Legal Update: Damages awarded for employee’s breach of fiduciary duties

In Green Light Multiplex Co. Ltd v Lam Shi Yan and Another [2024] HKCFI 2101, the Court of First Instance considered a dispute of an employee being alleged of breaching his fiduciary duties and an employer being alleged of breaching the implied duty of mutual trust and confidence.

Facts

The 1^st defendant (“Defendant”) was employed as a General Manager responsible for the daily management and performance by the plaintiff company (“Plaintiff”). It was also undisputed that the Defendant was hired for his specific network of potential customers and suppliers as well as his expertise in a new area of business of the Plaintiff’s industry.

Over the years, the Defendant expanded the Plaintiff’s business into a new market segment for the Plaintiff and procured an exclusive distributor agreement (“EDA”) with a supplier for a several years on which various Plaintiff’s contracts will depend.

About a year later, the Defendant tendered his resignation letter. The Defendant then left his position about a month later with the Plaintiff’s consent.  

The Plaintiff claimed that the Defendant breached his fiduciary duties in the period leading to his departure by:-

• diverting business away from the Plaintiff during the last months of his employment;

• causing the termination of the EDA leading to the loss of business and contracts which depended on the EDA’s continued performance;

• interfering with the Plaintiff’s business relationships and opportunities with various other parties through his conduct and representations in meetings and correspondences; and

• wrongfully disclosing trade secrets and confidential information of the Plaintiff during his notice period.

On the other hand, the Defendant’s case was that the Plaintiff acted in repudiatory breach of the implied term of mutual trust and confidence by changing his duties and stripping him of certain powers (e.g. by excluding him from management duties and meetings), which he alleged to have ‘drastically’ changed the nature of his employment.

Court’s Analysis

A. Fiduciary Duties

In considering whether an employee (who is not a director of the employer) can owe fiduciary duty to his employer, the Court adopted the analysis of University of Nottingham v Fishel [2000] ICR 1462 and noted that:-

1. it will consider the “particular duties undertaken by the employee” and whether “in all circumstances he has placed himself in a position where he must act solely in the interest of his employer”; and
   
2. it will not simply look at a specific type of employment per se, but the obligations which the employee has undertaken under the employment contract and the employee is in a equivalent position which equity imposes rigorous duties on top of the contractual obligations.

In this case, the Defendant was hired as a General Manager and was specifically recruited to expand the Plaintiff’s business relying on the Defendant’s expertise, bringing over his connections in an industry/market where the Plaintiff was not previously involved.

In the circumstances, the Court was satisfied that the Defendant owed fiduciary duty to the Plaintiff because of the position he put himself in with respect to his employment with the Plaintiff.  

B. Implied Terms

The Defendant contended that the Plaintiff was subject to the following implied terms:-

(1) the implied term of mutual trust and confidence;

(2) the Plaintiff shall not unilaterally change the status, functions and/or nature of the employee’s job,
including by varying or taking away employee’s responsibilities, duties and/or powers;

(3) the Plaintiff shall not hinder, obstruct or prevent the performance of the employee’s duties and
responsibilities; and

(4) the Defendant shall be given prior notice of any changes in personnel and/or be involved in any
such changes.

The Court readily accepted the implied terms (1) and (3) as they both fall under the well-established implied term of mutual trust and confidence in employment contracts. (For a detailed explanation of this implied term please see our recent article on this topic here.)

The Court considered that while there is an implied term that the employer shall not unilaterally change the whole nature of an employee’s job, the term was not breached by the employer’s minor adjustments made to aspects of the job and role. The court noted:

“…it must be emphasized that the most important duty of the 1st defendant – getting in project lighting business for the plaintiff – was not affected at all. Therefore, it cannot be said that there was a fundamental change to the whole nature of the 1st defendant’s job, not to mention that there was no demotion as such;”

The implied terms (2) and (4) were not held to be applicable in this case.

The Court further remarked that the Plaintiff did not do anything wrong or commit a breach of the implied term of trust and confidence in taking away the Defendant’s authority after he had resigned. This seems to echo the conclusion reached by the Court in the case of Lam Siu Wai v Equal Opportunities Commission (HCLA 21/2020) that the implied duty of trust and confidence is about the maintenance not the termination of an employment relationship. (Please refer to our article here for further details.)

C. Outcome

Having made the above analysis, the Court held that the Defendant breached the implied term of fidelity and his fiduciary duty owed to the Plaintiff by acting in a manner detrimental to the Plaintiff by attending various meetings and sending correspondence with third parties which resulted in:-

1. loss of various projects which the Plaintiff was engaged in;
   
2. diversion of potential business which the Plaintiff could have engaged in; and
   
3. loss of rights as sole distributor including the loss of the EDA.  

As a result of Defendant’s breaches, he was liable to compensate the Plaintiff more than HK$2.5 million in damages (which were judicially set off against his successful counterclaim for a performance bonus).

However, the Court found that there was insufficient evidence to establish that the Defendant breached the implied term of fidelity and good faith by the alleged non-disclosure of trade secrets and confidential information to third parties.

The Court also dismissed the Defendant’s counterclaim for the Plaintiff’s breach of the implied terms of mutual trust and confidence.

Key Takeaways

The above case confirms that fiduciary duties can arise in respect of an ordinary employee who may not hold any directorship but may be in a position of importance of an employee. It also shows that an employer can vary, take away or add different responsibilities, duties and/ or powers without breaching the implied terms of the contract. However that is a matter of fact and degree and emphasises the importance of expressly reserving the right to change the nature of the employee’s role and duties in the employment contract.

Notwithstanding above, the issue of whether fiduciary duties can arise in an employment relationship and whether certain terms can be implied into an employment contract are highly fact-sensitive. Employer should consider seeking legal advice when managing any conflict in a relationship so as to minimise the risk of litigation where the outcome may be uncertain.  

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.