UK High Court Awards $5.3 Million for Wrongful Refusal of Discretionary Bonus

Quick Hits

• Even where an employment contract is governed by foreign law, in this case Delaware law, English courts may still apply English principles to how discretion (including bonuses) is exercised.
• Employers must exercise bonus discretion rationally, in good faith, and for the purpose set out in the contract.
• Where a bonus clause links awards to individual financial performance, employers cannot rely on unrelated behavioural or reputational factors.

Background

Mr Gagliardi was a U.S. citizen who moved to London and acquired a UK resident permit in 2012. In 2013, Evolution Capital Management (ECM), a US-based investment manager, hired him to establish and grow its block trading fund.

He performed work for the company from London. He rented a house in London and his children lived and attended school there. He paid U.S. federal income tax.

The fund was extremely successful, far exceeding expectations. However, disagreements emerged over risk management and strategy. In November 2021, ECM separated Mr Gagliardi’s fund from its core business. In April 2021, he signed a further contract with ECM.

His contract included a discretionary bonus clause:

“For each calendar year, provided you are an employee in good standing on each fiscal-year-end bonus payday, you may receive a discretionary bonus based on your individual performance and [ECM]’s overall performance (“Discretionary Bonus”). The target range of the Discretionary Bonus will be 10%-15% of profit of your revenue contributions but will be purely discretionary.”

Shortly afterwards, Mr Gagliardi was served with a subpoena from the U.S. Department of Justice (DOJ) as part of a broader market investigation into block trading. He was dismissed in February 2022 on one week’s notice.

Bonus day fell on 15 March 2022. ECM decided not to award Mr Gagliardi a discretionary bonus.

In August 2022, he issued proceedings in England, claiming he was entitled to a discretionary bonus.

Why Didn’t ECM Pay a Bonus?

The High Court found that ECM’s reason for not paying a bonus was its desire to “wait and see” how the DOJ and U.S. Securities and Exchange Commission (SEC) investigations unfolded.

Crucially, Mr Gagliardi was never charged with any offence. The SEC ultimately took no enforcement action against him, and a separate DOJ investigation concluded with a non-prosecution agreement involving another institution.

The High Court’s Decision

Although the contract was governed by Delaware law, the High Court held that English law principles still applied to how discretion was exercised. In particular, the High Court relied on the Supreme Court of the United Kingdom’s decision in Braganza v BP Shipping Ltd., which requires contractual discretion to be exercised:

• in good faith;
• in accordance with its contractual purpose; and
• not arbitrarily, irrationally, or capriciously.

Analysis

The High Court identified several weaknesses in ECM’s case:

1. The wrong factors had been taken into account.

The bonus clause focused on individual revenue performance. The High Court rejected ECM’s argument that it could rely on behavioural or reputational concerns. Those factors were not part of the contractual bonus criteria.

2. “Good standing” did not mean “still employed.”

ECM argued that Mr Gagliardi was not an employee “in good standing” on bonus day. The High Court disagreed. The contract expressly contemplated bonus payments to former employees and required payment within one month of the termination of employment. “Good standing” meant that the employee had not been dismissed for cause.

3. Investigations were not tantamount to misconduct under the contract.

The mere existence of a regulatory investigation was not evidence of wrongdoing. Nor did it justify withholding a bonus or deferring the decision indefinitely.

4. Post-event justifications are problematic.

The High Court found that many of ECM’s arguments were constructed after the fact. At the time the decision was made, there was little evidence that reputational concerns played any real role. Courts will focus on what the employer actually considered at the time—not what it later wishes it had considered.

Conclusion

Mr Gagliardi had generated 97 percent of the fund’s profits. On a rational and proper exercise of discretion, the High Court held that ECM would have awarded him the maximum bonus within the target range. The result was $5,385,000 (15 percent of profits), plus interest.

Key Takeaways for Employers

This case reinforces some important principles around discretionary bonuses:

• Cross-border contracts do not insulate employers from English standards of fairness, particularly where discretionary decisions affect employees with a strong connection to England.
• Employers must exercise discretion rationally and in line with the purpose of an employment contract’s bonus clause.
• Only factors permitted by the bonus wording can be taken into account.
• Unless a contract expressly allows it, employers cannot defer bonus decisions pending investigations.
• Courts will closely scrutinise contemporaneous documents showing how the decision was made. Employers cannot rely on hindsight to justify a weak or flawed process.
• A well-drafted bonus clause and a careful, well-documented exercise of discretion may be the best protection against challenge.

Ogletree Deakins’ London office, Cross-Border Practice Group, and Employee Benefits and Executive Compensation Practice Group will continue to monitor developments and will post updates on the Cross-Border, United Kingdom, and Employee Benefits and Executive Compensation blogs as additional information becomes available.

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