Bank breached contract by clawing back a sacked trader's bonus shares

What happened

Etienne Alexiou joined ANZ in August 2011 to head a trading desk in its Global Markets division. In the 2014 performance year his base income was $460,000, while his bonuses for 2012, 2013 and 2014 were $2.65 million, $4 million and $5 million. Part of each bonus was paid in ANZ shares that did not vest (become his to take) for one, two or three years.

In 2014 the regulator, ASIC, was investigating whether banks had manipulated a benchmark interest rate, the bank bill swap rate. On 19 November 2014 ANZ stood down seven traders on full base pay while the investigation continued. Mr Alexiou was the most senior of them. With no chance to earn bonuses, his pay was in effect cut by about 90%, and in January 2015 a newspaper named him as one of the seven.

Reviewing traders' instant messages for the investigation, the Bank said it found language that breached its policies, which required staff to stay "professional and polite" online. It was not disputed that many of Mr Alexiou's chats seriously breached those policies. On 1 September 2015 the Bank ended his employment, citing the chats, with four months' pay instead of notice. On 3 September 2015 it told him his provisional $5 million 2014 bonus would not be granted and his deferred shares from 2012 and 2013 had been clawed back, apart from one parcel forfeited on termination.

The clawback clause

His employment contract and the share plan's conditions of grant contained the same clause. It gave the Board an "on-going and absolute discretion" to reduce performance pay, including deferred shares, to zero. The ground relevant here was where the Board considered that, having regard to information which had come to light after the grant, the grant was not justified.

The Board had delegated that decision to a clawback review group, with final sign-off by the chair of its human resources committee. The Bank's own internal guide asked the same question as the contract: if the conduct had been known when the bonus was awarded, would it have been awarded?

The claims

Mr Alexiou sued in the Federal Court. His main case was that the Bank took adverse action against him under s 340 of the Fair Work Act 2009 (Cth), and victimised him as a whistleblower, because of complaints he had made, chiefly one he said he made in October 2011 about a colleague's remark that he would "slaughter the rate set". Justice Perram dismissed those claims. He did not accept the Bank's evidence of why it sacked Mr Alexiou, but he was not satisfied the complaint was made, and he found a later complaint was not a reason for what the Bank did. The judge did find Mr Alexiou was not involved in trying to manipulate the rate. Separately, Mr Alexiou argued in contract that the clause never authorised the clawback.

Why the clawback was a breach of contract

Where a contract gives a power that arises only if someone "considers" a particular thing, the power exists only if that opinion is actually formed. If it is not, using the power anyway is a breach of contract.

The Chief Compliance Officer's memo recommended that "100% of his deferred equity is clawed back" in light of his conduct, but did not identify any new information or say whether the 2012 and 2013 grants would have been justified had it been known. The review group approved a clawback for behaviour it saw as serious, which the judge called "a different opinion to the one required by the contract".

Years later the officer said in an affidavit that he had believed the bonuses would not have been awarded had the conduct been known. No 2015 document recorded that view, and the judge found the evidence was likely false. Apart perhaps from one review group member, nobody formed the required opinion, so the power to claw back "never arose".

Damages put Mr Alexiou where he would have been had the contract been performed. The judge found he would probably have sold the shares as they vested, and refused any discount for the chance that the Bank could have made a valid decision: the Bank bore that burden and did not argue for one. The parties were left to agree the judgment sum. The forfeited parcel was not recovered. Nor was the $5 million 2014 bonus: it fell outside the contract claim, and the whistleblower claim that covered it failed.

Why his other arguments failed

Mr Alexiou also argued the Bank could not punish him for bad language it had long tolerated, a principle called estoppel. The judge found the Global Markets culture was one of "toxic masculinity" and bad language was widespread. But the Bank had disciplined staff over chat messages, confidentially, so its silence was no clear promise not to enforce its policies. His other equitable and implied-term arguments failed too.

What this means for you

If part of your pay is deferred shares or a deferred bonus, read the clawback and forfeiture rules closely. A discretion described as "absolute" can still come with conditions, and a court will check whether the decision-maker answered the question the contract sets.

Clawback and forfeiture differ. A clawback usually needs a decision under the clause. Forfeiture can be automatic on resignation or termination on notice, though a "good leaver" may keep the shares. Employers should make the decision the clause requires and record it at the time. If deferred pay has been withheld or clawed back, consider getting advice early.