A Clearly Drafted Discretionary Bonus Clause Upholds Employer’s Right to Withhold Bonuses

In the recent case of BGC Partners (Singapore) Ltd and another v Sumit Grover [2024] SGHC 206, the High Court of Singapore affirmed that there is no absolute rule that all contractual bonuses are discretionary in nature. An employee’s entitlement to bonus turns on the construction of the bonus clause, and the court will look at all relevant circumstances to ascertain parties’ true intentions. The court also held that even if an employer had the discretion to determine bonus, that discretion must not be exercised arbitrarily, capriciously, or irrationally.

Facts:

Mr. Sumit Grover (“Sumit”) was a former employee of BGC Partners Singapore Ltd and GIFT Group Pte Ltd (collectively, BGC). Following the termination of Sumit’s employment, BGC initiated legal action to recover amounts owed under a loan provided to him. In response, Sumit counterclaimed for damages for unlawful termination of his employment and unpaid bonuses.

An issue that arose in this case concerned Sumit’s entitlement to bonus payments. The High Court was called upon to determine if Sumit’s entitlement to bonuses was guaranteed as of right and whether BGC’s decision to withhold the bonuses was lawful.

In determining this issue, the High Court considered the bonus clause in Sumit’s employment agreement, which provided as follows:

5. Bonuses

5.1 Individual bonus (1)

You will be eligible for an individual bonus which shall be calculated as follows

[The Payout Rate x Individual Net Revenue] LESS Expenses.

…

If awarded, the individual bonus will be paid six monthly, 90 days in arrears, that is in September each year for the bonus period 1 January to 30 June inclusive …

…

5.2 For the avoidance of doubt, the entitlement to the bonus will only arise, when and if a bonus is paid to you.

Holding:

1. Whether Sumit’s entitlement to bonuses was guaranteed as of a right or at BGC’s discretion?

Affirming the holdings in earlier decisions, the High Court observed, as a starting point, that whether an employee is entitled to bonus under an employment agreement turns on the construction of the bonus clause in question. There is no absolute rule that all contractual bonuses are discretionary in nature. Even where the contract expressly states that bonus is 'discretionary' or that the employer reserves an 'absolute right' to declare bonuses, the courts will look at all relevant circumstances to ascertain the parties’ true intentions.

In relation to the bonus clause in question, the High Court held that the bonus clause was discretionary for the following reasons:

a) the bonus clause used the phrase “will be eligible” rather than “entitled”,

b) the words “if awarded” signifies that the award of a bonus is a hypothetical event; and

c) the fact that “entitlement” to a bonus only arises “when and if a bonus is paid” supports BGC’s contention that bonus payments were conditional and not as of right.

2. Whether the decision to withhold the bonuses was lawful?

The court observed, from existing case-law, that a contracting party has an implied duty to exercise a contractual discretion reasonably, or to ensure that such a contractual discretion will not be exercised arbitrarily, capriciously, or irrationally. The court readily found that this implied duty applied to employment relationships and, specifically, in the context of the employer’s exercise of its discretion in awarding bonuses to employees. The court also acknowledged that the courts will not intervene in the exercise of a contractual discretion lightly. Judicial intervention may be warranted only if the exercise of contractual discretion is “so outrageous in its defiance of reason that it can be properly categorised as perverse”.

In this case, BGC’s reasons for withholding bonuses from Sumit included the latter’s unwillingness to share customer lines within his team so that prices could be disseminated to all clients in a timely manner at the same time, and also his absenteeism from work without valid reasons. In respect of Sumit’s unwillingness to share customer lines with his team, the court held that such conduct amounted to a failure by the defendant to demonstrate teamwork reasonably expected of him. The court found that it was reasonable for BGC to withhold bonuses from Sumit on this ground alone. Further, it could not be said that BGC’s exercise of its discretion in this regard was arbitrary, capricious or irrational.

Takeaways:

• Employers should pay attention to the drafting of bonus clauses. The proper interpretation and construction of a bonus clause will be the court’s first port of call in trying to ascertain the true intentions of the parties. Extrinsic evidence in the form of prior negotiations will be admissible only if it used for the purpose of illuminating the contractual language, not to vary or contradict it. In the BGC case, the court disregarded the ex-employee’s evidence on pre-contractual negotiations between the parties wherein BGC was alleged to have guaranteed bonus payments to the ex-employee. The court found that such extrinsic evidence went towards contradicting the bonus clause and was inadmissible as such.
• The employer’s exercise of a contractual discretion is not immune from judicial scrutiny and intervention. Employers have an implied duty to exercise their contractual discretions reasonably and the BGC case confirms that this duty extends to the award of discretionary bonuses. That said, judicial intervention is unlikely unless the exercise of the discretion was so outrageous that it can be said to be perverse.

This article is produced by our Singapore office, Bird & Bird ATMD LLP. It does not constitute as legal advice and is intended to provide general information only. Information in this article is accurate as of 19 September 2024.