High Court dismisses claims against senior employees and confirms provisions of Employment Ordinance are part of the mandatory employment laws of Hong Kong

Feb252015

Summary

In a recent judgment, the Court of First Instance dismissed claims that a group of senior employees had breached their contractual and fiduciary duties by resigning and signing contracts to work for the same employer on the same day. The Court also confirmed that an employee working in Hong Kong is entitled to exercise rights under the Employment Ordinance (EO) even if his or her contract is stated to be governed by a foreign law. (Cantor Fitzgerald Europe and Cantor Fitzgerald (Hong Kong) Capital Markets Limited -v- Jason Boyer and Others [2012] HKEC 301 (Unreported, Reyes J, 29 February 2012).)

The case involved a number of claims by Cantor Fitzgerald against four former employees, all but one of which were dismissed by the Court. It addresses a number of issues that often arise in Hong Kong when one or more employees leave to join the same employer and is likely to be of interest to both employers and employees, particularly in the financial services sector in which Cantor Fitzgerald operates.

Key findings in the case include:

  • Freedom of choice of occupation is protected under Hong Kong law and an employee or director has the right to resign from his or her employment to work elsewhere;
  • “Kiss-and-tell” clauses requiring an employee to disclose approaches by a competitor will be construed strictly. Any ambiguity will be decided against the drafter of the clause. The term “competitor” may not encompass a business which is a start-up company;
  • Under sections 6 and 7 of the EO employees have the right to terminate employment by giving notice at any time or by agreeing to make a payment of wages in lieu of notice (PILN). These rights form part of the mandatory employment laws of Hong Kong and can be exercised by employees working in Hong Kong even if their contract is stated to be governed by foreign law;
  • Contractual terms which provided a narrow window for the employees to give notice and to pay liquidated damages higher than sums provided for in the EO for leaving before the end of the term reduced the employee’s rights under the EO and were not enforceable;
  • Restrictive covenants, including a 12 month non-poaching of employees clause, were unenforceable as there was no evidence to justify the length or scope of the restraints;
  • Cantor Fitzgerald was ordered to repay monies wrongly deducted from employee’s commission without his agreement.

The circumstances in which these findings were made is discussed in greater detail below.

Background

The Plaintiff employers were Cantor Fitzgerald Europe (CFE) and Cantor Fitzgerald (Hong Kong) Capital Markets Limited (Cantor HK). The four Defendants were all former executives who had held senior roles within Cantor Fitzgerald in Asia: Boyer was seconded from CFE to Cantor HK, where he was a director of Cantor HK and one of two leading resident executives in Asia. Ainslie and McGonegal were top revenue generators and co-heads of Cantor HK’s Cash Equities Desk who held the title of Managing Director. Von Parpart was Managing Director, Chief Economist and Strategist (Asia) and was responsible for providing research support.

On 30 May 2011 the four executives resigned from their employment with Cantor Fitzgerald and signed contracts with a new employer, Mansion House. The executives all terminated their employment by agreeing to make PILN the same day but did not begin work for Mansion House until September and October 2011.

Cantor Fitzgerald claimed that the four executives had breached their duties by procuring the others to resign to join a competitor, acting in concert to leave together to join a competitor and failing to disclose their intention to leave or the approaches made by their new employer.

CFE and Cantor HK had refused to accept the PILN tendered by Boyer, Ainslie and McGonegal, claiming that Boyer was not entitled to terminate by PILN because his employment contract was governed by English law and that the payments tendered by Ainslie and McGonegal were insufficient.

Cantor HK also claimed liquidated damages from Ainslie for terminating his employment before the end of the Renewal Term and sought to enforce a number of restrictive covenants in the executives’ contracts.

McGonegal in turn counterclaimed against Cantor HK for amounts he claimed were wrongfully deducted from commission due to him and given to him in the form of Cantor ‘grant units’ instead.

The Judgment

Employees not acting in concert and no breach of duty

The first issue determined by the Court was whether any of the Defendants had breached their fiduciary duties or duties of fidelity owed to Cantor Fitzgerald. The Court determined that Ainslie and McGonegal did not have any overall responsibility for the corporate governance of Cantor HK and did not owe fiduciary duties. For present purposes it was not necessary to distinguish too finely between the duty of fidelity and a fiduciary duty as the Court proceeded on the basis that where a person owes either a duty of fidelity or fiduciary obligation, that person must not act in a way which is contrary to the interests of an employer or company.

The Court stressed that this did not mean that an employee or director may not resign from his or her employment to work elsewhere as the freedom of choice of occupation is a right recognized at common law and guaranteed by the Basic Law: “The Court will not compel a person to serve as employee or director of a company against one’s will. For the Court to act otherwise would be tantamount to consigning an employer or director a form of enslavement.”

The evidence was that prior to their resignations, each of the executives were aware that the others were negotiating to join Mansion House, their draft contracts were nearly identical and that they instructed the same solicitors to revise their contracts with Mansion House. The Court determined that this was not sufficient for it to infer that they acted in concert or procured, persuaded or encouraged each other to resign. On the contrary, the evidence was that the executives made up their minds separately from each other. The Court held that the executives were not acting in concert and there was “no shred of evidence” that they had conspired to injure Cantor.

In any event, the Court was unable to conclude that Cantor HK had suffered anywhere near the 29% loss of revenue allegedly suffered due to the executives’ departures and that had it found any breach, it would have been hard-pressed to quantify damages at other than a nominal figure.

No breach of the “kiss and tell” clause as not a competitor

Cantor Fitzgerald argued that Boyer and Ainslie had breached their contract by not disclosing they had been approached to join Mansion House. Both had clauses in their contracts requiring that they disclose to Cantor Fitzgerald if they were approached to take up employment with a competitor.

The Court considered the expression “competitor” in the relevant clauses was vague and noted that any ambiguity in the sense of who was a competitor must be decided against the drafter of the clause, Cantor Fitzgerald. At the time the contracts were entered into Mansion House was emerging from the insolvency and near de-listing of its parent and was starting from scratch. The Court considered it would be wrong to read the expression “competitor” as encompassing a business which was little more than a start-up.

The Court held that a duty to inform an employer of one’s intended resignation or having been approached can only arise from (and must be strictly delimited by) the express terms in an employment contract. Even where there is an express term to such effect, given that an employee cannot be forced to work where one is unwilling, the Court noted it may be difficult to establish damage consequent upon the breach of the term as an employee is free to make up one’s mind whether to stay or leave. The Court expressed doubt at the suggestion that there was any duty on other employees at law or in equity to persuade another employee not to leave if the employee learnt the other was thinking of resigning.

Right to terminate by PILN part of mandatory employment laws of Hong Kong

Under section 6 of the EO either party to an employment contract may “at any time” terminate the employment by giving the other party notice under the contract. Section 7 of the EO further provides that either party may “at any time” terminate the contract without notice by agreeing to pay a sum by reference to the length of notice required multiplied by the average monthly wages earned by the employee during the 12 months before the date of notification.

CFE argued that Boyer was not entitled to terminate his employment in accordance with the EO because his contract with CFE stated that it was governed by English law “save for any mandatory employment laws of Hong Kong“. Boyer argued that ss6 and 7 EO were mandatory provisions of Hong Kong employment law, which overrode the express terms of his contract with CFE. Boyer’s Counsel referred to s70 of the EO, which nullifies any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred on an employee by the EO.

The Court agreed that given s70 of the EO, ss6 and 7 of the EO must be treated as over-riding provisions and that these provisions form part of the “mandatory employment laws of Hong Kong” binding on CFE.

The Court expressly disagreed with the reasoning applied in the earlier decision of HSBC Bank plc v Wallace, in which Deputy Judge Gill had held that the EO did not override a foreign proper law of an employment contract. The Court noted that “One cannot attempt to get around the protection afforded by the EO to employees working here through the expedient of choosing a foreign law. Such attempt will be struck down by EO s.70“.

Clause limiting when notice can be given unenforceable

Both Ainslie and McGonegal’s contracts provided that they could only give notice during a narrow window of two weeks at the end of the last month of the Renewal Period of their contracts. The contracts provided that their employment would then terminate “on the expiry of three (3) months (which period of notice the parties agree is reasonable) from the latest date notice could have been given”.

Ainslie and McGonegal had both tendered PILN for three months but Cantor HK argued that the period of notice required under the notice clause was three months after the end of the Renewal Period (a period of approximately ten and eight months respectively). The Court held that under ss6 and 7 of the EO Ainslie and McGonegal were entitled to give 3 months’ notice to terminate or 3 months’ PILN at any time and not just within the narrow window stated in the employment contract.

Liquidated damages claim dismissed

Cantor HK also claimed liquidated damages of US$1,430,340 against Ainslie under a clause in his contract, which imposed liquidated damages if Ainslie left Cantor HK without its consent prior to the expiry of the term of his employment contract. The Court dismissed this claim stating that Ainslie had legitimately terminated his employment in accordance with the EO and to impose liquidated damages in the circumstances would operate as impermissible fetter or restraint on an employee’s freedom to exercise the rights under ss6 and 7 of the EO.

The Court further noted that even if the clause was enforceable in principle, it must also be shown that the liquidated damages stipulated constitute a genuine pre-estimate of the damage to be suffered by Cantor HK as a result of Ainslie’s premature departure. The Court was not satisfied on the evidence that this was the case.

Restrictive covenants void and unenforceable

Cantor Fitzgerald sought to enforce a number of restrictive covenants contained in the executive’s contracts, including a restrictive covenant which restricted the executives from poaching certain Cantor Fitzgerald employees for 12 months after termination.

Whilst the Court was prepared to assume it was reasonable to protect Cantor Fitzgerald’s interest for the executives to be restrained from poaching certain employees, it held that the covenant was unenforceable as there was no evidence to justify the 12 month period imposed.

The Court declined to enforce a second restriction in Boyer’s contract, which enjoined him from commencing employment with certain classes of persons in a business in competition with Cantor for 12 months on the basis the covenant was too wide and there was ambiguity as to what constituted a business in competition.

The Court also commented on a number of the restrictive covenants that had expired before trial. Ainslie and McGonegal’s contracts both contained clauses restricting them from competing with Cantor Fitzgerald for six months after termination. The Court considered the clause was unreasonably wide and questioned how six months could be justifiable as no more than necessary to protect Cantor Fitzgerald’s interests. It noted that contractual acknowledgements that a restrictive covenant is reasonable are a factor to be taken into account by the Court but that the Court must still be satisfied (as it was not) on the totality of evidence that the restrictive covenants are no more than what is reasonably required to protect the legitimate interests of an employer.

Von Parpart’s contract contained similar restrictive covenants but for a period of three months only. The Court noted that the 3 month restrictions must still be regarded as too wide in the absence of evidence showing how the duration was reasonably necessary for the protection of Cantor HK’s interest. It observed that reasonableness may be hard to establish in light of Von Parpart’s limited functions, which were essentially confined to research and public relations within Cantor HK.

Employee required to repay loan by CFE

CFE was successful in its claim for repayment of a loan it had advanced to Boyer in the form of a Cash Advance Distribution Agreement (Cash AD), which was repayable on termination of his employment. Boyer had signed the terms of the Cash AD but claimed that it was not enforceable for various reasons including that it was not signed by CFE and that the Cash AD was part of his discretionary bonus entitlement. The Court determined CFE had offered the discretionary bonus subject to the terms of the Cash AD, which Boyer had accepted by signing the Cash AD. Boyer was bound by the terms signed by him and the Cash AD was accordingly repayable to CFE.

Cantor HK required to repay amounts wrongly deducted from commission

Under the terms of his contract, McGonegal was entitled to be paid commission. However, some 10% of the commission payable to McGonegal was paid to him from time to time in the form of Cantor Fitzgerald ‘grant units’ instead of in cash. McGonegal claimed repayment from Cantor HK of the deducted amounts on the basis he had not agreed to receive payment of his commission by way of grant units.

The Court found that McGonegal had signed two Incentive Unit Bonus Plan Award Agreements agreeing to receive part of his 2008 commission by way of grant units and was bound by his signature on those agreements. For subsequent commission payments, however, McGonegal had not agreed to receive any part of his commission in the form of grant units. The Court determined that Cantor HK had wrongly deducted the amounts from McGonegal’s commission and ordered that these be repaid to him with interest to run on the wrongly deducted sums from the date when the deduction was made.

Conclusion

This case provides some interesting guidance and reminders for employers and employees working in Hong Kong.

For employers, some of the key points to take away from this case are:

  • If an employer wants to require its employees to disclose if they are approached by a competitor, an express clause must be included in the contract and should be carefully worded to avoid any ambiguity.
  • Employers should ensure that the terms of their employment contracts are in accordance with the Employment Ordinance (EO) as any terms of an employment contract which extinguish or reduce rights, benefits and protections granted to employees under the EO will be null and void.
  • Contract clauses which purport to restrict the employee to giving notice during a narrow window are likely to be void and unenforceable.
  • If employees have been seconded from overseas or are employed in Hong Kong under contracts governed by foreign law, they are entitled to and should be afforded the same rights, benefits and protections that other employees are entitled to under the EO. Any contract term that purports to extinguish or reduce those rights will be void if exercised while the employee is based in Hong Kong.
  • Employees working in Hong Kong are entitled to terminate their employment at any time by giving notice or agreeing to make payment in lieu of notice even if the contract is governed by foreign law and/or does not provide for this.
  • Restrictive covenants should be drafted narrowly to ensure they protect the employer’s legitimate interests and go no further than is reasonably necessary to protect those interests. This can be more readily achieved if the covenants are tailored to the particular employee. Employers should be prepared and able to justify the scope and period of any restraint they seek to enforce. Covenants drafted too broadly without justification will be held to be unenforceable by the Courts.

For employees, additional points to take away from the case are:

  • An employee has the right to resign from his employment to work elsewhere although an employer may restrict the employee from engaging in certain activities post-termination for a limited period if the contract contains enforceable restrictive covenants.
  • An employee will be bound by the terms of any agreement he or she signs with the employer, save to the extent the terms are in breach of s70 of the EO or are otherwise void and unenforceable. Employees asked to sign any documents by their employer which may change or vary the terms of their employment should read the agreement carefully and take legal advice if they have any concerns regarding the terms offered.

Note: Tanner De Witt acted for the Defendants, Messrs Boyer, Ainslie, McGonegal and Von Parpart in Cantor Fitzgerald Europe and Cantor Fitzgerald (Hong Kong) Capital Markets Limited -v- Jason Boyer and Others [2012] HKEC 301 (Reyes J, 29 February 2012).

For further information, please contact:

Kim Boreham
Partner

Russell Bennett
Partner

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.