On appeal

Continuing our series on the implications of recent significant cases, Chris
Middleton of Kemp Little’s employment group looks at the issues surrounding
some employment-related disputes

Company acted irrationally in cancelling share options
Malone v BPB Industries plc [2002] IRLR 452

From 1988 until his dismissal for poor performance in 1995, Mr Malone was
employed by BPB’s Italian subsidiary. He was granted options under BPB’s senior
executive share option scheme in 1990, 1991 and 1992.

Under the rules of the scheme, an option could be exercised once it had been
held for three years. However, when Malone sought to exercise all his options
in 1997, he was told they had been cancelled by a resolution passed by BPB’s
directors when he was dismissed. Malone brought an action against BPB, claiming
that the cancellation of his options had been unlawful.

The rules of the scheme provided that, if the employee’s employment
terminated for a reason other than misconduct, the employer had an ‘absolute
discretion’ to decide the ‘appropriate proportion’ of options that the employee
would be entitled to exercise. When exercising their discretion, the directors
of BPB decided that the appropriate proportion should be zero, and effectively
cancelled all of Malone’s options.

The High Court held that under the terms of the scheme, BPB was not entitled
to cancel options that had matured. However, it went on to find that, even if
the board of directors was entitled to cancel Malone’s matured options, the
decision to exercise its discretion in this way was irrational and perverse. It
therefore awarded damages of £100,636, plus interest. BPB appealed.

The Court of Appeal rejected BPB’s argument that the test for irrationality
should be judged by the standard of good faith as an employer could still act
irrationally even though it was being honest. Instead, it held that the correct
test for irrationality is whether the decision was one that no reasonable employer
could have reached.

On the facts of the case, the Court of Appeal agreed that BPB had exercised
its discretion in a perverse and irrational manner. This was influenced by the
fact that the options had been awarded at a time when Malone’s performance had
been good, and the options had matured by the time of his dismissal.

Moreover, the court found it hard to see why Malone should be put in the
same position as someone dismissed for misconduct – where the scheme
specifically provided that options would be cancelled – when his dismissal was
on the grounds of his performance after the options had matured.

If there remained any doubt, this decision makes clear that an ‘absolute
discretion’ conferred on an employer under an option, bonus or similar scheme,
will rarely be that. When exercising a discretion, employers should focus on
matters such as why the entitlement was originally granted, whether it has
already been earned, and whether it is appropriate to remove that entitlement
now. The case also suggests that a decision to reduce an award, rather than
cancel it, is less likely to be unlawful.

Aggravated damages awarded because of way defence conducted
Ziawalla & Co and Mr T Hodsdon v Ms J Walia EAT/827/00

Ms Walia was a mature student who, having completed her legal studies,
accepted employment with Ziawalla & Co. She was taken on as a paralegal in
anticipation of being awarded a training contract with the firm. In the end,
she was not awarded a training contract, and her employment was terminated.

Walia brought a claim of sex discrimination against the firm and certain
named employees.

The Employment Tribunal found in her favour against the firm and against one
of its employees, Mr Hodsdon. The tribunal said that Mr Hodsdon had subjected
Ms Walia to intimidating, hectoring and bullying behaviour. The firm itself had
failed to prevent this, and had also failed to put an Equal Opportunities
policy in place. It had also failed to give her adequate work under supervision
in order to assess her suitability for a training contract. The tribunal
awarded her approximately £44,000, including amounts for injury to feelings and
aggravated damages.

The firm and Hodsdon appealed against the decision and the amount of damages
awarded. The EAT upheld the tribunal’s decision on liability. For the most
part, it also upheld the amount awarded, although it did reduce the award for
injury to feelings and the amount of interest awarded.

The interesting issue arising out of this case, however, is the fact that
the award of £7,500 for aggravated damages was largely based on the way in
which the respondents had conducted the case, rather than on their conduct
while Ms Walia was employed by them.

The tribunal had found that, in defending the proceedings, the respondents
had attacked Walia in relation to her personal standards of professional
conduct and had made various threats to her. The defence had been ‘deliberately
designed by the respondents to be intimidatory and cause the maximum unease and
distress to the applicant.’

The EAT agreed that there is no reason why aggravated damages cannot be
awarded because of the way in which discrimination proceedings are defended.
They pointed out that misconduct by a respondent in the defence of a claim
could well amount to victimisation for which an applicant could bring a claim
in itself. It would clearly be unsatisfactory if victimisation of this sort
could only be compensated by way of separate proceedings rather than at the end
of the hearing in which it had arisen.

Employers should therefore be wary about defending discrimination claims in
a way that could be regarded as over the top and aggressive. However, the EAT
did say that the facts in this case were exceptional, and that cases attracting
awards for aggravated damages because of litigation misconduct would be few and
far between.

Chris Middleton is an assistant solicitor in the employment group at Kemp

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