Legal Update: The Court confirms that employer’s duty of trust and confidence does not apply to the right to terminate

In the recent decision of Yang Zhizhong v Nomura International (Hong Kong) Limited [2024] HKCFI 2192 handed down by the Court of First Instance, the employer was successful in defending against the claims of breaches of implied terms of the employment contract. In that case, the Court has reaffirmed inter alia the following key legal principles in respect of the following terms that will generally be implied into an employment contract and relationship:-

• Implied duty of trust and confidence

i.e. “The employer shall not without reasonable and proper cause, conduct itself in a manner calculated and/or likely to destroy or seriously damage the relationship of confidence and trust between the employer and employee”, Malik v BCCI [1998] AC 20 (see also Grant David Vincent Williams v Jefferies Hong Kong Limited [2013] HKEC 1059)

• Braganza duty

i.e. a duty on an employer to exercise any contractual discretion in good faith, rationally and for proper purposes and not arbitrarily or capriciously or in a manner which is not bona fide, Braganza v BP Shipping Ltd & Another [2015] 1 WLR 1661

• Implied anti-avoidance term

i.e. a term necessary in order to give effect to the common, reasonable expectation of both employer and employee that the former could not exercise the power of termination in order to avoid giving the employee a benefit, Tadjudin Sunny v Bank of America, National Association, CACV 12/2015

Summary of the case

• The Plaintiff was one of the senior managing directors of the Defendant, a licensed corporation registered with the SFC.

• Following SFC inquiries and internal investigations about possible compliance issues in relation to the Defendant’s Chinese Wall policies with reference to Plaintiff’s conduct, a written warning was issued to the Plaintiff by the Defendant.

• Around the same time, the Plaintiff was headhunted by a competing bank.

• All the above came to a head when the Plaintiff was granted zero discretionary bonus for the year 2016/17. The Plaintiff found this to be unacceptable.

• After failed attempts by the Defendant to settle the matter with the Plaintiff, the Defendant eventually terminated the Plaintiff’s employment by giving the 3 months’ notice of termination specified in the employment contract on the grounds of redundancy.

• The Plaintiff commenced proceedings against the Defendant claiming, among other things, that the Defendant acted in breach implied terms of the employment contract by 1) issuing a written warning, 2) granting zero discretionary bonus and 3) terminating the employment.

The Court noted the following from the relevant legal authorities:-

• The Court restated that the implied duty of mutual trust and confidence first recognised in the case of Malik v BCCI [1998] AC 20 is only applicable during the course of an employment relationship and does not apply to the exercise of the right of dismissal by an employer (including the manner in which an employee is dismissed). Please refer to our detailed analysis of this duty in our previous article here.

• Separately, where a party has a contractual discretion, the exercise of such discretion is only limited by the Braganza duty. Braganza duty can co-exist with the implied duty of trust and confidence in employment contracts.

• In the circumstances, the Court concluded that while the implied duty of trust and confidence and the Braganza duty apply to the Defendant’s decision-making in the grant of discretionary bonuses, the duties did not apply to the decision to terminate / discontinue the employment. Insofar as the act of termination of employment is concerned, the only implied term applicable in this case was the anti-avoidance term.

Applying the above legal reasoning to the facts of the current case, the Court held that:-

• There was no breach to the duty of mutual trust and confidence by the Defendant’s issuance of the warning letter to the Plaintiff since both the SFC and internal investigations found concerns over his inability to recognise the perception of breach of regulations particularly given his duty as a senior managing director of ensuring the Defendant’s compliance with its own policies and regulations.

• There was no breach to the duty of mutual trust and confidence and the Braganza duty by the Defendant’s decision not to grant Plaintiff any discretionary bonus as the Court considered that the decision was made rationally with the consideration of proper factors, which was supported by the Defendant’s reasons and contemporaneous evidence. The matter remained one of discretion for the employer provided its processes and reasoning complied with the relevant implied terms.

• There was no breach to the anti-voidance term in the decision to terminate employment on the ground of redundancy as the bonus had earlier been determined as zero and the Unvested Bonus Awards was forfeited by Plaintiff’s own failure to sign the waiver. The stated ground of redundancy was used by the Defendant merely to “save the Plaintiff’s face” and the evidence showed that the Defendant had in fact offered to pay outstanding bonus for a general waiver of claims.

Key Takeaways

All in all, the Court reaffirmed and applied the well-established implied terms and duties in an employment relationship consistent with the past legal authorities. 

Nevertheless, it is helpful to note that this case demonstrates the importance for an employer to have contemporaneous records (which were vital to the Defendant’s defence in the case) of the decision-making process to show that the relevant decision is made properly and in accordance with the applicable duties.

Russell Bennett and Mark Chiu

For more information on employment matters, please contact:

Russell Bennett

Partner | Email

Mark Chiu

Consultant | Email

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.