United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR STUART RITCHIE (of Counsel) Instructed By: Messrs Allen & Overy Solicitors One New Change London EC4M 9QQ
For the Respondent	IN PERSON


 


MR JUSTICE WALL:

1. The question in this appeal is whether or not the Employment Tribunal sitting at London (North) on 12 July 1999 and 6 October 1999 was wrong in law to make an award to Mr Farren in the sum of $49,640 representing a performance related bonus which Mr Farren claimed he had earned during the calendar year 1998 in the course of his employment as Managing Director of Thomson Financial Publishing – Europe (TFP Europe). The reasons for the Tribunal's decision were sent to the parties on 16 February 2000. In the proceedings before the Tribunal, Mr Farren was the Applicant. The Respondent was Thomson Financial Services Ltd (Thomsons) and it is Thomsons who are the Appellants before us.
2. The Tribunal also reached a unanimous decision that Mr Farren had been unfairly dismissed and awarded him compensation for unfair dismissal in the sum of £12,616. This sum, as we understand it, has been paid, and the only outstanding issue between the parties is the question of Mr Farren's bonus.
3. The question of Mr Farren's bonus for 1998 depends critically upon the interpretation of his contract with Thomsons. On 10 February 1997, Mr Farren signed a letter bearing the same date, written by Jon Baynes, Thomson Human Resources Advisor, which sets out the terms of Mr Farren's contract in some detail. For present purposes, the relevant paragraphs are 3 and 23. Paragraph 3 reads as follows:

"You will be eligible for a performance related bonus; The exact amount of bonus payable annually will depend on the performance of TFP Europe, as detailed in Exhibit A. (Please note however, that any bonus payment is made at the discretion of the Company and may not be paid in whole or part, if for any reason you are no longer employed by the Company, or under notice, whether given by you or the Company)."

4. Paragraph 23 of the contract provides:

"23 In the event of any discrepancy of information between the terms of this Contract and information provided to you orally or in writing at interview, the terms of this Contract shall prevail. No variations to the terms will be valid unless they are authorised in writing by the Human Resources Department."

5. Exhibit A to the contract which Mr Farren signed on 12 February 1997 reads as follows:

"Each year, a potential bonus ("Target Bonus") will be calculated based on the "Net Contribution" of TFP Europe. Net Contribution is defined as TFP revenues generated in Europe less corresponding expenses as detailed below.

Each year, a Target Bonus will be earned if the Net Contribution meets or exceeds the "Target Contribution". This Target Bonus will be £15,000 plus 20% of the amount that Net Contribution exceeds Target Contribution. The Target Bonus, if earned, will be paid by February 15^th of the following year. This amount will be paid only if Mr Farren is employed by Thomson Financial Services through December 31^st of the target year, unless Thomson Financial Services elects to terminate this agreement pursuant to clause #20. In such case the bonus, if otherwise earned, will still become due and payable.

Target Contributions are based on achieving 15% per year contribution growth. Acquisitions made or significant changes in requirements for the TFP-Europe office may require an adjustment to the Target Contribution. A one-time expense reduction of $50,000 has been applied to the 1997 target. Thus the Target Contributions are as follows: 1997: $1,540,000; 1998: $1,828,000; 1999: $2,103,000; 2000+: prior yr target + 15%."

6. The document continues as follows:

"Definition - Basis

Revenue All TFP European revenues

Expenses:

Salaries As incurred

Commissions from prior yrs As charged to current year

Commissions from current yr As incurred for current year

Bonus As earned

Payroll Taxes As incurred

Benefits As incurred

Temps/Consultants As incurred

Facilities Charges As charged by TFS – Europe

Travel & Entertainment As incurred

Supplies As incurred

Depreciation Amortization of TFP-Europe fixed asset purchases

Recruiting As incurred

Production Allocated based on per unit cost of products distributed

Promotion TFP charges and those incurred directly by TFP-Europe

Royalties As incurred for European sales

Bad Debt As incurred

Other As incurred

Total Expenses Total of above expenses

Net Contribution Revenue less Total Expenses"

7. It is common ground between the parties that during the year 1997 Mr Farren did not meet the target of $1,540,000 referred to in Exhibit A of his contract. The figures, which we were told were not in dispute, are contained in a document which Mr Stuart Ritchie, Counsel for Thomsons, accepted may well have been produced only after Mr Farren had left the company. We do not propose to set out the detail of the figures in the document which is at page 22 of our bundle: suffice it to say that the revenue generated during 1997 was $2,334,731: that the total charges against that sum amounted to $999,506. Accordingly, the net contribution was $1,335,225, a shortfall of some $204,775 on the target figure of $1,540,000.
8. Mr Farren acknowledged that he had not earned a bonus in 1997, and did not dispute the figures contained in the right-hand column of the document on page 22. He argued, however, that the reason he did not earn his bonus was because of the inherent unfairness in including US Charges in the calculation, when he was responsible for the European side of the business. He pointed out that for the year 1997, the sub-total of US Charges amounted to $747,378. Their removal from the equation would, plainly, have taken the net contribution well above the 1997 target figure.
9. On 17 February 1998, Mr Thomas Eder, the President and Chief Executive Officer of Thomson Financial Publishing based in Illinois wrote a letter to Mr Farren in the following terms:

"Dear Nigel:

I am pleased to amend your existing contract of employment (copy attached) as follows:

Clause #20: [this relates to periods of notice and is immaterial for present purposes]

Exhibit A: The original Exhibit A is superseded by the attached Exhibit A – Revised. (You will note that I have substantially reduced the financial targets in order to enhance your opportunity for bonus achievement. Production charges, previously allocated at $360k, are no longer included in the calculation. I have enclosed the 1998 Plan worksheet for your reference).

All other aspects of your existing employment contract shall continue in full force. If you understand and agree to the amendments of your agreement, please sign below and on Exhibit A – Revised and return an original of each to me for my records.

If you have any questions, please give me a call.

Best regards."

10. The first two paragraphs of Exhibit A are in identical terms to those contained in the original Exhibit A which we have set out above. There are, however, differences in the third narrative paragraph which now reads as follows:

"Target Contributions are based on achieving 15% per year contribution growth. Acquisitions made or significant changes in requirements for the TFP-Europe office may require an adjustment to the Target Contribution. The Target Contributions are as follows: 1998: 1,808,000; 1999: $2,080,000; 2000 +: prior yr target + 15%."

In the "Definition – Basis" section of the revised Exhibit A, the items are the same with the exception that the item in the original Exhibit A:

"Production Allocated based on per unit cost of product distributed"

has been removed. Mr Farren signed this document on 19 February 1998, the same date as he counter-signed Mr Eder's letter.

11. The 1998 Plan worksheet, which accompanied Mr Eder's letter, duly set out the means whereby the Target Contribution of $1,808,000 is to be achieved. This document takes into account not only revenue and expenses relating to what it describes as "TFP Europe London" but also revenue and expense relating to what it describes as "TFP Europe Skokie", Skokie being the location of the headquarters of Thomson Financial Publishing. The projected income for TFP Skokie is $400,000 and the projected expenses $463,800. The total revenue projected for TFP Europe London is $2,375,000 with expenses of $503,200. Thus the calculation for Mr Farren's bonus is total revenue of $2,775,000 with total expenses of $967,000 leaving $1,808,000, the figure contained in the revised Exhibit A.
12. Mr Farren's case before the Tribunal and before us was that neither US income nor US expenses would be taken into account when calculating the 1998 bonus and that this was expressly agreed between himself and Mr Eder. On this basis, he argued that the proper way to calculate his bonus was by reference to the profit and loss account for Thomsons for the year ending 31 December 1998. That document is in our papers at page 23. It appears to show an operating margin of $2,045,000 against a budgeted figure of $1,871,803 with what is described as the resultant 'variance' being $173,197. It appears to have been this figure which the Tribunal lit upon in order to make its award on the basis that 20% of $173,197 equals $34,639.40. This, added to $15,000 equals $49,639.40 which the Tribunal appears to have rounded up to $49,640.
13. Mr Ritchie, for the Appellant argues that there was no proper contractual basis for the Tribunal taking the profit and loss account as the correct calculation to work out Mr Farren's bonus, and that the proper contractual approach was to look at the 1998 equivalent of the 1997 figures on page 22 of our bundle. That document, which showed the 1998 target at the contractual $1,808,000 showed a net contribution of $1,361,721, a figure well below Mr Farren's target.

The approach of the Tribunal

14. In his skeleton argument, Mr Ritchie attacks the reasons given by the Tribunal for their decision. He described their reasoning as vague, general and extraordinarily cryptic. Given that they had received detailed written submissions which were amplified orally, he submitted it was remarkable that no reference was made to them. There was only one reference to a submission made by the Appellant. He complained that the Tribunal gave insufficient reasons to enable the Appellant to know why it had lost, and relied on the well known case of Meek v City of Birmingham District Council. He submitted that this case presented an unusually strong example of a Tribunal's failure to give adequate reasons on what became the key issue presented to it.
15. We regret to say that we feel obliged to agree with these criticisms of the Tribunal's reasons. Whilst we acknowledge that they were also, to an extent, dealing with other matters now resolved, there is an almost total absence of narrative, and the critical issue in the case – the 1998 bonus – is approached in a way which leaves us wholly unclear about the Tribunal's reasoning. There is, for example, no discussion of the relevant contractual terms, and no analysis of the argument put forward on behalf of the Appellant.
16. One obvious error, in paragraph 12 of the reasons, is the assertion that the Appellant admitted that Mr. Farren "had achieved the 1997 target and they alleged that the 1998 contract was varied". It is common ground that Mr Farren did not reach the 1997 target, and we do not understand what is meant by the phrase "they alleged that the 1998 contract was varied".
17. We think that the inadequate approach of the Tribunal will become clear if we set out paragraphs 14 to 15 of the Extended Reasons:

"14 The Contract of Employment set out in a letter of 10 February 1997 stated "you will be eligible for a performance related bonus the exact amount of bonus payable annually would depend on the performance TFP Europe as detailed in exhibit A. Please note however that any bonus payment is made at the discretion of the company and may not be paid in whole or part if for any reason you are no longer employed by the company or under notice whether given by you or by the company. The 1998 account were prepared (sic) and sent to the Applicant in December 1998 which showed the United Kingdom charges & expenses separately from the United States charges and expenses.

Submissions

15 From the evidence before the Tribunal, the Tribunal accepted the Applicant's contention that the two columns set out in the documents relating to the targets stated and did not relate to a combined figure of London and the United States as was contended by the Respondent. It is accepted that the bonus was re-negotiated in 1998 because the Applicant had not received sufficient monies based on the calculation of the 1997 figures. Therefore the contention of the Respondents that the Applicant had not reached his target in 1998 by combining the United States figure and the London figure is rejected. It is accepted that the Applicant thought that he was reaching his target and was not informed that his targets had not been reached for 1998 until after his dismissal. We accept therefore his contention made in the written submissions that he was owed $49,640 which was calculated at being $15,000 plus 20% of excess over plan of $173,200.

The Tribunal concluded that the Applicant had reached the target set out for past years and the sum of $49,614 was unlawfully deducted from his wages contrary to Section 13 of the Employment Rights Act."

18. This, in our judgment, is an inaccurate and wholly inadequate analysis of the contract and the consequences flowing from it, and we have no hesitation in concluding that on any view the Tribunal's decision fell well below the modest standards set by Meek v Birmingham City Council. It follows that in any event the appeal will have to be allowed. The question is: should it be remitted to a differently constituted Tribunal to be reconsidered, or is it possible for us to substitute our decision for that of the Tribunal.
19. Mr. Ritchie invited us to take the latter course. He said that the interpretation of the contract was a matter of law, upon which we could properly adjudicate.. His primary submission was that the contract could properly only be construed in one way, and if it was, the inevitable result was that Mr Farren's claim was doomed to failure.
20. The difficulty which Mr Farren faces, it seems to us, is that his interpretation of the contract, and in particular the revised Exhibit A and the 1998 plan, is wholly inconsistent with the documentation. In his letter of 17 February 1998, Mr Eder made it clear that he was excluding production charges and reducing the net contribution by $20,000. These contractual changes, which Mr Farren agreed, are reflected in the document on page 22. Mr Farren accepts that the 1997 figures reflected the original contract, and it seems to us inevitable, therefore, that the 1998 figures on page 22 reflect the variations in the contract agreed by Mr Farren in February 1998. The 1998 plan is, in our view, plainly a contractual document. It was sent by Mr Eder with the letter of 17 February, and we feel quite unable to construe it in the manner suggested by Mr Farren. If US revenue and expenses were to be excluded from the bonus calculation, why should they be specifically included in the 1998 plan? The idea that Mr. Eder and Mr. Farren agreed terms which were wholly inconsistent with or not inserted into Mr. Eder's letter of 17 February 1998 simply does not bear examination.
21. In our view, the position is perfectly straightforward and admits of only one construction. The variations in the 1997 contract negotiated between Mr Farren and Mr Eder are contained in the documents on pages 19, 20 and 21 of our bundle. In our judgment, those documents are capable of only one construction, namely that the 1998 bonus was to be calculated on the basis of the items contained in the 1998 plan. When that exercise is carried out, as it is on page 22, there is a shortfall of some $446,279.
22. Mr Ritchie told us that there was no income generated by TFP Europe Skokie in 1998. No request for information designed to challenge that assertion was sought before the Tribunal, and there would, accordingly, be no basis, as we see it, to challenge the 1998 figures as therein set out. Even if one is sceptical about the bad debt figure of $200,000, its removal from the equation does not, in our view, materially assist Mr Farren.
23. In these circumstances, quite apart from the inadequacies of its reasons, the Tribunal was in error in its construction of the contact. Accordingly, the appeal will be allowed and paragraph 2 of the Tribunal's decision set aside.