Anar & Ors v Dresdner Kleinwort Ltd & Anor [2010] EWHC 1249 (QB)

Application for summary judgment by defendants where the claimants' were seeking bonus payments, or damages for breach of employment contracts, on the ground that discretionary bonus payments had been converted into an entitlement to a specific sum. Summary judgment refused.

The claimants were either employed or seconded to the two defendants and it was accepted that they were contractually entitled to discretionary bonuses.  At a company meeting in 2008 it was announced that there would be a guaranteed minimum bonus pool and this wording was repeated on occasions following that meeting . In December 2008 the claimants each received letters setting out the bonus amount "provisionally awarded" to them.  Those payments were subsequently not made as set out because the defendants claimed that the financial position of the company had altered such that they were entitled to change their mind.

In this application the claimant's argued against summary judgment as there were important points that needed to be argued at trial. Simon J reviews the principles of Part 24 applications, the evidence before him and the parties' submissions. He concludes that the claimants would have no realistic chance of success at trial on any action based solely on the announcements made at the company meeting as, among other things, i) the claim proceeded on the basis that individuals could enforce payments from a pool where there was no stipulation as to how much each claimant should receive, differentiating it from Clark v Nomura as that case concerned a single claimant; ii)  there was uncertainty as to who would qualify and iii) the statements were made in a relatively informal setting and attendance was not required.  He then assesses the claims based on the provisional bonus letters and concludes that, while "there are real difficulties in the argument that [the respondents] had bound itself not to impose any conditions on the allocation of bonuses" the lack of clarity in communications meant that the claimants should not be prevented from trying to persuade a judge that this provisional view is wrong. _________________

Neutral Citation Number: [2010] EWHC 1249 (QB)

Case No: HQ09X04007 & HQ09X05230 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION Royal Courts of Justice Strand, London, WC2A 2LL

Date: 28 May 2010

Before: The Hon Mr Justice Simon

Between :

**The Parties named in Schedule A (Claimants)

and**

(1) Dresdner Kleinwort Limited; (2) Commerzbank AG (Defendants)

And between:

**Fahmi Anar and others (Claimants)

and

(1) Dresdner Kleinwort Limited; (2) Commerzbank AG (Defendants)**

­­____________________

Mr Jonathan Sumption QC and Mr Martin Chamberlain (instructed by Linklaters LLP) for the Defendants Mr Nigel Tozzi QC and Ms Kate Livesey (instructed by Stewarts Law LLP) for the Schedule A - Attrill - Claimants. Mr Andrew Hochhauser QC and Mr David Craig (instructed by Mishcon de Reya) for the Anar Claimants. ____________________

Hearing dates: 4-5 May 2010

Approved Judgment I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

............................. MR JUSTICE SIMON

**The Hon Mr Justice Simon: Introduction **1.This is an application by the Defendants for Summary Judgment under Part 24 against two sets of Claimants.

2.The First Defendant ('DKL') is a service company wholly owned by Dresdner Bank AG ('DB'). The Claimants form two groups. It is convenient to refer to the Claimants in the first claim as 'the Attrill Claimants' and in the second claim as 'the Anar Claimants'.

3.At the relevant times, both sets of Claimants were either employed by or seconded to DKL and worked for DB's global investment banking division, which was known as 'Dresdner Kleinwort' or 'DKIB'.

4.DB was formerly owned by Allianz SE, but became a wholly owned subsidiary of the Second Defendant ('Commerzbank') with effect from 12 January 2009; and, as a result of this acquisition, there was a change of personnel at the most senior levels of management at DB and DKL.

5.The two claims are similar. In each action the Claimants seek to recover sums which are said to be due as bonuses for the calendar year 2008 or alternatively damages for breach of contract. In broad terms the Claimants accept that under the terms of their contracts of employment the award of an annual bonus was discretionary. They advance their claim on the basis that two events converted what had been a right to be considered for a bonus into an entitlement to a specific sum.

6.Although it will be necessary to consider these two events in greater detail later in this judgment, it is convenient to summarise them at this stage.

7.The first was an announcement made by the Chief Executive Officer of DKIB (Dr Stefan Jentzsch) at what was referred to as a 'Town Hall meeting' on 18 August 2008. The announcement was that there would be a guaranteed minimum pool of €400 million available for staff bonuses. There were also a number of further references to the continued existence of this 'guaranteed' minimum pool by senior executives of DKIB on a number of subsequent occasions between 18 August and November 2008.

8.The second event was the sending and receipt of letters dated 19 December 2008 to each of the Claimants, informing them of the amount of a bonus which had been 'provisionally awarded' to them. The letter stated that the provisional award was subject to review in the event that there were additional material deviations in DKIB's revenue and earnings, as against the forecast for the months of November and December 2008.

9.The Claimants claim these two events gave rise to legally binding obligations to pay the amount of the bonus specified in the 19 December letter.

10.The Defendants contend that they were only statements of their intention at the relevant time; and that, by the time the bonuses came to be finally determined and paid, the economic background and financial condition of DKL was such that DKL was entitled to change its mind, without infringing the Claimants' legal rights. The Defendants also contend that there is no real prospect of the claims succeeding, even on the factual assumptions contained in the Claimants' pleadings; and that it is just and convenient to dispose of the case summarily.

11.In answer, the Claimants argue that there are important factual issues which need to be investigated at trial, that they have good chances of succeeding with their claims at trial and that, in any event, the Defendants' applications for summary judgment should be dismissed.

The principles to be applied on a Part 24 Application 12.So far as relevant to the present applications, Part 24 of the CPR provides that a Court may give summary judgment where it considers that the Claimant has no real prospect of succeeding in the claim, and there is no other compelling reason why the case should be disposed of at trial.

13.The principles to be applied when considering the first part of this test have been summarised by Lewison J in The Federal Republic of Nigeria v Santolina Investment Corporation [[2007] EWHC 437 (Ch)](http://www.bailii.org/ew/cases/EWHC/Ch/2007/437.html) at [3]-[4], by reference to a number of authorities. This summary has been cited with approval by the Court of Appeal in Khatri v Cooperatieve Centrale Raiffeisen [[2010] EWCA Civ 397]().

14.The relevant principles can be stated as follows:

1) The Court must consider whether the Claimants have a 'realistic' as opposed to a 'fanciful' prospect of success: Swain v Hillman [2001] All ER 91.

2) A realistic claim is one that is more than merely arguable: ED&F Man Liquid Products v Patel [[2003] EWCA Civ 472](http://www.bailii.org/ew/cases/EWCA/Civ/2003/472.html) at [8].

3) In reaching its conclusion the court must not conduct a mini-trial: Swain v Hillman.

4) This does not mean that a court must take at face value everything that a claimant says in statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED&F Man Liquid Products v Patel at [10].

5) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [[2001] EWCA Civ 550](http://www.bailii.org/ew/cases/EWCA/Civ/2001/550.html).

6) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on a summary judgment hearing. Thus the court should hesitate about making a final decision without a trial, even when there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical 100 Ltd [[2006] EWCA Civ 661](http://www.bailii.org/ew/cases/EWCA/Civ/2006/661.html);  [2007] FSR 63.

15.There is perhaps one further point to note in the context of the present application: that it is important to distinguish between facts, argument and questions of law. A large part of the evidence traversed all three categories.

**The factual background **16.It is common ground that the Claimants were entitled under their contracts of employment with DKL to be considered each year for the payment of a discretionary bonus as a supplement to their salary; and that in deciding whether to pay the bonus, DKL would not behave arbitrarily, capriciously or inequitably. It would exercise its discretion as to whether to award a bonus, and if so the amount of that award, in good faith and in a manner which was neither irrational nor perverse.

17.There was an established mechanism for fixing individual bonuses. This involved the allocation of a bonus pool and allocations from the pool to individual employees in a process which took place in November. In about mid-December, each employee received a letter from either DKL or DKIB's Human Resources Department confirming the amount of the bonus. The cash element of the bonus was paid with the salary in January of the following year, provided that the employee was still employed on the payment date and had not given or received notice to terminate his or her employment.

**A chronology of main events **18.In the first half of 2008 there was considerable uncertainty about the future of the Dresdner Banking group, particularly after the management board of DB had announced in mid-March 2008 that it was separating its retail banking division from the investment banking parts of DB, including DKIB. The announcement led to speculation that the restructuring of DB was a prelude to the sale by Allianz of the investment banking business.

19.The uncertainty about the future of DKIB gave rise to particular concerns among many of DKL's and DB's employees about the security of their positions with DKIB. The senior management recognised the possibility of a widespread departure by DKIB staff. The FSA intervened and placed DKIB's UK regulated bodies on the 'FSA Firm Watchlist'. In its letter to Dr Jentzsch dated 23 May, the FSA having referred to uncertainty of DKIB's uncertain future, stated,

This lack of direction could have a destabilising effect in both the short and medium term, which could exacerbate the challenges faced by the firm during the current market turbulence. In particular (i) the continuing uncertainty among management and staff could lead to a significant number of key individuals leaving or becoming disaffected, which may pose a heightened risk to DK where management acknowledge that resources are already stretched within support function ...

20.In the FSA's view significant work needed to be undertaken to address these concerns, and DKIB were required to assess the key risks to its operations 'including the risk of the loss of key staff.'

21.On 11 June the Management Operating Committee of DKIB expressed the view that,

... consideration be given to creating some kind of staff retention scheme to help retain front, middle office and back office staff whose continued presence is judged of importance to (DKIB) at this time

The minutes of the meeting of the DKIB Executive Committee noted,

Stability of the workforce (front and back) is key. Regulators have picked up on the risks brought about by the uncertainty.

Allianz have embraced the concept of giving front and back office financial certainty, but this is likely to take some time.

22.In his reply to the FSA letter on 30 June Dr Jentzsch, having referred to the risk of defections rising considerably in the light of the uncertainty over the future of DKIB, informed the FSA,

A retention program is therefore being discussed internally as well as with Allianz, and we expect its terms to be finalized shortly.

23.On 11 August Dr Jentzsch wrote in German to a number of senior personnel at Allianz, but included a passage in English, in quotation marks,

[DKIB] and Allianz senior leadership have recognised the importance of providing certain financial assurances to the employees [of DKIB] in these times of continued speculation over [DKIB's] future. As a result it was decided that the minimum bonus pool payable to [DKIB] employees will be €400 million. This number is approx 25% lower than the like-for-like bonus pool was in 2007, which in my view is a very generous gesture compared to both the performance if the business and the accrual rate of our competitors.

It can be assumed for present purposes that Dr Jentzsch was indicating what he would be saying about the minimum bonus pool to the employees of DKIB.

24.On 12 August the Board of DB approved the preparation and communication of the minimum bonus pool for DKIB as presented by Dr Jentzsch. The minutes record Dr Jentzsch's explanation of the minimum bonus pool.

A minimum bonus pool, which should be announced in the coming week, is needed to ensure employee stability. All risk policies must be strictly observed in order to prevent the pool being 'generated' by taking excessive risks. The minimum bonus pool should be guaranteed and allocated on a discretionary basis. Revenues of €2,327.5 million formed the basis of the cash pool of €400 million, with corresponding increases.

Independently of the minimum pool, but related to it at a content level, approximately 60 front office staff should receive individual bonus guarantees.

In fact individual bonus guarantees were allocated from the €400 million bonus pool. None of the Claimants was given an individual bonus guarantee.

25.On 18 August 2008, Dr Jentzsch announced the creation of the minimum bonus pool at a business update or Town Hall meeting, held at DKIB's offices in London and simultaneously broadcast to its offices in Frankfurt, Moscow and New York. The announcement was also broadcast over DKIB's intranet. As pleaded in the Attrill Particulars of Claim, Dr Jentzsch said:

i)The creation of a guaranteed minimum bonus pool of €400m had been created for distribution to front and middle office staff of DKIB for the 2008 financial year;

ii)There was potential for the size of that pool to be increased if revenue exceeded targets; and

iii)Individual bonus allocations from the bonus pool would be made in the usual way and would be communicated to employees in December 2008.

26.It is common ground that the announcement of a bonus pool at such an early stage in the year was unprecedented. It is plain that it was made in August with the express purpose of encouraging employees to remain with DKIB. Although a hand-written note of what Dr Jentzsch said was taken and this referred to a promise that the bonus pool would remain, 'no matter what', it is right to note the Claimants' concern that there is now no available recording of the precise words used.

27.On 31 August there was an announcement from Dr Jentzsch that Allianz had agreed to sell DB to Commerzbank for €9.8 billion.

28.The Claimants plead that they were frequently given assurances regarding the guaranteed Retention Pool of €400m both before and after the announcement of the decision to sell DB to Commerzbank. It is convenient to illustrate this by two examples among many others.

29.First, between 12 September 2008 and 30 January 2009, questions and answers were posted on the DKIB intranet. These were drafted by the Human Resources Department and were approved by an Allianz steering group with responsibility for integration with Commerzbank.

Q.8:  How does the proposed Commerzbank acquisition affect the [DKL] bonus pool for 2008

A:  The minimum bonus pool for employees of the business division Dresdner Kleinwort … remains in place and will be awarded on a performance basis as previously announced by Stefan Jentzsch …

30.Secondly, an email was sent by Mark Hindle (DKIB's Head of HR) to all employees of DKIB on 20 October 2008.

The communication date for bonus awards for both [DKIB] (Front Office employees) and Aligned Functions (support employees) will be Friday 19 December 2008.

The bonus pool for the Front Office has already been communicated by Stefan Jentzsch in his updates. The bonus pool for Functions will be comparable with last year's, adjusted for headcount movements. Individual bonus awards continue to be discretionary and determined by the relevant management. And last year's award should not be taken as any indication of the level of any bonus award for 2008.

Bonuses communicated on 19 December 2008 will be paid in full with January salaries through the January payroll. The 2008 bonus awards will be awarded in cash and subject to statutory deductions ...

31.Two points may be noted at this stage. First, the announcement of the minimum bonus pool, and the reiterated reassurances given to employees achieved their purpose. Nearly all of the key employees stayed at DKIB; although some of these did so as a result of individually guaranteed bonus awards. Secondly, on 15 September Lehman Brothers went into insolvent liquidation; and in the immediate aftermath, a number of leading global financial institutions had required large injections of capital from public funds. On 3 November Commerzbank announced that it would receive an initial €8.2 billion in guaranteed funding commitments from the German Government stabilisation fund, Sonderfonds Finanzmarktstabilisierung (SoFFin), with later commitment from SoFFin increasing the total funding and capital to €18.2 billion by January 2009.

32.On 4 December 2008 the Board of DB discussed options for adjusting the bonus pool as a result of the poor financial performance of DKIB since August 2008. The Board considered an evaluation of DKIB's performance, which estimated,

DKIB's operating loss for 2008, based on the figures for October and an indicative forecast for the November/December results from today's perspective (as at the end of November) will be approximately €2.9 billion (including the effects of the financial market crisis), following a loss of €2.2 billion for the first 9 months.

33.The minutes show that, having considered the matter the Board of DB resolved,

... to leave the volume of the DKIB bonus pool resolved on August 12, 2008 unchanged at present. However, this resolution is subject to the proviso that a clause is included in the bonus letter stating that the bonus payment will be adjusted if material negative deviations in DKIB's revenue and earnings as against the existing forecast for the months of November and December 2008 are established during the preparation of the annual financial statements for 2008. The review of this issue will be conducted in January 2009 under the leadership of Stefan Jentzsch.

34.The 19 December 2008 letters sent by DKL's Human Resources Department were in similar terms to each of the Claimants:

Dear [    ]

A discretionary bonus for 2008 under the arrangements given below has been provisionally awarded at

€ [    ]

The provisional bonus award stated above is subject to review in the event that additional material deviations in Dresdner Kleinwort's revenue and earnings, as against the forecast for the months of November and December 2008, are identified during the preparation of the annual financial statements for 2008 i.e. that Dresdner Kleinwort's earnings position does not deteriorate materially in this period. This will be reviewed in January 2009 by Stefan Jentzsch. In the event that such additional material deviations are identified, the Company reserves the right to review the provisional award and, if necessary, to reduce the provisional award. ... You will receive a detailed statement confirming your final bonus award in local currency in February 2009. This will be paid together with your salary in the February 2009 payroll.

35.The paragraph beginning 'The provisional bonus award stated above' has been referred to in the pleadings and during this application as the 'material adverse change' or 'MAC' clause.

36.On 10 February 2009, there was a meeting of a sub-committee approved by the Board of DB, whose purpose was to decide whether there were any material deviations in DKIB's revenues and earnings as against the forecast for the months of November and December 2008. The sub-committee reviewed a document entitled 'Bonuspool DKIB Business Performance - DKIB Bonus Review'. It will be necessary to consider the process which was undertaken; but the conclusion of the sub-committee was that the figures showed a material deviation in DKIB's revenue and earnings against the forecast for November and December 2008.

37.The Board of DB convened to discuss this on 17 February 2009. Consideration was given to DB's substantial losses for 2008, the Commerzbank bonus decisions, the German legislation under which Commerzbank was being provided with €18.2 billion of funding and capital by the German government, discussions that Commerzbank had had with SoFFin about capital payments, the position other investment banks had taken in respect of their bonus pools, and DB's capital ratio.

38.On 18 February 2009, the Claimants received an email stating, among other things,

…we on the Board of Managing Directors of the new Commerzbank conducted a review of bonus payments for 2008. After an intense round of discussions, the boards of Commerzbank and Dresdner Bank decided in favour of a policy as uniform as possible for the two banks and their subsidiaries. No bonuses will be paid for 2008.

This was followed by a later email, in which the Claimants were told that bonus awards for all front and middle office employees who had received letters with bonus awards on 19 December 2008 would be cut by 90%. The majority of the Claimants received 10% of their bonus awards with the February 2009 payroll. Four of them received no part of their awards. €152.2m had been distributed to those whose bonuses had been guaranteed. Approximately 10% of the remaining €247.8m was distributed.

39.The Claimants' claim is for the balance of the sums which had been 'provisionally awarded' in the 18 December letter.

**The arguments in summary **40.Mr Tozzi QC (for the Attrill Claimants) and Mr Hochhauser QC (for the Anar Claimants) submitted as follows.

i) The 18 August announcement and the subsequent repeated reiterations constituted a clear and unequivocal promise that there would be a guaranteed bonus pool of €400m from which individual bonus awards would be made in the usual way.

ii) The promises were relied upon by the Claimants, as DKL had intended. The Claimants decided to continue in their employment, rather than resign as they were lawfully entitled.

iii) Individual bonus allocations were made and the Claimants were informed of these allocations in the 19 December 2008 letters. This constituted the implementation of the promise made by DKL, apart from the making of the payment which should have occurred in January 2009.

iv) The introduction of the MAC clause was a breach of the implied term of trust and confidence which exists between employer and employee. It was also a breach of an implied term that the First Defendant would not act in a manner, or introduce conditions, designed to avoid paying a bonus to the Claimants.

v) In any event, there were no additional material deviations in DKIB's revenue and earnings as against the forecast for November and December (as at 19 December 2008).

vi) If there were, the decision to reduce the awards by 90% was irrational or perverse, or in breach of the implied term of trust and confidence.

41.Mr Tozzi and Mr Hochhauser adopted a slightly different approach to the 18 August announcement taken in isolation. Mr Tozzi submitted that it had binding legal effect taken by itself. Mr Hochhauser approached the announcement and the 19 December letter together. I propose to treat each set of Claimants as adopting the arguments of the other.

42.Mr Sumption QC (for the Defendants) submitted as follows.

i) When properly analysed, Dr Jentzsch's 18 August announcement (and the subsequent reiterations) did not demonstrate an irrevocable commitment to pay €400m, irrespective of what happened in the remaining 4½ months of the year. It lacked the necessary elements of certainty, formality and consideration.

ii) The announcement was a statement of DKIB's intention at the time rather than a representation. That intention was confounded by the calamitous change in economic circumstances which occurred within a month of the announcement.

iii) There was nothing in what was said that displaced the usual basis on which individual bonus awards were made, which depended (among other things) on the performance of DKIB and market conditions.

iv) The Claimants' reliance on an estoppel cannot succeed since (in so far as it can be relied on at all as a matter of law) there was no sufficiently precise representation.

v) The claim advanced on the basis of a breach of the implied term of trust and confidence adds nothing to the argument, since it requires no more than that the employer takes decisions which are not irrational and perverse, and gives reasons for decisions and explanations for the process by which they are made.

vi) The letter of 19 December expressly stated that the award was provisional and subject to a condition.

vii) The condition which triggered the right to review the provisional award was that additional material deviations in DKIB's revenue and earnings were identified, as against the forecast for the months of November and December 2008. The deviations were identified in good faith and the Defendants were entitled to the view that they were material. Once they reached that view they were entitled to exercise and an unfettered discretion.

The contracts of employment 43.Each of the Claimants entered into a contract of employment with the First Defendant, incorporating paragraphs 1-20 of DKL's Employment Handbook.

Paragraph 1.4 provided:

[DKL] reserves the right to vary the terms and conditions described in this handbook and the terms and conditions of your employment generally. Such changes can only be made by a member of the Human Resources Department and must be communicated to you in writing. When the change affects a group of employees, notification may be by display on notice boards or Company Intranet.

44.It is common ground that there were other provisions in the Handbook which are relevant. Under the heading 'Discretionary Bonus Awards.' Paragraph 33 set out the basis on which bonuses would be awarded.

33.1 You may be may be eligible to be considered for the payment of an annual discretionary award if, but only if, on the day bonus awards are actually paid (which is usually in the first quarter of the calendar year), you are both employed by the Company and not within a period of notice of termination of your employment.

33.2 Whether an award is made and the amount of such award, if any, is at the absolute discretion of the Company.

33.3 Many factors influence the Company's decision to make a discretionary award and if awarded, the amount paid to an individual employee. There is no formula for calculating the level of awards which may be paid in any given year. The Company makes awards to support its commercial objectives at the given time and is likely to take into account many different and competing factors. These are likely to include but are not limited to:

...

...

....

Many of these criteria have elements of subjectivity within them. Achievement of a particular level of performance by itself does not entitle you to an award or a particular award.

33.4 Not all of these criteria may be applicable to the consideration of any or every employee's discretionary award and different criteria may be applied and/or emphasised for a specific individual depending on the particular circumstances. The criteria and reasons for making a discretionary award... may change from year to year.

33.5 if you are absent during a bonus year, for example, including but not limited to sickness absence ..., any discretionary award is likely to be pro-rated to reflect the period of your absence unless exceptional circumstances prevail. In any event, your overall contribution during the relevant year will be considered.

33.6  While the fact that you may have received a discretionary award in a previous year and its amount are factors which the Company may consider they are neither an indication nor a commitment that an award or a similar level of award will be made in any future year.

The legal principles to be applied 45.It is convenient to start by setting out some relatively uncontroversial propositions of law, before considering the arguments advanced at the hearing. Although I have summarised these propositions of law under particular headings, there is a degree of overlap. Simply by way of example, the same conduct may constitute the acceptance of an offer, any necessary consideration and reliance for the purposes of an estoppel or a misrepresentation claim.

46.(1) Intention to create legal relations. In determining questions of contractual intent and, in particular, whether there was an intention to create legal relations, the Court applies an objective test: Chitty on Contracts, 30th ed. at §2-161. It follows that the subjective intention of individuals, whether as to the intent of the Claimants or the Defendants, is not admissible: Bingham J in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 at 610,

The Court's task is to review what the parties said and did and from that material to infer whether the parties' objective intentions as expressed to each other were to enter into a mutually binding contract. The Court is not of course concerned with what the parties may subjectively have intended.

47.In Edmonds v Lawson & Anor [2000] All ER 31. Lord Bingham CJ (who gave the Judgment of the Court) stated at [21]

Whether the parties intended to enter into legally binding relations is an issue to be determined objectively and not by enquiring into their respective states of mind. The context is all-important.

48.In RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [[2010] UKSC 14 ](http://www.supremecourt.gov.uk/docs/UKSC_2009_0048_JudgmentV2.pdf)Lord Clarke, set out at [45]:

The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.

49.The fact that the contract has been performed is a matter to be taken into account in deciding whether there was an intention to create legal relations, see Lord Clarke at [54] in the RTS case (above) but,

Each case depends on its own facts. We do not understand Steyn LJ [in Percy Trentham Ltd v Archital Luxfer Ltd and Ors [1993] 1 Lloyd's Rep. 25 at p.27] to be saying that it follows from the fact that work was performed that the parties must have entered into a contract. On the other hand, it is plainly a very relevant factor pointing in that direction. Whether the Court will hold that a binding contract was made depends upon all the circumstances, of which this is but one.

50.Where the parties are in a pre-existing relationship the Court will be more inclined to recognise an intention to create legal relationship: Smith LJ in Thomas Judge v Crown Leisure Limited [[2005] EWCA Civ 571](http://www.bailii.org/ew/cases/EWCA/Civ/2005/571.html); [2005] I.R.L.R. 823 at [23]

These two men were employer and employee; in effect, legal relations already existed between them. If words had been uttered that were capable of amounting to a contractual promise, it could not sensibly have been suggested that there was no intention to create legal relations.

51.The Court should not be astute to find uncertainty so as to strike down agreements which were intended by the parties to have legal effect: Chitty on Contracts, at §2-140.

  1. (2) Acceptance. For the creation of a contract, there must generally be an acceptance of the offer in a manner which shows assent to the terms of the offer. Usually the law requires the communication of an acceptance of an offer. However, there are exceptions. One exception may arise where the offer expressly or impliedly waives the requirement of communication of acceptance. Further exceptions occur where the offer invites acceptance by conduct; or there is a unilateral contract: Chitty on Contracts, at §2-047.

53.An issue which arises in the present case is the extent to which, in the context of contracts of employment, an employee's continuing to work can be regarded as an acceptance of an offer in relation to his employment. The conceptual difficulty is that doing nothing, like saying nothing (in the absence of an obligation to communicate or act) is inherently ambiguous. In Khatri v Cooperatieve Centrale Raiffeisen-Boerenleenbank BA [2010] EWCA Civ 397 the Court of Appeal had to consider whether an employee's act of continuing to work constituted the acceptance of adverse changes to his contract. The Court of Appeal at [51] adopted a test articulated by Elias J in Solectron Scotland v Roper [[2004] IRLR 4](http://www.employmentappeals.gov.uk/Public/Upload/EAT305033172003.doc) at [3]

The fundamental question is this: is the employee's conduct, by continuing to work, only referable to his having accepted the new terms imposed by the employer? ... sometimes the alleged variation does not require any response from the employee at all. In such a case if the employee does nothing, his conduct is entirely consistent with the original contract continuing; it is not only referable to his having accepted the new terms. Accordingly, he cannot be taken to have accepted the variation by conduct. (emphasis added).

54.The Court of Appeal decided that continuing to work did not amount to an acceptance by the employee of an adverse change in terms offered by the employer. The same principle should apply where the change is favourable to the employee, although human nature may make disagreement to an adverse change more likely to be expressed than agreement to a beneficial change.

55.(3) Consideration. In English Law a promise is not, as a general rule, binding as a contract unless it is either made in a deed or supported by consideration. The purpose of the doctrine of consideration is to put legal limits on the enforceability of promises even where they are intended to be legally binding: Chitty on Contracts, at §3-001.

56.Stilk v Myrick (1809) 2 Camp 317 is the foundation of a long-established rule that the performance of a pre-existing contractual obligation is not sufficient consideration, Chitty on Contracts, at §3-067; however where a promisee has in fact conferred a benefit (factual or practical) on the promisor by performing the original contract, then the requirement of consideration is satisfied and there is no reason not to enforce the promise, if the other requirements for its enforceability are met, see Chitty on Contracts, at §3-069 and, for example, Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1, Russell LJ at 18-19 and Purchas LJ at 23, and Horwood & Ors v Land of Leather Ltd & Ors [[2010] EWHC 546 (Comm)](http://www.bailii.org/ew/cases/EWHC/Comm/2010/546.html) Teare J at [41].

57.It is clear that the context of the performance of the obligation may be relevant. Thus, where improvements in employee contracts are announced by an employer in the context of pay negotiations, continuing to work has been held to amount to consideration: Lee and others v GEC Plessey Telecommunications [1993] IRLR, Connell J at [116]-[118].

58.Where there is both an intention to agree and consideration, it will be difficult to negative the presumption that the parties intended the agreement to have legal effect, for example: Edwards v Skyways Ltd [1964] 1 WLR 349, per Megaw J at 355.

59.(4) Estoppel and Misrepresentation. In Steria Ltd and others v Hutchison and others [[2007] ICR (CA) 445](http://www.bailii.org/ew/cases/EWCA/Civ/2006/1551.html) [91] to [93], Neuberger LJ observed that estoppels are relied on because of difficulties in establishing a contract; and, since unconscionability is the single factor that must be established for an estoppel and views on unconscionability may vary, it is necessary to have specific but flexible guiding principles.

[93] When it comes to estoppels by representation or promissory estoppel, it seems to me very unlikely that a claimant would be able to satisfy the test of unconscionability unless he could also satisfy the three classic requirements. They are (a) a clear representation or promise made by the defendant upon which it is reasonably foreseeable that the claimant will act, (b) an act on the part of the claimant which was reasonably taken in reliance upon the representation or promise, and (c) after the act has been taken, the claimant being able to show that he will suffer detriment if the defendant is not held to the representation or promise. Even this formulation is relatively broad brush, and it should be emphasised that there are many qualifications or refinements which can be made to it.

[94] The requirement for these three features, at least in relation to estoppel by representation, was very clearly put by the Privy Council in Tai Hing Cotton Mill Lt v. Liu Chong Hing Bank Ltd [1986] AC 80, 110, in the following terms: 'the essence of estoppels is a representation (express or implied) intended to induce the person to whom it is made to adopt a course of conduct which results in detriment or loss.'

[95] I can see no reason, in theory or practice, why this should not be equally true of promissory estoppel ...

60.(5) The Implied Duty of Trust and Confidence. It is common ground that in employment contracts there is an implied mutual duty of trust and confidence between employer and employee. In Keen v Commerzbank AG [[2006] EWCA Civ 1536](http://www.bailii.org/ew/cases/EWCA/Civ/2006/1536.html); [2007] ICR 623 the Court of Appeal considered the ambit of the implied duty in a case in which an employee had made a claim for damages for breach of the implied term. His complaint was that the bank had exercised its discretion in relation to the award of bonuses in a way which was irrational and perverse. The Bank applied to strike out that claim and successfully appealed the Judge's decision dismissing the application. At [43] to [57], Mummery LJ discussed the nature of the obligation of trust and confidence in the context of bonus payments and adopted various statements of Potter LJ in Horkulak v Cantor Fitzgerald International [[2004] EWCA Civ 1287](http://www.bailii.org/ew/cases/EWCA/Civ/2004/1287.html); [2005] ICR 402 at [46]

[55] As Potter LJ said ... 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'.

[56] 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.

[57] He also observed at [47], that to do otherwise would be to 'fly in the face of of the principles of trust and confidence which have been held to underpin the employment relationship'.

61.At [59]-[60] Mummery LJ described the difficulties that the Claimant faced: first, the very wide nature of the contractual discretion and the burden of showing that the discretion had been exercised irrationally; and secondly, the lack of expert evidence supporting the claim of irrationality.

62.Moses LJ elaborated on the difficulties faced by an employee in establishing irrationality in relation to the employer's award of a bonus.

[110] ... 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

[111] ... 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 ...

**Discussion and conclusion *The legal effect of the announcement on 18 August 2008 and the repetitions of what was said thereafter? *63.I do not accept the Claimants' argument that the announcement of 18 August 2008, and the subsequent reiterations and references to the minimum bonus pool created enforceable rights which the Claimants can (even arguably) enforce by action.

64.First, the claim proceeds on the assumption that individual employees could enforce a promise to pay from the minimum bonus pool without any stipulation about how much any individual would receive, or the basis on which they were to receive it. Paragraph 33 of the Handbook indicated the type of factors which might apply to the size of an individual employee's bonus. Although 'the aggregate sum made available for discretionary awards by management' was one of the factors, there were others factors which might properly be taken into account, for example, the need to incentivise employees and to recognise market-leading performance. Any assessment of an individual's bonus would involve a highly subjective exercise of discretion involving judgements of the relative merits of a number of individuals. It is no answer to say that the Court has shown itself willing and able to assess damages for breach of a contractual term to award a bonus. The case which is relied on by the Claimants, Clark v. Nomura International Plc [2000] IRLR 766, illustrates some of the difficulties that might arise in the present case. In the Clark case there was a single claimant, whose entitlement to damages for breach of the obligation could be calculated in the light of clear contractual criteria following the hearing of evidence. In the present case the award of damages would involve interdependent calculations of a large number of claims. Not only would the Court have to calculate damages on the basis of a wide commercial discretion, it would have to do so in relation to a number of criteria.

65.Secondly, there is the uncertainty about who might qualify for a bonus. The hope was that the announcement would result in all the employees staying; but the legal effect of the announcement can properly be judged on the basis that the hope might have been disappointed. It is legitimate to ask what would have been the result if all but a handful (or even half the employees) had left? Would those who remained have been entitled to be paid consequentially larger amounts? Mr Sumption rightly described such a result as a commercial tontine. The Claimants' response appeared to be to accept the logical relevance of the question, but to evade the conclusion by pointing out that in practice the situation was unlikely to arise. A question might be posed as to the entitlement of those who joined after the announcement was made, and whether they were entitled to participate in the fund, so as to dilute the entitlement of others? There are no clear answers to such questions.

66.Thirdly, there are difficulties in construing the announcement as being the establishment of a sum which would be unaffected by any other consideration set out in §33 of the Handbook: for example, market trends and the financial performance of the company.

67.Fourthly, there is the relative informality of the way in which the announcement was made. It is no answer to say that it was not unusual, or even that it was usual, to communicate information to employees at a 'Town Hall' meeting. What is striking about making the announcement is that not all of those affected by it were present or were asked to be present. In addition, the relative informality in which people were informed of what was intended was reflected in the lack of any formal note of what was said or any formal communication to the employees. If this were intended to be an irrevocable and legally binding commitment it was, at the very least, an unconventional way to enter into such a commitment.

68.These are factors that make it highly unlikely that the hypothetical reasonable employee would regard what was said on 18 August and subsequently as a binding offer to that individual.

69.In the light of this conclusion it is unnecessary to deal in detail with the other difficulties in the Claimants' case: the difficulty in identifying an act amounting to an acceptance of the offer which was unequivocably referable to the offer, the communication of such acceptance and the necessary consideration. Similarly, if the announcement and subsequent statements were insufficiently clear and precise to give rise to a contractually binding promise, it is difficult to see how they could be sufficiently clear and precise to amount to a statement on which it was reasonable to rely for the purposes of an estoppel, or for a claim based on a misrepresentation.

70.For these reasons I have concluded that a cause of action based solely on the announcement and subsequent statements prior to the 19 December letters has no realistic chance of success at trial.

*Claims based on 19 December letters *71.The letters sent out to individuals on which the monetary sums claimed are based described the bonus as awarded 'provisionally' and 'being subject to review.' Before considering whether the proviso was properly applied, it is necessary to consider whether it was open to DKL to qualify the award of the bonus by the imposition of further terms.

72.The arguments are similar to those in relation to the 18 August announcement; although without difficulties of uncertainty as to the amount of the bonus.

73.The Claimants' case is that the allocation of the bonus 'crystallised' each of the Claimant's entitlement to be paid; and that it was not open to DKL or Commerzbank to impose any qualifications in relation to entitlement to the allocated bonus.

74.The Defendants' case is that the letter contained an offer, which was subject to a legitimate qualification; and that, in any event, the Claimants face similar difficulties as they do in relation to the August announcement and subsequent reiterations: there was neither acceptance of the offer nor consideration for it.

75.If the letter had stated:

A discretionary bonus for 2008 has been awarded at € [] gross. This will be paid in local currency in February 2009,

the question of the enforceability of that promise could plainly not be disposed of summarily in an employer's favour. It would, for example, at least be open to an individual Claimant to argue that the promise was made in clear terms, that he or she acted on the basis of the promise and that he or she would suffer detriment if DKL were not held to the promise. An employer who awards an annual bonus before the end of the year in which it is earned, and at the beginning of a period associated with seasonal spending should not be surprised if its promise is acted on.

76.Despite the persuasive submissions of Mr Tozzi and Mr Hochhauser, it seems to me that there are real difficulties in the argument that DKL had bound itself not to impose any conditions on the allocation of bonuses, at least provided such conditions fell within one of the criteria in §33 of the Handbook. However, for reasons which appear later in this judgment, I have concluded that they should not be prevented from trying to persuade a Judge hereafter that this provisional view is wrong.

77.The confirmation of the bonus in the letter of 19 December was subject to two conditions, both described as a 'review'. The first-stage review was of DKIB's revenue and earnings for the months of November and December. If there were 'additional' material deviations from the forecast in the preparation of the annual statements for 2008, the second stage review would be triggered. Once the second stage review was triggered a wide discretion in relation to the award of the bonus was reserved, as was the right to reduce the provisional award.

78.The starting point should have been a comparison of two figures: the forecasted figures for revenue and earnings in November/December, and the actual figures for November/December prepared for the purposes of the annual financial statements.

79.What in fact occurred is described by John Benson, 'Head of Legal' in London for Commerzbank AG, in his first witness statement. He exhibits various documents, including the Minutes of a sub-committee, approved by the Board of DB, which met on 10 February 2009. The sub-committee consisted of Dr Jentzsch, Wulf Meier (DB Board member responsible for Human Resources), Klaus Rosenfield (CFO of DB) with Dr  Helmut Merkel in attendance. The purpose of the meeting was stated to be to review the preliminary 'actuals' as of 4 February 2009. These were figures which had been agreed with the auditors, KPMG. The sub-committee considered a document entitled 'Bonuspool DKIB Business Performance – DKIB Bonus Review'. There are two potentially relevant categories of figures: 'On-going Business' and 'Crisis'.

80.The 'On-going Business' figures set out the mid-year projection of revenues as at 5 November of €2,553,000,000 and preliminary actuals (as at 4 February) as €2,009,553,000, a difference or deterioration of €544,000,000. The 'Crisis' business showed an even more striking difference or deterioration of €1,536,000,000. The overall deterioration was €2,080,000,000 (€544m + €1,536m).

81.In his witness statement at §58 Mr Benson states:

The preliminary actuals were agreed with KPMG during the preparation of the annual financial statements for 2008.

As to the sub-committee's views on the figures, Mr Benson states at §63:

The sub-committee agreed (with no dissents) that these figures amounted to a material deviation in DKIB's revenues and earnings as against the forecast for the months of November and December 2008.

82.Mr Benson was not present at the sub-committee meeting; but the minutes record On December 4, 2008 the Board of Dresdner Bank resolved to initially leave the volume of the DKIB bonus pool resolved on August 12, 2008 unchanged; however a caveat was to be inserted in the bonus letter that was circulated on December 19, 2008 according to which the bonus payment would be adjusted if significant negative deviations in DKIB's revenues and earnings as against the forecast for the months of November and December 2008 were established when preparing the financial statements for 2008. The bonus letter dated December 19, 2008 provides for a corresponding review to be made with the participation of Dr Jentzsch.

83.This appears to be a misreading of the letter. First, the trigger for the second-stage review was not the discovery of 'significant negative deviations', but 'additional material deviations'; and secondly, the first-stage review was not to be made 'with the participation of Dr Jentzsch' but, 'in January 2009 by Stefan Jentzsch.'

84.The second paragraph of the minutes shows that the sub-committee discussed the 'Bonuspool DKIB Business Performance - DKIB Bonus Review' on 9 February 2009. The third paragraph minutes the sub-committee's consideration of the figures in this document. The fourth paragraph concludes by recording Klaus Rosenfield's view that

... only the deterioration in on-going earnings is relevant for the assessment of the DKIB bonus pool ...

85.The fifth paragraph records Dr Jentzsch's willingness to take part in an individual determination of bonuses, provided that the €400 million was considered as a bonus pool and only individual performance was assessed; and the sixth paragraph records Klaus Rosenfield's statement,

...  that the figures contained in the document were determined in a due and proper manner together with KPMG, to the extent that they had been established as of the entry closing date of February 10, 2009. The numbers available are therefore reliable. He does not see any grounds to doubt the assessment that DKIB's earnings situation has deteriorated significantly in the months of November/December 2008. Wulf Meier concurs with this view.

86.The conclusion is set out in the seventh and final paragraph.

After taking note of and discussing the figures, the participants in the meeting come to the conclusion that the Board, after taking the business lines/units in line with page 6 of the document into account, is able to make differentiated adjustments to the individual bonus figures communicated in the bonus letters.

87.It appears that there was no expressed dissent from this conclusion. Following the sub-committee review, it fell to the Board of DB to decide how adjustments to the bonus pool should be made as part of the second-stage review. The Board met on 17 February for this purpose and decided that most of the employees to whom the letter had been sent would receive 10% of the stipulated sum. Although criticism is made of this decision, it was plainly made in the light of the losses which had been incurred; and is not arguably outwith the confines of the broad discretion. Rightly in my view, the Claimants focussed their criticism on the first-stage review process.

88.The Claimants focus on five points: (1) Dr Jentzsch's involvement in the first-stage review, (2) the significance of the word 'additional' in the phrase 'additional material deviations', (3) the relevant date of the forecast with which the actuals fell to be compared, (4) whether DKIB had carried out the reviews, (5) whether it was open to the bank to reduce the bonus pro rata across the board?

89.Before dealing with these points I should express my disquiet that a provision which must have been known to be so important for their employees and whose terms plainly gave rise to widespread concern by their employees, should have been expressed so unclearly. The fact that it was open to different interpretations is apparent from what was said about it by Dr Jentzsch; as well as from the arguments about its meaning in Court.  It is also perhaps surprising that the only explanation from the Defendants about the first-stage process came from Mr Benson and Mr Sumption.

90.Point 1. The 19 December letter stated that the additional material deviations, 'will be reviewed in January 2009 by Stefan Jentzsch.' It is clear, both from paragraph 5 of the sub-committee minutes of 10 February 2009 and from his witness statement that Dr Jentzsch strongly disapproved of any attempt to reduce the sums allocated to employees in the 19 December letter. According to §48 of his statement he told a Town Hall meeting on 19 December that the purpose of the review was to protect the bank if an individual employee performed badly in the last 2 months of the year and made a loss. It is not easy to reconcile this statement with the terms of the letter. It is also difficult to reconcile with the minutes of the Dresdner Bank Board meeting of 4 December, which Dr Jentzsch attended.

The Board resolved to leave the volume of the DKIB bonus pool resolved on August 12, 2008 unchanged at present. However, this resolution is subject to the proviso that a clause is included in the bonus letter stating that the bonus payment will be adjusted if material negative deviations in DKIB's revenue and earnings as against the existing forecast for the months of November and December are established during the preparation of the annual financial statements for 2008

91.It is right that the additional material deviations were not reviewed by Dr Jentzsch in January. However, this stipulation cannot properly be understood to be crucial to the first-stage review. It cannot have been intended that only Dr Jentzsch could decide these matters and only in the month of January. It makes no commercial sense that if, for example, he became incapacitated, the first-stage review could not take place. Furthermore, as Mr Sumption pointed out, Dr Jentzsch participated in the 10 February review. There is no indication in the minutes that he dissented from the conclusion and there is nothing to this effect in his witness statement.

92.Point 2 and 3. These points are interlinked and involve two imprecise terms: the word 'additional' and the phrase 'forecast for the months November and December 2008'.

93.The word 'additional' must have been intended to draw a contrast. It appears therefore that the first-stage review should have identified a material deviation. As already noted, the 'Bonuspool DKIB Business Performance - DKIB Bonus Review' prepared by KPMG identified the deviation between the Mid Year Projections as at 5 November for revenue and the actuals for 2008 as €544,000,000, which was unarguably material. But the MAC clause did not refer simply to a material deviation; it referred to an 'additional' material deviation. It is not sufficient to say that KPMG prepared the figures in good faith, no doubt they did; and no doubt the sub-committee thought they were carrying out the exercise intended by the MAC clause. The question is whether they did. In §63 of his witness statement Mr Benson simply says, The sub-committee agreed (with no dissents) that these figures amounted to a material deviation in DKIB's revenues and earnings as against forecast for the months of November and December 2008. It is difficult to see how they could have reached any other view.

94.It may be that there is some other document which shows a deviation which could give rise to the argument that the material deviation identified by KPMG was 'additional', possibly the MYP for August referred to in §3 of the sub-committee minutes; but this is not apparent. There is no evidence from those who were at the meeting, apart from Dr Jentzsch; and the matter is not made  clearer by Mr Benson's reference to deviations made up in part by 'Crisis' deviations, which Mr Rosenfield regarded as irrelevant to the operation of the MAC clause.

95.The sub-committee assumed that the relevant forecast was that of 5 November 2008; but that date was not referred to in the letter; and it is at least an arguable construction of the 19 December letter that what was being referred to was an additional material deviation after 19 December and not from a date 6 weeks before. There is a suggestion in Mr Blessing's Town Hall update of 14 January 2009 that Commerzbank received information about a deterioration in results on 18 December; and there is a reference in Mr Dunn's witness statement at §112 that DKIB lost €84.4 million in the last two weeks of December 2008, which (as he observed) hardly looks material when compared with the loss figures referred to by Mr Benson.

96.Point 4. The contractual position is not entirely clear; but it seems as if the two-stage review should have been carried out by Dr Jentzsch on behalf of DKL or DKIB. In fact, the sub-committee which carried out the first-stage review was appointed by DB and the second-stage review was carried out at the meeting of the Board of Directors of DB on 17 February 2009. As already noted, DKL was a wholly owned subsidiary of DB; and it may be that the decisions can be ratified by DKL. If this were the only point, I doubt very much whether it would amount to a reason for allowing the matter to go to trial.

97.Point 5. If a second-stage review was triggered then, subject to any assurances which may have been given as to how the review would operate, I cannot see any objection to reducing the bonus across the board for all those who had been provisionally allocated a bonus. As Dr Jentzsch explained to the DB board in a minute of 8 December, the provisional allocations had involved a careful assessment of individual performance. It does not seem to be either a breach of obligation nor an act of irrationality to treat all employees who received the letter of 19 December in the same way: by reducing the allocation by a percentage which applied to everyone, if that is what was done.

98.Points 2 and 3 raise questions which cannot be resolved on this application. They raise reasonable grounds for believing that a fuller investigation into the facts of the case would add to or alter the evidence available and so affect the outcome of the trial, see [14f] above. There is also a further issue which some of the Claimants may be able properly to advance at trial: namely, whether the assurances given by Dr Jentzsch as to how the reviews described in the 19 December letter would be carried out gave rise to enforceable rights.

99.For these reasons I have concluded that the Defendants have failed to show that the Claimants have no real prospect of success in their claims.

Published: 14/06/2010 13:31

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