that he had largely met the criteria stated by Mr Amaitis to be applicable to his case. We would not disturb that finding.

We accept also that, in considering the quantification of the discretionary bonus, the judge did not apply a “minimum obligation” approach. He saw his task as being to assess the sum which the claimant would probably have received had he remained in CFI’s employment. This appears both from the structure of the judgment and the frequent reference to what would have happened or what was ‘probable’ or ‘likely’ (see also paras 89, 90, 92, 94, 96 and 101 of the judgment). However, we do not regard this in itself as a ground for criticism.

The principal foundation for this contention is to be found in the judgment of Mustill J in Paula Lee Ltd v Robert Zehil Ltd [1983] 2 All ER 390. The issue was how the court should assess damages in a case where the contractual obligation gave the defendant a choice or discretion in the manner of performance (in that case in relation to the range of clothes to be selected for import). Mustill J said (at 394B-D):

“There is one further distinction which must be mentioned, namely that which exists between (a) an obligation expressed in terms of a range of alternatives from which the promisor may choose and (b) a single obligation expressed in an indefinite way. A duty of the latter kind may often be construed as an obligation to act reasonably, and the damages will be assessed on the basis of what would have been reasonable. That this distinction does exist cannot, I think, be disputed, and it presents no serious theoretical difficulty when it is possible to say that there is one reasonable mode of performance, and one alone. But what of the case where there is more than one reasonable method, or a whole range of reasonable methods shading into one another? One possible view is that the court should try to forecast how the defendant would have performed but for the repudiation. In my opinion this approach is inconsistent with principle, since the defendant may in the event have done no more than was necessary to qualify as reasonable, and to assess damages on any other basis would be to penalise him for failing to do something which he was not obliged to do. The answer must, in my judgment, be that the court is to look at the range of reasonable methods, and select the one which is least unfavourable to the defendant, bearing in mind, of course, that in deciding what methods qualify as reasonable the question must be approached with the interests of both parties in mind. This is, I believe, the way to account not only for the decision in Abrahams v Herbert Reiach Ltd, but also for the divergences of approach which might seem to exist between the various judgments, and within the individual judgments, delivered in that case.”

That passage was approved by Lord Hoffmann in Lion Nathan Ltd v C-C Bottlers Ltd (PC) [1996] 1 WLR 1438. However, on the facts of that case, which concerned a warranty by the vendor of a business that a forecast of profits (“P.R.S.) was made “in good faith, and on a proper basis”, the principle highlighted was held inapplicable. Lord Hoffmann mentioned Lavarack and Paula Lee as examples of cases where, in order to assess damages, the court has to determine what benefits the plaintiff would have derived from the performance of the defendant’s obligations under the contract. He said:

“It is well settled that the court will assume that the defendant would have performed those obligations in the way least onerous to himself…

All this makes perfectly good sense when damages depend upon a prediction of how the defendant would have performed outstanding obligations which gave him a choice of what to do. But this is not such case…. The P.R.S. had to be ‘calculated in good faith’ and therefore had to be a bona fide estimate made without regard to whether it would have produced a higher or a lower price….” (p 1446 F-H))

The facts of the present case are far from both Paula Lee and Lion Nathan. However, in our view the latter provides the closer analogy, once it is accepted (as we have done) that Clause 3(b)(ii) embodies a scheme designed to confer a contractual benefit on the employee, and that it is to be administered rationally and in good faith. The company is not free to choose from a “range of reasonable methods” of performance. There is only one method of arriving at a decision: that is, negotiation, followed (in the absence of mutual agreement) by a decision by the President of the parent body. The fact that the final decision is to be made by someone other than the employing company, or its officers, emphasises the objectivity of the process. It seems to us implicit that the President will pay due regard to the interests of both employer and employee, rather than simply to that of achieving the “minimum burden” for the company. The task of the court is to put itself in his shoes.

This is not inconsistent with the approach adopted by the judge in relation to clause 3(a) (para 87). That gave the company a specific “right” to reduce the claimant’s salary by 25% in defined circumstances. Thus the company had a clear choice between two alternatives – to reduce or not to reduce. In assessing damages, the judge rightly assumed that it would not have done what it was not obliged to do. Clause 3(b)(ii), as we have interpreted it, does not give the company such a choice between alternatives, but provides a method of arriving at a decision on a bonus, to which the employee is then entitled.

We accept, of course, that due weight must be given to the range of criteria which may be properly taken into account. Too close an analogy with other bonus cases may not be helpful. For example, in Clark v BET, by reason of the claimant’s employment history, his history of salary increases in previous years, and the terms of the bonus scheme, the calculation of what would have been the position had the claimant not been wrongfully dismissed was relatively straightforward and the judge was able to apply his observation that he should not “assume that any discretion would have been exercised so as to give the least possible benefit to the plaintiff if such a presumption would on the facts be unrealistic”.

By way of contrast in this case, it is plain that not only was it an objective purpose of the bonus scheme to motivate and retain the employee (see paragraph 46 above), but the judge identified as a criterion spoken to by Mr Amaitis that the bonus scheme “could be used to weed out non-producers”. Thus, while a rational and bona fide exercise would not permit award of a nil bonus to a person who by reference to the other criteria could not properly be regarded as a non-producer, the judgment of the employer as to just how useful a producer he was might plainly and properly differ from employee to employee. Mr Amaitis was entitled to form his own view of the talents or performance of the claimant, and make an overall assessment of the claimant’s performance and the desirability of retaining his services in a competitive field. It would not be realistic to suppose that the President of Cantor Fitzgerald Partnership, as the final arbiter in the event of disagreement on amount, would not be influenced by the views of Mr Amaitis. However, the court must also make the difficult assumption, contrary to what in fact happened, that in doing so Mr Amaitis would have acted as a reasonable employer, not one guilty of conduct amounting to constructive dismissal.

With no contractual signposts in relation to the formula for calculating the bonus payable, and no clear indications from the treatment of the claimant in previous years in relation to the payment of discretionary bonus, the task of the court is more difficult. No doubt in tackling that issue, the court will have in mind a range of possible outcomes. But in principle its task remains the same, that is to put itself in the shoes of the President, and decide what figure he would in the end have arrived at.

As to Mr Béar’s submission (2), we accept that, in relation to the year 2000 the judge, having stated that the purpose of the bonus was to create an incentive without losing the disciplinary control it could have, gave no further reasons for quantifying the bonus at £180,000. In our view he should have done so.

In relation to the year 2001, the reasons for the award of £450,000 on top of the fixed remuneration of £250,000 were briefly stated at paragraph 101 of the judgment. Apart from the finding at (ii) that the claimant would have met the principal criteria entitling him to a bonus, the reasoning in relation to amount was that: (i) The claimant would have received a total increase in remuneration above the £520,000 he would have received in the previous year. This was linked with the statement at paragraph 96 of his judgment that the judge approached the figures for the bonus payment on the basis of the expectation of the claimant engendered by his promotion to a senior level that his remuneration would be substantially larger from year to year; (iii) The fact that the claimant’s basic salary was set in 1999 at a lower threshold than others in an equivalent position and parity with them was not a contractual right; (iv) A total package of £700,000 would have been less than that received by the other managing directors.

Here it is necessary to deal with the criticisms made of those reasons under Mr Béar’s submission (3), (see para 63 above).

So far as submission (3)(a) is concerned, we do not consider that the judge was wrong in principle to take the claimant’s expectation into account when assessing the level of bonus. It is true that, so far as the evidence was concerned, the claimant did not express the expectation attributed to him by the judge, namely that he would receive a year-on-year increase. He advanced his case as to what he would have been paid by comparison with what he had since learned, (but while he was employed did not know), the other Senior Managing Directors received. However, it was the evidence of Mr Amaitis that he would himself sound out the Senior Managing Directors to try to gain an idea of their expectations for their own bonuses, before coming to his own conclusion as to what remuneration should be paid which he would then discuss with Mr Lutnick. On that basis, it seems to us that the judge was entitled to assume, if he thought it right, that the claimant would have argued the case for an increase each year and that acting rationally and in good faith, Mr Amaitis would be likely to give some weight to the expectations he expressed provided that he considered that the performance criteria were satisfied.

So far as submission (3)(b) is concerned, the submission that £450,000 was the wrong starting point for those expectations is based upon what we regard as a misreading of the judgment.

On the basis upon which the judge proceeded i.e. the expectation of the claimant that, as a result of his promotion to Senior Managing Director under the August 1999 contract, his overall remuneration would increase from year to year (see paragraph 96 of judgment), we do not perceive any error of principle or mathematical discrepancy in the judge’s reasoning.

The claimant entered into his new contract in August 1999 to commence on 1 October 1999. Thus, the third year of his former contract never ran to term and each year of his new contract now ran in parallel with the bonus year 1 October – 30 September. Under his new contract, he was entitled to £250,000 salary plus a ‘once only’ bonus of £100,000 which was paid upon signature in August 1999. He was entitled to a ‘guaranteed’ bonus of £100,000 payable at 30 September 2000. He had also the expectation of a discretionary bonus payable (if he stayed in CFI’s employment) in respect of year ending 30 September 2000. The judge held that he would have received (but for his departure) the sum of £180,000 discretionary bonus for the year 2000 (see paragraph 94 of the judgment). Moving on to 2001, (in respect of which no guaranteed bonus was payable) the judge assessed the discretionary bonus at £450,000 for reasons which we have already quoted.

It is Mr Béar’s submission that, in respect of the year 1999 i.e. prior to the new contract, the claimant was in fact only paid £300,000 and not £450,000, being the salary under his former contract of £200,000 plus the ‘once only’ bonus of £100,000. Thus, he submits the starting point for any expectation of escalation in overall remuneration should have been £300,000. This reasoning seems to us to be fallacious. The £450,000 to which the judge referred in paragraph 92 of the judgment was the figure to which the claimant was entitled under his August 1999 contract. We see no objection to the judge taking it into account as a comparison in arriving at the figure of £520,000 as the claimant’s total remuneration for year ending September 2000. That was the starting point from which the judge concluded, as he was entitled to do, that the claimant would have received a larger discretionary bonus (assessed at £450,000) in the year 2001, (see paragraph 100 of judgment). The judge, having found that the trigger for the claimant’s expectation of escalation from year to year, was his promotion to Senior Managing Director under the August 1999 contract, the amount which he had received in the incomplete third year of his earlier contract was of no more than historic interest.

We would only add that, because of the lack of correspondence between the yearly anniversary of the claimant’s earlier 3-year contract and CFI’s year-end for assessment of bonus, and because of the timing of the bonus payments actually made in respect of the first two years of that contract, the amount which the claimant would eventually have received in respect of that third year had his former contract continued to term, is obscure.

In relation to submission 3(c) it does indeed appear that, when assessing the level of the bonus which would have been paid, one of the factors which the judge took into account was a comparison of the claimant’s position with the overall remuneration package i.e. the level of salary plus bonus (if any) paid to the other Senior Managing Directors. Indeed it was the case for the claimant that he should do so and the performance of the other desks and remuneration of the other Senior Managing Directors were the subject of examination in evidence. It is also clear that Mr Amaitis gave unchallenged evidence that the assessment of bonus was an exercise in respect of the individual’s performance in relation to his particular work and responsibilities as well as the performance of his desk as a whole. What is not clear is the degree to which the comparison made by the judge actually affected the level of the figure at which he arrived, given that his only comments on this aspect were at paragraph 90 (“the claimant was not entitled to expect parity … For the purpose of the court looking at the position the payment to others is relevant to the probability of a bonus being paid to the claimant.”), at paragraph 100 (iii) (“His basic salary was set in 1999 at a lower threshold than others in an equivalent position, and parity with the others was not a contractual right.”) and at paragraph 100 (iv) (“A total package of £700,000 would have been less than the others – compared with some by a very large margin.”).

In our view, the judge was entitled to have regard to the range of salary and bonus payments being paid to employees who were of the same title and status as the claimant, not only as an indication that bonuses were being paid in the years concerned, but to see whether he was in the right ball park when assessing what might have been paid to the claimant. The case for CFI was simply that no bonus would have been paid to the claimant. No fall-back position was adopted or positive case advanced, as to the level of payment which would have been made should that contention be rejected by the judge. In the circumstances, the judge had to do the best he could with no worthwhile assistance from a witness (Mr Amaitis) who, in relation to liability at least, was found to be generally unreliable and who “in an attempt to answer the detail … has rationalised after the event” (see paragraph 59 of the judgment). The assertion by Mr Amaitis that bonuses were individually assessed, whether challenged or not, did not require the judge to work in a vacuum which had no regard to the wider practice of CFI. Having concluded that the claimant would have lasted the course and achieved results which merited a bonus award on the criteria put forward by Mr Amaitis, the judge could not arrive at an appropriate range for consideration without taking into account the general levels of remuneration (including bonus) paid to employees of the claimant’s level and status. So long as the judge restricted himself to that general exercise, and took account also of the different work and responsibilities of the other Senior Managing Directors by way of distinction when considering the position of the claimant, he cannot be criticised. Unfortunately, the reasoning set out in the judgment is too exiguous to know whether or to what extent he did so.

Turning to submission 3(d), there are two respects in which it is said the claimant failed to use his best endeavours and thus to satisfy the condition precedent as to payment of his bonus.

The first relates to the failure of the claimant during his employment to contain the T&E costs below the target figure of 4%. In this respect much reliance has been placed by Mr Béar on an admission by the claimant made in cross-examination that “looking back”, and despite the fact that Mr Amaitis did not address him on the topic, the latter had had reasonable grounds to be dissatisfied at his failure to “get to grips quickly enough with the problem”. He also accepted that he had delayed in sending the text of a letter intended to go to brokers in this respect.

The judge did not deal directly with the question of T&E expenses save that, in paragraph 61 of the judgment, he referred to CFI’s assertion that Mr Amaitis had good cause to criticise the claimant’s performance and general failings and to the fact that Mr Windeatt, a manager in CFI’s accounting department, gave evidence of a number of occasions when attention had to be drawn to the claimant’s failure to keep control of T&E costs. In respect of Mr Windeatt the judge stated that he was “inclined to overstate the position” and, in respect of Mr Amaitis, he broadly rejected his evidence that his complaints concerning the claimant’s performance were justifiable. In this respect, he said at paragraph 74:

“I have concluded that Mr Amaitis began to have his doubts about the claimant’s ability to perform in late 1999. Such shortcomings as he perceived were not significant”

and, at paragraph 75:

“Having considered the evidence in connection with Cantor’s complaints, including the occasions complained about by the claimant, the effect of it does not support the conclusion that he was failing in grave or serious respects, as opposed to fault being found with his judgment and availability whenever an opportunity arose. Important as these were to Mr Amaitis, they were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance.”

It is also right to note that the criticisms made by the defendant in respect of T&E related to a time when, as the judge found, the claimant’s position was being made intolerable and his health was breaking down as a result of the dictatorial and unreasonable behaviour of Mr Amaitis towards him.

We have been referred by Mr Brennan to various passages in the transcripts of oral evidence in relation to these matters, in order to put the admission made by the claimant in the context of his evidence overall. Bearing in mind that the judge had been addressed at some length upon the matter and, in round terms, had rejected the complaints concerning the claimant’s performance of the contract, we feel quite unable to say in this court that the judge should have found a breach of the ‘best endeavours’ obligation and we would reject this ground of appeal.

Similarly, we do not consider that the fact of the claimant’s excessive drinking or drug abuse, in themselves warranted any such finding. The important question was whether or not the claimant’s work was thereby affected to a significant degree particularly against the background of his treatment by Mr Amaitis. It appears that the claimant was a drinker and user of cocaine from a time well before his promotion to Senior Managing Director, the inference being that such conduct alone did not prevent him from putting in a performance which merited his promotion to that post.

Mr Béar places reliance upon passages from the judgment at paragraphs 74 – 75 where the judge said:

“The claimant’s heavy alcohol intake had probably reached levels where from time to time it impacted upon his work, but not so as to render him unfit to do the job … [the evidence] does not support the conclusion that he was failing in grave or serious respects … [the matters complained of by CFI] were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance.”

It is submitted that these findings suggest that the judge concluded that the claimant’s alcohol and cocaine use did affect his performance to some degree, albeit not in a manner rendering him unfit or which had serious consequences for his performance. Mr Béar points out that the test under the discretionary bonus clause was simply whether the claimant was failing to use his best endeavours. Again, we do not think the judge was obliged so to conclude. The judge found that, at the time of his promotion, the claimant had himself taken medical advice in this respect, and was already under treatment and in progress towards overcoming his cocaine addiction. He also found that the medical evidence indicated he was free of such addiction when he left (see paragraph 69 of judgment). In those circumstances we do not think it was clear that the claimant was not using his best endeavours during the financial year ending September 2000, in relation to which the judge made his award of £180,000.

In relation to the year 2001, Mr Béar submits that the probability is that the claimant would have resumed his pattern of alcohol and drug abuse and thus again have been in breach of the best endeavours clause. Again, we do not think that the judge was obliged so to hold.

For these reasons, and subject to grounds (5) and (6) below, we would reject the substantive criticisms of the judge’s conclusions on quantum. Furthermore, the evidence overall, including in particular that of the total remuneration paid to others of similar status , does not suggest that the figures arrived at by the judge were out of line with the claimant’s reasonable expectations, if the company had been acting as a reasonable employer. It is, however, a legitimate ground of complaint that the judge has failed to explain his reasoning in proper detail (applying the approach laid down by this court in English v Emery Reimbold & Strick Ltd [2002] 1 WLR 2409). In contrast to the earlier part of his judgment, in which his conclusions on liability are clearly and fully expressed, the part dealing with quantum is very short. There is virtually no reasoning to support the discretionary bonus of £180,000 for the first year, and the reasoning for the figure of £450,000 in the second year is expressed in very general terms. We do not accept Mr Brennan’s suggestion that this lack of expressed reasoning is excusable because of the confidentiality of some of the relevant material. That suggestion is not supported by anything in the judgment. Further, if the judge had seen this as a problem he could have provided a confidential addendum to the judgment dealing with these matters.

We will return to the consequences of this conclusion after dealing with the other grounds of appeal.

The claimant claimed loss of basic salary for the period from July 2000 when he ceased employment with CFI to June 2001 when he began new employment. During that period it was clear that the claimant had relapsed into heavy drinking and cocaine use at or about the turn of the year and for some two months he was ‘hors de combat’ so far as seeking new work was concerned. His medical records charted his relapse, his treatment during January 2001 and his residence in the Priory Hospital during February 2001 to cure himself of his addictions. The judge held that it would have taken the claimant two to three months from the end of 2000 to obtain work had he been in a position to seek it. There was an issue between the parties as to whether the claimant had recovered from his mental health problems by December 2000, so that the relapse at the turn of the year was properly viewed as something new, i.e. the result of a self-indulgent binge over Christmas for which CFI could not be held liable, or whether the claimant had not in fact recovered from his mental health problems induced by his treatment at CFI, so that the relapse was correctly to be viewed as a connected condition setting back the claimant’s path to rehabilitation and good health.

It was the claimant’s oral evidence that, after his departure from CFI, he had not reverted to alcohol or cocaine abuse until 31 January 2001 when, as he alleged, a conversation with a friend about Mr Amaitis triggered a relapse. This evidence was, however, inconsistent with the notes of the admitting doctor at the Priory Hospital which stated:

“Alcohol relapsed over Christmas – felt confident that he could control his drinking – started with a pint or two, within a few days was reinstated with his habit. Few weeks later, started using cocaine as well … heavy use as much as when he was using when he saw Dr McGilchrist in July 1999.”

The judge found (at paragraphs 103-104 of the judgment) that the claimant’s suggestion as to the trigger for the relapse was unlikely, but went on to say that the correspondence bundle disclosed a more likely course, namely that by a letter dated 18 January 2001 the claimant had written to Mr Amaitis in a personal approach designed to avoid the threatened litigation and seeking a ‘fair financial resolution’. He noted that the claimant had received no response and returned to the Priory Hospital. The judge stated as follows:

“Since I have concluded that Cantor wrongfully terminated the contract, the refusal of Mr Amaitis to acknowledge the wrong it had done, in my judgment exacerbated the original breach. On balance I have concluded that, had it responded and accepted liability it is unlikely he would have relapsed. In the circumstances it is not open to Cantor to suggest the claimant failed to mitigate his damage. In my judgment Mr Brennan was correct to submit that the episode was part of the continuum flowing from the breach.” (emphasis added)

In this respect Mr Béar complains that the judge reached a conclusion of primary fact as to the cause of the relapse which had not been contended for by the claimant and made a finding which was essentially unfounded speculation on his part. In any event he submits that the conclusion was unsupportable in the face of the medical evidence which, in the note from which we have quoted above, disclosed a relapse beginning at Christmas 2000 and not after 18 January 2001. He submits that the only conclusion open to the judge was that the relapse, and hence the subsequent need for hospital treatment, were the responsibility of the claimant himself and/or that they amounted to a failure to use reasonable steps to mitigate his loss.

In our view CFI are right in their submissions. The claimant’s use of alcohol and cocaine was of longstanding (see paragraph 95 of judgment) and well preceded his promotion in August 1999. There seems to us no doubt upon the medical records that, having been free of his habit for some time, the resumption of excess alcohol and cocaine use occurred at the turn of the year before the claimant sent his letter of 18 January. It is equally clear from paragraphs 6 and 7 of the joint report of the medical experts, Dr Bird and Dr McPherson, that they were agreed that after leaving CFI the claimant was suffering a stress-induced condition as a result of his experience for some six months but that, following engagement in psychological therapy, he was free of his drink and drug habit and sufficiently improved to be ready for work by the end of 2000. It was his resumption of heavy drinking and cocaine use at Christmas and the turn of the year (i.e. before 18 January) which caused a recurrence of the anxiety and depressive symptoms from which he had previously been suffering but from which he had sufficiently recovered to be fit for work.

The position, as it was left after questioning of Dr Bird by the judge, and with which both counsel were apparently content, is as follows:

“Mr Justice Newman: The case for the defendant is, whatever was the position in June 2000, by the end of 2000 he was fit and ready to go and should have found other employment; whereas the case for the claimant is: no, not so, this was merely a continuation and therefore he was out of a job … until a later date, therefore the court should conclude that the defendant is responsible for what occurred in 2001 and not the claimant.

That in very simple terms is the issue I have …

A.

That is what I did think was the underlying issue. Sure, my understanding is that there is a continuum, that he was making good progress towards the end of 2000; and then probably chiefly because of relapse of drinking and cocaine use this stress-induced adjustment disorder relapsed again.

Perhaps the best indication that there is continuity was that Mr Horkulak’s phobic anxiety state, this is a very particular, what one might call as it were subset, of this adjustment disorder, he has a phobic anxiety about Mr Amaitis. It is very clear cut, very specifically triggered by anything to do with Mr Amaitis. That has been a feature throughout. Obviously, like everything else, it waxes and wanes, but it has always been there since I have known him, and it has certainly been there during 2001 ”

As we understand that answer, Dr Bird was agreeing that there was a continuum in the sense that Mr Horkulak had never entirely lost his phobic anxiety state of Mr Amaitis, but Dr Bird did not change his view stated in the joint report that the claimant was fit to return to work by the end of 2000. He did not say that the claimant’s return to use of alcohol and cocaine was triggered by the claimant’s phobic anxiety state; but, to the contrary, that such state revived as a result of the relapse into drink and drugs. Thus the need for a resumed period of treatment in hospital was attributed by the judge to a cause which was not supported by the claimant’s own account (which the judge found to be “unlikely”) or by the medical evidence. While the relapse was a set back on the path to full rehabilitation, it was brought on by drink and drugs and not the cause to which the judge attributed it. In those circumstances we do not think that there was evidence to ground the judge’s finding. We would therefore allow this ground of appeal and reduce the award of damages relating to loss of basic salary by 2 months which, subject to correction by counsel, represents a reduction of £41,667.

As already made clear at paragraphs 20 and 21 above, the claimant concedes that a further credit/reduction of £75,000 is required under this head.

Our conclusions under grounds (4) and (5) call for a reduction in the damages award in the amounts set out, which in total (subject to checking of the figures) amount to £116,667.

Following our conclusions as stated under grounds (1), (2) and (3) above, we have not been persuaded that the judge’s decision on quantum was necessarily wrong, but we accept that his stated reasoning was inadequate. In such circumstances, the appeal court is faced with a difficult choice. The option of seeking further clarification from the judge of his reasons (see English para 22) has not been suggested by the parties, and is unlikely to be realistic so long after his judgment. To leave the judgment as it stands risks creating a legitimate sense of injustice on the part of CFI. But to direct a new trial on this issue would reopen old wounds on both sides, and cause disproportionate expense, without any guarantee of producing a different or better result.

We do not think that a full retrial of the issues is the only alternative. It is open, in our view, for this court (under CPR 52.10, and in line with the overall objective of the CPR) simply to refer the issue of quantum to the same judge for redetermination on the basis of the evidence already given. Such an order would leave it open to the judge, having heard the parties, to decide whether and to what extent he thinks it necessary to hear further evidence upon that question or whether he should simply receive the further submissions of the parties based upon the evidence previously before him. Given the limited assistance he seems to have obtained from the oral evidence on this issue, we see no reason why the latter course would not be appropriate.

On balance we consider that to be the right course. However, we accept that the parties have not had an opportunity of addressing us on the appropriate form of order in the light of the detailed conclusions we have reached on the substantive issues. Accordingly, we defer making a final order until a further hearing on the consequences of this judgment.