Singapore High Court reads into employment contracts an implied duty to exercise contractual discretion reasonably in the context of discretionary bonuses.

In brief

Where an employment contract expressly states that bonus is “discretionary” or is within the employer’s “absolute right” to declare, does an employer have an unfettered discretion to decide whether to declare bonuses? In BGC Partners (Singapore) Ltd and another v Sumit Grover [2024] SGHC 206, the General Division of the High Court (GDHC) reiterated that employers owe an implied duty to exercise their contractual discretion reasonably. What is considered reasonable would depend on the specific facts of the case.

Key takeaways

• Whether an employee is entitled to bonus under an employment agreement turns on the construction of the bonus clause in question. It is important to note that how the parties label the nature of a bonus is not definitive and the court will take a contextual approach in interpreting the bonus clause. This case is a reminder that employers should review their bonus clauses to ensure that the contractual language reflects the employer’s intention whether to grant such bonuses as a matter of right or discretion.
• Even where an employee’s entitlement to bonus is discretionary, the employer must exercise its discretion within reasonable boundaries. While a court will not intervene in the exercise of such discretion lightly, it may do so if the exercise of contractual discretion is so outrageous in defiance of reason that it can be regarded as perverse. Employers should be mindful of this when exercising their discretion to avoid breaching their implied duty to exercise their contractual discretion reasonably.

Background

The defendant, Mr Sumit Grover, was a former employee of the plaintiffs, which are part of the BGC group of companies (“BGC Group“). The defendant was initially employed by the second plaintiff before the employment agreement was novated to the first plaintiff. The plaintiffs had commenced proceedings against the defendant after the defendant’s employment was terminated to claim sums owed under a loan given by the plaintiffs to the defendant. In response, the defendant counterclaimed for damages for unlawful termination of his employment and allegedly unpaid contractual bonus.

According to the bonus clause in the employment agreement between the defendant and the second defendant, the defendant “will be eligible for an individual bonus” based on a certain formula set out in the clause. The clause further states that “if awarded”, the bonus will be paid in September each year. It also states: “For the avoidance of doubt, the entitlement to the bonus will only arise, when and if a bonus is paid to you”.

The defendant claimed that the bonuses were guaranteed and that the first plaintiff had unlawfully withheld his bonuses.

Decision of the High Court

The GDHC rejected the defendant’s arguments entirely and held that the defendant was not entitled to any contractual bonuses.

First, the GDHC held that the defendant’s entitlement to bonus payment is discretionary based on a holistic reading of the bonus clause. This is gleaned from the use of the word “eligible“; if the defendant was entitled to bonus, the clause should have used the word “entitled” instead. Furthermore, the clause goes on to state when the bonus would be paid “if awarded“; this specifies that the award of bonus is a hypothetical, not guaranteed, event. Finally, the bonus clause expressly clarifies that the “entitlement” to a bonus only arises “if a bonus is paid” which makes clear that the bonus payment is conditional and not as of right.

Second, the GDHC confirmed that an employer is subject to a duty of reasonableness in exercising its discretion to withhold bonus payments to an employee. On the facts, it held that the first plaintiff had acted reasonably in withholding the bonus payments to the defendant because of the defendant’s conduct during the course of his employment. In particular, the defendant had refused to share information and prices with his colleagues and to distribute customer lines with them. According to the court, the defendant’s behaviour was a legitimate concern for the employer and it was reasonable for the employer to withhold the bonuses on the basis that he had refused to share his lines with his colleagues.

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