A. Facts

The Plaintiff commenced her employment with the Defendant as an analyst at the level of vice president on 5 June 2000. The Plaintiff’s employment contract provided that either party might terminate the employment by giving a minimum of 1 month’s notice in writing or by making payment in lieu of notice. The contract also provided that the Plaintiff was eligible to be considered for a bonus under the Defendant’s performance incentive programme, subject to her being in employment with the bank at the time the Bank came to decide upon and pay bonuses under the programme. On 28 August 2007, the Defendant terminated the Plaintiff’s employment by giving her 1 month’s salary in lieu of notice, without any bonus or pro-rata bonus for 2007.

B. The Plaintiff’s claims

The Plaintiff claimed against the Defendant, among others, damages for wrongful termination of employment by the Defendant with the intention of depriving her of the performance bonus for 2007.

The Plaintiff’s claims were based on the following terms implied into her employment contract at common law:-

  1. The Defendant should not exercise its right to terminate her employment by giving 1 month’s notice or by making payment in lieu of notice in order to avoid her being eligible for the performance incentive programme (the“implied term of antiavoidance”).
  2. The Defendant should not act in a manner contrary to the implied term of mutual trust and confidence between an employer and employee (the “implied term of mutual trust and confidence”).

The Defendant disputed the existence of the first implied term and objected to any issue being raised on the second implied term which remained un-pleaded by the close of the Plaintiff’s case.

C. The un-pleaded implied term of mutual trust and confidence

The implied term of mutual trust and confidence was not pleaded and remained un-pleaded by the close of the Plaintiff’s case. The Plaintiff’s position was that the implied term of mutual trust and confidence was hardly a controversial principle of law, and argued that in circumstances where the Plaintiff had pleaded the full terms of her employment contract, there was no need to specifically plead this implied term which was so widely accepted as affecting all contracts of employment.

In the closing submission, the counsel for the Plaintiff was not seeking to argue that the court should allow the Plaintiff to rely on the implied duty of trust and confidence for the purpose of implying the terms which have been pleaded, but contended two separate “sub-category” implied terms implied under the duty of mutual trust and confidence which had not been pleaded, namely:

  1. an employer must not exercise a power to dismiss unconscionably and without reasonable cause and contrary to the legitimate expectations of the employee; and

  2. must not exercise a power to dismiss to deprive an employee of a contractual benefit which results in the unreasonable forfeiture of such a benefit.

The Defendant’s objection was that by introducing the implied term of mutual trust and confidence with the two “sub-category” un-pleaded implied terms under it, the Plaintiff was introducing an entirely new and different case from that which was pleaded and thus should not be allowed.

The Judge was of the view that as a matter of law, the duty of mutual trust and confidence between an employer and his employee was nowadays implied into every contract of employment. There was no need to plead such a well established principle of law. However, the two “sub-category” implied terms were indeed free standing and separate from the three pleaded implied terms. They were directed at the Plaintiff’s claim for the 2007 bonus, which was covered by the first implied term. The Plaintiff’s case under the first implied term was a very narrow one, i.e. that the Bank dismissed her with a subjective intention of avoiding payment of the 2007 bonus. However the scope of these two “sub-category” implied terms sought to be introduced under the pretext of a well recognised duty of mutual trust and confidence was much wider. They expanded the Plaintiff’s case from subjective intention of the Defendant to avoid payment to objective unconscionable dismissal, lack of reasonable cause of dismissal, legitimate expectation of the Plaintiff, and the mere fact of unreasonable forfeiture of the bonus. The Judge raised that the obligations under these “subj-category” implied terms were not established legal principles but just implied terms suggested in an article by an academic. The Judge ruled that while the existence of the duty or implied term of mutual trust and confidence was trite law which need not be pleaded, the issue raised by such legal principle must be pleaded, and the Plaintiff should not be allowed to reply on the two “sub-category” implied terms.

D. The implied term of anti-avoidance

Under law, a term may only be implied into a contract, if:

  1. it is reasonable and equitable;
  2. it is necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
  3. it is so obvious that “it goes without saying”;
  4. it is capable of clear expression; and
  5. it does not contradict any express term of the contract.

The Defendant’s objections to the first implied term were that (a) it is inconsistent with an express terms of the letter of employment; (b) it is inconsistent with the employer’s statutory right to terminate under sections 6 and 7 of the Employment Ordinance (“EO”); and (c) the legislature had enacted a comprehensive system of employment protection in Part VIA of the EO, and it is not open to the common law to legislate into legislated area.

(a) inconsistent with an express terms of the letter of employment

The Plaintiff’s employment contract provided that:-

“You will be eligible for consideration under the Bank’s performance in centive programme and it will subject to you being employed by the Bank at the time of payment.”

The programme was administered through a continuous performance evaluation process as outlined in the Bank’s “Pay for Performance” presentation which explained what was pay for performance and the philosophy behind it; that total compensation, i.e. remuneration package; how an employee’s performance was evaluated; and how the bonus was assessed.

The major part of an employee’s remuneration package was composed of performance bonus and equity which were rewards for performance, a principle to which the Bank expressly committed itself. While there was no simple formula for determining the amount of bonus and it was largely linked to profit contribution of the individual employee, his line of business and the Bank as a whole and the compensation data in the market.

There was no dispute that whether to award a bonus and the amount to award was discretionary. However, given the Bank’s expressed commitment to pay for performance, the very comprehensive programme of performance evaluation and assessment of bonus, and the significant ratio the performance bonus had to bear on the total remuneration package, the discretion was not an unfettered one. The discretion had to be exercised in a serious and bona fide manner.

The Judge however considered that the eligibility to be considered under the programme was contractual, being expressly provided by clause 1 of the letter of employment. While clause 1 provided that the Plaintiff as eligible for consideration for an award of the bonus under the Defendant’s performance incentive programme subject to her being employed by the Defendant at the time of payment, clause 3 gave the Defendant the right to terminate her employment without the need for justification by giving a month’s notice in writing or by payment in lieu. Thus unless the first implied term pleaded was implied into the employment agreement, the Plaintiff’s eligibility to be considered under the performance incentive programme was illusory and could be easily taken away by the Bank exercising its right to termination under clause 3, even if she was utterly without fault.

In addition, since the bonus had to be earned by performance, an employee had a reasonable expectation to receive his bonus at the end of the year. The Judge considered that no talent would stay if he was under the constant fear that his employer would deprive him of the fruits of his effort by terminating him before the date of payment of the bonus. Without the assurance given by the implied term, the purpose of the programme would be defeated. The Defendant would be unable to retain talent and profit would suffer. That would be contrary to the interest of the Defendant. Not only was the implied term not inconsistent with clause 3, it supplemented the express terms, without which the employment agreement would have no business efficacy.

Furthermore, an employer/employee relationship was built on mutual trust and confidence. If at the time the Plaintiff was entering into the employment agreement with the Bank she had asked, "What about my bonus if I am dismissed through no fault of may own during the year, by notice or payment in lieu?" An officious bystander knowing of the performance incentive programme and clause 1 and clause 3 of the letter of employment would have readily responded saying "Surely your employer will act in good faith. It goes without saying that he won't do that to deprive you of your bonus unless he has good reasons to terminate your employment." Such an answer certainly covered the implied anti-avoidance term. The implied term was obvious and "it goes without saying".

The Defendant referred to the case Thomas Vincent v South China Moring Post Publishers Ltd. in which the court held that the implied duty of mutual trust and confidence could not prevent the employer from terminating the employment of the employee in accordance with an express term in the contract allowing either party to terminate by giving one month's notice. However, the Judge considered that the aforesaid approach of mechanically comparing the implied term with express term was inappropriate in construing an employment contract. The Judge considered that an employer had a duty imposed by law to deal with his employee in good faith, and under this duty he might not exercise his express contractual rights so as to destroy or seriously damage this relationship of trust and confidence. To say the minimum, he might not exercise his right to terminate employment by giving notice or payment in lieu with the intention to avoid paying the employee the performance bonus.

In the circumstances of the Plaintiff's employment agreement, in particular the structure of the remuneration package, the Bank's commitment to pay for performance, and the lack of efficacy without the implied term, the Judge was of the view that the implied term pleaded might reasonably be implied into the employment agreement and there was no inconsistency between it and clause 3 of the letter of employment.

The Judge was of the view that the implied term as pleaded was very narrow. It only prevented the Defendant from terminating the employment with the intention to avoid paying bonus. It did not prevent the Bank from terminating for reasons other than to avoid paying the bonus.

(b) inconsistent with the employer’s statutory right to terminate under sections 6 and 7 of the Employment Ordinance

The Plaintiff’s counsel argued that sections 6 and 7 of the Employment Ordinance gave an employer an unqualified and free standing right to terminate the employment of his employee by notice or payment in lieu. But the effect of the term sought to be implied would render it wrongful for the Bank to terminate prior to the time for consideration and payment of any bonus, if done with an intention to deprive the Plaintiff of the bonus. The implied term would then effectively disentitle the Bank as employer from doing lawfully and rightfully that which the express terms of the employment agreement and sections 6 and 7 said it was entitled to do. Therefore, such a term could not be implied into the employment agreement as it was inconsistent with sections 6 and 7.

The Judge considered that the right given by sections 6 or 7 was not mandatory but permissive. It did not require every contract of employment to be terminated by notice or payment in lieu. The statutory right to terminate by notice might unilaterally or by agreement be waived by the party to whom it was conferred against whom the obligation was owed. Notice might be waived and the parties might also be mutually discharged from the contract by mutual agreement. The Judge gave an example saying that section 6(1) provided that a party might terminate the contract of employment by giving notice to the other party, orally or in writing of his intention to do so. The parties might by agreement cut down the statutory right by waiving the right to give oral notice by agreeing that notice should be in writing and that oral notice shall be ineffective. Therefore the Judge considered that it was open to the parties to agree that the Bank should not exercise its right to terminate the Plaintiff’s employment by giving notice or payment in lieu, whether in accordance with the letter of employment or pursuant to the statutory right.

We have hesitation in agreeing with the Judge’s reasoning in this part of his judgement. The Judge raised that the statutory right to terminate by notice might unilaterally or by agreement be waived by the party to whom it was conferred against whom the obligation is owed. In fact it is expressly set out in section 8 of the EO that nothing in section 6 or 7 shall be taken to prevent either party from waiving his right to notice or to payment in lieu of notice. Therefore, the parties’ right to waive their rights for notice or payment in lieu of notice is in fact endowed by the EO, rather than the contractual agreement between the parties. This is especially the case as section 70 of the EO provides that any term of an employment contract which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by the EO shall be void. The Judge further gave an example saying that whilst section 6(1) provided that a party might terminate the contract of employment by giving notice to the other party, orally or in writing of his intention to do so, the parties might by agreement cut down the statutory right by waiving the right to give oral notice by agreeing that notice should be in writing and that oral notice should be ineffective. However, it is in fact uncertain whether a contractual provision limiting a party’s right to terminate the employment by giving only written notice is enforceable due to the fact that section 6 and 7 do not impose any restriction. There are academics supporting the view that a contractual provision limiting the right of a party to give only written notice is unenforceable.

(c) whether such an implied duty is excluded by the protection under Part VIA?

The Plaintiff’s counsel quoted a House of Lords decision in Johnson v Unisys. In this case, the House of Lords held that an implied term that the employer would not, without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between the employer and employee did not exist because the evidence intention of the Parliament manifested in Part X of the Employment Rights Act 1996 was that such claims had to go through specialist tribunals and that the remedies were limited by legislature.

The Plaintiff’s counsel argued that in the light of the express statutory regime in Part VIA of the EO, which provided for limited protection and relief to employee whose employers terminate their employment with an intention to extinguish or reduce any right, benefit or protection covered by the EO or payment under the employee’s contract, there was no room for any contractual common law implied term as contended for by the Plaintiff. The Plaintiff’s counsel further argued that the legislature had carried out that exercise of balancing the interests of employers and employee with proper regard not only to the individual dignity and worth of the employees but also to the general economic interest in Hong Kong. It was therefore inappropriate for the court to imply any prohibition against any other forms of “unfair”, “unjust” or “unreasonable” dismissal.

The Judge considered that in the United Kingdom the Employment Rights Act 1996 provided a very comprehensive statutory regime of employment protection against “unfair dismissal” which is far more extensive than Part VIA of the EO., and the interest protected by Part VIA was at best an interest against “dismissal to save costs”. In view of the very narrow protection under the EO, it could not have been the legislature’s intention that the statutory remedy under Part VIA is exhaustive and the courts were prohibited from allowing the common law to develop in the area of employment protection.

E. Conclusion

In conclusion, the Judge was of the view that the term sought to be implied, i.e. not to terminate the Plaintiff’s employment by notice or payment in lieu in order to avoid her being eligible for consideration under the performance incentive programme, was reasonable, equitable, necessary to give business efficacy to the employment agreement, and capable of clear expression. It was not inconsistent with the express terms, sections 6 & 7 of the EO, and was not prevented by Part VIA of the EO. It was therefore implied into the Plaintiff’s employment agreement with the Bank.

The Judge further provided that for similar reasons, the two sub-category implied terms, not to exercise the power of dismissal unconscionably without reasonable cause and contrary to legitimate expectations and not to dismiss to deprive an employee of a contractual benefit which results in the unreasonable forfeit of such a benefit, could probably be implied. But those implied terms would not be considered due to lack of pleading.