Key takeaways

• Whilst there are legal and commercial reasons for group companies to enter into different agreements with the same person in the course of employment, parties should be reminded of the legal issues regarding overlapping employment contracts, such as the intention to create legal relations, consideration and governing laws.  
• As demonstrated in the Court of First Instance's recent judgment, the Court was prepared to adopt a sensible and totality approach in assessing the interrelationship of different agreements. In this case, the Court considered that entering into one of those agreements and performing the same could be regarded as valid consideration of the others. It would therefore be difficult for parties to mount the "total failure of consideration" argument in relation to potentially overlapping duties between related employment contracts in a similar context. 

In more detail

Background

The facts of this case are not unfamiliar. A consultancy company ("Services Company") was engaged by a BVI holding company ("BVI Holding Company"), its controlling shareholder ("Controlling Shareholder") and its PRC operating subsidiary ("PRC Operating Company") to help sell the PRC Operating Company's business/shares. 

As a result of this business venture, the parties entered into the following four agreements:

• A services agreement entered into amongst the Controlling Shareholder, BVI Holding Company, PRC Operating Company and the Services Company, pursuant to which the Services Company shall provide consultancy services ("Services Agreement"). 
• A Hong Kong employment agreement entered into between the BVI Holding Company and the employee (the controlling shareholder of the Services Company) ("Employee"), whereby the Employee was appointed as the acting CEO and the CFO of the BVI Holding Company ("Hong Kong Employment Agreement"). 
• A PRC employment agreement entered into between the PRC Operating Company and the Employee, pursuant to which the Employee was appointed as a director, the acting CEO and the CFO of the PRC Operating Company ("PRC Employment Agreement").
• A Deed of Share Award entered into amongst the Controlling Shareholder, the BVI Holding Company and the Employee, whereby the Employee was to be entitled to be vested shares in the BVI Holding Company on certain conditions ("Deed"). 

(Hereinafter collectively called the "Four Agreements")

Disputes subsequently arose. The Controlling Shareholder, BVI Holding Company and PRC Operating Company, as the Plaintiffs, sought to invalidate the Four Agreements on the grounds of, among other things, misrepresentations and total failure of consideration. 

Legal principles and analysis

(a) The Hong Kong Employment Agreement and the Services Agreement 

As far as the Hong Kong Employment Agreement and the Services Agreement were concerned, the Plaintiffs argued that they should be void due to fraudulent misrepresentations on the part of the Employee. The Court found in favor of the Employee on evidence and found that the Hong Kong Employment Agreement and the Services Agreement were valid as there was no misrepresentation. 

(b) PRC Employment Agreement

Regarding the PRC Employment Agreement, the Plaintiffs contended that it should be void due to total failure of consideration, as the Employee's obligations under the PRC Employment Agreement were identical to those under the Hong Kong Employment Agreement.

The Court ruled against the above contention and found that, on evidence, there was no complete overlap of work and services under the two employment agreements. The Court went further and confirmed the legal position that the actual performance of a contractual duty owed to a third party can of itself constitute valid consideration. In the circumstances, the Court held that, even if there were a complete overlap of the Hong Kong Employment Agreement and the PRC Employment Agreement, the Employee's performance of the former should amount to valid consideration in support of the latter as the PRC Operating Company had indeed obtained the benefit of a direct obligation. Therefore, the PRC Employment Agreement was held valid. 

(c) The Deed of Share Award 

The Plaintiffs also challenged the validity of the Deed on the grounds that, among other things, the BVI Holding Company's seal was not affixed to the Deed and that the Deed was not supported by consideration. Among other things, the Court held that the Deed, the Hong Kong Employment Agreement and the PRC Employment Agreement were, as a matter of fact, interrelated collateral contracts, and thus the Employee provided valuable consideration for the Deed by way of entering into and performing those employment agreements.

In conclusion, the Court upheld the validity of the Four Agreements and ordered that the Plaintiffs had to pay and compensate the Employee and the Services Company in accordance with the terms of the Four Agreements.

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