Commercial Division Blog
Agreement to Pay Bonus Unenforcable Without Formula for Computing the Amount of the Bonus
On November 27, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Gallotti v. Advance Watch Co. Ltd., 2013 NY Slip Op. 33009(U), dismissing a breach of contract claim because there was no standard for determining the amount the plaintiff was owed under the agreement.
The plaintiff in Gallotti entered into an employment agreement with defendant. The agreement provided that plaintiff was
eligible for a Medium Term Incentive based on the increase in the shareholder value of [the defendant]. The objectives and metrics used to define and measure the achievement under this plan will be defined within one month from the approval of the strategic business plan of [defendant].
Defendant "never defined any objectives and metrics, and" plaintiff "was never paid" a Medium Term incentive bonus, even though the required increase in shareholder value allegedly occurred. After defendant terminated plaintiff's employment, plaintiff brought an action for, among other things, breach of contract for failure to pay the bonus.
The court dismissed the breach of contract claim even though plaintiff's employment agreement provided that he would be paid a bonus, writing:
It is well established that "a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. . . . .
A price term is not necessarily indefinite because the agreement fails to specify a dollar figure, or leaves fixing the amount for the future, or contains no computational formula. Where, as here, a bonus agreement exists, but specifics of how it is to be computed is left for future negotiation, the court can compel payment, but only if some objective method of determination is available, independent of either party's mere wish or desire. Such objective criteria may be found in the agreement itself, commercial practice or other usage and custom. If the contract can be rendered certain and complete, by reference to something certain, the court will fill in the gaps. In other words, the court can bind a defendant to a computational formula not expressly contained in the contract, but only if there is an objective method of creating such formula.
In this case, there are no objective criteria that can be used to compute the MTI Bonus. Though the MTI Bonus was supposed to be tied to an increase in shareholder value, which purportedly increased by $60 million during [plaintiff's] employment, there simply is no objective way to determine how much of such increase was meant to be remitted to [plaintiff]. In the complaint, [plaintiff] avers that he is entitled to at least $6 million. But, he provides no basis for maintaining that the MTI Bonus should be 10% of the increase in shareholder value. Indeed, any percentage proffered by [plaintiff], [defendant], or even this court will merely be a made-up number with no objective nexus to the parties' intentions. Even though [defendant] failed to define and measure the basis for calculating the MTI Bonus, the Agreement does not provide a remedy for such contingency. This renders the MTI bonus an unenforceable agreement to agree.
(Internal quotations and citations omitted).
Plaintiff was promised a bonus but that promise was unenforceable because the basis for calculating the bonus was not defined. Anyone drafting contracts should make sure not to leave their client in a similar situation.