Christmas has come early for an employee attacking the employer’s exercise of discretion to refuse to pay discretionary bonus. Calver J awarded $5.385 million to Mr Gagliardi [G], upholding his challenge to ECM’s decision to pay him zero discretionary bonus. Calver J’s judgment considers in detail the requirements of a rational bonus exercise.
Facts
G was an experienced portfolio manager in the US and European equity capital markets. From 2013 G specialised in block trading, a skilled and high-risk form of trading. ECM is an investment management company based in Nevada USA and it hired G to launch and develop ECM’s block trading fund.
G’s employment contract provided for a discretionary bonus:
“For each calendar year, provided you are an employee in good standing on each fiscal-year-end bonus payday, you may receive a discretionary bonus based on your individual performance and [ECM]’s overall performance (“Discretionary Bonus”). The target range will be 10-15% of profit of your revenue contributions but will be purely discretionary.”
G’s employment commenced and he set to work on the block trading fund. The speed and volume at which trading developed took all by surprise, and disagreements arose about trading strategy and appropriate risk management. On 5 November 2021, ECM decided to separate G’s fund from its core business. On 15 November, on arrival in the US for business meetings, G was served a subpoena by the US Department of Justice [DOJ] in relation to a market-wide investigation into block trading malpractices by the DOJ and Securities and Exchange Commission [SEC]. On 28 February 2022, ECM dismissed G on one week’s notice, expiring on 7 March 2022.
Bonus payday was 15 March 2022. In relation to G, ECM decided to pay zero bonus. The judge found as a fact that this was because it did not want to pay bonus before knowing the outcome of the DOJ/SEC investigation [246].
In July 2023, the SEC made a preliminary determination to propose enforcement action against G for trading violations [268]. However after enquiry, the SEC revised its approach and G was never charged with any offence [274]. In January 2024, a non-prosecution agreement was entered into between Morgan Stanley and the DOJ [272], under which Morgan Stanley paid financial penalties and restitution of $249 million.
The High Court Judgment
While the contract was governed by Delaware law, it nevertheless also included the implied term of mutual trust and confidence as a matter of English law [295]. Thus the exercise of discretion by ECM was subject to the requirements set down by the Supreme Court in Braganza v. BP Shipping. The exercise of discretion in determining bonus had to be done in good faith in accordance with its contractual purpose and not arbitrarily, irrationally or capriciously [299].
The judge considered the wording of the bonus clause and held that calculations of bonus were to be by reference to G’s individual revenue performance and contribution. The wording of the clause did not permit the discretion to be exercised by reference to any other matters, including the behavioural and reputational matters pleaded by ECM [301]. ECM’s argument that these factors were captured by the words “individual performance” was rejected by the court; they were a reference to G’s individual contribution to the fund’s revenue.
The judge also rejected an argument that G was not “an employee in good standing” on payday. The contract provided for pro rata payments to ex-employees, so it could not be a requirement that G was still in employment on payday [315]. The contract also required payment to ex-employees within one month of termination. The judge held that ECM therefore had no right to withhold payment of bonus and ‘wait and see’ how the DOJ/SEC investigation would proceed [319]. Further, all that was meant by “in good standing” was that the employee had not been terminated for cause [327]. As G had not been dismissed for cause, he was entitled to a good faith exercise of discretion of whether ECM should pay bonus.
Applying Braganza, the judge held that ECM had to carry out that exercise rationally and for the contractual purpose of rewarding G’s contribution to the fund’s revenue. ECM argued there were a number of conduct issues that justified the zero bonus. However, the judge held that, not only was ECM wrong to take into account issues unrelated to G’s financial performance, but, as a matter of fact, it had not had these issues in mind at the time. The judge noted that there was very limited evidence of reputational damage to ECM caused by G, at the time that ECM exercised its discretion [258]. These issues had been identified in an ex post facto attempt to justify the decision made [406].
Analysing the evidence, the judge held that the only factor actually considered by ECM at the time of its exercise was the SEC/DOJ investigation. Even that could not justify a zero bonus: the mere fact of the SEC/DOJ investigation did not constitute proof of wrongdoing or breach of the implied term by G, nor would it justify termination for cause [416].
Given that G had generated 97% of the fund’s profits, the judge held that on a proper exercise of discretion, ECM would have awarded the top end of the 10-15% target. Accordingly, the judge awarded G a 15% bonus of $5,385,000, plus interest.
Comment
In the run-up to bonus season, and ten years on from the Supreme Court’s decision in Braganza, this judgment serves as a timely reminder of the principles governing the awards of discretionary bonuses.
The starting point is the scope of the contractual provision itself, including the purpose of the bonus and any prescribed criteria for calculation. Where there is a discretionary exercise, it must be done by reference to the contractual purpose of the bonus clause. It will be irrational if other extraneous factors are taken into account, or if relevant factors are ignored. Where there is a pending matter like an investigation, absent an express contractual provision, the employer cannot defer the decision until the outcome is known.
The case also highlights the importance of contemporaneous records of how the bonus discretion exercise has been conducted. Employers are well advised to ensure such records are accurate and contain adequate reference to all the factors that have gone into the decision. Where a bonus decision is challenged, the court will scrutinise the contemporaneous evidence to assess the exercise and what was taken into account. The employer cannot rely on ex post facto justifications to repair an inadequate exercise. A well-drafted bonus clause and well-taken exercise are essential to insulate the bonus decision from challenge.
Gagliardi v. Evolution Capital Management LLC [2025] EWHC 3214 (Comm)
Braganza v. BP Shipping Ltd [2015] UKSC 17
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