JOANNE KAY WOOD v. JARDINE FLEMING HOLDINGS LTD.

HCA 12524/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12524 OF 1998

____________

_______________

J U D G M E N T

_______________

1. In these proceedings, which were transferred to the High Court from the Labour Tribunal on 6 July 1998, the plaintiff is claiming from the defendant, her former employer, a sum by way of bonus payment for 1997, her last year of service with them, which she claims was orally agreed in October 1996, as a variation of her employment contract, in a discussion with Mr Miles Armstrong, the chief executive of the division in which she worked. Her employment was terminated on 4 November 1997, with three months salary and benefits in lieu of notice, but no bonus was paid. The statement of claim also included claims for costs of transportation and shipment to Australia, and compensation for unreasonable dismissal under the Employment Ordinance, which were not pursued at trial.

2. The plaintiff was first employed by the defendant on 1 April 1994 and the terms of her employment were embodied in a letter dated 14 January 1994. Her appointment was stated to be as a Senior Manager, Corporate Finance Department at a salary of $600,000 per annum, and the provisions as to bonus were set out as follows:

2.2 Bonus

You have no contractual entitlement to bonus but provided your employment is not terminated under the provisions of paragraph 7.4, the Company will at its discretion pay you an annual bonus each year in respect of your service with the Company during the previous year ending 31st December. The amount (if any) will depend on the financial results of the Jardine Fleming Group and on your own performance.

3. Paragraph 7.4 of the letter provided for the defendant to terminate the employment at any time without notice on the grounds of dishonesty, misconduct or negligence. There is no dispute that the plaintiff's employment was terminated under paragraph 7.3 by written notice and payment of three months' salary.

4. It is clear from the evidence that, until 1997, the plaintiff was highly regarded, and her salary was progressively increased, to $675,000 in July 1995, to $725,000 in January 1996 and to $800,000 in July 1996, by which time she had been promoted to assistant director. She also received bonus payments under the provisions of paragraph 2.2, for 1994 in the sum of $1,350,000, for 1995 in the sum of $1,200,000, and for 1996 in the sum of $1,600,000. These payments were made in about April of the following year. On 1 January 1997 the plaintiff was promoted to director with a salary of $1,100,000 per annum, and, she claims, a guaranteed bonus. However, it is the defendant's case that, not only was there no agreement as to bonus, but that, following her promotion, the plaintiff's performance deteriorated to such an extent that they terminated her employment, and exercised their discretion not to pay any bonus.

5. The issues before me now are, first, whether there was any variation of the plaintiff's employment contract as to payment of bonus, and if so, to what extent, and, second, if there was no such variation, whether she is nevertheless entitled to a payment of bonus under her written terms of employment, the discretion having been exercised improperly or capriciously.

Variation of employment terms

6. There is no dispute that, at a meeting between the plaintiff and Mr Armstrong on 16 October 1996, it was agreed that the plaintiff would be promoted to director, that her salary would be increased to $1,100,000 per annum, that she would have housing allowance commensurate with her director status and a club debenture.

7. The background to this meeting is that, in early October, the plaintiff spoke to a director, Mr Mark Dowie, and told him that she had been approached by another merchant bank, or an agent of that bank, with an opportunity to join them on a package including cash compensation of US$500,000. Mr Dowie was very keen that the plaintiff should stay with the defendant, so he promised to speak to Mr Armstrong to try to obtain improved terms of service with the defendant sufficient to encourage the plaintiff to remain, as she wanted to do. The matter of the bonus was certainly mentioned at this stage, because both the plaintiff and Mr Dowie recall that he told her that the defendant did not give guaranteed bonuses. This is not strictly correct. A number of the defendant's directors were given guarantees of payments, although these were without exception either on first appointment, or, in Mr Armstrong's case, terms agreed upon cessation of his employment. They were usually described as "bonus equalisation" payments, and were clearly to compensate those who were leaving another company, and thereby abandoning their right to a bonus from that company. There is no other evidence of a guarantee being given to any employee already with the company.

8. Later the defendant spoke to Mr Armstrong who, having earlier sought the approval of the group chairman, Mr Henry Strutt, offered the terms above which the plaintiff accepted. Mr Armstrong says that he gave no guarantee as to bonus, and this is to some extent confirmed by the plaintiff herself who says in her witness statement that she asked for a guaranteed bonus but Mr Armstrong said that he was not prepared to commit to this.

9. The tenor of the discussion between the plaintiff and Mr Armstrong was clearly to make her an offer which was sufficiently similar to that she said was proposed by the other bank, to make it worth her while to stay. The plaintiff admits that the figure of US$500,000 she had discussed with the other bank was for all benefits including salary, bonus and housing, and was in the nature of a total compensation package. However, there was no precise or definite offer in writing, so it is not clear, and in my view doubtful, that it included a guaranteed bonus, although it would have contemplated a bonus. What is clear is that in this industry there is an established system of rewarding employees on a total compensation basis, where an annual bonus is a large component of that compensation, and an employee, who knows that his or her performance throughout the year has been at least adequate, will receive a bonus in respect of that year, the amount depending on that performance and the profits made by the company in that year. Indeed, I have no evidence that any employee of the defendant, still in their employment when bonuses were paid, failed to get one in any year. The plaintiff was given to understand by Mr Ian Ramsay, the director who interviewed her on first appointment, that such a bonus could be up to twice annual salary if the company was pleased with your performance. It would therefore be a simple calculation for the plaintiff to make, on the assumption that she continued to perform well, that she could expect a bonus of sufficient size to make her total compensation in the region of the US dollar figure she had in mind. And her evidence is that she did work the figures out in her head, not that any precise figure was promised, having been told by Mr Armstrong that the defendant could not meet exactly the same overall compensation that she said had been offered, but that he trusted that the overall package would be attractive enough to keep her on. I have no doubt that bonuses were discussed, including the levels a director could expect, but equally the plaintiff must have been in no doubt that, not only was any bonus governed by the terms of her employment contract, but it depended on her own performance as well as that of the defendant.

10. My attention was drawn to a handwritten note by Mr Armstrong most of which he admits was written at, or before, the meeting on 16 October, with the plaintiff's requirements and what was agreed. It includes a note which reads "Bonus" with the figure 1900 over the figure 1100. Mr Armstrong says that this was written later and the 1100 referred to the salary discussed of $1,100,000 and 1900 referred to bonus, presumably of $1,900,000. However, in the absence of any evidence from the plaintiff that this figure, or indeed any similar figure, was specifically agreed at the meeting, it appears likely that this was a calculation by Mr Armstrong of a possible bonus the plaintiff could earn which would achieve the object of compensating the plaintiff in the amount she sought. It is clear from the plaintiff's witness statement that she had in mind, and was expecting to earn, a sum nearer to twice her annual salary, which makes it even less likely that any specific figure was agreed.

11. One further matter which should be mentioned in the context of the bonus is that, while all the other terms agreed were reduced into writing, the directorship and salary in a letter from Mr Strutt, and the rest of the employment benefits in a document from the human resources department, nothing appears in such a document regarding bonus. Indeed, although the plaintiff asked about her "agreed" bonus when given the letter terminating her employment, this seems to be the only mention of it since the date of the meeting in 1996, orally or otherwise, and there was no specific claim for bonus either in letters before action, or in the Labour Tribunal proceedings, only a general claim for breach of contract, which Mr Coleman for the plaintiff submits include that part relating to bonus.

12. In the circumstances I accordingly consider it unlikely that the new package offered by Mr Armstrong included any guarantee of a bonus at all, and certainly not of any particular figure. The plaintiff had no more than a confident expectation of a bonus, based on her knowledge of the practice in the company, and her own experience. There was clearly a variation of the plaintiff's contract of employment as contained in the original letter of 14 January 1994, but only in so far as is mentioned above, leaving the provisions as to bonus unchanged. Which means that I must now turn to consider whether, under those provisions, she is now entitled to a bonus at all, and, if so, in what amount.

Bonus entitlement

13. The cases of the parties under this head reveal two distinct issues: first, whether the discretion as to bonus is unfettered, or bound by principles of law, and, second, if principles of law must be applied to its exercise, whether that exercise was capricious, irrational or perverse. If the answer to the first is that there is an absolute unfettered discretion, then, however well the plaintiff performed in the relevant period, she could claim no entitlement to the bonus. In the latter case, then the conduct and performance of the plaintiff must be examined to see whether the defendant was entitled to withhold such bonus.

14. Discretion itself falls into two categories: where there is a choice whether to make any payment, and how much payment is to be made. It is the contention of the defendant that the clear terms of the contract of employment here gives the employer unfettered discretion as to whether or not any bonus at all should be paid. Indeed, the initial words of the relevant provision in the contract state in no uncertain terms that the employer has no contractual right to bonus, that payment is at the defendant's discretion, and refers to an amount (if any). On the face of it, not only does the contract give the defendant a discretion as to whether a bonus is paid or not, but also as to the amount of any bonus, which might consequently be nil.

15. Mr Yuen for the defendant has drawn my attention to a series of cases in which the courts have consistently refused to interfere with exercise of a clearly stated discretion. In Loftus v Roberts (1902) 18 TLR 532, Vaughan Williams LJ summed up what he saw as the position at p. 534:

"It seemed to him that there was some misapprehension as to the true ground of the decisions in the common law cases which had been cited－viz., "Taylor v. Brewer," Bryant v. Flight," and "Roberts v. Smith." The decision in the first of these cases and in the third, and the dissentient view of Baron Parke in the second, was this－that wherever words which by themselves constituted a promise were accompanied by words which showed that the promisor was to have a discretion or option as to whether he would carry out that which purported to be the promise, the result was that there was no contract on which an action could be brought at all. The doctrine was an old one. In "Leake on Contracts" 3rd ed., p.3, it was expressed thus :- "Promissory expressions reserving an option as to the performance do not create a contract." That was a literal translation of a passage in the Roman Digest, and it was the ground of the decisions he had mentioned. This was not one of that class of cases in which it was said that there was no contract because the words were too vague. This was a case in which it was said there was no contract because the promissory words left a discretion to the alleged promisor."

16. Similar decisions was reached in the cases of Kofi Sunkersette Obu v A. Strauss & Co. Ltd [1951] A.C. 242 and Re Richmond Gate Property Co. Ltd [1965] 1 WLR 335, in both of which there were contracts for remuneration to be made, with the amount left "to the discretion of the company" in the former and "such amount as the directors may determine" in the latter. In both cases the courts rejected the submission that they should exercise the discretion vested in the company or the directors, as to do so would involve making a new agreement between the parties. They rejected similarly any question of assessing payment on a quantum meruit basis.

17. Mr Coleman contends that the employment contract must be looked at in the light of the employment culture of this industry, where the bonus is an integral part of the remuneration package, and is considered payable as of right notwithstanding the wording of the contract. It is not in dispute that payment of bonuses is considered part of the remuneration package for those in investment banking, but this argument is something of a two-edged sword, as, while an employee might reasonably expect to receive an annual bonus while in employment, the evidence shows that it is clearly accepted, as part of the same employment culture, that upon leaving in the course of a year, invariably no bonus is paid. The defendant's records for 1997 show that of those who left during the year, not one was paid a bonus. It is for this reason that "bonus equalisation" payments, and "sign on bonuses" are paid to those commencing employment by leaving other companies, in the knowledge that they will not receive any bonus from those other companies and need to be compensated for that, possibly to encourage them to leave.

18. In support of his argument Mr Coleman drew my attention firstly to Moray Vincent v Merrill Lynch Australia Pty Ltd [2000] NSWIRComm 160 where it was held that, although expressed to be discretionary, the bonus scheme was "a related condition of or a collateral arrangement to the contract of employment". However, that case was an application under section 106 of the Industrial Relations Act 1996 of Australia, whereby the applicant sought a variation of his contract of employment on the basis of unfairness, as defined by that ordinance, and gave wide powers to the Commission to make any order for payment of money in connection with the contract as it considered just. At no stage was the effect of the wording of the contract at Common Law considered.

19. However, even where there is a clear discretion which the employer may exercise whether or not to pay a bonus, and as to the amount of such bonus, there is some authority to the effect that this discretion must not be exercised irrationally or perversely, although it may be exercised unreasonably. In Clark v Nomura International plc [2000] IRLR 766, Burton J had this to say in respect of the court's restrictions on the exercise of such discretion, at p. 744:

"I do not consider it is right that there be simply a contractual obligation on an employer to act reasonably in the exercise of his discretion, which would suggest that the court can simply substitute its own view for that of the employer. My conclusion is that the right test is one of irrationality or perversity (of which caprice or capriciousness would be a good example) ie that no reasonable employer would have exercised his discretion in this way."

20. This takes the line of reasoning of the earlier cases, which held that there was no right at all to bring an action where the contract involved a discretion, a step further, and sets limits, albeit very wide limits, on that discretion. Where an employer goes beyond those limits, and only then, may the court interfere. I will accordingly look at the events surrounding the plaintiff's employment during 1997, and the circumstances of her dismissal in November of that year. In doing so, I emphasize that it is not for the purpose of establishing whether her dismissal was unreasonable or not, or even perverse, but to see whether there are any grounds to say that the decision not to pay a bonus was so irrational that no reasonable employer would have exercised his discretion this way, and by employer, I mean an employer in the field in which the plaintiff worked.

21. As I have already said, until the end of 1996 the plaintiff was a valued, and no doubt valuable, employee, as her regular increases in salary, and generous bonuses testify. It is also clear that, when faced with the possibility of her leaving, the defendant was prepared to go a long way in improving her benefits to persuade her to stay. Indeed, in an "Executive Performance Appraisal" dated 17 October 1996, completed by her immediate superior Mr Dowie, she was rated extremely high in most areas and recommended for promotion to director immediately. While it is apparent that this report was necessary to smooth her promotion through the group executive committee meeting to approve it, Mr Dowie admitted in evidence that the report was correct and reflected their views of her and her abilities. Her appointment as director took effect on 1 January 1997.

22. What occurred after that is very much in dispute. The defendant's case is that there was a sudden and very obvious change in the plaintiff's attitude, that she failed to liaise with or report to other directors, in particular Mr Dowie who remained her immediate superior, that she was arrogant and high handed in her approach to the Tokyo regional office, failed to pursue China business, and not being what was constantly described in evidence as "pro-active" in pursuing new business nor participating in setting policy direction and business strategy. There was also a complaint that she spent less time in the office than most of the other staff. In short they claim that she was not pulling her weight, not making the contribution expected of a director, and was not effective in bringing in new business.

23. The plaintiff maintains that any failure on her part as a director was the fault of those above her, Mr Dowie and Mr Armstrong, who excluded her from management and the duties she expected to take on as a director, and that in any event she did do valuable work that year for the benefit of the company.

24. Problems appear to have arisen at a very early stage between the plaintiff and Mr Dowie as to the plaintiff's role in the company after her promotion. It is clear that it was agreed with him, and Mr Armstrong in October that, although they wished her to continue her activity as a team leader in mergers and acquisitions (M&A) for a period, and to continue to work on important and "big ticket" China-related M&A work, and to have more exposure to capital market transactions, she would be able to extend her role outside China, which had been her speciality, to Korea and Japan,. There seems to have been a misunderstanding as to what that role was, with the plaintiff clearly believing it to be as a director in charge of those areas, and Mr Armstrong's intention that it should be to assist and work with them.

25. Her working relationship with Mr Dowie appears to have suffered at the same time as her promotion. She complains that he failed to introduce her to the Korean and Japanese markets, showed a lack of support and interest in what she was doing, kept her out of things she ought to be doing, and there was a lack of communication between them. She also said that she suspected that he did not intend to keep the terms upon which she had agreed to stay. I take this to mean the type of work she would be doing rather than the financial benefits agreed. Mr Dowie on the other hand claims that he had difficulty discussing her work with her, to the extent that, having had a good working relationship with her hitherto, he was hurt by her defensive attitude and could not understand the barrier between them that had not been there before. It appears to be this concern as to the plaintiff's relationship with the rest of the corporate finance directors and staff which seemed to Mr Dowie the biggest problem.

26. In addition to that of Mr Dowie and Mr Armstrong, evidence as to the plaintiff's work and behaviour was given by Mr David Lowes, a director of Robert Fleming International Ltd in London with responsibilities which include working closely with the defendant. He was aware that things were not going well as far as the plaintiff was concerned and had discussions with her as well as with Mr Dowie and Mr Armstrong. He says that she told him she thought everyone was conspiring against her and she was being excluded. He, of course, being based in London, would not have first hand experience of the plaintiff's work, and would rely largely on the opinions of others. But it is clear from his evidence that a problem was perceived, and that the plaintiff herself was aware there was a problem.

27. The principal evidence for the defendant is that of Mr Dowie. It was he who worked most closely with the plaintiff, and it is mainly upon his opinion of her that Mr Armstrong and Mr Lowes acted, and which coloured their views. As well as the more general complaints referred to above, about which he says he tried to arrange meetings with her to discuss them, but encountered difficulties doing so, he gave two examples of behaviour he considered inappropriate in relation to her work. The first of these was a mandate the defendant received from Telstra, an Australian telecommunications company, to give an investment appraisal in respect of a venture in China. He says that he gave the project to the plaintiff as this was her area of expertise, and was then astonished to find that she was going on holiday and leaving the matter to a more junior member of the staff, Samantha Hon. This is not strictly accurate, as Miss Hon was part of a team which included another director, and an assistant director. However, the plaintiff was in charge, and it is clear from the evidence that she was absent for most of the time it was being worked on, and had little input in the final report. In respect of this I find her explanation that the project was a non-starter an unconvincing explanation for taking leave during the short time the report was required and without informing Mr Dowie well in advance, knowing he had put her in charge, and consequently not being available for meetings with the client. While this may not have affected to project itself or the content of the final report, I have to agree with the defendant that it was odd behaviour from a director which might have had some effect on the relationship with a client.

28. The other matter concerned a proposed B share listing of a coal company in China. The plaintiff had been given the transaction to give her some experience of capital markets and had been dealing with it since early 1997. This too was coming to a crucial stage in July 1997 when she was planning to be away. There is no doubt that she knew of that stage, as in a message to other members of the staff on 27 June 1997 she referred to the likelihood of approval being given in Beijing on 2 July and the listing to proceed immediately thereafter. Again her explanation is that she left a competent person in charge and a contact address. However, I can see here as well grounds for concern by her superiors that she was not taking her involvement as seriously as they might expect.

29. The plaintiff maintains that throughout 1997 she was performing important and productive work for the defendant. She refers specifically to a visit to South Africa on an M&A marketing trip, which the defendant concedes was successful, and to her training work within her department. Such problems with relationships as there were she blames on Mr Dowie, who she felt was keeping her out of what she should be doing. However, although she admits that she was told by Mr Armstrong to report to Mr Dowie, she also admits that she did not accept that this was in keeping with their agreement in October 1996, leaving the obvious inference of some resentment between them. This may be some indication of the reasons for the change that took place in the relationships in the company from early 1997. For changes there certainly were. From being regarded as an indispensable member of the company, the plaintiff became the subject of numerous discussions between the directors as to her behaviour and performance, and her lack of co-operation and communication. The plaintiff claims that this was largely a result of the attitude of Mr Dowie to her, and that the claims made by the defendant are in any event much exaggerated. The latter may to a degree be true. The witness statement of Mr Dowie in particular seems designed to emphasize what he sees as her shortcomings, and her strengths are only admitted grudgingly.

30. The fact remains, however, that those in authority over her had genuine and serious concerns about her. Many of their complaints seem minor when looked at individually, such as not attending a dinner to meet a senior executive from London, but the evidence taken as a whole reveals a situation where the plaintiff was not fitting neatly into the organisation as before her promotion, and not doing what was expected of her as a director. It is also clear that, in corporate finance, there is constant pressure on all who work there to perform to a very high standard, and to maximize income for the company, and that anyone who falls below that standard is at risk of being replaced. The evidence here shows to my satisfaction that the defendant's senior officers believed the plaintiff had fallen below that standard, and I accept the evidence of the defendant's witnesses that this was the situation, and reject the alternative, which is that there was a conspiracy to put her in a position so that she could be removed. It is clear that the concerns were real, to the extent that by September 1997 both Mr Armstrong and Mr Dowie had decided that she must go. Such a decision is unlikely in my view to have been taken lightly, bearing in mind their previous high opinion of her, but once it was taken, I believe that, had they not been advised that a warning letter and a period of probation should be allowed, they would have dismissed her in September.

31. It may well be, and I accept that it is probably the case, that the plaintiff did not believe that her performance was below the standard expected of a director. This is certainly apparent from her denial of the allegations made in the defendant's letter of warning to her in September 1997, and when she was dismissed in November. But for the purposes of this action it is not necessary for me to decide as a matter of fact whether her dismissal was justified in the light of her conduct and performance. The only consideration here is whether there were sufficient grounds for the defendant to believe that, having dismissed her as they were entitled to do under the contract of employment, they were then justified in denying her a bonus. If there was nothing in her conduct to justify it, and she had been performing at what her superiors saw as a high level and generating income, then it would be clear that the dismissal and refusal of bonus was capricious, or a mere whim to the extent that the court should interfere with what is otherwise a clear discretion.

32. The test must be subjective, and in particular, in the world of corporate finance in which the parties operated, and the culture of high performance meriting high incomes, there is no evidence here to support a case of such irrationality which would be necessary to bring this into that category of case where discretionary decisions can be questioned. It follows from the above that I find that I am unable to say that the circumstances here are such that no reasonable employer would have exercised his discretion in the way that the defendant has done here, and the plaintiff's claim to that effect must fail.

33. The plaintiff's claim is accordingly dismissed with an order nisi that she pay the costs of the defendant to be taxed.