In a significant decision for employers, the United Kingdom’s High Court of Justice, King’s Bench Division, has upheld a claim for a discretionary bonus after finding that the employer exercised its discretion irrationally. In Gagliardi v Evolution Capital Management LLC, the High Court awarded an employee $5.385 million, despite the bonus being described as “purely discretionary.” The judgment is a timely reminder—particularly as bonus season approaches—that discretion does not mean unfettered freedom.

• Even where an employment contract is governed by foreign law, in this case Delaware law, English courts may still apply English principles to how discretion (including bonuses) is exercised.
• Employers must exercise bonus discretion rationally, in good faith, and for the purpose set out in the contract.
• Where a bonus clause links awards to individual financial performance, employers cannot rely on unrelated behavioural or reputational factors.

Mr Gagliardi was a U.S. citizen who moved to London and acquired a UK resident permit in 2012. In 2013, Evolution Capital Management (ECM), a US-based investment manager, hired him to establish and grow its block trading fund.

He performed work for the company from London. He rented a house in London and his children lived and attended school there. He paid U.S. federal income tax.

The fund was extremely successful, far exceeding expectations. However, disagreements emerged over risk management and strategy. In November 2021, ECM...

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