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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Brogden & Anor v Investec Bank Plc  EWHC 2785 (Comm) (06 August 2014)
Cite as:  EWHC 2785 (Comm),  IRLR 924
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Strand, London, WC2A 2LL
B e f o r e :
| Andrew Brogden
|- and -
|Investec Bank Plc
Jonathan Nash QC & Scott Ralston (instructed by Sidley Austin LLP) for the Defendant
Hearing dates: 15-18, 21-24, and 29 July 2014
Crown Copyright ©
|The bonus clause||2|
|The arguments in brief||6|
|B. FACTUAL BACKGROUND||12|
|The claimants join Investec||13|
|The Structured Equity Derivatives business||15|
|Investec retail structured products||17|
|Bonuses for 2008/2009||26|
|Bonuses for 2009/2010||28|
|Bonuses for 2010/2011||31|
|C. THE ISSUES||33|
|Accord and satisfaction||33|
|The rate issue||35|
|D. WAS THERE AN ORAL AGREEMENT?|
|The alleged oral agreement||39|
|The claimants' evidence||42|
|The Bank's evidence||47|
|The claimants' credibility||49|
|No documentary evidence||52|
|The claimants' own evidence does not support their case||66|
|Other matters allegedly agreed||69|
|E. INTERPRETATION OF THE BONUS CLAUSE||73|
|The applicable legal principles.||74|
|The meaning of EVA||75|
|Good faith and rationality||91|
|Discretion and its limits||95|
|The allegations of bad faith and irrationality||102|
|F. THE RATE ISSUE||104|
|The claimants' case||105|
|G. OTHER ISSUES||118|
|Reserving for kick out products||119|
|Adjustments to the Funding Gap Reserve||123|
|The 'profit payaways' issue||133|
|The 'early bird' issue||142|
Mr Justice Leggatt :
The bonus clause
"In your second financial year of operation starting on 1 April 2008, the bonus calculation will be based on an EVA formula calculated as 40% of the EVA generated by the Equity Derivative business. The bonus pool available for distribution to members of the team will be calculated after deduction of NI.
In the third financial year starting on 1 April 2009 and thereafter the bonus calculation will be normalised based on a formula calculated as 30% of EVA generated by the Equity Derivative business. The bonus pool available for distribution to the members of the team will be calculated after deduction of NI, an amount for Head Office and an amount for TSF support.
The proportion of the available bonus pool to be distributed to each member of the team in any year will be determined by you following consultation with David Van Der Walt.
The bonus pool will be paid to members of the team on or before 23 June in each year and no part of the bonus pool in each financial year will be deferred."
The arguments in brief
B. FACTUAL BACKGROUND
The claimants join Investec
The Structured Equity Derivatives business
Investec retail structured products
Bonuses for 2008/2009
Bonuses for 2009/2010
"We seem to be missing each other a lot on the issue. Where I feel the bank is trying to be generous you seem to feel that we are not coming to the party. That does not mean that I am not equally concerned as I thought that there was a reasonable understanding of how we operate and what would be expected. That being said this does not preclude us from having a good discussion around the issue."
Mr Van Der Walt went on to set out in the email a calculation of EVA which resulted in a bonus pool available to the desk of £4.2m. He continued:
"Against this background it was felt by the group and myself that £6 million would be a reasonably decent gesture as extra recognition for some of what the desk has achieved and trying to marry expectations to the reality that faces us."
The offer to make available a bonus pool of £6m was accepted by the claimants and the distribution of this pool among the SED team was also then agreed with Mr Van Der Walt.
Bonuses for 2010/2011
"Obviously the reported P&L is not too pretty this year, but we would make the case that for a variety of reasons (some good, some bad) this is not a fair reflection of the achievements of the business."
C. THE ISSUES
Accord and satisfaction
The rate issue
i) The 'institutional market rate' of interest that the Bank would have been required to pay had it had to borrow in the wholesale lending market similar term funds to those deposited which is the claimants' case; or
ii) The interest rates actually credited to the SED desk by the Bank's Central Treasury on the funds as the Bank contends.
D. WAS THERE AN ORAL AGREEMENT?
The alleged oral agreement
i) Profits from trades would be recognised immediately rather than accruing over the life of the trade; the SED business would operate on a mark to market basis and therefore unrealised profits and losses would be taken into account;
ii) Fair accounting principles would be applied in line with standard practice in the equity derivatives market;
iii) In relation to structured products, the desk would be credited for funds raised at the prevailing institutional market rate; and
iv) There would be no cross-subsidy of or from other businesses.
The claimants' evidence
The Bank's evidence
The claimants' credibility
No documentary evidence
"In year 3 and thereafter a normal EVA model would apply at a rate proposed of 30% which is how the other trading businesses are remunerated."
It is unlikely that Mr Van Der Walt would have written in these terms if he was agreeing with the claimants any special terms which would apply in calculating their bonuses and which did not apply to the other trading businesses.
i) I referred earlier to the fact that, on being sent EVA figures for 2008/2009 by Mr McKenna on 14 May 2009, Mr Brogden emailed Mr Van Der Walt to say that "this is some distance away from my view of what is right, fair and/or realistic". It was Mr Brogden's evidence that by "right" he meant that the figures did not reflect the method of calculation that he and Mr Van Der Walt had originally agreed and that this "was my way of saying that this was a breach of contract". I consider this fanciful. If Mr Brogden had meant or wanted to say that the figures did not reflect a method of calculation that he and Mr Van Der Walt had agreed, then I am sure that that is what he would have said.
ii) At around this time Mr Brogden prepared a note for himself of differences between the Bank's figures for P&L and what Mr Brogden described as the "market standard". In this note Mr Brogden wrote that it is "market standard for the structured product desk to pay a 'friendly' rate to the bank's internal treasury desk". (It is clear from the context and in particular the fact that Mr Brogden's note treated the 'friendly' rate as leading to understatement of the SED desk P&L, that Mr Brogden was, despite the wording of his note, referring to the rate paid to the SED desk by the Bank's Central Treasury. Mr Brogden confirmed in his oral evidence that this was so.) He went on to calculate what he described as "Theoretical P&L", said to be "based on more realistic funding rate assumptions". I do not think it conceivable that Mr Brogden would have written the note in the terms that he did if at the time he had believed that the Bank had agreed to calculate P&L for the SED desk on the basis of funding rates which were not "market standard".
iii) In the bonus discussions for the following year (2009/2010) Mr Brogden was now dealing in the first instance with Mr Clapham who had not been a party to the discussions which led to the claimants joining the Bank. If there was an agreement governing the way in which the SED bonus pool was to be calculated, it would have been necessary to ensure that Mr Clapham was aware of this. However, Mr Brogden did not.
iv) In an email sent on 16 April 2010 to Mr Clapham, Mr Van Der Walt described a conversation with Mr Brogden about the SED bonus pool numbers. It is clear from this email and from a further email which Mr Van Der Walt sent to Mr Brogden himself on 5 May 2010 that in their discussion Mr Brogden had put forward an argument that the rates of interest paid to the SED desk by the Bank's Central Treasury did not reflect the value to the Bank of the deposits raised and that this should be taken into account when considering bonus. Mr Brogden's argument was based on the proposition that "if we [i.e. the Bank] had gone to the markets to raise term cash then we would have had to pay more". In his email to Mr Brogden Mr Van Der Walt set out reasons why he considered the argument to be flawed. I cannot believe that, if Mr Brogden had made an agreement with Mr Van Der Walt that the SED desk would be credited with the rate of interest that Investec would have had to pay in the institutional market, Mr Brogden would have neglected to remind Mr Van Der Walt of that fact. The fact that he did not and put forward only an argument of a theoretical nature is in my view in and of itself a compelling demonstration that there was no such agreement.
v) One of the points made by Mr Van Der Walt in his email rebutting Mr Brogden's argument was that "we generally do not reward on an EVA basis for deposit gathering". If, despite what may generally have been the case, such an arrangement had been specially agreed, I am sure that Mr Brogden would have pointed that out. Likewise, when in a later email sent on 14 May 2010 (quoted in paragraph 30 above) Mr Van Der Walt expressed concern that he and Mr Brogden did not seem to have a mutual understanding of "how we operate and what would be expected" and invited further discussion, Mr Brogden made no attempt to dispel the misunderstanding by reminding Mr Van Der Walt of what he now says they had previously agreed.
vi) It is most telling of all that Mr Brogden made no reference to the alleged oral agreement at the end of the 2010/2011 year, when differences about bonus led to his resignation from the Bank. In these discussions Mr Brogden put the fact that the interest rates paid to his desk by the Central Treasury were significantly below market rates and the effect which this had on the calculation of bonus at the centre of his arguments. Yet he conspicuously did not at any point suggest that the claimants were entitled to be credited in their bonus calculation with market rates because of an alleged agreement.
vii) This omission continued even when Mr Brogden resigned from his employment with the Bank. In his resignation letter dated 20 July 2011 he alleged a breach of contract in relation to the payment of bonus but it was a different breach from those now asserted (being that he had not been allowed to decide on the allocation of the bonus pool among members of his team). It was only in a letter before claim sent by his solicitors on 21 October 2011 that it was asserted for the first time that during their pre-contractual negotiations Mr Van Der Walt had told Mr Brogden that the Bank would pay the "institutional market rate" on sums raised. At this stage the agreement was said to have been made "in around November 2006".
"I am trying to find a sensible solution for everybody here. I am not trying to hold people to contracts. At the moment I say we have [a] contract, we have a clear dispute and I think at that point the working relationship is basically ended."
"5. Credit rating is not an issue, they can structure around this. I asked this 3 or 4 times.
6. They can be number 1 in UK retail products without Abbey reliance and do not need our credit to play. The UK retail market is £4 - £5 bil per annum and sold to building societies and life offices.
7. They do not need a lot of cash to run the business and can structure to be short or long cash. Currently stay short due to internal prices. Told him we charge LIBOR +1/8th and pay LIBOR from central treasury.
8. Abbey retail network makes the[m] £10mill per annum this is a nice to have but the business will stand alone and it is not reliant on Abbey."
"Although not the primary source of profit for the desk, it is important to have access to flow business in order to either offset other (more profitable) trades, or as an efficient way for a trader to take a proprietary view. Retail structured products would be a good source of flow for the business and we would aim to cover virtually all of the UK retail structured product market as well as some parts of mainland Europe."
This description and the statement in Mr Van Der Walt's email that the claimants could "structure to be short or long cash" supports Mr Van Der Walt's evidence that involvement in the retail structured product market was at that stage expected to take the form of selling derivatives to institutions which issued such products and that the claimants were not expecting to be taking deposits. Furthermore the reference to LIBOR as the rate paid by Central Treasury could be what Mr Brogden has remembered as a statement that the Bank would pay the institutional market rate on funds deposited with the Central Treasury by the SED desk.
The claimants' own evidence does not support their case
Other matters allegedly agreed
E. INTERPRETATION OF THE BONUS CLAUSE
The applicable legal principles
"When one speaks of the intention of the parties to the contract, one is speaking objectively ... and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties."
The meaning of "EVA"
"In the third financial year starting on 1 April 2009 and thereafter the bonus calculation will be normalised based on a formula calculated as 30% of EVA generated by the Equity Derivative business. The bonus pool available for distribution to the members of the team will be calculated after deduction of NI, an amount for Head Office and an amount for TSF support."
"Investec preferred to use EVA, rather than revenue, to measure financial performance, and that EVA was defined as revenue minus costs minus cost of capital, all calculated before tax."
Similarly, it was Mr Reid's evidence that the concept of "EVA" was explained to him in this way by Mr Brogden in early January, when Mr Brogden told him about the opportunity to join Investec and described the Investec model for measuring performance and paying bonuses.
"The bonus pool available for distribution to the members of the team will be calculated after deduction of NI, an amount for Head Office and an amount for TSF support."
It could not sensibly be supposed the amounts for Head Office and TSF support should be decided other than by Investec. This confirms that it is Investec who is to calculate the bonus pool.
Good faith and rationality
"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."
Discretion and its limits
"An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term."
The reference to "taking into account the interests of both parties" in this passage must mean that the decision is one which affects the interests of both parties, since in none of the cases was there any express requirement to take the interests of the other party into account.
The allegations of bad faith and irrationality
F. THE RATE ISSUE
The claimants' case
" it seems to me that breach of expectations is, at root, an aspect of irrationality or perversity. In other words, if expectations have been engendered by an employer, that may have been done in such a way that to disappoint those expectations would, absent some special change in circumstances, involve the employer acting in a way that no reasonable employer would act; in which case, irrationality or perversity, as those concepts are to be understood in this context, is established. "
G. OTHER ISSUES
Reserving for kick out products
Adjustments to the Funding Gap Reserve
"We have chosen not to execute this 'hedge' because we believe that commercially we are already long the market and we do not want to increase this position."
The question of hedging was discussed further at a strategy meeting held in Johannesburg on 9 July 2009. Mr Brogden gave a presentation at this meeting in which he discussed the "liquidity risk [that] arises from term hedging kick out products".
The 'profit payaways' issue
"Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements."
"A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changing in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors."
Both experts agreed that where the dividing line falls can be a grey area.
"When it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in accounting estimate."
Mr Watson-Brown made the point that if past accounts had to be restated every time there was a change in valuation technique, companies would have to be restating their accounts all the time, which would be impractical.
The 'early bird' issue
Note 1 It is unnecessary in this case to consider the qualifications to the objective test discussed in that paragraph. [Back] Note 2 In fact, it does not appear to correspond to how the term EVA is used by Stern Stewart, who define EVA as net operating profit after taxes minus the cost of capital. [Back] Note 3 See R Dworkin, Taking Rights Seriously (Harvard, 1977), p.31. [Back] Note 4 I refused permission to make other amendments raising a number of other additional issues. [Back]
Note 1 It is unnecessary in this case to consider the qualifications to the objective test discussed in that paragraph. [Back]
Note 2 In fact, it does not appear to correspond to how the term EVA is used by Stern Stewart, who define EVA as net operating profit after taxes minus the cost of capital. [Back]
Note 3 See R Dworkin, Taking Rights Seriously (Harvard, 1977), p.31. [Back]
Note 4 I refused permission to make other amendments raising a number of other additional issues. [Back]