EN
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.