Bonuses: Are Variation Clauses A Double-Edged Sword ?

Katana

By Mel Sangster, Senior Associate in the employment team at national law firm Dundas & Wilson.

Variation clauses are often included in employment contracts to provide employers with the widest degree of flexibility. The intention of such clauses is to allow the employer to unilaterally change the terms of the contract, should they wish. Sometimes however, this can work against the interests of the employer, as was seen in the case of Dresdner Kleinwort Limited and Commerzbank AG v Attrill and others [2013]

Most of the commentary in relation to this case focuses on the dangers of making promises to staff, as in that case those promises were later found to be legally binding. A pivotal point in the Court of Appeal's reasoning was, however, related to the variation clause included in the contract.

The dispute arose from the fact that, on 31 August 2008, it was announced that Dresdner Bank AG would be sold to Commerzbank. In order to allay the FSA's concerns and to curb staff departures amid speculation prior to the announcement, the CEO of Dresdner informed employees that a minimum bonus pool of €400m had been created for staff for 2008. Staff were told that this would be split, depending on individual performance, and be paid in 2009. The announcement was also broadcast to staff via the company intranet.

A few months later, in the midst of the financial crisis, Dresdner sought to qualify the promise it had made to staff. A clause was added to employees' bonus letters stating their entitlement may be adjusted if the bank's performance was materially affected.

The sale of the bank to Commerzbank was completed in January 2009 and staff were told that the provisional bonuses had been reduced by 90%. As a result, 104 employees instigated legal proceedings. The court was required to determine whether the bank was obliged to adhere to their promise of a minimum guaranteed bonus pool.

The Court of Appeal held that representations made by Dresdner's CEO at the staff meeting were sufficient to impose a contractual obligation on the bank. The announcement amounted to an amendment to the employees' terms and conditions as a result of a contractual variation clause in the staff handbook. The variation clause gave the bank the unilateral power to vary employees' contracts provided certain conditions were met. The Court of Appeal held these conditions had been met and the contracts had been varied by the announcement.

On one level, this case acts as a stark reminder to employers to be careful what they promise – this mistake will ultimately cost the bank around €52million. If communications to staff are sufficiently clear and objectively demonstrate an intention to create legally binding obligations, an employer may have no option but to adhere. This remains the case even where the communications are made orally, in a more informal setting. In this case the variation clause actually restricted the bank's actions, rather than providing it with the degree of leeway which was no doubt intended when the variation clause was drafted.

Employers should, therefore, carefully consider the wording of any clause which gives them the right to unilaterally make changes to an employee's contract. Whilst this right may be useful in certain scenarios, clauses of this nature may be engaged in circumstances not anticipated by the employer. If this happens, the seemingly helpful variation clause may actually turn out to be a double-edged sword.

Dundas & Wilson

image: © sardinelly

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