Summary of key facts

When Dresdner Bank announced its intention to separate its investment banking from its commercial banking division this resulted in speculation regarding a sale of the investment division and many employees started to leave. The FSA indicated that the Bank was on its watch list because of the serious risk of a large scale exodus of staff. In the interests of retaining its staff the CEO of Dresdner Kleinwort Investment Banking ("DKIB") was authorised by the Board to announce a minimum bonus pool. At a "Town Hall" meeting in August 2008 the CEO announced a guaranteed minimum bonus pool to be allocated to individuals on a discretionary basis according to individual performance. This was simultaneously streamed on the Bank's intranet. Further reassurance was given to employees via other Town Hall meetings and answers to FAQs on the intranet.

In December 2008 each employee received a bonus letter specifying a provisional award but subject to a material adverse change ("MAC") clause providing for a review of the provisional bonus award and, if necessary a reduction, in the event that there were additional material deviations in DKIB's financial performance as against the original forecast. This was to be reviewed in January by the CEO.

In due course, as a result of pressure from Commerzbank which acquired DKIB, the amount paid to the individuals was reduced by 90% from the original award indicated in the December letters on the basis of the application of the MAC clause.

The employees sued for breach of contract. DKIB defended the claim on the basis that statements made at the August Town Hall meeting, and subsequently, were not intended to and did not have contractual effect.

High Court Decision

Did the announcement give rise to a contractual entitlement?

Yes. It was sufficiently certain to give rise to legal obligations and, taking into account the context in which it was made – following a board resolution, by the CEO with the intent of stabilising the workforce and using the term "guaranteed" – it was intended to have legal effect. There was no requirement on staff to indicate acceptance and there was valuable consideration given the benefit to DKIB in stabilising its workforce.

Legality and interpretation of the MAC clause

It was not technically necessary for the judge to consider the legality of the introduction of the MAC clause because it had been conceded that, if the Town Hall announcement was legally binding, DKIB was not entitled to introduce the MAC clause. Nevertheless the judge considered and found the introduction of the clause to be a breach of the implied term of trust and confidence. It having been clear that: "the clause was introduced simply as a means of enabling [DKIB] to go back on the promise made".

In relation to construction of the clause, the judge indicated it must be given the construction most favourable to the Claimants, given that DKIB sought to impose it unilaterally. Applying this, the use of the word "necessary" meant an adjustment could only be made if the Bank had no other choice open to it, it being expedient or appropriate to reduce bonuses because of public reaction to banker bonuses generally, failed to meet this high threshold.

Practical impact of the decision

  • On a strict analysis the facts of this case are fairly unusual/extreme given the background of a serious risk of a mass exodus of staff (to the extent that the Bank was on the FSA watch list), and the CEO of the Bank personally making statements regarding the minimum guaranteed pool, having been expressly authorised to do so by the Board. Indeed the CEO gave evidence that he intended/regarded his statement as legally binding, thereby supporting the Claimants case.
  • In less extreme cases showing the necessary intent to create a legally binding obligation may be much more difficult.
  • Nonetheless, no doubt Claimants lawyers will be encouraged by this decision as will individual bankers who feel they have received assurances regarding the size of the pool/their likely award and, ultimately, received less.

Key lessons for employers

  • Avoid any statements regarding "guaranteed pools".
  • Seek to ensure unit leaders/desk heads do not give assurances as to pool size/likely awards.
  • If you want a MAC clause, expressly include it at the start of the bonus year when communicating to staff.
  • Be very, very careful when drafting such clauses as they are likely to be construed strictly against you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.