The High Court was faced with the central question of the proper interpretation and enforcement of contractual bonus provisions in employment contracts, particularly where bonuses are described as “discretionary”.
Facts:
This case concerned a breach of employment contract claim brought by Mr. Gagliardi against Evolution Capital Management LLC (ECM), a hedge fund. Mr. Gagliardi was employed as a senior portfolio manager under a contract dated 28 April 2021, one that included provisions for remuneration comprising a salary, sign-on payment, a new-issue bonus (17% of new-issue income), and a discretionary bonus with a “target range” of 10-15% of “profit” as generated by “the business,” although this was expressly stated as being “purely discretionary”. He was recruited by a Mr. Lerch (CEO of ECM) specifically to expand into the US market using his expertise in block trading and his valuable relationships with major US banks.
ECM’s primary goal was to secure these relationships and scale their business quickly, with Mr. Lerch acknowledging that they were essentially “buying his relationships”. On this basis, Mr. Gagliardi was hired solely to “trade and get paid,” and not to be involved in operations or management.
Immediately upon joining, Mr. Gagliardi began trading actively in the existing A1 share class. This caused immediate tension, as he started trading before completing his onboarding process or receiving formal risk limits. This led to conflict with Mr. Toresco (CIO) and Mr. Devesa (Risk Manager), who stressed the need for a formal “process”. However, Mr. Lerch consistently prioritised Mr. Gagliardi’s trading activity over internal procedure, characterising the disputes as mere “teething problems”.
The issue of risk management was a persistent point of friction, as Mr. Gagliardi exceeded limits on several occasions, yet Mr. Lerch frequently granted retrospective approval. Mr. Gagliardi also displayed poor focus on compliance, failing to file required certifications on time, though Mr. Lerch chose not to initiate disciplinary action, again prioritising profitability while generating substantial trading revenues.
A market-wide regulatory inquiry into block trading led to subpoenas to the claimant and ECM in late 2021/early 2022. ECM withheld the payment of the discretionary bonus, leading to the claimant suing the company for breach of contract.
Decision:
The High Court ruled in favour of Mr. Gagliardi, awarding him USD$5.385m in damages (plus interest), determining that his former employer, the US hedge fund ECM LLC, had breached its contractual obligations in failing to award him any discretionary bonus for his trading activities in 2021, endeavours which had delivered over USD$60m in profit and contributed 97% of the fund’s revenue. Mr. Justice Calver ruled that, when properly construed, the hedge fund’s contractual discretion (which was governed by Delaware law) over whether to award Mr. Gagliardi a bonus was not broad and unfettered, and was subject to prescribed contractual criteria.
The Court held that ECM acted in breach of the employment contract and in breach of the implied covenant of good faith and fair dealing by improperly refusing to award and pay a discretionary bonus. Mr. Justice Calver found that, despite the bonus being contractually discretionary, the employer’s refusal to pay was irrational and breached the implied obligation of good faith that underpins all employment contracts.
The High Court ordered ECM to pay Mr. Gagliardi USD $5,385,000 (representing 15% of the relevant profit figure adopted by the Court) plus pre-judgement interest from the date payment was due. The company’s counterclaim was dismissed.
Implications:
The most critical implication of this case is the legal constraint placed on an employer’s supposed “unfettered discretion” over bonus payments. Despite the term “discretionary bonus,” the Court affirmed the principle that an employer’s discretion is not absolute. When a bonus is tied to performance criteria—in this case, “revenue contributions” and profit & loss targets—the decision-making process must be rational and subject to the implied duty of good faith and fair dealing.
The ruling emphasises that, where an employee delivers exceptional financial results, an employer cannot arbitrarily or irrationally refuse to pay a bonus. Refusal under such circumstances constitutes a breach of contract.
The employer’s attempts to rely on minor process breaches, or “teething problems,” and Mr. Gagliardi’s poor attitude (which ECM consistently overlooked while he was profitable) were rejected. If an issue was insufficiently serious to warrant disciplinary action or termination at the time, it cannot later be relied upon to justify refusing compensation.
