Inner House finds former employee of housebuilder entitled to payment of bonuses post-termination

Lord Pentland

About this case:

• Citation:
  [2022] CSIH 3
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Pentland

It was held by the Lord Ordinary that Gavin Loudon, a former employee of the Stewart Milne Group, remained entitled to the bonus payments due to the construction of his contract of employment. The reclaimers challenged that finding on the basis that the Lord Ordinary had erred in his interpretation of when a bonus was considered to have been earned.

The appeal was heard by the Lord President, Lord Carloway, sitting with Lord Woolman and Lord Pentland. The Dean of Faculty, Dunlop QC, appeared for the reclaimers and Lake QC for the respondents.

Earned and paid

Following a long and successful career in the house building industry, the respondent sold his business to the reclaimers and became their employee in 1999 at the age of 53. His role was to identify land for acquisition as development sites for housing, and under his contract he was entitled to performance bonuses when houses were built on land he introduced to the company, or where the company was able to purchase land he identified at under market value.

On 31 March 2020, the respondent retired with the agreement of the reclaimers because he was redundant. After his retirement, the reclaimers started development at a number of sites identified by him. The respondent raised a commercial action seeking payment of his performance bonuses for those sites, arguing that the terms of his contract entitled him to all bonuses he had earned prior to his retirement if he left with the agreement of the company.

The commercial judge held that the respondent’s contract distinguished between when a bonus was earned and when it was paid, noting the timescales on which planning permission was granted or land was acquired. To construe the contract otherwise would result in there being no reason for an employee to focus on long-term projects that may only come to fruition after their retirement.

It was submitted for the reclaimers that reading the clause as a whole a bonus was only earned where acceptable planning permission had been obtained. Any other reading would result in a bonus becoming payable in circumstance where no value in the land had enured to the reclaimers. The commercial judge ought to have taken into account that the interpretation advanced by the respondent created a liability of uncertain scope on the reclaimers that could potentially last for more than a decade.

Counsel for the respondent submitted that the purpose of the termination clause was to encourage him to leave employment on terms that suited the reclaimers by providing incentive for him to do so. The intention of the distinction between “earned” and “paid” was to protect payment of bonuses that had not become payable by the time of his termination.

Meaningful advantage

Lord Pentland, delivering the opinion of the court, observed generally: “It is important to recall that the respondent was 53 years old at the time the parties entered into the contract. He could therefore reasonably have expected to continue working for the reclaimers for around 12 years; that would have taken him up to the then prevailing normal retirement age of 65. In these circumstances it would have been obvious to the parties that many of the strategic land development projects which the respondent was responsible for identifying and introducing would not be likely to come to fruition during the remainder of his working life.”

He continued: “From the reclaimers’ perspective, it would have made sense for them to have some leverage over when the respondent left their employment. They could achieve this objective by conferring on the respondent the entitlement to receive bonuses where a project materialised after his employment ended, but only where he ceased employment at a time that suited the reclaimers’ business needs.”

Considering these factors together, he said of the intention of the contract: “The purpose of the termination provisions may reasonably be inferred to have been to achieve an advantage for a good leaver extending beyond what would have been his rights under the common law. The aim of those provisions was to put him in a better position than he would have been in as regards entitlement to receive bonuses which had become payable but had not in fact been paid by the date of termination of the contract.”

He explained further: “On the reclaimers’ approach to the construction of clause 6 the respondent, as a good leaver, would derive nothing of value from the termination provisions and the clause would be stripped of any sensible commercial purpose. Good leavers and bad leavers would have the same rights on the reclaimers’ approach. By contrast on the respondent’s approach the good leaver would be entitled to a meaningful advantage.”

Lord Pentland concluded: “The commercial judge was right to recognise that the approach reflected in clause 6 drew a distinction between when a bonus was earned and when it was paid. The timing of payment was linked to the grant of planning permission or to acquisition of the site, but the earning of a bonus was not. The pursuer earned a bonus by his work in introducing and identifying a site; payment of his bonus was, however, conditional on the grant of planning permission or acquisition of the land.”

The reclaiming motion was therefore refused.