The judgment supports a strict approach to incorporating implied terms into employment contracts and underscores the value of robust investigation and disciplinary processes.

Background

The employer was an investment bank ("Bank"). The employee was a senior executive ("Executive") who held dual roles as a country head and an investment banking division (IBD) role. As part of his employment, the Executive was required to comply with various Bank policies and procedures, including those contained in the Bank's Employee Handbook, Compliance Manual, Code of Ethics, and Conflicts of Interest Policy.

Following queries from the regulator and an extensive internal investigation, the Bank found that the Executive had not sufficiently managed conflicts of interest (or the perception of such conflicts) including when arranging and attending a meeting with a member of the Bank's equity research team and the CEO of a company which was a potential applicant for an IPO which the Bank was ultimately mandated for a role in. The Bank found that the Executive's conduct breached its internal policies and, following a disciplinary review committee process:

1. issued the Executive with a written warning
2. removed the Executive from his country head role
3. required the Executive to attend additional compliance training and restricted his activities in relation to his IBD role

Separation negotiations followed, but the parties were unable to reach an agreement.

When the Executive's discretionary bonus for the financial year 2016/17 was considered, the Bank awarded him a nil bonus. The Bank subsequently provided him with three months' notice of termination of employment on the ground of redundancy. His unvested bonus awards were forfeited in accordance with the applicable plan documents.

The Executive brought a claim alleging that the Bank breached various implied terms in issuing the warning letter, failing to pay the discretionary bonus, and terminating his employment. As a result of these breaches, he claimed damages of approximately USD 4 million for the loss of (i) the bonus award for the performance year 2016/17; (ii) salary; and (iii) unvested bonus awards granted in earlier performance years 2014/15 and 2015/16.

Judgment of the Court

Applicability of Implied Terms

The Court of First Instance affirmed the existence and importance of three key duties in employment contracts:

1. Implied Term of Trust and Confidence. In assessing whether there is any breach of this implied term, the court will consider:
   1. whether the employer's conduct was likely to destroy or seriously damage the relationship of trust and confidence between the employer and employee
   2. whether there was reasonable and proper cause for the conduct
   3. whether the conduct was calculated to destroy or seriously damage the relationship

The implied term of trust and confidence in this case applied to the decision to issue the warning letter to the Executive and the decision not to award a bonus. Applying the case of Lam Siu Wai v. Equal Opportunities Commission [2021] 5 HKLRD 30, the court reiterated that the implied duty of trust and confidence did not apply to the decision to terminate an employment contract.

2. Braganza Duty: duty to exercise discretion in good faith, rationally and for proper purposes, and not arbitrarily or capriciously, or in a manner which is not bona fide. In determining whether the duty has been breached, the court will consider:
   1. whether the employer took into account all relevant considerations and excluded irrelevant factors
   2. whether the result was so outrageous that no reasonable employer in the same field would have exercised discretion in that way

This duty applied together with the implied term of trust and confidence to the decision not to award a bonus.

3. Anti-Avoidance Duty: duty not to terminate employment to avoid granting employee benefits.

In relation to the termination of the Executive's employment, the court found that the only applicable implied duty was the Anti-Avoidance Duty i.e., that the Bank would not exercise its right to terminate the employment contract to avoid the Executive being eligible for, or receiving, a bonus award.

Whether there had been a breach of the implied terms

1. The decision by the Bank to issue the warning letter: no breach by the Bank

• The Bank had reasonable and proper cause to issue the warning letter. Of particular concern was the Executive's inability to recognize and handle the perception of a conflict of interest between the IBD and the research functions of the Bank, and his failure to protect the Bank from potential risks arising from his actions. During the internal investigation, the Bank discovered several additional situations involving the Executive, such as three different three-way meetings and two incidents of failing to keep certain names confidential. He had also informed junior staff that it was unnecessary to seek certain compliance approvals when such approvals should have been sought. In his position, the Executive had a special responsibility to ensure the Bank's compliance with the Securities and Futures Ordinance and the regulatory regime.
• The warning letter was not calculated by the Bank to destroy or seriously damage the relationship of trust and confidence between the Bank and the Executive. The Employee Handbook had stipulated a written warning as a disciplinary measure. It was therefore in the parties' contemplation that a written warning was a possible disciplinary outcome. Separately, the warning letter was issued as a private and confidential letter and not as a measure to publicly embarrass the Executive. When delivering the warning letter, the Bank had also tried to assure the Executive that it intended to continue the employment relationship.

2. The decision not to grant a discretionary bonus for the performance year 2016/17: no breach by the Bank

The Bank did not take into account irrelevant factors or omit relevant factors when deciding to award a nil bonus. While the Bank had taken into account the Executive's contributions to the business, these were outweighed by negative factors, including the misconduct detailed in the warning letter, the Executive's continued failure to complete compliance training, negative qualitative feedback, and the Executive's desire to leave the Bank.

The bonus decision was not irrational. The wording in the Executive's employment offer letter envisaged the possibility of a nil bonus, and the Employee Handbook emphasized the discretionary nature of the bonus. The court found a logical connection between the evidence and the Bank's reasons for the bonus decision. The bonus decision conveyed the Bank's serious disapproval of the conduct that led to the issuance of the warning letter. The court highlighted that it is not its role to substitute its own view of what was reasonable for that of the Bank. The court will only intervene if the decision-making process is irrational, which was not demonstrated in this case.

3. The decision to terminate the Executive's employment on the ground of redundancy: no breach by the Bank

• The court found that the termination was not in fact on the ground of redundancy and that redundancy was stated to "save the Executive's face." However, the Bank did not exercise its right to terminate the Executive's employment to avoid him being eligible for, or receiving, a bonus. The 2016/17 bonus decision had already been made in April 2017, whereas the Executive was given notice of termination on 31 May 2017. Therefore, at the time of the termination, the bonus decision had already been made. Regarding the unvested bonus awards, the Executive could have retained these if he had signed the relevant waiver in accordance with the CSU and SAR agreements. It did not follow that the purpose of the termination of employment was to prevent him from receiving the unvested bonus awards.

Key takeaways

Tips for employers:

• Nature of the Bonus: If a bonus is intended to be discretionary, it should be clearly described as such.
• Implement Clear Policies: Employers should establish clear workplace policies that outline acceptable behavior, and procedures for addressing grievances and disciplinary issues.
• Follow these policies: Employers should ensure that such policies are followed, particularly when making disciplinary and remuneration decisions and that there is consistency in the treatment of similar cases.
• Ensure adequate investigations: When issues arise, employers should conduct thorough and impartial investigations. These steps help demonstrate that remedial actions taken were reasonable, based on accurate information, and not arbitrary.
• Document Decisions and Actions: Employers should maintain detailed records of all employment-related decisions and actions to demonstrate that decisions have been made fairly and in accordance with company policies.

For more information, please contact tess.lumsdaine@bakermckenzie.com, roberta.chan@bakermckenzie.com or ken.kw.ng@bakermckenzie.com.