The courts recently dismissed claims brought by a senior employee against his former employer for allegedly breaching several implied terms of his employment contract. The Plaintiff sought damages exceeding US$4 million.

Background

The Defendant is the Hong Kong office of a financial services group operating in Asia (excluding Japan), which is involved in investment banking (the 'private side') and equity research activities (the 'public side'). Both business divisions use either private or publicly available information. The Plaintiff was employed by the Defendant from around 2008 to 2017, holding senior roles during his tenure. Both the Plaintiff and the Defendant were licensed and registered with the Securities and Futures Commission (SFC).

In mid-2016, the SFC conducted a routine inspection of the Defendant's business practices.  A subsequent investigation uncovered various deficiencies and non-compliance issues related to the Plaintiff's conduct. The Defendant carried out internal investigations later that year, resulting in a written warning being issued to the Plaintiff, who then stepped down as Head of China.

Toward the end of 2016, discussions between the Plaintiff and the Defendant occurred regarding mutually agreed separation. However, they could not agree on terms, particularly concerning the Plaintiff's 2016/2017 discretionary bonus, leading to the cessation of negotiations.

Unbeknownst to the Defendant, the Plaintiff was pursuing a new job during the investigation. Rumours about his departure spread, and he accepted another job offer in May 2017.  On 31 May 2017, the Defendant gave 3 months' notice to the Plaintiff to terminate his employment due to redundancy.

Issue

The Plaintiff argued that the Defendant breached its implied duties by issuing a warning letter, not granting a discretionary bonus for 2016/2017, and terminating his employment on the grounds of redundancy. He claimed these breaches caused a loss of discretionary bonus, annual base salary and unvested bonus awards.

Decision

The Court of First Instance first considered whether the implied terms applied to the Defendant's decisions. The Defendant accepted that the implied term of trust and confidence applied to issuing the warning letter, while the Court also applied it to the decision to not to grant the discretionary bonus.

The Court evaluated whether the Defendant breached its implied duties as claimed by the Plaintiff. To breach, actions must be unreasonable, without proper cause, and calculated to or likely to destroy or seriously damage the relationship of trust and confidence between the parties. The Court found that the Defendant had valid reasons for the warning letter and did not breach the implied term of trust and confidence in this respect. Regarding the bonus, the Court determined that the Defendant's judgment had considered appropriate factors such as the Plaintiff's misconduct and intention to leave, thus not breaching any implied duty.

Regarding the termination of employment, the Court referenced previous cases affirming that an employer’s right to terminate without cause, per contractual notice provisions, cannot be limited by the implied duty of trust and confidence, which pertains to maintaining an active employment relationship, not termination. The employer’s right would only be limited if termination were meant to avoid bonus eligibility, a concept known as the implied anti-avoidance duty. The Court found that the Defendant followed proper procedures and was entitled to terminate the Plaintiff's employment contractually by giving notice and without cause.

Ultimately, the Court held that the Defendant's actions did not breach the employment contract, resulting in the dismissal of the Plaintiff's claims.

Key Takeaways

Employers should note that, whether or not terms are implied into an employment contract will be determined on a case-by-case basis. Even where such implied terms exist, if an employer is able to show that it has exercised its discretion rationally and with proper cause to support its decision, the courts will likely find in favour of the employer. Employers should review policies to ensure they cover the necessary decision-making steps, including the discretionary nature of bonuses and the criteria for their distribution. Maintaining comprehensive records of decisions can be critical in legal disputes.

This judgment aligns with previous case law on alleged breaches of implied terms, reminding employers to exercise discretion with caution and in good faith.

(For full text of the judgment: Yang Zhizhong v. Nomura International (Hong Kong) Ltd (27/08/2024, HCA622/2018) [2024] HKCFI 2192)

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