In this case, the High Court held that the bonus clause in a former employee's contract of employment did not give the employer a broad and unfettered discretion to pay a zero discretionary bonus.
Facts
From 2013, Mr Gagliardi, an experienced portfolio manager in US and European equity capital markets, specialised in block trading. ECM is an investment management company based in Nevada, USA. It hired Mr Gagliardi to launch and develop its block trading fund. Mr Gagliardi’s employment contract provided for a discretionary bonus on the following terms:
“For each calendar year, provided you are an employee in good standing on each fiscal-year-end bonus payday, you may receive a discretionary bonus based on your individual performance and Profit generated from the Business (“Discretionary Bonus”)… The target range of the Discretionary Bonus will be 10-15% of such Profit but will be purely discretionary in order to reflect the Company's assessment of your revenue contributions. For further clarity if the Business generates a Profit of $10,000,000 in a year, the target range of your Discretionary Bonus would be $1,000,000 to $1,500,000… If you are not employed by the Company at the time either bonus would typically be paid in any year, unless you are terminated for Cause, the Company will a) pay you a pro-rated portion of the New Issue Bonus adjusted to reflect the date on which your employment ceased, and b) consider paying a similarly pro-rated Discretionary Bonus to you. Such pro-rated bonuses would be paid within a month following the cessation of your employment."
The speed and volume at which trading developed was significant. In 2021 Mr Gagliardi's trading delivered over USD 60 million in profit and 97% of the revenue to the fund. Disagreements arose about trading strategy and appropriate risk management. On 5 November 2021, ECM decided to separate Mr Gagliardi’s fund from its core business. On 15 November, on arrival in the US for business meetings, Mr Gagliardi was served a subpoena by the US Department of Justice (DOJ) in relation to a market-wide investigation by both the DOJ and Securities and Exchange Commission (SEC) into block trading malpractices. This investigation also involved other key block trading market participants. ECM conducted its own internal investigation, which found no wrongdoing by Mr Gagliardi. However, on 28 February 2022, ECM dismissed Mr Gagliardi on one week’s notice which expired on 7 March 2022.
ECM's bonus payday was 15 March 2022. ECM decided to pay Mr Gagliardi zero bonus. The judge found as a fact that this was because it did not want to pay a bonus before knowing the outcome of the DOJ/SEC investigation. In July 2023, the SEC made a preliminary determination to propose enforcement action against Mr Gagliardi for trading violations. However, the SEC later revised its approach and Mr Gagliardi was never charged.
Mr Gagliardi's contract was governed by the law of Delaware, but the parties agreed that English law principles governed the exercise of the contractual discretion as set out by the Supreme Court in Braganza v BP Shipping. The exercise of discretion in determining the bonus had to be undertaken in good faith in accordance with its contractual purpose and not arbitrarily, irrationally or capriciously.
The judge found that no reasonable decision maker faced with the profit delivered by Mr Gagliardi would have refused to grant him a bonus and that the proper exercise of discretion warranted a bonus award at the top end of the 10-15% target identified in the bonus clause. Key factors in coming to this decision were:
- The wording of the bonus clause meant that bonus calculations were to be assessed by reference to Mr Gagliardi's individual revenue and performance contribution. The wording of the clause did not permit ECM to take into account behavioural and reputational matters when exercising its discretion.
- The words "individual performance" were a reference to Mr Gagliardi's contribution to the fund's revenue only.
- Mr Gagliardi's contract provided for pro-rata bonus payments to ex-employees so it could not be a requirement that he was still in employment on bonus pay day.
- The requirement that Mr Gagliardi should be in good standing meant that he must not have been dismissed for cause, which he had not been.
- The contract required payment within one month of termination and therefore ECM had no right to withhold the bonus and "wait and see" how the DOJ/SEC investigation would develop.
- The DOJ/SEC investigation into block trading which included Mr Gagliardi did not constitute any proof of wrongdoing and did not justify a zero bonus, nor would it have justified termination of Mr Gagliardi's employment for cause.
- The other conduct matters which ECM argued justified the zero bonus were "meritless" as they were after-the-event justifications which ECM did not have in mind at the time it made the decision to award a zero bonus.
What does this mean for employers?
Perhaps obviously, this case reiterates that bonus calculations must be made by reference to any prescribed contractual criteria set out in the bonus clause. Clear drafting of bonus clauses is critical. Employers who wish to be able to take into account behavioural and reputational matters when determining bonus entitlements for key employees need to set this out. Similarly, if bonus awards will be subject to the outcome of an investigation (internal or external) this should also be expressly stated.
Another lesson from this case is that bonus clauses need to be coherent. The wording that required Mr Gagliardi to be an employee on bonus payday was not sufficient to allow ECM to refuse to pay a bonus after he had left employment, given that the remainder of the clause dealt with pro-rata payments for part year employment.
Finally, decisions about why bonus sums are awarded need to be documented contemporaneously so that, if challenged, employers can explain the reasons for any award, or non-payment of an award, based on evidence.
