You say it best when you say nothing at all

You say it best when you say nothing at all


Further to our update in last month’s “Have I Got Employment News for You?”, we provide a more detailed review of the recent bonus decision concerning Dresdner Kleinwort and its potential implications for employers.

The High Court issued its decision last month on the dispute between 104 London-based bankers and Dresdner Kleinwort (now part of Commerzbank) over a guaranteed minimum bonus pool of €400m. It found that the Chief Executive’s announcement of this pool at a Town Hall meeting had contractual effect, which meant that the bank could not rely on a “material adverse change clause” to reduce individual bonuses by 90%.

What does it mean for your company?

  • Businesses should be extremely cautious when communicating with staff about their pay and bonuses, even in an informal manner. If they are not careful, they run the risk of being held to any promises they make, even if that was not their intent.
  • Employers need to consider carefully using group methods for communicating with staff, such as “Town Hall” meetings, which have become increasingly popular in recent years. We would recommend exercising caution before using Town Halls to make any communications about pay or bonuses going forward.
  • Finally, it is a reminder for employers to check their handbooks and employment contracts to ensure that the process for making unilateral changes to terms of employment are clearly and restrictively drafted. If your contracts or handbooks do allow for unilateral changes to terms and conditions being made via intranet announcements or notice boards, ensure that someone is responsible for approving any employee-related communications before they are posted, so that you do not inadvertently vary terms and conditions of employment.

The background

In 2008, Dresdner Kleinwort was operating as the investment banking division of Dresdner Bank AG. In March 2008, it was announced that Allianz, the ultimate parent company of Dresdner Kleinwort, had decided to either sell Dresdner Kleinwort, dramatically reduce the size of its operations, or wind it down. The announcement was seen as a precursor to a sale of Dresdner Kleinwort, and consequently gave rise to uncertainty amongst staff. In May 2008, this uncertainty led to Dresdner Kleinwort’s UK regulated entities being placed on the FSA Watchlist.

Given the staff uncertainty, on 18 August 2008, the Chief Executive of Dresdner Kleinwort announced in a Town Hall meeting with staff that they would receive a guaranteed minimum bonus pool of €400 million. Soon after, on 31 August, the acquisition of Dresdner Bank by Commerzbank was announced. On 15 September, Lehman Brothers collapsed, and in November 2008 (and again in January 2009), Commerzbank received a bail-out from the German government stabilisation fund.

In October 2008, the Global Head of HR for Dresdner Kleinwort, confirmed, in a Dresdner Kleinwort-wide email (also posted on the intranet), the communication date for bonus awards (19 December), and that they would be paid in cash in the January payroll. On 19 December, the bonus letters were distributed to staff, communicating their provisional bonus awards, subject to a “material adverse change clause”, which permitted the bank to reduce individual bonuses if additional material losses were identified for November and December 2008.

In January 2009, the takeover of Dresdner Bank by Commerzbank completed. In February 2009, the Dresdner Bank board decided that the material adverse change clause had been triggered, and consequently reduced the provisional bonus awards by 90%. 104 London-based bankers sued the bank, arguing that they were entitled to the rest of their provisional bonus awards.

What did the bankers’ contracts of employment say?

Each of the claimants’ employment contracts contained a contractual entitlement to be considered for the award of a discretionary bonus and also incorporated certain parts of the Employment Handbook, including the following section 1.4:

The Company 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.”

The decision on the law

The central issue decided in the judgment was whether the 18 August Town Hall announcement amounted to a promise that gave rise to a contractual obligation between Dresdner and its employees. This required consideration of the following classic questions as to whether a contract was formed:

  • Was the announcement sufficiently certain to create legally binding obligations?

  • Was there an intention to create legally binding obligations?

  • Did the announcement amount to an offer capable of acceptance? Were the employees required to communicate their acceptance, and if so, did they?
  • Was consideration given and/or received?

In addition, the judgment considered whether the announcement constituted a variation of terms and conditions under section 1.4 of the Handbook. If it did, then the claimants’ employment contracts would have been unilaterally varied, and, consequently, the third and fourth questions would fall away.

Certainty

The bank argued that the announcement could not be contractual as it was not sufficiently certain; no individual knew at the time it was made what their share of the bonus pool would be. This argument would seem pretty hard to defeat, but the judge disagreed. He held that the fact that someone did not know what their share of the pool would be did not deprive the promise made in the announcement of having contractual effect. Seemingly on this basis alone, he found sufficient certainty.

Intention to create legal relations

The next issue Mr Justice Owen considered was whether the bank intended to create legal relations. He found that it did, because if the announcement was not intended to have legal effect, it was difficult to see how it could have the intended effect of retaining staff at a time of uncertainty. This puts into peril any communication made to staff about their employment at a time of uncertainty, as even when an employer may simply want to give staff some comfort, this would suggest that the courts would look to find an intention to create legal relations.

Section 1.4 of the Handbook

Mr Justice Owen found that the October email sent by the Global Head of HR was enough to make the announcement comply with section 1.4 of the Handbook, because it was placed on the company intranet, even though the promise itself was not repeated in this email. This meant that, together with his findings on certainty and intention to create legal relations, the judge found a unilateral variation of the employees’ terms so that bonuses for 2008 would be determined by reference to the guaranteed minimum pool.

Acceptance

If the judge had not found that the email sent by the Global Head of HR was enough to comply with section 1.4 of the Handbook, he would have had to have found that the offer was capable of acceptance (and was indeed accepted), and that the employees gave consideration (dealt with below).

Mr Justice Owen found that the promises made in the announcement were capable of contractual effect, and therefore amounted to an offer capable of acceptance. However, he found that there was an implied waiver of a requirement on the employees to accept the offer, because no response was required from the people to whom the announcement was directed.

Consideration

Consideration is when the person receiving the promise gives or promises something in exchange - so for example, when you buy a newspaper in a shop, the consideration is the money you pay over in return for the newspaper. In this case, the judge found that the bankers had provided consideration for the promise of the bonus pool, because they stayed with the bank, and the commitment to the pool was a factor which weighed in their decision to stay. He even (somewhat surprisingly) found this where some had wanted to leave but had been unable to find another job or even those who joined the bank after the announcement was made.

The “material adverse change” (MAC) clause

By virtue of finding that the August announcement gave rise to a contractual obligation, the bankers won the case. However, the judge went on to consider the issue of the MAC clause if the August announcement had not created such an obligation. Mr Justice Owen found that had the bank been entitled to rely on the MAC clause, the clause was a breach of the implied term of mutual trust and confidence, and the requirements of the clause had not been met, so the reductions to the bonus awards would not have been valid in any event.

Comment

This decision marks a real high-point in pro-employee bonus decisions, which is all the more surprising given the background of the credit crisis against which these events unfolded. Between the Town Hall announcement and the adjustment of the bonuses, there was a financial tsunami which led to banks, including Commerzbank, being bailed out by taxpayers, and Dresdner almost going bust. If Commerzbank had not been bailed out by the German taxpayer, it may not have been able to take over Dresdner. If that had not happened, Dresdner may have followed Lehman Brothers and the bankers would probably not have got any bonus at all.

This background is interesting because the merits of a case always inform the legal approach:

  • For those who think the merits lie with those who should have been able to rely on what they were told, you put forward contractual arguments to support this.
  • For those who think that the bank was entitled to go back on what was announced because of the dramatic circumstances, you find ways to show that there was no contract, preferring arguments about lack of certainty and the informality of the presentation.

Litigation is risky at the best of times, but outcomes are even more difficult to predict when the merits can be argued both ways.