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In a recent judgement Yang Zhizhong v Nomura International (Hong Kong) Limited [2024] HKCFI 2192, the Court of First Instance (“Court“) discussed implied terms in employment contracts in detail.
Yang, a former Senior Managing Director of Nomura International (Hong Kong) Limited (“Nomura“), is claiming against Nomura for breach of his employment contract following Nomura’s termination of his employment. Nomura engages in investment banking activities and equity research activities in Hong Kong, and is regulated by the Securities and Futures Commission (“SFC“).
Yang was appointed as Chairman of the Investment Banking Division in 2011. In 2015, he arranged and attended a three-way meeting between he, Ms Liu (who was the Head of China Equity Research and China Strategist for Nomura) and the CEO of Huatai Securities Co Ltd (a potential applicant for an initial public offering (“IPO“) (“Three-Way Meeting“). Nomura was subsequently mandated a role in the IPO.
In 2016, the SFC carried out a routine inspection of Nomura’s business and expressed its concern about the Three-Way Meeting, which created a potential conflict of interest between Nomura’s investment banking division (which earned fees from promoting an IPO) and the research division (which was in a position to influence the investing public through its published research). After conducting internal investigations, Nomura considered that Yang had not taken proactive steps to manage any such perceived conflicts of interest. This eventually led to the termination of Yang’s employment by Nomura.
There had also been separation discussions between Yang and Nomura following Yang accepting an offer from HSBC, however, they did not agree on the terms eventually.
Yang alleged that Nomura breached the implied terms of his employment contract by:
1) Issuing a warning letter;
2) Refusing to grant him the discretionary bonus for the performance year 2016/17; and
3) Terminating his employment on the grounds of redundancy.
The Court dismissed Yang’s claims and discussed amongst others, the following implied terms of his employment contract:
Mutual Trust and Confidence
The Court confirmed the test for the implied obligation of mutual trust and confidence, that is:
1) Whether the employer’s conduct was likely to destroy or seriously damage the relationship of trust and confidence between employer and employee. This is to be assessed objectively, by reference to all the circumstances;
2) Whether there was reasonable and proper cause for the conduct; and
3) Whether the conduct was calculated to destroy or seriously damage the relationship.
The issues that the Court was asked to determine was whether such implied obligation applied to (i) Nomura’s decision to issue the warning letter; (ii) Nomura’s decision not to award Yang any bonus for 2016/17; and (iii) Nomura’s decision to terminate Yang’s employment. The Court refused to apply this obligation to Nomura’s decision to terminate Mr Yang’s employment because this duty is concerned with the preservation of the continued relationship between an employer and employee and therefore, could not be applied to the termination of the relationship.
The court further held that there was no breach of the implied term of mutual trust and confidence by Nomura in issuing a warning letter due to Yang’s misconduct, since Nomura was acting in accordance with the provisions in Nomura’s employee handbook. There was also no breach of the implied term of mutual trust and confidence by Nomura in refusing to award a discretionary bonus because by the time Nomura made its decision, it still intended to preserve an amicable relationship for the remainder of Yang’s employment during the separation discussions.
The Duty in Braganza v BP Shipping Ltd and another [2015] 1 WLR 1661 (“Braganza Duty“)
The Court confirmed the test for the Braganza Duty (i.e. a duty to exercise its discretion in good faith, rationally and for proper purposes, and not arbitrarily or capriciously or in a manner which is not bona fide, where a contract provides for an apparently unqualified power or discretion), that is:
1) Whether Nomura took into account all relevant considerations and excluded irrelevant ones; and
2) Whether the result was so outrageous that no reasonable decision-maker could have reached it.
The Court held that the Braganza Duty applied to Nomura’s decision not to grant the discretionary bonus to Yang and co-existed with the implied term of trust and confidence.
Applying the legal test, the Court found on the facts that Nomura did not act irrationally (and thus was not in breach of the Braganza Duty) in making such decision, since it had considered all relevant considerations e.g. Yang’s misconduct and his diminishing financial contributions to Nomura, and excluded all irrelevant ones.
Anti-avoidance Term
This term concerns whether Nomura exercised its right to terminate Yang’s employment (by giving three months’ notice in writing or by paying in lieu of notice) in order to avoid Yang being eligible for or receiving a bonus award.
On the facts, the Court held that although Yang’s employment was not terminated on the ground of redundancy, Nomura was entitled to terminate Yang’s contract on three months’ notice. The termination could not have been for the purpose of depriving Yang of the discretionary bonus, because the notice of termination was given after the bonus decision had been made.
Conclusion
The Court accordingly did not find any breaches of the aforesaid implied terms on the part of Nomura.
This case offers useful guidance as to the tests to construe implied terms of an employment contract, giving both employers and employees more clarity as to their respective rights and obligations. Employers are reminded of the duty to exercise discretions in good faith, rationally and for proper purposes, even where they have sole or absolute discretions. This is particularly relevant in their exercise of discretion as to whether or not to grant bonuses to their employees. Employers should also note that to the extent that disciplinary proceedings are contractual in nature, they must follow the disciplinary process provided for.
The full judgment can be accessed here.
On 30 September 2024, the Court handed down the Reasons for Decision (HCMP 736/2019, the “Fujian Nuoqi Case“) in relation to the disqualification order against the former CFO of Fujian Nuoqi Co., Ltd. (“Fujian Nuoqi“). The CFO was disqualified from being involved in the management of any corporation in Hong Kong for three years and was ordered to pay the Securities and Futures Commission’s (“SFC“) costs.
In the SFC’s press release dated 18 October 2024, the SFC’s Executive Director of Enforcement emphasized the importance of CFOs in safeguarding business assets, ensuring accurate financial disclosures, and reporting suspicious transactions to the boards. In particular, the SFC commented that the Fujian Nuoqi Case has made it clear that CFOs have “supervisory duty to make proper enquiry about suspicious transactions and promptly report them to the boards“.
In the Fujian Nuoqi Case, according to the SFC’s investigation, RMB225 million from Fujian Nuoqi’s IPO proceeds was withdrawn shortly after the listing of Fujian Nuoqi shares in January 2014 without proper approval and not for genuine commercial purposes. In giving the disqualification order, the Court remarked that there was a marked degree of incompetence and negligence on the part of the CFO but there was no allegation of dishonesty. It was a case where the chairman and CEO of Fujian Nuoqi withheld information from the CFO.
It may be beneficial to compare the Fujian Nuoqi Case with an earlier case (HCMP 1462/2019, the “Changgang Dunxin Case“) in which the SFC successfully obtained disqualification and compensation orders against the former CFO of Changgang Dunxin Enterprise Company Limited (“Changgang Dunxin“). In this instance, the former chairman and executive director of Changgang Dunxin had misappropriated funds from share and bond placements. The CFO not only failed to notify the auditors, the audit committee, and the board about the chairman’s misappropriation of HKD163 million but also took actions to conceal the misappropriation. As a result of his serious misconduct, he was disqualified for 10 years and ordered to repay the misappropriated sum plus interest, along with covering the SFC’s costs.
Such cases relating to the CFO’s duty to “report and protect” highlight the importance of corporate governance and the CFO’s expanding role. The scope of the CFO’s duties has expanded far beyond traditional finance, necessitating a more comprehensive grasp of new challenges and risks. Historically, the CFO’s main role centred on financial stewardship, ensuring the company’s financial health and ability to meet its obligations. Although this remains a crucial responsibility, today’s CFO must navigate a broader range of tasks. The modern CFO needs to be well positioned to address various matters beyond a company’s finances, including corporate governance, risk management, and maintaining robust internal control systems.
For the third straight year, MinterEllison LLP is thrilled to be an industrial partner of the ARCH Community Outreach (“ACO“) Careers Program 2024, providing valuable job shadowing opportunities for local secondary school students to have a taste of working in the legal industry.
Following the conclusion of the ACO Careers Program 2024, our Paralegal (Pending Admission) Alan Sham and trainee solicitor Matthew Lau were invited to attend the Graduation Day and to sit on the panel of the presentation session on the 1st of September 2024, during which the students were given the opportunity to present what they have learnt throughout the Program, as well as network with representatives from various industrial partners of the Program.
We are pleased to have witnessed what the students have learnt throughout the Program, and are especially overjoyed to hear the feedback from students who have been with us during our 2-day work shadow programme on the 8th and 9th of August 2024. Participating in the ACO Careers Program is one of the many ways we at MinterEllison LLP contribute to the community, and we continue to look forward to future initiatives to foster the next generation of legal professionals.
In the recent case Green Light Multiplex Co Ltd v Lam Shi Yan [2024] HKCFI 2101, the Court of First Instance (“Court“) awarded over HK$2 million to an employer for breach of contractual and fiduciary duties by a former employee who wrongfully diverted business opportunities away.
Background
The 1st Defendant, Mr. Lam Shi Yan (“Lam“), was employed as the General Manager of the Plaintiff, Green Light Multiplex Co. Limited (the “Company“), which was originally engaged in the business of lighting components supply. Lam was hired to, among other things, expand the Company’s business into the project lighting business.
In this connection, Lam procured Abacus Lighting Limited (“Abacus“) to enter into an exclusive distributor agreement with the Company (the “EDA“). Under the EDA, the Company had the exclusive right to purchase, promote, and sell Abacus’ products and services in Hong Kong and Macau.
The relationship between Lam and the Company subsequently deteriorated in many respects. Lam alleged that Mr. Gordan Lai (“Lai“), the founder and Managing Director of the Company, stripped him of his powers and responsibilities through, for example, firing Lam’s subordinate without consulting him in advance. Lam contended that he had no choice but to resign given that the trust and confidence of the employment relationship had been undermined.
On the other hand, the Company, among other things, alleged that Lam wrongfully procured Abacus to breach the EDA, causing the Company to lose its exclusive distributorship to Pinetum Lighting Limited (“Pinetum“), a competitor of the Company which Lam later joined (although Lam denied that he had ever been employed by Pinetum). As a result, the Company lost further business opportunities in various construction projects.
In the circumstances, the Company claimed against Lam for breach of various implied terms of his employment contract and his fiduciary duties owed to the Company, which gave rise to loss of business opportunities and profits.
Implied terms of Lam’s employment agreement
Both the Company and Lam contended that certain terms had been implied into Lam’s employment contract. The Court accepted the Company’s case that the following duties owed by Lam were indeed implied into his employment contract: (1) a duty of fidelity and good faith; (2) a duty not to divert business opportunities; (3) a duty not to solicit customers; (4) a duty not to disclose confidential information; and (5) a duty not to use information obtained in the course of or as a result of his employment with the Company to the detriment of the Company.
The Court also accepted Lam’s case that there was an implied term that he would not be demoted, provided that the change of title would lead to a fundamental change to the whole nature of the job.
Fiduciary duties owed by Lam to the Company
The Court held that in determining whether an employee who is not a director owes fiduciary duties to the employer, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interest of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached. An analysis is therefore required as to whether in all the circumstances, and by reference to the specific contractual obligations, the employee has undertaken to act solely in the employer’s interests.
Here, considering the two factors below, the Court had no hesitation in concluding that Lam, as the General Manager, owed fiduciary duties to the Company, even if he was not a director of the Company:
Diversion of business opportunity and breach of duties by Lam
After considering a multitude of factual evidence adduced by the parties, it was held, among other things, that:
Takeaways
Apart from the general duty of fidelity and good faith that all employees owe to the employer, employees of sufficient seniority may also owe fiduciary duties to their employer if they have undertaken to act solely in the interest of the employer under the employment contract, notwithstanding that they are not directors. In general, fiduciary duties are higher and stricter than duty of fidelity.
Further, even in the absence of post-termination confidentiality obligations and restrictive covenants (which are commonly provided for in employment contracts to prevent employees from joining a competitor and soliciting business from former clients immediately after termination), the Court is ready to award damages to the employer if an employee’s conduct is found to be in breach of the implied terms of his/her employment contract and/or fiduciary duties owed to the ex-employer.
The full judgment can be accessed here.
On 23 August 2024, the Court of First Instance of the High Court (“Court“) in ING Bank N.V. v Industrial and Commercial Bank of China Limited [2024] HKCFI 2220 dismissed the defendant’s application for proceedings to be stayed in favour of Xi’an Intermediate People’s Court (“Xi’an Court“) on the ground of forum non conveniens (“FNC“).
The judgment contained a helpful summary of the principles governing FNC challenges and in particular where foreign law is said to apply to the matters in dispute.
Background
The plaintiff, a well-known international bank and one of Europe’s largest, was the vendor’s banker in a series of international sale of goods transactions with a total value of around US$171 million. The defendant is one of the largest banks in the world.
The payment terms for the transactions were DP (documents against payment) at sight. Pursuant to this arrangement, the documents of title and other commercial documents were delivered by the plaintiff (as the remitting bank) to the High-Tech Industries Sub-Branch of the defendant (“HTI-SB“) (as the collecting bank) for collection of the purchase price from the purchaser. The International Chamber of Commerce (“ICC“) Uniform Rules for Collections 522 (“URC“) were incorporated into the contract between the plaintiff and the defendant.
The plaintiff claimed that the defendant acted contrary to the collection instructions given to its branch HTI-SB and released the documents to the purchaser without collecting the purchase price. The defendant denied that it was required to act in accordance with the vendor’s direct instructions and relied on course of dealings and applied for proceedings to be stayed in favour of Xi’an Court.
Principles on FNC
The Court applied the test of FNC summarised in SPH v SA [2014] 17 HKCFAR 364 at [51] as follows:-
(a) The single question to be decided is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action, ie, in which the action may be tried more suitably for the interests of all the parties and the ends of justice?
(b) In order to answer this question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum (‘appropriate’ in this context means the forum which has the most real and substantial connection with the action) and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong. Failure by the applicant to establish these two matters at this stage is fatal.
(c) If the applicant is able to establish both of these two points, then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantage if the action is tried in a forum other than Hong Kong.
(d) If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer. Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum.
The Court’s Analysis
Appropriate Forum
As a first step, the Court looked for the forum which has the most real and substantial connection with this action taking into account the following factors:
Governing Law
The defendant asserted that Chinese law governed the relationship between the plaintiff and defendant and so the issue of governing law was also a key issue in the application. Nonetheless, the Court agreed with the plaintiff that (a) the Court would not make a final decision on proper law, which may be revisited at trial; (b) the Court would consider the proper law to assess the appropriate forum; and (c) if there is a good arguable case that Hong Kong law is the proper law, then it should follow that Hong Kong court is the appropriate forum.
In determining whether Hong Kong has the closest and most real connection with this action, the Court considered the following factors:
After evaluating the above factors, the Court believed that there is a good arguable case that Hong Kong law is the proper law because Hong Kong has the closest and most real connection with this action.
Accordingly, although the Court accepted that the Xi’an Court is perfectly capable of dealing with international transactions of the present type, the Court concluded that Hong Kong is the appropriate forum which has the most real and substantial connection with this action and it was not satisfied that Xi’an Court is clearly or distinctly more appropriate forum to hear this action.
Takeaways
This case provides helpful guidance on the jurisdictional disputes and conflict of law issues where the parties have not incorporated a jurisdiction or governing law clause in their contracts as is common in documentary credit and collection arrangements between trade finance banks.
Jurisdiction disputes of this nature can often be avoided by incorporation of suitably drafted jurisdiction or arbitration and governing law clauses in transaction documents.
Please see full judgment here.
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