Limits on the use of discretion – Gagliardi v Evolution Capital Management

The case of Gagliardi v Evolution Capital Management highlights limits on the use of discretion

The High Court’s decision in Gagliardi v Evolution Capital Management LLC is one of the most significant recent rulings on the exercise of employer discretion in bonus schemes. For businesses operating employee incentive plans, particularly those involving discretionary elements, the case provides an essential reminder: “discretion” does not mean unlimited freedom.

Background to the Dispute

Robert Gagliardi was a highly successful portfolio manager hired by Evolution Capital Management (ECM) to build and run its block trading fund. His employment contract included a discretionary bonus clause tied to his individual performance and profit generation, with a target range of 10–15% of profit, though expressed as “purely discretionary.”

In 2021, Gagliardi’s trading generated extraordinary results, accounting for 97% of the fund’s revenue and USD $35.9 million in net profits. Despite this, ECM awarded him a zero-bonus following his dismissal in early 2022. ECM argued that it retained a broad discretion under the contract, particularly because of an ongoing U.S. regulatory investigation into industry‑wide block trading practices.

Gagliardi pursued a claim in the High Court for breach of contract.

The Court’s Findings: Discretion Must Be Rational and Purpose‑Driven

The court ruled decisively in Gagliardi’s favour and awarded him USD $5.385 million in damages, the bonus that should have been paid had ECM exercised its discretion lawfully.

The judgment affirms three key principles highly relevant to employee ownership schemes and incentive structures:

1. Contractual Discretion Is Not Unfettered

Although the bonus clause was described as discretionary, the court held that ECM could not lawfully award zero where the contractual purpose of discretion was to assess Gagliardi’s revenue generating performance. Discretion must be exercised in line with the purpose of the clause, not used to achieve unrelated objectives.

2. Discretion Must Be Exercised Rationally, Not Arbitrarily

The judge found ECM’s refusal to pay any bonus to be irrational, arbitrary, and capricious, given the scale of Gagliardi’s trading profits. No reasonable employer would conclude that a performance linked discretionary bonus should be zero in such circumstances.

3. Employers Cannot Rely on Extraneous Factors

The court rejected ECM’s argument that reputational concerns and regulatory investigations were valid reasons to refuse payment. These matters were unrelated to the performance based purpose of the discretionary bonus clause.

Why This Matters for Companies and Employee Ownership Structures

For organisations implementing employee incentive plans especially those offering performance related bonuses, profit shares, or equity linked compensation the ruling reinforces that:

• Discretion must be tethered to clear contractual principles.
• Employers should retain documented, objective criteria for discretionary payments.
• Decisions must be consistent, rational, and evidence‑based.
• Discretion cannot be used to withhold rewards for reasons unrelated to performance.

Conclusion

Gagliardi v ECM is a clear warning to employers: where incentive plans rely on discretionary elements, that discretion must be exercised lawfully, rationally, and for the contractual purpose intended. For companies designing or operating employee ownership and reward structures, the message is simple – any discretion provisions need to be drafted with care to ensure they accurately reflect the intended parameters.

If you’d like help reviewing the discretion elements in your own incentive plans, RM2 would be delighted to assist. Please drop us a line at enquiries@rm2.co.uk, and we’ll be happy to set up a call.