UK: Can An Oral Promise Made At A Staff Meeting Be Contractually Binding?

Last Updated: 29 May 2012
Article by Nick Dent

The recent High Court decisions in the "banker bonus" litigation stemming out of the Commerzbank/Dresdner merger (Attrill & Others v Dresdner Kleinwort Limited) have received extensive media coverage. However, the implications of these decisions aren't just relevant to the banking industry, or to the payment of bonuses. The case concerns whether oral promises made to staff amounted to contractual obligations, and the decision could potentially impact on any business which makes verbal commitments to its employees.

The facts

Under their employment contracts, the claimants, who worked in DKIB, the investment banking division of Dresdner Bank, were entitled to be considered for a discretionary annual bonus. The bonus pool would normally be decided in November and individual bonus numbers would be communicated by letter in December, with the bonuses being paid in the January payroll.

In March 2008, Dresdner Bank announced that DKIB would be separated from the commercial banking business. Uncertainty over the future of DKIB led a large number of investment bankers to leave. In order to retain staff, and because the bank had been put on the FSA's 'watchlist' due to the risk of substantial staff defections, the Dresdner Board agreed:

  • to a guaranteed minimum bonus pool for DKIB of €400m, to be allocated to individuals on a discretionary basis according to individual performance, and
  • that staff could and should be told about this

This was announced to DKIB employees by Dr Jentzsch (DKIB's CEO) at a staff meeting on 18 August 2008, which employees could watch via a video link on screens or on their computers.

On 31 August 2008, it was announced that Dresdner Bank would be sold to Commerzbank. A matter of days later, Lehman Brothers collapsed and several banks accepted substantial state funding, including Commerzbank, which received in total €18.2billion from the German government. In view of this, Commerzbank's position regarding the payment of bonuses changed.

On 19 December 2008, employees were sent letters confirming their provisional bonus award. However, the letters said that the award was subject to a 'material adverse change' (MAC) clause, so that the bonus would be adjusted if 'material negative deviations' in DKIB's revenue and earnings, as against the forecast revenue, were identified. However, at a staff meeting the same day, Dr Jentzsch reassured employees that it was very unlikely that Commerzbank management would seek to rely on the MAC clause.

In January 2009, after the sale of Dresdner Bank was completed, Dr Jentzsch was replaced and in February 2009, the employees were informed that, in reliance on the MAC clause, their provisional bonuses had been reduced by 90%.

High Court decision

The judge concluded that Dr Jentzsch's promise in August 2008 gave rise to a contractual obligation to pay discretionary bonuses from a guaranteed minimum bonus pool of €400m.

The judge made the following significant findings:

  • There was no reason why in principle an announcement made to the workforce should not give rise to contractual obligations, provided that:
  • the terms were sufficiently certain, and
  • the bank intended to create legally binding obligations - which was shown by steps taken before the 18 August announcement:
    • the proposed guaranteed minimum bonus pool was approved by the bank's Compensation Committee
    • the proposed announcement of the bonus pool for the purpose of retaining staff was approved by the Board
    • there were references to a 'guaranteed' minimum bonus in HR documentation – if it had not been guaranteed, it would not have achieved its intended purpose of stabilising the workforce and satisfying the FSA's concerns about the need for a retention plan, and
    • statements about the bonus pool in FAQs which were posted on the intranet.
  • The promise to employees that they were entitled to a share in a bonus pool can amount to a contractual commitment to individual employees entitled to be considered for a discretionary share of that pool.
  • The employment handbook expressly stated that unilateral changes to terms and conditions could only be made by a member of HR and that, if the change affected a group of employees, it must be notified by display on notice boards or on the company intranet. The judge considered that there had been an effective change of terms, on the basis that:
  • the transmission of the 18 August announcement over the intranet using a live video link satisfied the second condition, and
  • the first condition was satisfied by an email sent to staff by HR in October 2008, which referred to the bonus pool communicated by Dr Jentzsch and provided further information about the bonus payment process, amounted to a confirmation of the change to employment terms by HR.

Significantly, the judge also noted that, even if the bank hadn't had a contractual obligation to pay the full bonuses, the introduction of the MAC clause would have been a breach of the duty of implied trust and confidence.

Implications for employers

This decision is potentially a valuable support for employees who are given an oral promise by their employer. Oral promises will only amount to a variation of employment terms if the announcement is couched in sufficiently certain terms, with the demonstrable intention of creating legally binding obligations. It will often be difficult on the facts for employees to show that their employer really intended to create binding legal obligations, but employers should still ensure that the precise phrasing of any oral assurances or promises to staff is considered as carefully as written communications.

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.

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