In the case, Mr Khatri worked at the Co-op Bank as a derivatives trader and was entitled to performance-related bonuses calculated according to a set formula. His contract stated that the bank maintained the right to ‘review or remove this.... arrangement at any time'. After completing a trial period at an alternative position within the bank, Khatri indicated he did not want to work on these new terms and wished to be paid his performance-related bonus. He was later made redundant but didn't receive the bonus.
The issue at stake was whether Khatri had accepted that he wouldn't receive a bonus because he undertook the trial position. The Court of Appeal held that he hadn't; he had simply carried on doing his old job but reported to a different superior and the change to his bonus that the new contract entailed would not be effective until the bonus had been payable.
The case serves as a reminder to employers to be careful when it comes to the terms in their employees' contracts. They must be explicit as to when the employer's discretion will be exercised and must ensure that their employees sign contracts each time they are varied, however slightly. Indeed depending on the circumstances, this may not be enough. In addition, the court must also be satisfied that the employer, in introducing any changes, is acting in a rational and fair manner. Certainly when it came to Khatri and the acceptance of the terms of his revised contract it would seem entirely unreasonable - even ridiculous - for him to have entered into a contract that disadvantaged him financially some £1.4 million.
The Khatri case illustrates the difficulty of when acceptance of new contract terms precisely occurs. If, for example, an employee has had changes made to their contract and the effect of those changes were fairly immediate such as a change to working hours and the employee carried on working without complaint or objection, then it might reasonably be said that while there has not been an unequivocal act of acceptance, there has been an acceptance of the change through their conduct.
In relation to clauses that stipulate an employer's ability to exercise discretion within a contract, caution should most definitely be applied. The defendants in the Khatri case were criticised for the inclusion and reliance upon the review or removal of the ‘at any time' phraseology as it was deemed unreasonable by the court in light of the preceding language which clearly pointed to entitlement to financial remuneration. The court explained: ‘Three little words at the end was not the way to convey that to the employee or the reasonable reader.'
The case acts as a warning that employers should think twice before being too reliant upon clauses that seemingly allow them to do as they wish when it comes to bonuses including non-payment. They must act in a reasonable and proportionate manner and must not exercise their discretion in a capricious or irrational manner. If the courts feel that no reasonable employer would have acted the way they did, then they are leaving themselves exposed to criticism and punishment at the hands of the courts. In Khatri, a clear message was sent to employers to exercise their discretion fairly and with transparency, as Lord Justice Jacob remarked: If you are to give with one hand and take away with the other, you must make that clear."
The irony here is that while many employers seek to avoid any commitment to specific rights or figures in relation to bonuses, a well-drafted bonus scheme will afford both employers' and employees' confidence by providing employees with a target to aim for and optimise their performance towards; the end result will predictably benefit both parties.
Stuart Jones is a partner in the employment team at law firm Weightmans
