Legal Update: The High Court confirms and restates the employer’s right to terminate under contractual provisions, and the limited effect on that right of the implied duty of trust and confidence in employment contracts

The Duty

The implied duty of mutual trust and confidence (the “Duty”) was first recognised in the UK case of Malik v BCCI [1998] AC 20 and was later adopted by the Hong Kong Courts in Evelyn Semana Bachicha v Poon Shiu Man Henry (CACV 55/2000) . Essentially, it is a duty implied by the courts in an employment contract that the employer and the employee may not, without reasonable and proper cause, conduct themselves in a manner likely to destroy or seriously damage the relationship of trust and confidence between them.

Lam’s case

In the recent judgment handed down by the Court of First Instance in the Labour Tribunal appeal case of Lam Siu Wai v Equal Opportunities Commission (HCLA 21/2020), it was affirmed that the Duty does not apply to the act of termination of an employment relationship, in itself.

In that case, the Claimant (Lam), who was a former employee of the Equal Opportunities Commission (EOC), was dismissed by the EOC with immediate effect by payment in lieu of notice.

1. Lam claimed damages for the wrongful dismissal by the EOC on the ground that it acted in breach of the Duty in terminating her employment. She relied on EOC’s statement in her termination letter that “your recent attitude and behaviour do not closely match with the requirements of this senior position …” (the “Dismissal Reason”) and challenged that her termination was in bad faith and not for a valid reason under the Employment Ordinance.
    
2. EOC’s position was that there was no obligation to provide any reason or valid reason for the termination of Lam’s employment without cause and it had paid all termination payment due to her.

Having considered the evidence, the Labour Tribunal held that the EOC had failed to prove that the Dismissal Reason was a ‘true and valid’ reason for dismissing Lam. It also found that the EOC breached the Duty as it was ‘possible’ that the Chairperson of the EOC ‘retaliated’ against Lam for her involvement in an internal dispute and created a pretext to dismiss her. The Tribunal allowed Lam’s claims and awarded damages to her.

On appeal to the Court of First Instance, in considering the key issue of whether the Duty is applicable to a termination of the employment, it made the following points.

1. It considered the starting point that a contractual right to terminate an employment can be exercised unreasonably or capriciously so long as the right is exercised in accordance with the contract.
    
2. The Court considered that the case of Tadjudin Sunny v Bank of America, National Association (CACV 12/2015) does not assist Lam.
   
   
   1. In Tadjudin, having regard to the Duty, the Court of Appeal implied a term into an employment contract in that case that the employer was not to exercise its right to terminate the employee’s employment in order to avoid her being eligible for performance incentive program.
       
   2. It was considered that Tadjudin was decided on its own ‘narrow and specific’ facts and was not an authority which could support a contention for the Duty to apply to termination of an employment relationship.
       
3. Lam was also not assisted by the case of Williams v Jeffries Hong Kong Ltd (HCA 320/2011).
   
   
   1. In Williams, before summarily dismissing the employee for gross misconduct, the employer sent messages to third parties wrongly attributing the fault of the alleged misconduct to the employee resulting in stigma and damage to the reputation of the employee The Court awarded “stigma damages” to the employee for breach of the Duty on the basis that the public statements in relation to his misconduct were a separate and distinct breach of the Duty.
       
   2. It was considered that Williams was determined on the fact that the employee in that case was summarily dismissed for gross misconduct (whereas Lam was not) and it was unclear for the decision how damages awarded were related to the breach of the Duty.

In the end, the Court dismissed Lam’s claim by holding that the termination was in accordance with its right under the employment contract and under section 7 of the Employment Ordinance (i.e. by payment in lieu of notice) and thus it did not matter the reason behind the exercise of such right.

The Court also made it clear that it is inappropriate to apply the Duty to the termination of an employment itself, as that would have a far reaching effect on employment law. The introduction of any limits on the right to exercise a contractual provision for termination, such as requiring sufficient or valid reason, in good faith, should be a matter left to the legislature.

As regards the level of damages, the court further and restated noted that “an action for wrongful dismissal (in breach of contract) could yield no more than the salary which should have been paid during the contractual period of notice”.

In reality, the Court’s decision and reasoning in Lam as to the scope of the Duty is merely a restatement of the correct and well-established legal principle of what is recoverable in a claim for wrongful dismissal. The issue was recently examined in detail in the UK Supreme Court case of Edwards v Chesterfield Royal Hospital NHS Foundation Trust [2011] UKSC 58.

Scope of the Duty

The Edwards case concerned two appellants seeking damages against their former employers for breach of the Duty on the ground that the employers had failed to comply with certain contractual disciplinary procedures which resulted in their wrongful dismissal.

The Supreme Court referred to the decision of an earlier case of Johnson v Unisys Ltd [2001] UKHL 13 in which the House of Lords had held that an employee’s claim to recover damages at common law for loss arising from the manner of his dismissal is limited with reference to the contractual notice period on and cannot be recoverable for breach of the Duty, in respect of the act of termination itself.

Applying the same principle, the Supreme Court in Edwards considered whether the loss forming the basis of the claims flowed directly from the employer’s failure to follow the disciplinary procedures which led to the claimants’ dismissal or whether there were earlier events which preceded and were separate and independent of the act of dismissal itself.

The majority of the Supreme Court held that both claims fell outside the scope of the Duty and the claim for damages for wrongful dismissal should fail as:-

1. one of the appellants was clearly claiming additional losses suffered ‘as a consequence’ of the dismissal; and
    
2. for the other appellant, even though the claim was related to breach of procedures by the employer in making disciplinary findings, such findings were part and parcel of the actual dismissal complained of and the breach did not of itself cause any separate/independent and identifiable loss.

Returning to the cases of Lam and Williams (which Lam sought to rely on above), the court’s decisions in both case are consistent with the principles reiterated in Edwards case.

1. Lam was a claim for damages directly linked to the dismissal and the underlying reasons for it, which is outside the scope of the Duty and did not give rise to damages recoverable under common law.
    
2. On the other hand, Williams was distinguishable because the employer’s act of making public announcements stigmatising Mr. Williams constituted a separate cause of action accrued or acquired before the dismissal and separate from the act of dismissal. It was that separate breach of the Duty which therefore entitled the employee to recover damages at common law for the loss caused by that stigma.

This approach and these outcomes are consistent with the Hong Kong case which first recognised the duty Evelyn when the Court of Appeal first applied Malik in Hong Kong.

1. The case concerned a domestic helper who claimed that she had been constructively dismissed by her employer due to the oppressive work environment and the abusive behaviour by the employer.
    
2. Based on Malik the lower Court awarded additional damages to the domestic helper, above her notice period, for the additional financial loss she suffered due to the constructive dismissal. This was challenged by the employer on appeal.
    
3. The Court of Appeal considered that the employer’s treatment of the domestic helper went beyond a claim for damages flowing from the manner of dismissal, and that such conduct also amounted to a separate and independent cause of action constituting a breach of the Duty.
    
4. On such basis, the Court awarded the damages to the domestic helper by assessing the foreseeable consequences of such breach of the Duty, which was not subject to the principles limiting the damages recoverable in wrongful dismissal cases.

To sum up, and as can be seen from the Bachicha case, the position has always been clear that no damages can be recovered under a claim of a breach of the Duty for the manner of and reason for the dismissal unless there is an act separate and independent from the dismissal constituting a breach of the Duty.

Conclusion

The Lam case is an important reminder to the employers in Hong Kong that they should remain vigilant in handling the dismissal of an employee whilst there is, in general no limit on an employee’s rights to exercise their contractual and statutory rights of termination, they should, nevertheless,  take particular care to:-

• not conduct itself in a way which may give rise to a separate cause of action and risk a separate and independent breach of the Duty; and

• refrain from making any formal statement as to the underlying termination reasons when they are terminating an employee’s employment by way of notice or payment in lieu (i.e. not for cause) which might be considered untrue or in bad faith, to minimise the risk of attracting a breach of Duty claim.

Russell Bennett & Mark Chiu

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

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Russell Bennett
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.