Wednesday, 17 November 2010

Humphreys v Norilsk Nickel International (UK) Ltd, [2010] EWHC 1867

How fair does your employer have to be when assessing your entitlement to a bonus?  Not very fair at all.

This is the upshot of the claim brought by Dr Humphreys against his former employer, Norilsk.  Dr Humphreys is an economist, with a particular expertise in judging market price shifts; in 2004 he agreed to become the chief economist for the Norilsk group.  Norilsk agreed to pay him over £400k per year, plus a bonus, depending on his performance – nothing if it were unsatisfactory, over half a million if it exceeded all expectations.

All was satisfactory for the first few years; Dr Humphreys received substantial bonuses.  It went wrong in 2009.  Dr Humphreys left Norilsk and did not receive his bonus by the due date.  He emailed; he was fobbed off.  5 months after the due date, Norilsk’s solicitors told Dr Humphreys’ solicitors that Norilsk would not be paying a bonus for the final year.  The reason?  His performance was unsatisfactory.  His forecasts of the price of nickel were out by over 50%.  Indeed, Norilsk even claimed that Dr Humphreys’ performance in past years was due to market conditions being fairly easy.  Once the going got tough, Dr Humphreys got going.
The issue in the case was whether Norilsk could unilaterally decide the level of bonus.  The High Court said yes.  The contract of employment said that the level of bonus would be decided by the Norilsk management board; the contract did not set out any objectively achievable targets.  Dr Humphreys could not point to a term of the contract and say “I’ve done that” – it was all down to whether his performance was satisfactory, and that was a decision solely down to Norilsk.  Therefore, no matter how much Dr Humphreys had done, or how accurate he had been with his nickel predictions, his bonus was entirely in the hands of his employer.

That is not quite the full story.  The decision whether to award a bonus must be bona fide.   A previous case (Clark v. Nomura International Plc) stated that an employer’s decision must not be irrational or perverse; Burton J charmingly suggested that a “capricious” decision would be one or the other.  So Norilsk had to show that it was not acting perversely or irrationally in refusing Dr Humphreys a bonus.

This is not a high hurdle; the employer is not required to act fairly.  Norilsk duly cleared it with some ease.  For the first two quarters of 2008, Dr Humphreys’ estimates of nickel prices were quite accurate; however the impact of the global recession plunged the prices to under half of Dr Humphreys’ estimate.  Norilsk claimed it had lost out as a result of the erroneous forecast and that provided it with ample reason not to pay out a bonus.  The High Court agreed – a company that had lost half a billion dollars in 2008, in part because the chief economist failed to spot the global recession, was not irrational or perverse in not rewarding such conduct with a bonus.

Although Norilsk won the case, its managers will have spent time on the case that they will not get back, and there will be some irrecoverable legal costs.  The easy way to prevent claims for the failure to award a performance bonus is to make such targets measurable.  If Dr Humphreys had been required to get within, say, 10% of the nickel price before getting a bonus, his arguments would have failed even sooner.  However this may have been a difficult thing to negotiate, and perhaps the parties thought that these circumstances would never arise.  As it turned out, Norilsk retained the power to decide the bonus, so long as they did not do so in a stupid manner.

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