The Claimant was employed by the Defendant as its regional sales manager in the UK from November 2010 until July 2011. He alleged that the Defendant had failed to pay him a proportion of a commission payment to which he was contractually entitled and duly issued proceedings for breach of contract. The Court determined that he should be allocated a two-thirds share of the commission payment (and not the 48% share originally allocated to him by the Defendant). The Defendant appealed, broadly on the grounds that the Court had erred in determining that the contractual documentation bestowed no more than a heavily circumscribed discretion - rather than, as the Defendant submitted, a broadly untrammelled discretion, restricted only by the requirements of Wednesbury unreasonableness - as to how it chose to allocate commission payments. The Defendant submitted that, unless its decision was irrational, the Court had been wrong to interfere with the allocation.

The Court of Appeal dismissed the appeal. The Defendant's discretion was not untrammelled but limited by the detailed terms of the contractual provisions. The Defendant chose not to call evidence from the manager who actually decided how and on what basis to allocate the commission payment. In the absence of any evidence as to the Defendant's actual decision-making process, it could not be assumed that it had taken a reasonable decision, so the Court had been entitled to reach its own conclusion.

Tim Crane, Employment Law Solicitor

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Case No: B2/2014/3425

Neutral Citation Number: [2016] EWCA Civ 115

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE WINCHESTER COUNTY COURT

MR RECORDER HARRAP

CASE No: 2QT24687

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 01/03/2016

Before:

LORD JUSTICE ELIAS

LORD JUSTICE BEATSON

and

LORD JUSTICE VOS

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Between:

HILLS (Claimant/Respondent)

 and

NIKSUN INC (Defendant/Apellant)**

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Mr Alexander Robson (instructed by DMH Stallard LLP) for the Appellant

Mr Matthew Winn-Smith (instructed by Bookers & Bolton Solicitors) for the Respondent

Hearing date: 17th February 2016

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Judgment

Lord Justice Vos:

1. Mr Hills, the respondent ("Mr Hills"), was employed by Niksun Inc., the appellant ("Niksun"), for just 9 months between 1st November 2010 and 31st July 2011 as Niksun's regional sales manager in the UK. The judge found that he had been underpaid commission of £6,701.75 in respect of the Asian and Pacific element of a sale of security software to the international businesses of Credit Suisse (the "APAC" deal). Niksun had allocated 48% of the available APAC commission to the UK office, and the judge found that it should have allocated two-thirds.

1. The main issue that is raised by this appeal is whether the judge was right to interfere with Niksun's exercise of what it describes as the broad discretion provided to it in the contractual documents. Niksun submits that the judge was wrong to decide (a) that the UK (and therefore Mr Hills) was entitled to a higher commission rate, and (b) that one of the main factors used by Niksun in deciding the commission distribution, namely the relevant "Point of Influence", had been wrongly identified as the USA instead of the UK.

1. When the trial began, there were significantly more issues than those that now remain. As a result, the focus of the trial was rather different from the approach adopted by the parties in this court. This has resulted in some discussion about what was or was not put to the judge in argument as to the exercise that he was undertaking. In the result, it appears that the arguments presented to us were broadly put before the judge, albeit in a rather less elaborate form. I mention this only because it may explain why the judge approached the matter in the way that he did.

1. Before turning to the parties' arguments, it is necessary to set out the essential parts of the rather detailed contractual arrangements between Mr Hills and Niksun.

1. The Contract of Employment (the "Contract") included the following clause headed "Commission":-

"You may from time to time be eligible to participate in such commission plan(s), if any, as [Niksun] may in its absolute discretion determine.

Participation will be on such terms, and subject to such events, as [Niksun] may from time to time determine at its absolute discretion. …"

1. Niksun did indeed implement a commission plan for 2011 which was contained in two contractual documents counter-signed by Mr Hills. The first was the Sales Compensation Letter dated 6th January 2011 (the "Letter") which included the following provision at the end under the heading "Miscellaneous":-

"All other details, eligibility requirements, terms and conditions as per the NIKSUN FY 2011 Sales Compensation Plan will apply, and shall take precedence. All disputes in compensation and commissions, and in any interpretations of this letter or NIKSUN's policies, will be solely decided by NIKSUN management."

1. The second document was the Sales Compensation Plan dated 1st March 2011 (the "Plan") which included a number of provisions upon which the parties have placed reliance as follows:-

"IMPORTANT NOTICE

"This plan is not a contract between NIKSUN and its employees and does not confer upon the employee any promise, express or implied, of continued employment, or any reasonable expectation of a particular amount or level of incentive compensation. NIKSUN reserves the right to determine what level of incentive compensation, if any, is fair and reasonable under the circumstances, and is in the best interest of NIKSUN. Until NIKSUN has made such a final determination, no portion of this incentive compensation shall be considered as vested in or earned by the employee."

"2. Commissions

Commissions are earned on shipments and paid on collections in accordance with this plan and the individual Compensation and Account Assignment Letters…"

"3. Commission Splits: Commission credits can be split between plan participants when multiple participants are substantially involved. For more details on this subject, see section on "Commission Splits"."

"SPLIT COMMISSIONS

Notwithstanding anything to the contrary elsewhere in the plan, any and all commission and SE bonus splits must be pre-approved by the parties involved in the split, documented in writing with the signatures of the affected parties and VP of Sales, VP, Sales Operations with final approval by the COO/CFO/CEO. …

All orders booked by NIKSUN Regional sales managers to the end-user will be credited using 100% to the "Point of Influence". A variety of circumstances can occur which could justify considering commission splits or changes to this practice. The following sample split guidelines will be used to determine the appropriate percentages of the split commission:

Point of influence: This is the location where the major account control resides and from where global standards and strategy are set, including the negotiation with contract management to set terms and conditions (e.g. pricing, delivery, acceptance, etc). Point of Influence is allocated 34% of the order.

Point of sale: Location where purchase orders are received and enough work is done by regional sales managers receiving the purchase orders, such that the Point of Sale will be allocated from 0% to 33% at the sole discretion of the senior management of the company. In such cases, VP, sales Operations will make a joint case in writing to COO/CFO/CEO, who will determine the appropriate allocation. The remainder of 33% minus that allocated to Point of Sale will be awarded by COO/CFO/CEO either to Point of Influence or Point of Installation.

Point of Installation: Location where the product will reside once installed, and enough work is done by regional sales Managers at the Point of Installation, such that the Point of Installation will be allocated from 0% to 33% at the sole discretion of the senior management of the company…"

1. Having set out the relevant terms of the Contract, the Letter and the Plan, the judge explained the view that he had formed about the written and oral evidence he had heard. In particular, he concluded that Mr Hills was so strongly motivated to maximise his claim that he had been willing to behave in a dishonourable way and was a witness whose evidence should be treated with caution. The other witnesses were not so tainted and the judge relied significantly on the evidence of a Mr Robert Denton-Powell ("Mr Denton-Powell") who was Niksun's manager for the UK and Ireland at the relevant time and Mr Hills' immediate boss.

1. The judge then set out the history of the Credit Suisse deal generally and the APAC deal in particular, concluding that Mr Denton-Powell had taken over as country manager on 15th February 2011, reporting to Mr Rangu Salgame ("Mr Salgame") in the USA. He had made Mr Hills the "point-man" with whom Credit Suisse London should deal. Whilst the US and the UK were working in parallel on the deal, Credit Suisse was an account assigned to Mr Hills for which he would get revenue recognition. Mr Hills had to coordinate the APAC locations as well as the UK.

1. The judge then dealt with a conversation between Mr Salgame and Mr Denton-Powell that he found took place in May 2011 in which Mr Salgame had told him that the UK would be "looked after" in terms of commission for the APAC deal, and that he had understood that to mean that the UK (including, of course, Mr Hills) would receive two-thirds of the available commission. Mr Denton-Powell had reported to Mr Hills that the UK would be "looked after" and that they would receive the lion's share of the remuneration but not all of it (which was what Mr Hills had claimed).

1. On the question of the "Point of Influence", the judge first set out again the definition of that term from the Plan and then said this:-

"I must put to one side the fact that senior management of the company who were in the United States had to be involved. That must be neutral between the national sales teams. Whilst I can clearly take into account the historic input from the United States in deciding the location where the major account control resides and from where global standards of strategy are set, including negotiation with contract management to set terms and conditions. I must look at the actual global deal as done. Based on the evidence of Mr Denton-Powell that I have accepted, I find that the [Point of Influence] in regard to the deal actually completed on 30 June 2011 was the United Kingdom".

1. In construing the contractual documentation, the judge then concluded that the decision-making power as to commission-split rested with Niksun, but that Niksun was not given "a general discretion such as is found in the banker's bonus cases". I interpose that it appears that the only authority actually cited to the judge was one of those cases, namely Keen v. Commerzbank AG [2006] EWCA Civ 1536. The judge decided that "[i]n exercising that power, [Niksun] is constrained by the language of the documents with their precise matrix for earning commission and repeated reference to commission being earned on shipment" (original emphasis).

1. On the facts of this case, the judge thought that the task of the decision-maker was to determine what level of incentive compensation was "fair and reasonable under the circumstances" taking those words from the "Important Notice" in the Plan. Mr Salgame was required to have regard to the guidelines on split commissions, the facts as known to him of the way in which the APAC deal was finally brought to fruition, and the assurance that he gave Mr Denton-Powell that the UK would be "looked after". The judge then said that "[i]n a world where split commissions were common", Mr Denton-Powell took Mr Salgame's assurance to mean that the UK team would be allocated the lion's share, which he put at two-thirds of the available commission. In those circumstances, the judge determined that it was "simply not lawful" for Mr Salgame to award less than two-thirds, because that was "quite simply outside the bracket of what [was] "fair and reasonable under the circumstances"".

1. In concluding, the judge made clear that he had rejected Mr Hills' argument that Niksun had to follow the starting point in the Plan allocating all the revenue to the Point of Influence unless there was written agreement to the contrary.

1. Niksun submits that the judge was wrong to construe the contractual documentation as providing for a heavily circumscribed discretion. Instead the judge ought to have held that Niksun had a broad untrammelled discretion, only restricted by the requirements of Wednesbury unreasonableness (see Associated Provincial Picture Houses Limited v. Wednesbury Corporation [1948] 1 KB 223 per Lord Greene MR at pages 233-234). Niksun pointed to the number of occasions on which there were references in the contractual documents to the discretion of Niksun's management (e.g. under the definitions of "Point of Sale" and "Point of Installation"). This was a global business and a global negotiation in which one of the express purposes of the commission arrangements was to strengthen the general business position of Niksun. The discretion to make a commission payment at all might be heavily prescribed, but in relation to the division of commission, Niksun had a far broader latitude.

1. Niksun submitted that the judge was mistaken in deciding simply what was "fair and reasonable under the circumstances", whilst ignoring what was in the best interest of Niksun, which only Niksun could itself determine. Even if he was right to look at all the circumstances, he wrongly confined his attention to only three circumstances when he should have realised that Mr Salgame would have quite properly have had numerous other factors in mind, such as the contribution made by other staff in other areas and the need to incentivise them.

1. It was, Niksun submitted, not for the judge to determine the "Point of Influence"; that was a matter for Niksun under the contract. The courts should not substitute their own views of reasonableness for the views of the contractual party in question (see paragraphs 39-41 of Mummery LJ's judgment in Keen supra). The judge wrongly limited his analysis to the "actual global deal as done" rather than having regard to the contractual definition of "major account control" and "from where global standards and strategy are set". The judge ought only to have considered whether Niksun could reasonably have determined that the Point of Influence was the USA. Even if the Point of Influence were the UK, the award made was entirely permissible under the Plan. In any event, the decision was perverse as the evidence was that the opportunity for the deal developed during 2009 and 2010 out of relations between US sales staff and Credit Suisse's Mr Pin Lee, and out of Mr Sam Misdary's work in the USA.

1. In oral argument, Mr Alexander Robson, counsel for Niksun, submitted that Mr Hills had not pleaded that Niksun's decisions were irrational. He accepted, however, that in answer to Niksun's pleaded defence that it had the right to decide, Mr Hills had pleaded in his Reply the conversation with Mr Denton-Powell, to which there had been no rejoinder. Niksun had submitted to the judge that he could not determine the location of the Point of Influence unless Niksun's decision was irrational, and alternatively that the Point of Influence had been correctly determined as being the USA.

1. Mr Hills submits that, as a matter of law, the employee is 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" (see Keen supra at paragraphs 55-7), but the law has since moved on in the Supreme Court's recent decision in Braganza v. BP Shipping Limited [2015] UKSC 17 where it was held by the majority (Lady Hale, Lords Reed and Hodge) that a contractual discretion is to be exercised in accordance with both limbs of the Wednesbury test, namely that it was not unreasonable and that all relevant matters and no irrelevant matters had been taken into account (paragraphs 24 and 53). Moreover, the burden was on the employer to show that its decision was a reasonable one, and if the employer has acted in such a way as to engender particular expectations in an employee, those expectations are a relevant consideration in assessing whether an employer has acted rationally (see paragraphs 115-117 of Brogden v. Investec Bank plc [2014] EWHC 2785 per Leggatt J).

1. Against this background, Mr Hills' main submission was that Niksun had failed to demonstrate that it acted rationally or reasonably since it called no evidence to that effect. Mr Salgame was neither called nor did he explain his decision. The other evidence was exiguous, merely reporting on what had been decided. The judge had been right to hold that Niksun's discretion was circumscribed and to conclude, as he effectively did, that given the terms of the Plan, Niksun's decision was irrational. He was right to substitute two-thirds for 48%.

1. In relation to the determination of the "Point of Influence", the court had no idea what Niksun took into account, so there was no basis for thinking the decision rational in the Braganza sense. The court had all the necessary information to determine the question as it did.

1. In my judgment, the judge was right to consider the question of the "Point of Influence" first. It was impossible to reach a conclusion on whether or not the allocation of 48% commission to the UK team for the APAC deal complied with Niksun's legal and contractual obligations without first knowing whether there was any sustainable challenge to Niksun's determination that the USA was the Point of Influence. Moreover, as Elias LJ pointed out in the course of argument, if it were shown that the judge was right to decide that the Point of Influence was the UK, it would be hard to see how a commission rate of 48% could be sustained. Since Mr Salgame had thought that the UK should have 48% when he identified the Point of Influence as the USA, he would have had to increase the UK's percentage from 48% had he realised that the UK was the Point of Influence, and the judge had only increased that percentage from 48% to two-thirds.

1. I should deal first with the burden of proof. Mr Matthew Winn-Smith, counsel for Mr Hills, suggested that Baroness Hale in Braganza supra had held in paragraph 37 that in a case such as this, the employer had to show that its decision was reasonable. In my judgment, that is an over-simplification. The claimant, Mr Hills, had the burden of proof, but once he demonstrated that there were grounds for thinking that Niksun's decision was not reasonable (as he did here by pleading and relying on Mr Denton-Powell's evidence), the evidential burden shifted to Niksun to show that its decision was reasonable. That is not precisely what Baroness Hale said, since the point as to burden of proof was conceded in Braganza, but it is, in practice, consistent with it.

1. Niksun did not call evidence from its decision-maker, Mr Salgame, but it points nonetheless to the mass of other evidence that might have been taken into account in reaching the conclusion that the Point of Influence was the USA. Niksun says that the judge was wrong to rely particularly on the "actual global deal as done" rather than the location of the "major account control" and "from where global standards and strategy [were] set". The judge could and should have concluded, on the evidence, that one perfectly reasonable conclusion was that the Point of Influence was the USA.

1. In my judgment, the absence of any evidence as to the way the decision was taken is problematic for Niksun. The decision might have been taken rationally and it might not. The judge could not decide that the decision was taken rationally unless he at least knew what was actually taken into account. Otherwise, as was suggested in argument, the commission level might have been picked by throwing darts at a dart board – or perhaps by tossing coins. I acknowledge that this was not the way the matter was argued before the judge, but we have to consider whether he was justified in reaching the conclusion he did.

1. In these circumstances, the judge would, I think, have been justified in saying that the absence of evidence from Niksun as to the decision-making process meant that he could not assume that the decision was a rational one. Niksun had certainly not discharged its evidential burden of showing it was, when it appeared that Mr Salgame had told Mr Denton-Powell that the UK would be "looked after" meaning, as he reasonably understood, that it would receive the lion's share of the commission for the APAC deal. Had he approached the matter in that way, he would have been justified in determining the Point of Influence and the commission himself on the evidence.

1. Mr Robson's main attack on the judge's decision-making was to submit that his determination of the Point of Influence (see paragraph 11 above) lacked any indication that he understood that he was only deciding whether Niksun could reasonably have decided that the Point of Influence was the USA. That is true, but can be explained by the analysis I have undertaken. At least, it seems to me that the judge was justified, in the absence of evidence from Niksun as to its decision-making process, in deciding the Point of Influence for himself, on the basis that the reasonableness of the decision had not been established.

1. In any event, I think it is possible to support the judge's approach to the Point of Influence on an alternative basis. It is true that it would have been better if he had decided upon the construction of the contractual documents before he decided the Point of Influence issue rather than the other way round. But when he came to decide construction, he held that Niksun did not have "a general discretion such as is found in the banker's bonus cases". This could perhaps be taken as applying only to the award of commission generally, but I think he was probably referring also to the determination of the Point of Influence. The judge concluded, as a matter of construction, that in exercising its discretions, Niksun was "constrained by the language of the documents with their precise matrix for earning commission and repeated reference to commission being earned on shipment". Even though I can only find one reference to the commission being earned on shipment, I think the judge was right to describe Niksun's discretion as being constrained by "the language of the documents with their precise matrix for earning commission". I will return to this point when I deal with the first ground of appeal.

1. The judge plainly thought that, on the evidence he did hear, and starting from the definition of "Point of Influence" in the Plan, which he repeated when he made his decision at paragraph 23, Niksun ought to have determined the Point of Influence as being the UK. He did not ignore the historic input from the US team. He expressly mentioned it. He was entitled to consider the "actual global deal as done", since the definition refers to "the negotiation with contract management, to set terms and conditions of the contract", which points directly to the actual deal as done.

1. Whilst the judge does not expressly say so, I think it is reasonable to interpret what the judge did say, as meaning that he would have decided on the evidence he heard that Niksun could not reasonably have reached the conclusion that the UK was not the Point of Influence on the basis of the wording of the definition and the other constraints in the contractual documentation. This conclusion is supported by Mr Robson's answer to a question that I asked in argument. He accepted that, if the judge had thought that the USA was one of the possible reasonable decisions as to "Point of Influence", it could be seen from the judge's judgment that he would have won the point. In reality, the judge seems to have thought on the evidence that the only reasonable conclusion was that the Point of Influence was the UK.

1. In these circumstances, Niksun's appeal on the judge's decision as to the "Point of Influence" must, in my judgment, fail.

1. As to the first ground of appeal, I should return to the proper construction of the documentation looked at more generally. Do the terms of the "Important Notice" and the repeated references to the discretion of Niksun mean that its discretion is broad and untrammelled? In my judgment, they do not. The fact is that there is a detailed process for the award of commission set out in the Plan, which Niksun was obliged to follow. Of course, it had a discretion, but that discretion had to be exercised in accordance with the detailed terms of the Plan: "Commissions are earned on shipments and paid on collections in accordance with this plan and the individual Compensation and Account Assignment letters". The "sole discretion" formulation is reserved for the identification of "Point of Sale" and "Point of Installation" and for variations to the Plan itself.

1. Once this approach is established, Niksun's challenge boils down to the two complaints that (a) the judge only re-stated that he was asking himself what was "fair and reasonable under the circumstances" rather than also asking what was "in the best interest of Niksun", and (b) the judge only stated (in paragraph 29 of his judgment) three matters that Mr Salgame ought to have had regard to, when there were many more that he could and should have considered. I do not think these points can vitiate the judge's approach. He was particularly influenced by the fact that he had found that Mr Salgame had assured Mr Denton-Powell that the UK team would be "looked after", and that Mr Denton-Powell had reasonably construed that assurance as meaning that the UK would receive two-thirds. That was a legitimate factor to take into account in considering the reasonableness of Niksun's decision. The judge did not say he was considering the three factors that he mentioned alone; he simply said that they should have been considered "[i]n particular". The judge had set out the terms of the "Important Notice" and was fully conscious of it. Niksun's interests were relevant to the decision-making but did not overbear the fact that the UK had been assured it would get the lion's share of the commission on the APAC deal. Niksun's reliance on the provision of the Letter that provided that "[a]ll disputes in … commissions … will be solely decided by NIKSUN management" was also misplaced, because that related only to subsequent disputes – these issues related to Niksun's original decision-making.

1. Moreover, once it is established that the judge was justified in reaching the conclusion that the Point of Influence was the UK, the commission had to be greater than the 48% that Mr Salgame determined on the basis of a US Point of Influence. Niksun did not suggest any appropriate intermediate percentage between 48% and two-thirds. In those circumstances, I cannot see how the judge's decision can be vitiated. The conclusion that the commission should have been two-thirds was one that was open to him on the evidence.

1. Again, in the absence of any evidence as to Niksun's actual decision-making process, it could not be assumed that it had taken a reasonable decision, so the judge was entitled to reach his own conclusion.

1. For the reasons I have given, I would dismiss this appeal.

Lord Justice Beatson:

1. I agree.

Lord Justice Elias:

1. I also agree.