COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (MR JUSTICE NEWMAN)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CARNWATH
MR JUSTICE BODEY
| CANTOR FITZGERALD INTERNATIONAL
|- and -
Mr Timothy Brennan QC and Mr David Craig (instructed by Mishcon de Reya) for the respondent
Hearing dates : 10, 11 May 2004
Crown Copyright ©
Lord Justice Potter :
"69. In 1999 the claimant felt his addiction to alcohol and cocaine was out of hand and he sought help. He went to Dr McGilchrist in July 1999 … I do not accept his evidence that he completely overcame his addiction to cocaine in the time he suggested (by October 1999) but it is likely, and I find, that he had some success in curtailing it. He may have reduced his alcohol intake but he probably continued to drink heavily. The medical evidence does not support the conclusion that in June/July 2000 when he left Cantor he was addicted, but the claim he made to the doctors that he had been free of it for some six months is probably not true.
74. I have concluded that Mr Amaitis began to have his doubts about the claimant's ability to perform in late 1999. Such shortcomings as he perceived were not significant. The claimant's heavy alcohol intake had probably reached levels where from time to time it impacted upon his work, but not so as to render him unfit to do the job. Once the seeds of doubt had been sown, I am satisfied Mr Amaitis did nothing to prevent their unrestrained development.
75…. Having considered the evidence in connection with Cantor's complaints, including the occasions complained about by the claimant, the effect of it does not support the conclusion that he was failing in grave or serious respects, as opposed to fault being found with his judgment and availability whenever an opportunity arose. Important as these were to Mr Amaitis, they were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance. On an objective view of the relationship under the contract, it was under strain. The increase in tension probably increased the propensity of the claimant to cause annoyance to Mr Amaitis, but unless the differences were properly resolved and not exacerbated, it was inevitable the relationship would break down.
76. In my judgment the contract broke down and the position of the claimant became intolerable because Mr Amaitis took every opportunity to vent his disapproval of the claimant, to the claimant and sometimes in the presence of others. He demonstrated by his outbursts that he had lost faith in him and gave him no chance to re-establish the trust and confidence which would recreate the 'faith'.
77. Far from having any discussion and giving advice he uttered intemperate, summary views in foul and abusive language. His solution seems to have been to frighten the claimant into performing according to the standards he required and to make it plain that any contrary view which questioned his authority would not be tolerated.
79.I have reached the firm conclusion that Mr Amaitis' deliberate course of conduct from January 2000 to 28 June 2000 breached the implied term of trust and confidence in the claimant's contract of employment. As a senior managing director, having responsibility for managing employees, his position became intolerable. The outbursts of Mr Amaitis to the claimant were bound to become common knowledge in Cantor. Without Mr Amaitis' support, his authority to manage employees was severely undermined."
Remuneration under the contract
"In addition the Company [CFI] may in its discretion, pay you an annual discretionary bonus which will be paid within 90 days of the financial year-end (30 September) the amount of which shall be mutually agreed by yourself, the Chief Executive of the Company and the President of Cantor Fitzgerald Limited Partnership, however the final decision shall be in the sole discretion of the President of Cantor Fitzgerald L.P. … It is a condition precedent to any payment hereunder that you shall at all relevant times exercise best endeavours to maximise the commission revenue of the Global Interest Rate Derivatives Business and that you shall still be working for and not have given notice to or attempted to procure your release from this Agreement nor have given notice to the Company in accordance with clause 11(h) on the date such bonus is due to be paid."
The Decision of Newman J
|Fixed remuneration||£250,000 – 10,416||= £239,584
(rounded up to £520,000)
The damages accordingly were:-
£520,000 less 10 months received (10 x £20,833) = £312,000
"Basic salary - £250,000;
Discretionary bonus - £450,000.
Credit was given for £100,000 received by the claimant from his new employment. Total: £600,000"
"85. Contrary to Mr Béar's submission [Lavarack v Woods] does not govern the instant claim because the claimant had the benefit of a term in his contract which entitled him to receive a discretionary bonus, whereas Mr Lavarack was arguing that, had his contract survived, he would have been entitled,
"under some imaginary future new agreement which the defendants did not make with him but might have done if they wished" [Diplock LJ p297E]
The issue which arises for determination is, what would Cantor have been obliged to pay according to the provision entitling the claimant to a discretionary bonus? He is entitled to no more than that which Cantor would have been obliged to pay.
86. In my judgment the two relevant cases which disclose the correct approach are Clark v Nomura International Plc  IRLR 766, and Clark v BET Plc  IRLR 348. Cantor was obliged to exercise its discretion reasonably in good faith. Had it refused to exercise its discretion at all or done so unreasonably or in bad faith, it would have acted in breach of contract."
"89. The principal battleground has been joined over whether Mr Amaitis would have been obliged to award a bonus for 2000 or 2001. The claimant submits that his remuneration package for both years would have been similar to that awarded to other senior managing directors on other desks and in line with one who worked on the same desk and another who worked on the desk after the claimant left on 28 June 2000.
90. In my judgment the claimant was not entitled to expect parity. He was entitled to a fair and rational assessment of his entitlement. For the purpose of the court looking at the position the payment to others was relevant to the probability of a bonus being paid to the claimant.
91. Mr Amaitis set out the criteria for awarding a bonus in paragraphs 11-18 of his third witness statement, which because it contained profit figures and remuneration for others, remained confidential. His approach can be summarised as follows. The following factors would have been particularly important.
(i) Whether employment costs exceeded 50% of revenue at the desk.
(ii) A broker could normally expect 30-35% of his personal revenue and a discretionary bonus will make up the difference, if any, between salary and that figure.
(iii) The bonus scheme can be used to 'weed' out non-producers.
(iv) Travel and entertainment should be at 4%.
(v) He looked for 20% bottom line profit on a desk.
92. In my judgment certain basic facts about the claimant's remuneration at Cantor need to be remembered. In each of 1997 and 1998 he received £400,000. In 1999 his salary was fixed at £250,000 with a guaranteed bonus for 2000 of £100,000 and he received a once for all bonus of £100,000, in total £450,000. I regard the submissions for the year 2000 to the effect that he would have had his fixed salary reduced and would only have been paid his guaranteed bonus, as envisaging a highly unlikely outcome.
93. The London Interest Rate Derivatives desk was running at a significantly higher percentage than 50% for cost over revenue. The figures suggest at least 63% and perhaps higher. But there were factors which contributed to this, which were not in dispute:
(i) that the New York figures were low when business had been poor;
(ii) expensive fixed remuneration for 'star' brokers had been set in an attempt to improve the profitability.
Mr Amaitis would not have ignored these factors.
94. The travel and expenses were over 4% but so were other desks. The other desks where bonuses were paid were not invariably achieving the strict letter of the criteria. Indeed the criteria were not fixed (as with the reduction in fixed salary) and the purpose of the bonus was to create an incentive without losing the disciplinary control which it could have. In my judgment the claimant would have received a discretionary bonus [assessed by the judge as £180,000 for year 2000].
95. I reject the submission that had Mr Horkulak not been constructively dismissed he would have been dismissed within about three months after June 2000. Had Cantor not breached the contract of employment the capacity of the claimant to perform was not sufficiently affected by alcohol or cocaine so as to render him unfit for work. His excessive use of alcohol had a long history and he had, when necessary, taken steps to reduce it by seeing his doctor and a consultant. Even after the treatment he had received at the hands of Mr Amaitis in 2000 his condition as recorded by the Priory Hospital did not disclose a dependence equal to the 1999 level when he had managed to maintain his position and achieve promotion."
"96.The claimant maintains that his remuneration package for 2001 would have been in the region of £900,000. In reaching this figure he urges that account should be taken of the total package of remuneration received by other senior managing directors, including any bonus in partnership units and share options. Where awarded, a discretionary bonus could be paid in partnership units. Other managers received housing and car allowances. I approach the figures by reference to the likely outcome from a fair and rational exercise of discretion and the expectation, engendered by his promotion to a senior level, that his remuneration would be substantially larger from year to year.
97.I do not accept that there is sufficient evidence to assume that had the claimant been in charge of the desk the 50% threshold would have been exceeded.
98.It is not disputed that 2001 was a better year for the desk. I see no ground for concluding that had the claimant remained in charge he would have failed to achieve improvement as well. The New York Interest Rate Options Desk showed a significant profit. There was a profit for the area (London, New York and Tokyo) but it was less than the 20% criterion. But Tokyo had not fared well.
99.Mr Amaitis suggests that the turnaround was due to better control of employment costs and travel and entertainment, which control the claimant would not have achieved. This conclusion is based upon an assertion that the claimant was so far behind the other managers in 2000 that the position would have continued. The figures justified a conclusion that he had problems, namely employment costs with high fixed remuneration and low returns in New York. Travel and entertainment control, by withdrawal of the corporate credit card, was taken by Cantor and it is likely to have contributed to an improvement. I have insufficient evidence to justify the conclusion that the claimant's ability to gain control was so significantly less than the others that he would not have done so.
100.However, having regard to the nature of the evidential exercise and the element of uncertainty which is involved, I approach the conclusion by exercise of caution and moderation.
101.In my judgment having regard to the claimant's level of responsibility it is highly likely that his remuneration package for the year 2001 would have been as follows:
I have reached the figure of £450,000 by taking account of the following:
(i) The claimant would have received total remuneration significantly over his previous year, namely £520,000;
(ii) He would have met the principal criteria;
(iii) His basic salary was set in 1999 at a lower threshold than others in an equivalent position and parity with the others was not a contractual right;
(iv) A total package of £700,000 would have been less than the others – compared with some by a very large margin."
The Grounds of Appeal
Ground 1 - Discretion
"In common with other implied terms, it must yield to the express provisions of the contract. As Lord Millett observed in Johnson v Unisys it cannot sensibly be used to extend the relationship beyond its agreed duration; and, their Lordships would add, it cannot sensibly be used to circumscribe an express power of dismissal without cause. This would run counter to the general principle that an express and unrestricted power cannot in the ordinary way be circumscribed by an implied qualification: see Nelson v British Broadcasting Corporation  IRLR 148 (where it was sought to imply a restriction of location into a contract which contained an unqualified mobility clause). Roskill LJ said at p.151: ' … it is a basic principle of contract law that if a contract makes express provision … in almost unrestricted language, it is impossible in the same breath to imply into that contract a restriction of the kind that the Industrial Tribunal sought to do'."
"35. … At common law the contract of employment was regarded by the courts as a contract like any other. The parties were free to negotiate whatever terms they liked and no terms would be implied unless they satisfied the strict test of necessity applied to a commercial contract … But over the last 30 years or so the nature of the contract of employment has been transformed. It has been recognised that a person's employment is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem. The law has changed to recognise this social reality …
36. The contribution of the common law to the employment revolution has been by the evolution of implied terms in the contract of employment. The most far reaching is the implied term of trust and confidence. But there have been others."
"… the authorities do not justify any automatic implication, whenever a contractual provision exists putting one party at the mercy of another's exercise of discretion. It all depends on the circumstances …" Gan Insurance v Tai Ping Insurance  EWCA Civ 1047  2 All ER (Com) 299 per Mance LJ at 322(e)
"Not only must the discretion be exercised honestly and in good faith but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably.": see Abu Dhabi National Tanker Company v Product Star Shipping Ltd (The "Product Star")  1 Lloyds LR 397 per Leggatt LJ at 404.
"What was proscribed was unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed."
"I know of no principle on which he can claim as damages for breach of one service agreement compensation for remuneration which might have become due under some imaginary future agreement which the defendants did not make with him but might have done if they wished. If this were right, in every action for damages for wrongful dismissal, the plaintiff would be entitled to recover not only the remuneration he would have received during the currency of his service agreement but also some additional sum for loss of the chance of its being renewed upon its expiry." (p.20 d-f).
"A plaintiff in an action for damages for wrongful dismissal can rely only on the fact that the defendant was obliged to carry out the contract sued upon. His prospects in terms of money or monies' worth resulting from the carrying out of the contract may be conditioned by the estimated impact of external events on the results of the carrying out. But it has never been held that the plaintiff can claim any sum on the ground that the defendant might after the repudiation date have voluntarily subjected himself to an additional contractual obligation in favour of the plaintiff."
"In the present case, if the defendants had continued their bonus scheme, it may well be that on the true construction of this contract of employment the plaintiff would have been entitled to be recompensed for the loss of the bonus to which he would have been likely to be legally entitled under his service agreement until its expiry"
"From the wording of the contract, in particular from the fact that the word 'shall' plainly governs 'be increased', it seems to me that there was here a contractual obligation on BET to provide, and a contractual right on Mr Clark to receive, an annual upward adjustment in salary. It is only the amount (if any) that is in the absolute discretion of the Board. In assessing the amount there is an obligation to consider figures from a comparative group of companies.
Accepting the principle that a defendant in an action for breach of contract "is not liable for not doing that which he is not bound to do" per Diplock LJ in Lavarack v Woods of Colchester  1 QB 278, 294 B-C, if the board had capriciously or in bad faith exercised its discretion so as to determine the increase at nil and therefore to pay Mr Clark no increase at all, that would have been a breach of contract. This is a case where BET have repudiated their obligation altogether and the question I have to decide on the facts is what position Mr Clark would have been in had BET performed this obligation: see the judgment of Banks LJ in Abrahams v Herbert Reiach Ltd  1 KB 477, the passage at p.480 with which Scrutton LJ agreed at p.481. Nor should I assume that any discretion would have been exercised so as to give the least possible benefit to the plaintiff if such an assumption would on the facts be unrealistic."
"… there may be relevant factors which have led the employer to dismiss the employee other than the simple desire to avoid paying a large bonus … which relate to some deficiency in the employee's performance of his contract and which, while not justifying summary dismissal, nevertheless caused or contributed to a decision to dismiss. While it may be difficult to see how it could lead to a substantial reduction or total extinction of the bonus entitlement if the allegedly inadequate performance is not sufficient to justify summary dismissal, nevertheless the inadequacies in performance can and will fall to be considered on the assessment of the bonus … because they impact upon 'individual performance'." (para 38.2 p.774)
"Quite apart from the additional contractual straitjacket for the discretion in this case, the employer's discretion is in any event, as a result of the authorities, not unfettered, as both sides have accepted to be the law in this case. Even a simple discretion whether to award a bonus must not be exercised capriciously (United Bank Ltd v Akhtar  IRLR 507 EAT, Clark v BET plc  IRLR 348 and Midland Bank plc v McCann 5/6/1998 unreported EAT) or without reasonable or sufficient grounds (White v Reflecting Roadstuds Ltd  IRLR 331 EAT and McClory v Post Office  IRLR 159). I do not consider that either of these definitions of the obligation are entirely apt, when considering whether an employer was in breach of contract in having exercised a discretion which on the face of the contract is unfettered or absolute, or indeed even one which is contractually fettered such as the one here considered. Capriciousness, it seems to me, is not very easy to define: and I have been referred to Harper v National Coal Board  IRLR 260 and Cheall v APEX  IRLR 362. It can carry with it aspects of arbitrariness or domineeringness, or whimsicality and abstactedness. On the other hand the concept of 'without reasonable or sufficient grounds' seems to me to be too low a test. 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 could 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 could be a good example) i.e. that no reasonable employer would have exercised his discretion in this way. I canvassed this provisional view in the course of argument with both counsel, and neither appeared to dissent, and indeed Mr Temple QC in his closing submissions expressly adopted and used the test of irrationality. Such test of perversity or irrationality is not only one which is simple, or at any rate simpler to understand and apply, but it is a familiar one, being that regularly applied in the Crown Office or, as it is soon to be, the Administrative Court. In reaching its conclusion, what the court does is thus not to substitute its own view, but to ask the question whether any reasonable employer would have come to such a conclusion."
"Of course, if and when the court concludes that the employer was in breach of contract, then it will be necessary to reach a conclusion, on the balance of probabilities, as to what would have occurred had the employer complied with its contractual obligations, or, as Timothy Walker J put it in Clark v BET plc, assess, without unrealistic assumptions, what position the employer would have been in had the employer performed its obligation. That will involve the court in assessing the employee's bonus, on the basis of the evidence before it, and thus to that extent putting itself in the position of the employer; but it will only do it if it is first satisfied, on the higher test, not that the employer acted unreasonably, but that no reasonable employer would have reached the conclusion it did acting in accordance with its contractual obligations, and the assessment of the bonus then of course is by way of an award of damages." (para 40 pp.774-775)
"the defendant had two contractual obligations, to assess the bonus dependent upon individual performance by the claimant, and not to do so irrationally or perversely (or capriciously). There is therefore room for abuse of the discretion, i.e. if in whole or in part discretion was exercised otherwise than 'dependent upon individual performance', quite apart from the general concept of perversity or irrationality or capriciousness to which I have referred above." (para 41 p.775) (emphasis added)
Grounds 2 and 3 – Measure of Damages / Level of Award
"…to… assess, without unrealistic assumptions, what position the employer would have been in had the employer performed its obligation. That will involve the court in assessing the employee's bonus, on the basis of the evidence before it, and thus to that extent putting itself in the position of the employer…"
In that passage, he was summarising the approach adopted by Timothy Walker J in Clark v BET plc (himself following Banks LJ in Abrahams v Herbert Reiach). In my view, the court is not required to undertake the unattractive task of setting a threshold of irrationality. If the company's obligation was to make a fair and rational assessment, the court's task is to decide how in practice it would have fulfilled that obligation. Thus we reject Mr Béar's first submission.
Issues on quantum
(a) the judge relied on the claimant's expectations, engendered by his promotion to a senior level, that his remuneration would be substantially larger from year to year when there was no evidence of such expectation;
(b) the judge's starting point of £450,000 for those expectations (reflected in the bonus figures for 2000 and 2001) was too high;
(c) the judge appears to have reached his figures by comparison with the bonuses/total remuneration of his fellow managing directors when there was unchallenged evidence from Mr Amaitis that the assessment of the bonus paid to each Senior Managing Director was an individual exercise in respect of different people with different desks and responsibilities;
(d) the claimant's performance in relation to 'T&E' (Travel and Entertainment) costs on his desk was such that the judge should have found that the claimant was in breach of the condition precedent requiring him to use 'best endeavours' contained in clause 3(b)(ii); similarly, the judge should have found breach of the best endeavours clause by reason of the claimant's use of cocaine and consumption of excessive alcohol.
"There is one further distinction which must be mentioned, namely that which exists between (a) an obligation expressed in terms of a range of alternatives from which the promisor may choose and (b) a single obligation expressed in an indefinite way. A duty of the latter kind may often be construed as an obligation to act reasonably, and the damages will be assessed on the basis of what would have been reasonable. That this distinction does exist cannot, I think, be disputed, and it presents no serious theoretical difficulty when it is possible to say that there is one reasonable mode of performance, and one alone. But what of the case where there is more than one reasonable method, or a whole range of reasonable methods shading into one another? One possible view is that the court should try to forecast how the defendant would have performed but for the repudiation. In my opinion this approach is inconsistent with principle, since the defendant may in the event have done no more than was necessary to qualify as reasonable, and to assess damages on any other basis would be to penalise him for failing to do something which he was not obliged to do. The answer must, in my judgment, be that the court is to look at the range of reasonable methods, and select the one which is least unfavourable to the defendant, bearing in mind, of course, that in deciding what methods qualify as reasonable the question must be approached with the interests of both parties in mind. This is, I believe, the way to account not only for the decision in Abrahams v Herbert Reiach Ltd, but also for the divergences of approach which might seem to exist between the various judgments, and within the individual judgments, delivered in that case."
"It is well settled that the court will assume that the defendant would have performed those obligations in the way least onerous to himself…
All this makes perfectly good sense when damages depend upon a prediction of how the defendant would have performed outstanding obligations which gave him a choice of what to do. But this is not such case…. The P.R.S. had to be 'calculated in good faith' and therefore had to be a bona fide estimate made without regard to whether it would have produced a higher or a lower price…." (p 1446 F-H))
"I have concluded that Mr Amaitis began to have his doubts about the claimant's ability to perform in late 1999. Such shortcomings as he perceived were not significant"
and, at paragraph 75:
"Having considered the evidence in connection with Cantor's complaints, including the occasions complained about by the claimant, the effect of it does not support the conclusion that he was failing in grave or serious respects, as opposed to fault being found with his judgment and availability whenever an opportunity arose. Important as these were to Mr Amaitis, they were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance."
"The claimant's heavy alcohol intake had probably reached levels where from time to time it impacted upon his work, but not so as to render him unfit to do the job … [the evidence] does not support the conclusion that he was failing in grave or serious respects … [the matters complained of by CFI] were not seen at the time as disabling the claimant from the performance of the contract, nor do they support a case for the effects of alcohol and probably some cocaine having really serious consequences on his performance."
Conclusion on quantum
Ground 4 - Mitigation
"Alcohol relapsed over Christmas – felt confident that he could control his drinking – started with a pint or two, within a few days was reinstated with his habit. Few weeks later, started using cocaine as well … heavy use as much as when he was using when he saw Dr McGilchrist in July 1999."
"Since I have concluded that Cantor wrongfully terminated the contract, the refusal of Mr Amaitis to acknowledge the wrong it had done, in my judgment exacerbated the original breach. On balance I have concluded that, had it responded and accepted liability it is unlikely he would have relapsed. In the circumstances it is not open to Cantor to suggest the claimant failed to mitigate his damage. In my judgment Mr Brennan was correct to submit that the episode was part of the continuum flowing from the breach." (emphasis added)
"Mr Justice Newman: The case for the defendant is, whatever was the position in June 2000, by the end of 2000 he was fit and ready to go and should have found other employment; whereas the case for the claimant is: no, not so, this was merely a continuation and therefore he was out of a job … until a later date, therefore the court should conclude that the defendant is responsible for what occurred in 2001 and not the claimant.
That in very simple terms is the issue I have …
A. That is what I did think was the underlying issue. Sure, my understanding is that there is a continuum, that he was making good progress towards the end of 2000; and then probably chiefly because of relapse of drinking and cocaine use this stress-induced adjustment disorder relapsed again.
Perhaps the best indication that there is continuity was that Mr Horkulak's phobic anxiety state, this is a very particular, what one might call as it were subset, of this adjustment disorder, he has a phobic anxiety about Mr Amaitis. It is very clear cut, very specifically triggered by anything to do with Mr Amaitis. That has been a feature throughout. Obviously, like everything else, it waxes and wanes, but it has always been there since I have known him, and it has certainly been there during 2001 "
Ground (5) – Credit for Earnings