In GX Networks Ltd v Greenland the Court of Appeal held that a contractual power to cap an overperformance bonus "by exception only" meant that it could only be capped in exceptional circumstances. In this case the employee's substantial overperformance on sales targets, coupled with the employer's decision not to review her targets because of the likely demotivating effect, were not exceptional circumstances.

This case concerned the interpretation of a clause in an employment contract relating to bonus for overperforming on sales targets, which stated:

"Targets will be reviewed at the end of Q1, Q2 and Q3 to ensure that the target is challenging but achievable. The sales director has the discretion to cap an individual's Q4 bonus at 100% if required although such cases will be by exception only and require HR and Finance agreement."

The dispute had arisen following the introduction of a new commission scheme, whereby sales targets were set by consultation with the employee, but could be reviewed throughout the year (as set out in the clause above) if they were thought to be too high or too low. Commission was calculated according to a set formula. If sales targets were exceeded, an additional "overperformance comission" (or bonus) was also payable, based on a much more generous calculation. Ms Greenland, a sales executive, had achieved 305% of her sales target, which entitled her to a bonus of about 4.5 times her basic salary. The employer sought to apply the cap as if she had achieved 130% (rather than capping it 100%). This would have allowed her some but not all of her overperformance bonus. Ms Greenland sued for breach of contract in the High Court, which upheld her claim for the full amount.

The employers appealed, arguing that, on the true meaning of the clause, the usual method of controlling overperformance commission was by adjusting the target but, if that was not done, the alternative or exceptional method was to apply a cap. The Court of Appeal disagreed; the clause was poorly drafted and far from clear, but "by exception only" had to mean that the cap could only be used "in exceptional circumstances". It could not be used simply as a convenient alternative to the setting of appropriate targets through consultation.

The court noted that the employer had decided not to consult with Ms Greenland over an increase to her target (in full knowledge that she had already exceeded it), because of the demotivating effect this would have. This decision did not amount to "exceptional circumstances". Furthermore, in a scheme designed to encourage and reward success, an exceptional degree of success could not itself be regarded as an exceptional circumstance.

Comment

This case emphasises the importance of ensuring that any discretionary power to cap or reduce a commission or bonus is carefully drafted as any ambiguity is likely to be construed against the employer. It also emphasises the legal and practical importance for employers of keeping performance targets under regular review rather than seeking to unpick the consequences of an unrealistically low target.