Take care when labelling a bonus as discretionary in a contract

The High Court recently ruled on the interpretation and enforceability of “discretionary” bonus provisions in employment contracts. Mr. Gagliardi brought a breach of employment contract claim against a former hedge fund which had contracted him as a senior portfolio manager. The contract in question included a salary, a sign-on payment, a new-issue bonus, and a discretionary bonus based on profitable revenues. Mr. Gagliardi was specifically recruited by the CEO to expand into the US market owing to his expertise in block trading and his valuable relationships with major US banks. The hedge fund’s primary goal was to secure the benefit of these relationships and scale its business quickly, with the CEO tacitly acknowledging that they were essentially “buying his relationships,” hiring Mr. Gagliardi on a “trade and get paid” basis.

Upon joining, Mr. Gagliardi immediately began actively trading in the A1 share class without completing his onboarding process or receiving formal risk limits, leading to conflict with the CIO and risk manager. However, the CEO consistently prioritised Mr. Gagliardi’s trading activity over internal procedure, despite him often exceeding specified trading limits, frequently granting retrospective approval. Mr. Gagliardi’s lack of attention to compliance was also overlooked, as the CEO continued to prioritise profitability. However, a market-wide regulatory inquiry into block trading led to subpoenas to the claimant and the hedge fund by early 2022, prompting the fund to withhold payment of his discretionary bonus. This led the claimant to sue the hedge fund for breach of contract.

The High Court ruled in favour of Mr. Gagliardi, awarding him $5.385m in damages (plus interest), determining that his former hedge fund had indeed breached its contractual obligations in failing to award him any discretionary bonus for his trading activities in 2021. The Judge ruled that the hedge fund’s contractual discretion (governed by Delaware law) was neither broad nor unfettered and, as such, was subject to prescribed contractual criteria.

Despite the use of the term “discretionary,” the High Court has affirmed the principle that an employer’s discretion is not absolute where a bonus is tied to measurable performance criteria such as revenue contributions and profits. This ruling emphasises that, where an employee delivers exceptional financial performance, an employer cannot arbitrarily or irrationally refuse to pay a bonus, as this would constitute a breach of contract, irrespective of any allegations of minor breaches, misconduct or poor attitude that did not reach the threshold for disciplinary action or termination over the period in question. Employers should thus take care over phraseology when structuring discretionary bonuses into contracts.