Former director of housebuilding company entitled to bonus payments post-departure
A judge in the Outer House of the Court of Session has determined that the former executive of a housebuilding company who was made redundant should be entitled to bonus in respect of projects completed after his redundancy.
Gavin Loudon was employed by Stewart Milne Group Ltd between 1996 and 2020. He sought declarator that he was entitled to bonuses detailed in his contract of employment in relation to the acquisition of land by the company.
The case was heard by Lord Ericht. The pursuer was represented by Lake QC and the defender by McBrearty QC.
Identified and introduced
The pursuer became involved with the defenders after he sold a company that he had acquired in 1990 to them in 1996. Under the terms of a contract dated 10 November 1999, the pursuer was entitled to a performance bonus for every 100 residential units for which planning permission was granted on land he identified and introduced to the company or included by agreement where an appropriate amount of time had been devoted to that land. Additionally, he was entitled to a value bonus of 13.5% of the difference between full market value of land he introduced to the company and the price the defenders paid for it where no more than 95% of that value was paid.
These bonuses were to be paid one month after the grant of permission or the completion of the purchase, or where a purchase was phased in equal instalments within either two or four years depending on the supply of the area. In the event of the pursuer leaving the company with its express agreement, all bonuses under these clauses would remain due and payable.
It was claimed that the pursuer was entitled to these bonuses in relation to 19 sites across Scotland that he introduced to the company. He submitted that “identified and introduced” should be given a purposive construction to reward him for the work done to get planning permission or allow the defenders to acquire the land on advantageous terms.
Addressing whether the entitlement survived the pursuer’s termination, it was submitted that the ordinary wording of the contract meant the bonuses were obtained in return for services during the contract, as opposed to arising when payable. If that interpretation were correct, it would have been necessary to include a term to preserve those rights on termination of the contract.
The defenders submitted that the bonus claims did not survive the pursuer’s termination, as they were earned on the occurrence of the trigger event. Esto that they did, a number of the sites identified in the claim did not fall within the provisions which gave rise to an automatic bonus entitlement, as they were undertaken in the ordinary performance of his duties.
Purpose to incentivise
In his opinion, Lord Ericht said of the construction of the contract: “The objective commercial common sense of the sentence is that there will be an automatic bonus where the pursuer has introduced and identified land, but there is also scope for a bonus to be agreed where the pursuer has not identified or introduced the land, but has done substantial work on the project.”
He continued: “I do not accept the defenders’ contention that the bonus provisions did not concern themselves with the ordinary performance of the pursuer’s duties, for which he was well remunerated. There is nothing unusual about an employee being eligible for a bonus in respect of his normal duties. Indeed, the usual purpose of a bonus is to incentivise an employee to produce outstanding results in the course of his duties as employee.”
Turning to whether grants of planning permission made after the pursuer’s departure still entitled him to bonuses, he said: “The timing of the payment is linked to the timing of the grant of planning permission or purchase. However the earning of the bonus is not. All of the sites which I have found above to fall within the bonus scheme fall within the first limb of the Bonus Sentence i.e., where the land is identified and introduced by the pursuer. The pursuer earns the bonus by his work in identifying and introducing the land.”
He continued: “Payment of a bonus for that work is conditional on planning permission or land purchase or payment of a management fee. If that condition is never satisfied, then he is not entitled to payment. If that condition is satisfied prior to termination of the contract, he is entitled to payment. If that condition is satisfied after termination, it is a bonus which has been earned but not yet paid and he is entitled to payment after the condition is satisfied.”
Lord Ericht commented on the use of the bonus scheme: “It can take up to ten or even more years for a project to reach the stage where planning permission is granted or the land is acquired. The purpose of the bonus was to provide the pursuer with an incentive in relation to strategic land. Given the timescales involved, a bonus scheme which ceased to pay out on termination of employment would provide little incentive in respect of strategic land.”
He concluded: “Far from being an incentive to promote strategic land projects, it would be an incentive for an employee to focus instead on short-term projects where planning permission or land purchase could be swiftly obtained. Against that matrix, the pursuer’s interpretation, which takes account of the nature of strategic land and the timescales involved, is to be preferred.”
For these reasons, Lord Ericht found that the pursuer was entitled to relevant bonus payments following his departure from the company. The case was put out by order for discussion of the relevant interlocutor.