In the case of Brogden v Investec Bank, the High Court considered whether the amount of a bonus pool was discretionary, meaning that Investec was required to act in good faith in calculating it. The bankers in question had received zero bonuses.
The bonus in question was calculated as a set percentage of ‘EVA’ (Economic Value Added). The question the court had to consider was essentially whether the EVA was a woolly enough concept to amount to a ‘discretionary’ figure.
The significance of this is that, where a contract allows for the use of discretion (such as when paying a bonus), the discretion must be exercised honestly in good faith, and must not be exercised arbitrarily, capriciously or irrationally.
In this case the bank calculated the EVA as nil, so that no bonus was paid at all. The claimants disputed the bank’s calculation. They resigned and claimed the multi-million bonuses they said they would have been due had the bank acted rationally/in good faith etc.
The Bank said there was no good faith requirement, because the EVA was certain and not discretionary.
High Court found that the calculation was effectively a discretion. However, it also held that Bank, had acted rationally in its calculation and therefore the zero payments should stand in any case.
The case helpfully confirmed that a contractual discretion (and therefore, on obligation for the party with the discretion to act rationally) will only apply where:
(a) a contract gives responsibility to one party for making an assessment or exercising a judgment on a matter which materially affects the other party’s interests;
(b) the matter is one about which there is ample scope for reasonable differences of view; and
(c) the decision is final and binding on the other party, in the sense that a court will not substitute its own judgment for that of the other party who makes the decision.
So, put simply, whenever one party is given the right to determine a matter linked to a bonus, care should be taken to do so rationally, and in good faith.