Keen v Commerzbank AG: [2006] EWCA Civ 1536

CA: Mummery, Jacob and Moses LJJ: 17 November 2006

The claimant was employed as the manager of a proprietary trading desk in the defendant bank's global investment banking division on a basic salary of £120,000 per annum. He was entitled in addition to participate in the bank's bonus scheme, any award, its amount and timing being at the bank's discretion, and no bonus was payable if on the date of payment the employee was no longer employed by the bank or was under notice to leave. The claimant received bonuses of almost €3m for each of the years 2003 and 2004, which were awarded in March of the year following. He ceased working for the bank in May 2005 when the desk was closed down, being made redundant in June, and he received no bonus for that year. The claimant brought proceedings for damages for the bank's breach of an implied term not to exercise its discretion irrationally or perversely, in failing to award him more substantial bonuses for 2003 and 2004 and by failing to award him a bonus for 2005, contending that, in any event, the contractual provision on which the bank relied in refusing to make an award for 2005 was contrary to section 3 of the Unfair Contract Terms Act 1977. The judge dismissed an application by the bank for summary judgment on the ground that the claim had no real prospect of success, holding that the claim was properly arguable and that the issue whether the 1977 Act applied to the contract was better dealt with at trial.

The bank appealed.

The Court of Appeal held:
(1) The burden of establishing that the level of a discretionary bonus payment by the employer was irrational or perverse, where much depended on the employer's discretionary judgment having regard to fluctuating markets and labour conditions, was very high, and, since the bank had a very wide contractual discretion and there was a lack of independent evidence as to the size of the bonus pools for 2003 and 2004, the bank's awards of bonuses to the claimant for those years could not be said to be irrational.

(2) As a matter of construction of his contract, the claimant was not entitled to a bonus for 2005, as he was not employed by the bank when the bonuses were paid for that year. If under a contract of employment the employer supplied services or goods to the employee for his use or consumption, the employee could reasonably be regarded as a "consumer", but the proper question under the Unfair Contract Terms Act 1977 was whether the particular term came within section 3, rather than whether an employee was a consumer in relation to his employer. The bonus paid by the bank was additional pay for work rendered by the claimant to the bank as the bank's employee under a personal contract of service, and, in respect of pay for service rendered by him as an employee, the claimant did not come within the natural and ordinary meaning of a "consumer" vis-à-vis the bank. Further, a term as to payment of discretionary bonuses did not come within the "standard terms of [the] business" of banking, but rather was a term of the remuneration of certain employees. Accordingly, the claimant had no real prospect of success in establishing that the bank breached his contract by not paying him a bonus for 2005.

The appeal was allowed.

Appearances: Andrew Hochhauser QC and David Craig (Linklaters) for the defendant bank; Robin Knowles QC and Richard Leiper (Ferguson) for the claimant.