The Court of Appeal has recently upheld a Court of First Instance finding that an "anti-avoidance term" could be implied into a contract of employment.

In that case, the plaintiff, a former employee of a large bank, argued (among other things) that she had been dismissed by the bank in breach of an implied term of her employment contract. That term (the so-called "anti-avoidance term") was to the effect that the bank could not exercise its contractual (or statutory rights) to terminate the employment relationship by notice or payment in lieu of notice if such termination was in order to avoid the plaintiff being eligible for a discretionary bonus.

As with many bonus schemes in Hong Kong, the plaintiff's eligibility to be considered for a bonus was expressly stated to be subject to the employee remaining in the bank's employment on the date on which the awards were due to be made. Accordingly, as a result of her dismissal in August 2007, the plaintiff was no longer eligible for a bonus for the 2007 financial year, at least on the express terms of her contract.

The decision on "anti-avoidance"

The plaintiff succeeded at first instance (at least in respect of this aspect of her claim), and the Court of Appeal agreed. In reaching the decision that the "anti-avoidance term" ought to be implied into this particular contract, the court gave significant weight to the way in which the bank operated its performance incentive program, including its commitment to a "pay for performance" culture in relation to which the court was satisfied that there was a clear correlation between the size of an individual's bonus and the profits contributed to the business by the employee. In that context, the court noted that the plaintiff had historically received bonuses equivalent to 2 to 3 times her annual salary.

Taking into account the whole of those circumstances, the Court of Appeal was satisfied that:

  1. the "anti-avoidance" provision was necessary in order to give effect to the common (and reasonable) expectation of both the bank and the plaintiff that the bank would not be able exercise its power of termination in order to avoid the plaintiff being eligible for a bonus under the bank's performance incentive program;
  2. that a reasonable person, looking objectively at the terms of the employment letter in the light of the whole contextual background, would have no difficulty in coming to the conclusion that the contract of employment between the bank and the plaintiff meant that the bank's power of termination must be subject to such restriction; and
  3. the "anti-avoidance term" was entirely consistent with the well-established principle that an apparently unqualified power or discretion given to a party to a contract should generally be construed as being subject to some implied restrictions. In particular, in the employment context, the principle that a power or discretion given to an employer could not be exercised for an improper purpose, capriciously or arbitrarily, or in a way in which no reasonable employer, acting reasonable, would exercise it.

Having found that the "anti-avoidance term" ought to be implied into the plaintiff's contract of employment, the Court of Appeal then upheld the Court of First Instance's finding that on the particular facts of the case the bank had breached the "anti-avoidance" term. The Court of Appeal also upheld the award of damages in favour of the plaintiff for loss of the 2007 bonus.

Implications for employers

The Court of Appeal's decision made it clear that the contextual background was crucial in determining whether or not an "anti-avoidance" term ought to be applied in a particular context. An "anti-avoidance term" should not be implied into every contract of employment, particularly where the bonus sum (as a percentage of overall remuneration) is relatively small and is not so clearly linked to the employee's contribution to overall profits as in this case.

Importantly, this term (even where it may be implied) should not prevent an employer exercising its right to dismiss an employee in an appropriate case. So long as the employer can satisfy a court, if challenged, that there was valid reason for the dismissal (for example, due to redundancy, under-performance or misconduct), then it is unlikely that a court would readily infer that the employer had breached an implied "anti-avoidance" term.