Commerzbank Ag v Keen

On 7 April 2006 Morison J dismissed an application in the Commercial Court by Commerzbank AG (the Bank) for summary judgment under Part 24 CPR in relation to a claim against the Bank by Mr James Keen, a former employee, for damages for breach of contract (a) by under-payment of discretionary bonuses for the years 2003 and 2004 and (b) by non-payment of a discretionary bonus for the year 2005. The judge held that Mr Keen had a properly arguable claim against the Bank in respect of each of the three years for damages for breach of the discretionary bonus provisions in his contract of employment: see [2006] EWHC 785 (Comm). He gave directions for trial, including a provision for expert evidence on compensation.

Unless this appeal succeeds the trial of the bonus dispute will take place in March 2007 at the same time as the trial of Mr Keen’s other claim against the Bank (the share claim) relating to the withholding of shares awarded conditionally as part of the bonus for the trading years 2003 and 2004. The Bank accepts that the share claim has a real prospect of success and that it should go to trial. The trial is fixed for 6 to 8 days.

The Bank obtained permission to appeal from this court on a renewed application on 3 July 2006.

The Bank submits that the bonus claims should be summarily dismissed as having no real prospect of success. This would considerably shorten the length of the trial next March, saving time, trouble and costs all round.

Mr Keen was employed by the Bank for less than 3 years, from November 2002 until he was made redundant on 10 June 2005. Mr Keen says that he does not accept that redundancy was the true reason for his dismissal. He actually stopped working for the Bank on about 12 May 2005. He was the manager of the proprietary trading desk known as Special Situations 2 (SS2) in the Bank’s Investment Banking Division at its London Branch. Mr David McCreadie, the Bank’s Global Head of Brokerage, was his line manager.

The SS2 desk was closed in June 2005 following a redundancy consultation exercise. The Bank did not continue proprietary trading after that.

In addition to a basic annual salary of £120,000 and a benefits package, Mr Keen was eligible to participate in a discretionary bonus scheme as set out in an offer letter dated 27 September 2002 in the following terms.

“You are eligible to participate in the [Bank’s] discretionary bonus scheme. The decision as to whether or not to award a bonus, the amount of any award and the timing and form of the award are at the discretion of the [Bank]. Factors which may be taken into account by the [Bank] in deciding whether or not to award a bonus and the amount of any bonus include

•

The performance of the [Bank]

•

The performance of your business area

•

Your individual performance and your contribution to the [Bank’s] performance and the performance of your business area

•

The strategic objectives of the [Bank]

•

Whether you will be remaining in the employment of the [Bank]

No bonus will be paid to you if on the date of payment of the bonus you are not employed by the [Bank] or if you are under notice to leave the [Bank’s] employment whether such notice was given or received by you.

Bonus may be reduced for any period of absence in excess of one month whether through illness, maternity leave or any other reason other than absence on holiday.”

It was a straightforward term of his employment that the decision to award additional remuneration was in the discretion of the Bank: as to whether it is awarded at all, the amount awarded and the form and timing of the award. Some of the factors relevant to the exercise of the discretion are listed, but the Bank is not precluded from taking other reasonably relevant factors into account. Further, it was agreed that eligibility for additional remuneration is limited to those who, at the date of payment of the bonus, are in the employment of the Bank and not under notice to leave.

Mr Keen was awarded bonuses of almost € 3m for the years 2003 (€ 2.8m awarded in March 2004) and 2004 (€ 2.95m awarded in March 2005). This made Mr Keen the 4^th most highly paid employee of the Bank’s global banking operation in 2003, and the 3^rd most highly paid in 2004.

He was not awarded any bonus for the year 2005, as he was not employed by the Bank at the payment date of the bonus for that year (March 2006).

I will deal first with the breach of contract claims for the years 2003 and 2004.

The 2003 bonus

It was pleaded that it was an implied term of Mr Keen’s employment contract that the Bank would not exercise any discretion it had in relation to his bonus award irrationally or perversely. The implied term is admitted. As will be seen from the authorities binding on this court, an employer’s discretion in an employment contract is, like the statutory discretion of a public authority in public law, subject to an obligation that it should not be exercised irrationally or perversely.

The dispute is whether Mr Keen has a real prospect at trial of establishing a breach of the implied term by the Bank. He contends that the exercise of discretion by the Bank in relation to the 2003 bonus was in breach of contract, as it was irrational or perverse not to pay him a much bigger bonus. In particular, the Bank failed to take account of the P & L performance of SS2, which was extraordinarily good, and of Mr McCreadie’s recommendation of a much larger “bonus pool” for SS2, from which a higher bonus would have been paid to Mr Keen. He contended that no rational bank in the City, faced with the performance of SS2 and the recommendation of Mr McCreadie, would have “reduced” the bonus pool in the way the Bank did. Mr McCreadie’s recommendation was in line with what Mr Keen was led to expect and it was what would be a rational award in this very special pool of employment.

He alleges that SS2 made a profit of € 41.5m that year; that his line manager recommended a bonus pool for SS2 of between 15 and 18% of that profit; and that the Bank decided instead on a reduced bonus pool of 10% of profit, from which he, as manager of the SS2 Desk, allocated bonuses to himself (70% of the pool) and to others in the pool. He contends that a rational employer would have decided on a bonus pool in the range of 15-18% of profit and loss.

The Bank’s response is that there was no contractual obligation on its part to accept Mr McCreadie’s recommendation as to the size of the bonus pool; that it took his recommendation into account; that in 2003 the Bank and its Investment Banking Division made losses; that Mr Keen’s claim was based on a fundamental misunderstanding of the bonus process; that the manner in which the bonus was calculated was a matter for the Bank; that it was under no obligation to create a bonus pool at all; that it had given a rational explanation for its decision on the size of the bonus pool; that the burden of proof was on Mr Keen to establish that the Bank had exercised its discretion in a way in which no reasonable employer would have done; and that there was no real prospect of him discharging the burden of proof at trial.

As pointed out by Mr Robin Knowles QC in his careful submissions on behalf of Mr Keen, the evidence in support of the Bank’s response is in witness statements, which were not made by the individual responsible for the decision on the size of the bonus pool. They were made by an in-house lawyer, Mr John Benson, who was not personally involved in the relevant decisions on the size of the bonus pool.

Further, Mr Knowles observed that the evidence does not identify who in the Bank made the decision as to the size of the bonus pool for SS2 nor have there been produced contemporaneous documents evidencing the way the discretion of the Bank was exercised or explaining how the actual bonus figure for the pool was decided on or why the Bank rejected the recommendations of Mr McCreadie.

The 2004 bonus

Mr Knowles made similar submissions on behalf of Mr Keen in relation to the 2004 bonus. The response of the Bank was similar.

SS2 made a profit of € 57.5m for the calendar year 2004. Mr McCreadie’s recommendation was for a bonus pool amounting to 17.5% of that profit. The Investment Banking Division made a loss in 2004. The Bank decided on a bonus pool of slightly less than 10%.

Judgment below on 2003 and 2004 bonuses

The judge dismissed the Bank’s application for summary disposal of Mr Keen’s claims. He added that, as he had decided that the matter should proceed to trial, the less that he said about the strengths and weaknesses of the parties’ arguments the better.

The judge also pointed out that the fact that there was going to be a trial anyway on the share claim enhanced the case in favour of dismissing the summary judgment application.

He gave the following reasons for allowing the bonus issue for the years 2003 and 2004 to go to trial.

First, the Bank had not produced any compelling evidence on the making of the bonus decisions for either year. It was unclear who had made the decision and on what basis. The witness statement of the Bank’s in-house lawyer contained “very little positive material.”

Secondly, it must have been the common intention of the parties that Mr Keen would receive a bonus in some way commensurate with the success of his Desk. Without information as to how the bonus decision was made the right to challenge the decision would be empty.

Thirdly, the court would need to look at the contemporary documents in order to examine how and why the bonus decisions were made. Mr Keen was given no written statement showing how the bonus had been calculated, by whom and when.

Fourthly, Mr Keen believed that his line manager’s recommendation was fair and reasonable. He has not been given any satisfactory explanation for the reduction of the figure by the decision makers at the Bank.

Fifthly, the fact that Mr Keen was highly paid was not of much significance, unless the decision makers applied some kind of limit to the bonus.

Sixthly, the contract term indicated that he would be awarded a bonus calculated on an individual basis rather than on a Desk basis as operated by the Bank. There appeared to be no individual calculation applicable to Mr Keen. This called for an inquiry as to whether the Bank took account of his own performance and, if so, how.

The Bank’s submissions on appeal

The Bank relied on the following principal matters in support of its submission that the judge wrongly dismissed its application for summary judgment.

First, the judge’s approach to the employment contract term and the pleaded claim was erroneous. The Bank had a wide discretion under the bonus scheme. It was under an obligation not to exercise the discretion in ways that were irrational or perverse. But it was not under an obligation to accept or take into account the line manager’s recommendation (which would affect the line manager’s own bonus award), or to award a bonus commensurate with the success of the Desk, or to create a bonus pool for SS2. It had not behaved irrationally or perversely or in breach of contract

Secondly, the judge failed to take sufficient account of the size of the bonuses awarded in 2003 and 2004, and also of the fact that Mr Keen, and not the Bank, was largely responsible, as team leader, for the division of the bonus pool amongst the members of his team and therefore for determining the size of his own individual bonus award.

Thirdly, he failed to have proper regard to the burden on Mr Keen to prove that the Bank had behaved irrationally or perversely and therefore in breach of contract.

Fourthly, he erred in law in his approach to the application for summary judgment in the weight he placed on the fact that there was going to be a trial anyway. On the particular issue of bonus payments there was no need for a trial as it was suitable for summary disposal. Reasonable prospects of success on a different issue (the share claim) were irrelevant to the disposal of the bonus claims.

First, some general points on the role of the court on this appeal and the nature of the case.

Summary judgment

This court is not trying the case between Mr Keen and the Bank. Its function is limited to deciding whether, on the available material, the judge correctly decided that the case on the bonus claims should go to trial. There would, however, be no point in going through the trial process if it appears that there is no real prospect of the claim ever succeeding at the end of the day.

Even though the sums claimed are large and the arguments advanced in support of the claims may be lengthy and detailed, the claims may in fact have no real foundation in fact or in law which would justify having a trial at all.

Judicial discretion

The judge’s decision involves not only a legal assessment of the merits of the case. There is also an element of discretion in his decision to allow the claims to proceed to trial. This court is reluctant to interfere with the discretion of a first instance judge, unless it is shown that the judge erred in principle or was plainly wrong in not disposing of the case summarily.

This, along with some reservations about the direction in which the law was developing in this area, was the basis of my initial timidity about interfering with the judge’s decision to allow the claims to be tried in the usual way.

Amounts of bonuses

As to the size of the bonuses which have been paid by the Bank to Mr Keen and the bigger bonuses which he claims should have been paid to him, I must make it clear that it is not the function of the court to usurp the Bank’s exercise of its discretion. It is for the Bank to decide whether to pay a bonus and, if so, how much, when and in what amount and form. The court is not entitled to substitute itself for the Bank. The court is not a bank. It does not employ the staff of the Bank or pay them. The court’s function is limited to deciding whether the Bank acted in breach of the contract term relating the discretionary bonus decisions in the years 2003 and 2004.

Mr Keen agreed with the Bank that it has a discretion to decide whether he is paid a bonus on top of his basic annual salary and, if so, how much. The only function of the court is to decide on the legal limits to the Bank’s contractual discretion and whether the Bank has acted within or outwith the limits. Apart from that consideration, the Bank, not the court, is the judge of what it should pay its staff. If the employee thinks that he has been underpaid, he can make his representations to the Bank on the level of his pay or he can seek a better paid job with another bank, but he can only pursue a claim in court if there has been a breach of contract by the Bank.

All of this is obvious, but it needs to be stated and emphasised in order to answer ill-informed criticisms of the decisions under challenge.

Employment relationship: trust and confidence

Although this case has been brought in the Commercial Court, presumably on account of the fact that lots of money is being claimed from a bank, it is an employment dispute about payment of additional wages for work done by an employee under a contract of employment. It will be instructive to see how far the jurisdiction of the Commercial Court extends into the area of wage disputes between employees and their employers.

The employment relationship contains implied duties which do not normally feature in commercial contracts sued on by business men in the Commercial Court or in the exercise of public law discretions challenged by citizens in the Administrative Court. Employment is a personal relationship. Its dynamics differ significantly from those of business deals and of State treatment of its citizens. In general there is an implied mutual duty of trust and confidence between employer and employee. Thus it is the duty on the part of an employer to preserve the trust and confidence which an employee should have in him. This affects, or should affect, the way in which an employer normally treats his employee.

Consistent with this duty an employer ought to supply an employee with an explanation of the reasons for the exercise of a discretion in respect of additional pay. Unless there is a good reason to the contrary the explanation ought to be given by the person(s) responsible for the decision affecting additional pay.

Like the judge, I am concerned about the lack of direct evidence from any person involved in the exercise of the discretion concerning bonus payments. If the parties have agreed that an employer should have a discretion to decide, by reference to certain factors, whether an employee should be paid additional remuneration by way of bonus for work done under the contract of employment and, if so, how much, the employer is under an obligation to treat his employee fairly in explaining the situation. This would involve making known to the employee, quite apart from any duty of disclosure in litigation, the factors which have influenced the decision, by whom the decision was taken and the reasons for the decision taken.

On this point I note that, in response to the letter before action sent by Mr Keen’s solicitors on 3 August 2005, the Bank’s solicitors supplied explanations for the bonus awards in 2003 and 2004 and, in respect of the non-payment of a bonus in 2005, referred to the termination of his employment in May 2005 and to the specific provisions of the contract of employment requiring employment by the Bank when the bonus is paid.

This case has not been pleaded, argued or decided on the basis of breach of an implied duty of trust and confidence. The probable reason for this is that Mr Keen wants more than adequate reasons to be supplied in respect of the bonuses that he has received. He complains of lack of disclosure but his substantial claim is for damages for failure on the part of the Bank to exercise its discretion to award him larger bonuses for 2003 and 2004. The claim is made on the basis that no reasonable employer would have exercised its discretion under the bonus scheme in the way that the Bank did in respect of the size of the bonus pool for those years. He points to the fact that in the industry the core of a proprietary trader’s pay is from his bonus.

Mr Keen has pleaded a breach of the implied term on the part of the Bank that it would not exercise any discretion it had in relation to his bonus award irrationally or perversely: paragraph 7 of the Particulars of Claim. For example, he alleges that, in respect of the 2003 bonus:

“15.

The Defendant’s exercise of discretion to make a bonus pool in that sum [ 10% of P &L] was wrongful and in breach of contract.

(a)

That exercise was irrational and/or perverse: no rational bank in the City faced with the performance of SS2 (and thereby the Claimant) and the recommendation of Mr McCreadie would reduce the bonus pool in this way.

(b)

The Defendant failed to take any or adequate account of the performance of SS2 (and thereby of the Claimant) and of Mr McCreadie’s said recommendation.”

The loss and damage claimed is that a rational employer would have decided on a bonus pool in the range 15-18% of profit and loss (P & L), resulting in a proportionately higher bonus award by the Bank to Mr Keen.

Similar allegations are made in respect of the 2004 bonus, save that the bonus pool should have been 17.5% of P & L, and in respect of 2005, save that the bonus pool should have been 17.5% of €46.5m, being the amount of P & L accrued by SS2 in the period between 1 January and 12 May 2005.

As Mr Hochhauser QC for the Bank submitted, there are extreme difficulties in law and in fact in the way of such a claim succeeding, based as it is solely on a challenge to the lawfulness of the exercise of a wide discretion, which Mr Keen agreed the Bank should have in respect of his pay over and above his basic annual salary of £120,000.

As to the legal principles relating to discretionary bonuses Mr Hochhauser cited a number of authorities for the proposition that, in order to establish a breach of contract, Mr Keen must satisfy the court that no rational employer bank would have awarded bonuses less in amount than the sums that would have been awarded, if the Bank had followed the recommendation of Mr McCreadie: in other words that the Bank had exercised its discretion to award bonuses irrationally, arbitrarily or perversely.

The decision of this court in Horkulak v. Cantor Fitzgerald [2005] ICR 402, approved dicta at first instance of Burton J in Clark v. Nomura International plc [2000] IRLR 766 at 775 (claim for damages for breach of contract in failing to pay employee any bonus) and of Timothy Walker J in Clark v. BET plc [1997] IRLR 348 at 349 (assessment of damages in a wrongful dismissal case). The decision of this court in Mallone v. BPB Industries Ltd [2002] ICR 1045 was also cited.

In Horkulak Potter LJ described the bonus clause in that case in terms which are relevant to this case. The clause was

“46… .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.”

As Potter LJ said earlier in the same paragraph, the employee was entitled

“…to a bona fide and rational exercise [by the employer] of their discretion as to whether or not to pay him a bonus and in what sum.”

He made it clear that, although the contract did not contain any particular formula or point of reference for the calculation of the bonus, the obligation was to consider the question of bonus as a rational and bona fide exercise when taking into account the criteria adopted for the purpose of arriving at a decision.

He also observed that to do otherwise would be to “fly in the face of the principles of trust and confidence which have been held to underpin the employment relationship” (paragraph 47).

In my judgment, the claim that the bonus pool decisions for 2003 and 2004 were irrational or perverse faces difficulties which Mr Keen is unable to surmount.

First and foremost, the Bank has a very wide contractual discretion. Mr Keen has to show that the discretion has been exercised irrationally. It cannot be said that the decisions of the Bank on bonuses for 2003 and 2004 are irrational on their face. The burden of establishing that no rational bank in the City would have paid him a bonus of less than his line manager recommended is a very high one. It would require an overwhelming case to persuade the court to find that the level of a discretionary bonus payment was irrational or perverse in an area where so much must depend on the discretionary judgment of the Bank in fluctuating market and labour conditions.

Secondly, there is no independent evidence, expert or otherwise, lending any support to his claim of irrationality in the size of the bonus pools for the two years.

I would allow the appeal against the judge’s decision on the claim for breach of contract in respect of the 2003 and 2004 bonus awards.

The claim relating to the 2005 bonus raises a different point.

Mr Keen contends that, although his employment was terminated in June 2005, the Bank was in breach of contract in not awarding him a bonus in March 2006 for the period between 1 January and 12 May 2005, during which the profit made by SS2 was € 46.5m. He contends that, insofar as the Bank’s decision was based on the exercise of a discretion, it was exercised irrationally or perversely in not awarding him a bonus for 2005. A rational employer would have decided, he says, on a bonus pool or 17.5% of the profit of € 46.5m yielding a figure of € 8,137,500.

He also raises a point of law, contending that the contractual provision on which the Bank relies to refuse to make a bonus payment to him for 2005 is caught by section 3 of the Unfair Contract Terms Act 1977 (the 1977 Act), as a result of which the Bank is not entitled to refuse to treat him as ineligible for a discretionary bonus.

The Bank relies on the clear contractual wording that no bonus would be paid if he was not employed by the Bank at the date of the bonus. It limited the bonus rights and expectations of Mr Keen. The Bank was under no obligation to pay him any bonus. It contends that Mr Keen could not have had any reasonable expectation of being paid a bonus if he was not employed by the Bank on the payment date in March 2006. There were no factual questions that needed investigation at a trial.

Mr Keen’s response is that this provision prevents him from earning a bonus for the year in which he was not employed at the payment date; that it renders the contractual performance substantially different from that which was reasonably expected of the Bank or rendered no performance at all; and that it did not pass the test of reasonableness contained in the 1977 Act.

Mr Keen submits that the discretionary bonus provision is designed to reward past performance and that it contemplates that the bonus will be based on past performance. It is also submitted that the contract contemplates that employment by the Bank is a factor to be taken into account in deciding the amount of bonus rather than the termination of employment being a ground for refusing to pay any bonus at all. The Bank’s construction of the bonus provision would allow a capricious termination by the Bank and a capricious exercise of discretion, contrary to the implied term that the discretion should not be exercise irrationally or perversely.

The judge held that this issue, in particular the issues of construction of the contract and of the 1977 Act, would be better dealt with at the trial, after hearing evidence, including possibly expert evidence, than by way of summary judgment.

He considered that it was possible to argue that the Bank had behaved irrationally in refusing to pay a bonus for the work performed by Mr Keen in 2005. If the Bank was right, it could enjoy the success of his Desk without having to pay for it.

The Bank criticised the judge for not deciding this point of construction of the 1977 Act. As to construction of the contract it clearly provided that no payment should be made in circumstances such as this. As to the construction of the 1977 Act, it is a discrete issue of pure law, which can and should be decided summarily saving the trouble of a trial.

I am unable to agree with the judge that the issues arising on this claim are more suitable for determination at trial. The two crucial issues identified on this application are both questions of construction suitable for summary determination. The first is the construction of the contract term that no bonus will be paid if “on the date of payment of the bonus you are not employed by the Bank.” The second is the construction of the 1977 Act: is it applicable to the relevant contract term?

I shall deal with each in turn.

Construction of contract term

Morison J concluded that it was arguable that the decision not to pay Mr Keen any bonus for the work performed by him in 2005 was an irrational exercise of the discretion as to the timing of the bonus award (paragraph 29). The Bank had enjoyed the benefit of his work at the Desk until it closed it down mid-year. It had not paid him for it. He must have been working on the assumption and in the expectation that he would receive a bonus for the work he did.

The serious difficulty in the way of this argument is that, as a matter of construction, it is clear that Mr Keen is not entitled to a bonus if, on the date of payment, he is not employed by the Bank. He was not employed by the Bank in March 2006 when the bonuses were paid. There was nothing unusual in the bonus payments being made in the March of the following year. In the case of the 2003 and 2004 bonus payments were made in March in respect of the past year.

Mr Hochhauser accepted that there might be a case for damages for repudiatory breach of contract if it could be established that the Bank had terminated Mr Keen’s employment, for example just before the bonus payment date, in order to prevent him from obtaining a bonus payment. That was not alleged to be the case here. The circumstances were that the employment was terminated for redundancy when the Desk was closed down and the Bank ceased to carry on investment activities.

I agree that, for these reasons, the Bank was under no obligation to pay Mr Keen a bonus for the year 2005 or for part of the year. There is no real prospect of success in establishing a breach of contract by the Bank in respect of the decision not to pay him a bonus for the year 2005.

Construction of the 1977 Act

Mr Robin Knowles QC submitted that the Bank is not entitled to rely on the provision requiring Mr Keen to be in the employment of the Bank in order to participate in the discretionary bonus scheme. He submits that if it has the meaning contended for by the Bank, it is an unfair contract term within section 3 of the 1977 Act and is subject to the statutory requirement of reasonableness. The Bank, he contended, is claiming to be entitled to render a contractual performance substantially different from that which was reasonably expected of it: see Timeload Ltd v. British Telecommunications plc [1995] EMLR 459 at 468 and Zockoll Group Ltd v. Mercury Communications Ltd & Anor [1998] ITCLR 104 at 118E -119D.

The first question is whether the 1977 Act applies at all to a contract term for the remuneration of an employee. Section 1 of the 1977 Act provides that sections 2 to 7 of the Act apply only to business liability, that is liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business and references to liability are to be read accordingly.

Section 3 of the 1977 Act “applies as between contracting parties where one of them deals as a consumer or on the other’s written standard terms of business.”

It provides that

“(2)

As against that party, the other cannot by reference to any contract term-

(a)

when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b)

claim to be entitled-

(i)

to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii)

in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

Although there is no definition of “consumer” section 12 provides that

“(1)

A party to a contract “deals as a consumer” in relation to another party if-

(a)

he neither makes the contract in the course of a business nor holds himself out as doing so; and

(b)

the other party does make the contract in the course of a business; …”

No express mention is made to contracts of employment in respect of section 3, but there is a provision that section 2(1) and (2) do not extend to a contract of employment, except in favour of an employee: Schedule 1 paragraph 4. Section 2 prevents the use of contract terms to exclude or restrict liability for death or personal injury resulting from negligence and, in the case of other loss and damage, only in so far as the term satisfies the requirement of reasonableness.

Is section 3 capable of applying to the discretionary bonus term in the contract of employment between Mr Keen and the Bank? Mr Robin Knowles QC submitted that it is. He relies on a number of authorities cited by the Law Commission in Cm 6464 on Unfair Terms in Contracts (February 2005) in support of paragraph 6.2 (2) of the report:

“(2)

UCTA section 3 …applies to consumer contracts and contracts concluded on one party’s written standard terms of business. It has been held to apply to employment contracts on the basis either that the employee is a consumer or that the employment was on the employer’s written standard terms of business.”

In paragraph 6.10 the Law Commission recommended preserving UCTA’s controls over employment contracts when the employment is on the employer’s standard terms of employment. It did not recommend extending consumer protections to employees. After consultation the Law Commission concluded that “ it is not appropriate to treat employment contracts in the same way as consumer contracts or small business contracts.” In relation to standard terms the Law Commission stated in paragraph 6.8 that controls along the lines of section 3 should be maintained for standard written terms under which employers agreed to provide employees with “additional services” such as health plans and holidays.

“By reference to its standard written terms, an employer should not be able to exclude or restrict its liability to provide the promised services (or render services which are substantially different from what the employee reasonably expected) unless it is fair and reasonable to do so. We see less objection if this is done by a one-off negotiated term.”

Morison J summarised the rival contentions on section 3 of the 1977 Act and the scope for its application to the contract term that payment of the discretionary bonus was dependant on being in the employment of the employer at the time of payment of the bonus. He concluded that it would be unsatisfactory to resolve questions arising under the 1977 Act at the stage of summary judgment, such as whether the 1977 Act applied at all to contracts of employment, and that, if it did apply, questions of reasonableness were better dealt with at a trial after the evidence has been heard including, possibly, expert evidence.

The issue whether a term of a contract of employment relating to the requirements for payment of a discretionary bonus turns on the construction of the 1977 Act. It is the kind of legal question that can be decided by the court without a trial.

In this case the question of construction falls into two parts: the first is whether Mr Keen was dealing with the Bank “as a consumer” in contracting with it (the consumer point). The second is whether Mr Keen was dealing with the Bank on its “written standard terms of business” (the standard terms point).

I shall deal first with the question of construction in principle by reference to the object, scheme and language of the 1977 Act. I shall then consider the authorities cited and the academic writings on the topic.

As indicated earlier, the 1977 Act does not define “consumer.” I do not think that the answer to this point lies in simply asking in a general kind of way what is a consumer or whether an employee is a consumer in relation to his employer. It is necessary to focus on the particular contract term which is said to be caught by section 3.

If, under the contract of employment, the employer supplies services or goods to the employee for his use, then the employee to whom they are supplied for his consumption could reasonably be regarded as a consumer of the goods or services supplied and to fall within the object and language of the 1977 Act.

This particular contract term is concerned with the payment of discretionary bonuses. Although described as a “scheme” in which Mr Keen is entitled to participate and although payment is called an “award” made at the discretion of the employer Bank, a bonus paid by the Bank is additional pay for work done by Mr Keen under a contract of employment with the Bank i.e. it supplements wages already paid. The “discretionary bonus” is payable by the Bank to Mr Keen for the work personally rendered by Mr Keen, as an employee, to the Bank, as his employer, under a personal contract of service. To my mind Mr Keen does not fall within the natural and ordinary meaning of “a consumer” vis-a-vis the Bank in respect of pay for service rendered by him as an employee.

There is no authority binding on this court holding that an employee deals as a consumer with his employer in respect of pay for work.

Brigden v. American Express Bank Ltd [2000] IRLR is a decision of Morland J that a clause providing that the employer could dismiss an employee in the first two years of employment without implementing the disciplinary procedure was not void under the 1977 Act. He held that section 3 extended to contracts of employment and that, although the meaning was “artificial”, an employee dealt “as a consumer” with his employer. In support he cited Schedule 1 to the 1977 Act, the Scottish case of Chapman v. Aberdeen Construction Group [1991] IRLR 505 at paragraph 16, in which there was a concession that contracts of service fell within section 15 of the 1977 Act and that the question whether the contract was a consumer contract depended on the circumstances, and an article by Loraine Watson on “Employees and the Unfair Contract Terms Act 1977” in Vol 14 of the Industrial Law Journal p323.

Morland J went on, however, to hold that the claim failed as the clause in question did not come within clause 3 (2) of the 1977 Act, not being a contract term excluding or restricting liability of the employer in respect of breach of contract.

In the Scottish case of Chapman Lord Caplan, while holding that the employee pursuer was to be regarded as a consumer in relation to his contract of employment with the defenders, expressed the view that the term consumer may not sit comfortably on an employee in relation to his work.

In Peninsula Services Ltd v. Sweeny [2004] IRLR 49 (EAT, Rimer J presiding) Brigden was cited, but the argument based on section 3 was rejected. It was held that a commission arrangement, which required the employee to be in the employment of the employer on the date when the commissions would normally have been paid, was not a contract term within section 3(2)(b) of the 1977 Act.

The authorities on this point are not entirely satisfactory: they are not binding on this court; they have not had to confront head on the question raised in this case.

I note the following points on the authorities. First, the question is whether a “contract term” falls within section 3, rather than whether section 3 applies generally to a contract of service of employment.

Secondly, depending on the circumstances of the particular contract term, it is arguable that an employee may deal with his employer as a consumer.

Thirdly, none of the authorities holds that an employee deals “as a consumer” with his employer in respect of payment to him for his work, whether by regular salary payments or by additional pay in the form of an annual bonus.

I do not see how it can be argued with any real prospect of success that under such a term for remuneration Mr Keen “deals as consumer” with the Bank. As a matter of principle and of construction of section 3 I have been assisted in reaching this conclusion by the analysis of Professor Mark Freedland in the 2^nd edition of his work “The Personal Contract of Employment” at pp 190-191. I agree with his general conclusion that

“This body of regulation is of marginal application to personal work or employment contracts, both as to its scope and its substance.”

As he says, the regulation of fairness of contract terms by section 3 of the 1977 Act is not primarily directed at personal work or employment contracts and is not particularly appropriate to them. After citing Brigden and referring to the article of Loraine Watson, he rightly comments that such contracts do not really fit naturally into the categories of consumer contracts or standard form contracts, as it involves treating workers as users or recipients of goods or services when in truth they are providers of their services. It is artificial and unconvincing to read section 3 as extending to payment provisions in respect of personal services rendered by the employee to the employer. I do not think that there is a real prospect of a trial judge coming to a contrary conclusion after hearing all the arguments.

For similar reasons I have reached the same conclusion on the issue whether Mr Keen contracted on the Bank’s “written standard terms of business” in relation to the provision in the discretionary bonus scheme requiring him to be in the employment of the Bank at the date of payment of the bonus.

As Morland J pointed out in Brigden the relevant business in that case, as in this case, is the business of banking. The terms as to the payment of discretionary bonuses were not the standard terms of the business of banking. They were the terms of the remuneration of certain employees of the Bank, such as Mr Keen, who were employed in part of the Bank’s business.

I would allow the appeal on the ground that Mr Keen has no real prospect of establishing at trial that the Bank acted in breach of contract by exercising its discretion irrationally or perversely in respect of the amount of the discretionary bonus payments made in the years 2003 and 2004 and in not making any payment for the year 2005.

I would set aside the order of Morison J grant the application of the Bank and dismiss Mr Keen’s action in respect of the decision of the Bank on bonus payments for the years 2003, 2004 and 2005.

I agree with both judgments.

I agree that the appeal should be allowed for the reasons given by Mummery LJ. But I wish to add a few observations, since we are taking the unusual course of interfering with a judge’s decision in relation to an application by the Bank for summary judgment.

Mummery LJ (at paragraph 39) has already pointed out that the court must not substitute its own decision for that of the Bank. It follows that the mere size of the bonus paid to Mr Keen provides no guide whatever as to the irrationality of the award. There is no basis for contending that the fact that Mr Keen was paid € 2.8m for 2003, and € 2.95m for 2004 assists in any way in determining the rationality or the irrationality of such awards. It is trite but salutary to observe that the courts must not discriminate between the rich and the poor employee.

I accept that the implied duty of trust and confidence between employer and employee will, generally, require an employer to give his reasons for the exercise of his discretion to pay or withhold a bonus and to identify the decision-maker. Absent such an obligation, exploitation would be all too easy, even if exploitation is not a word which springs immediately to mind in this appeal. But, in the different context of a claim for damages for breach of the implied term not to make an irrational award, a failure to give reasons or to identify the decision-maker will not necessarily establish irrationality. It is for the employee to establish the irrationality of the decision. He must be able to demonstrate some feature of the award, or the circumstances in which it was made, which tends to show its perversity. If he can do so, then the absence of any explanation, or a failure to identify the decision-maker will lend powerful support to his case. If there is nothing to show that the award is outwith the range of additional payments a reasonable employer, in similar circumstances, would award, I take the view that silence would not be sufficient to demonstrate irrationality.

Accordingly, I reject the submission that unless an employer is compelled to provide reasons for his decision, the decision would not be capable of challenge. The contrary view was a significant feature of the judge’s reasoning (see paragraph 24 of his judgment). An employee must establish, at least, a prima facie case of irrationality, before an employer is required to justify his decision. For example, an employee would be able to rely upon a refusal to pay an award, despite the success of his department, or a significantly lower award than one awarded to comparable fellow-employees. It is likely that such cases can only be met by a sustainable explanation from the employer. The need to provide reasons arises, not to give the right to challenge content, but because, without any explanation, the employee is likely to succeed. In short, in cases which do not rely upon a breach of the implied duty of trust and confidence, the absence of reasons is only of evidential significance. The absence of reasons is not dispositive of the issue of rationality.

Similarly, a failure to identify the decision-maker will only be of significance if there is some other feature of the award which suggests irrationality. If the employer fails to identify who decided what award should be made, it is likely to cast doubt on the value of any subsequent explanation which attempts to justify the decision. It may suggest either that the person providing the reasons is not the same person as the decision-maker, as in the instant appeal, or that the decision-maker could not by himself think of any good reason for his conclusion. Reasoning provided after a decision is much more likely to trigger a suspicion that there was no good reason for the decision at the time it was made. Thus, a failure to identify the decision-maker does not, of itself, demonstrate irrationality but will provide powerful support for a prima facie case.

In the instant appeal, the decision-maker was never identified. Mr. Keen could only point to the outstanding success of the proprietary trading desk he managed and the recommendation of Mr McCreadie. One of the major difficulties with that recommendation is that there is nothing to show the basis on which it was made. There was an assertion, made in the defence, that Mr. McCreadie’s recommendation for 2003 was a “first fly past”, representing the “aspirations of the managers”. Even if it is assumed that that approach was modified in 2003 and 2004, there is nothing to demonstrate what factors he took into account in making his recommendations. There is nothing to show whether his recommendations remained more an aspiration than the product of careful consideration. I reject the conclusion that the failure to accept the recommendation of Mr McCreadie itself suggests irrationality.

Whether the rejection of the recommendation called for an explanation, as Morison J thought, or not, in my view the Bank did supply a proper reason for the award. I am unable to accept that the Bank remained silent or failed to provide adequate reasons for its decision. Morison J made no reference to the Bank’s letter dated 12 September, 2005, barely one month after a letter sent, on behalf of Mr Keen, accusing the Bank of irrationality. The Bank’s letter pointed out that Mr Keen was one of the highest paid employees in the London Office, and referred to the losses the Bank made in 2003, and the reduction in the value of its securities in 2004. These reasons were subsequently amplified by the Bank’s legal adviser. But the letter itself affords, in my view, ample explanation and justification for the award. Mr Keen knew why he had not been paid more. He may disagree with the awards. But I reject the notion that his disagreement with the reasons for limiting the awards, in a way which caused him such disappointment, justifies a trial.

Finally, I wish to lend emphasis to Mummery LJ’s reasons for rejecting the application of the 1977 Act to Mr. Keen’s contract of employment. It is all too easy in analysing authority and discussion of the application of the 1977 Act to contracts of employment to overlook the impact of the words “consumer” and “business” used in Sections 3 and 12 of the Act. An employee does not deal with an employer as a consumer. A bank’s business is not entering into contracts of employment with its employees.