How Discretionary is a Contractual Discretionary Benefit

Louise Walker
Legal Director
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To motivate, retain or recruit employees, employers often offer a range of contractual benefits. In many cases, employers will want to have discretion over whether the benefit is due and/or the level of the benefit that is due. For example, in a contractual bonus clause, the employer may set out that the payment of any bonus and the amount of any bonus are at the absolute discretion of the employer.

However, employers have never had ‘absolute’ discretion – even if the contract said that they did – as the law placed limits on their discretion. In line with mutual trust and confidence, the law said that an employer, when considering an employee’s discretionary entitlement, had a duty not to act irrationally or perversely.

However, the Supreme Court, has recently issued a judgment in the case of Braganza v BP Shipping Ltd and another that arguably raises the bar for employers. The Supreme Court has ruled that, on the facts of the particular case, it was not open to an employer to conclude that an employee had committed suicide which had the result that contractual death benefits were not payable to his widow. The decision was held to have been unreasonable, having been formed without taking relevant matters into account.

It appears that the correct legal test, when considering whether a contractual discretionary benefit is due, is now in two parts:

1) Have the right matters been taken into account in reaching the decision?; and

2) Is the result so outrageous that no reasonable decision maker could have reached it?

The second part of this test is very similar to the earlier legal test, but the inclusion of the first part has important implications for employers. What are the relevant or ‘right’ matters? What if some but not all of the right matters are taken into account? By implication, what are the ‘wrong’ matters? What if a ‘wrong’ matter is taken into account?

View our expert comments about how discretionary a contractual discretionary benefit is here.

Topics: Supreme Court