A recent Court of Appeal decision has confirmed that when allocating commission employers must exercise their discretion rationally and in accordance with the terms of the relevant contractual documentation (Hills v Niksun Inc). The case concerned Mr Hills, who was employed by Niksun Inc as its UK sales manager. After a sale of security software, he was promised that he would be “looked after” in respect of commission for the deal and receive the “lion’s share”. However, Niksun allocated only 48% of the available commission to the UK office.

Mr Hills then left and brought a claim for breach of contract, alleging that Niksun had failed to exercise its discretion to allocate commission rationally or reasonably. He argued that following last year’s Supreme Court judgment in Braganza v BP Shipping Ltd , contractual discretion should be exercised reasonably and no irrelevant matters should be taken into account.

In Braganza, the Supreme Court ruled that, when considering the exercise of power by a party to a contract, the contractual decision-maker was required to take relevant matters into account. In addition, the personal nature of employment contracts may justify a more intense scrutiny of the employer’s decision-making process than would be appropriate in commercial contracts. The Court concluded that, while the employer’s decision not to pay a death-in-service benefit was not arbitrary, capricious or perverse, it was unreasonable in the sense that the decision-making process was flawed.

What was decided?

The High Court judge hearing Mr Hills’ case considered the terms of his contract, sales compensation letter and sales compensation plan alongside the evidence of his manager, who confirmed that he understood “looked after” to mean two-thirds of commission. In these circumstances, the judge held that it was simply not lawful for the UK to be awarded less than two-thirds because that was outside the bracket of what was “fair and reasonable under the circumstances” (an express provision in the sales commission plan).

Niksun appealed this decision, arguing that the High Court should not have interfered with Niksun’s exercise of discretion. Dismissing the appeal, the Court of Appeal held that following Braganza, once Mr Hills had demonstrated that there were grounds for thinking Niksun’s decision was unreasonable, the evidential burden shifted. The absence of evidence from Niksun as to its decision-making process meant the judge could not presume the decision was a rational one. It had been open to the judge, on the evidence available, to find that the only reasonable conclusion was that the UK should be awarded two-thirds of the commission.

What does this mean for employers?

This case illustrates how references in contracts and commission plans to employers having “absolute discretion” will not give them broad and untrammelled power. Any discretion employers do have will be constrained by the terms of the contract or plan. In this case, Niksun was bound by a clear formulation for how commission should be calculated.

Keeping records of how discretion is exercised could be helpful in demonstrating that a decision was taken rationally and in accordance with the contractual terms. In this case, Niksun did not present any evidence of how the decision was taken, which left room for the court to substitute its own conclusion.

This case is specific to its particular facts, but shows how the impact of the Braganza ruling is still filtering through the courts. While the Court of Appeal acknowledged that Mr Hills’ argument over-simplified the Supreme Court’s judgment in Braganza, the door does seem to have been left open for employees (and for that matter, partners) in future cases to challenge the exercise of discretion on the basis that it was “unreasonable”.