Dresdner guaranteed bonuses

May 14th, 2012 by Julian Milford

Julian Milford

Late last week the High Court (Owen J) delivered its eagerly-awaited judgment in Attrill & ors v (1) Dresdner Kleinwort Limited (2) Commerzbank AG [2012] EWHC 1189 on whether 104 investment banking employees of Dresdner were entitled to share in a minimum guaranteed bonus pool of EUR 400 million. The claim is unusually valuable in the employment field: it is worth a total of around £52 million euros.

Dresdner announced a minimum bonus pool of 400 m euros in August 2008. The financial crisis of late 2008 followed. On 19 December 2008, Dresdner sent a “bonus letter” to employees stating that a discretionary bonus had been provisionally awarded in a specified sum, but subject to a “material adverse change” (MAC) clause. On 12 January 2009, the sale of Dresdner to Commerzbank was completed. On 18 February, the new CEO of Dresdner Kleinwort Investment Banking wrote to employees stating that bonus awards would be cut by 90%. Dresdner’s position was that this was consistent with the MAC clause, because there had been a material deterioration in Dresdner’s revenue over the relevant period.

In brief summary, the issues arising for the High Court were (1) whether the announcement of a guaranteed minimum bonus pool of 400 million euros amounted to a contractual obligation owed to those to whom it affected; and (2) whether Dresdner was entitled to introduce the MAC clause, and to rely upon it to cut bonus awards. Issue (2) only arose if the Court found in favour of the Defendants on issue (1), because all parties accepted that if the Claimants had a contractual right to share in a minimum bonus pool, the MAC clause could not properly be relied upon to remove it.

The High Court found resoundingly in the Claimants’ favour on all issues:

(1)    They had a contractual right to share in a minimum bonus pool of 400 million euros;

(2)    In any case, Dresdner’s introduction of the MAC clause amounted to a breach of the implied term of trust and confidence in the Claimants’ contracts; and moreover, the MAC clause had not been validly invoked.

In short, the tenor of the Court’s judgment was that Dresdner could not rely on the impact of the financial crisis – and whatever political or presentational issues flowed from that – to tear up contractual obligations owed to employees, however badly those might play politically.

The case largely turns on its facts, rather than on novel issues of legal principle. However, some interesting legal points emerge. One was the Court’s willingness to find that the introduction of a MAC clause itself amounted to a breach of the implied term of trust and confidence. That was because the true reason for its introduction was simply to enable Dresdner to go back on the promise that it had made, rather than to use it for the more limited purpose for which on its proper construction it could be used. What had driven the clause was political pressure from Commerzbank, borne of sensitivity to the public perception of the payment of bonuses on such a scale. There was no financial motive, in that the price that Commerzbank had agreed to pay for Dresdner already reflected the accrual for the guaranteed minimum bonus pool. In other words, the MAC clause was a political stratagem, not a financial imperative.  As the Sharon Shoosmith litigation against the Department for Education has recently illustrated in a very different context, making employment law decisions on the basis of political or presentational imperatives is a risky business.

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