High Court clarifies the implied duty of mutual trust and confidence between employer and employee

It is trite law that there exists an implied duty of mutual trust and confidence (the “Duty”) between employer and employee in Hong Kong.  This Duty applies to both employer and employee.  With respect to the former, it has been formulated by the courts to mean that an employer shall not without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee[1].  In Lam Siu Wai v Equal Opportunities Commission [2021] HKCFI 3092, the Court of First Instance clarified the nature and scope of the Duty and its interplay with the employer’s contractual and statutory right to terminate the employment of the employee without cause.  Kennedys acted for the Equal Opportunities Commission (the “Commission”).

Background

The Claimant began her employment with the Commission in September 1996.  According to the Claimant’s employment contract, the Commission had a right to terminate her employment without cause by giving her a minimum of three months’ notice or by paying her three months’ salary in lieu of notice.

On 15 May 2018, the Claimant’s employment was terminated by the Commission with immediate effect.  In the termination letter, it was stated that the Claimant’s recent attitude and behaviour do not closely match with the requirements of her position (the “Dismissal Reason”).  In accordance with the contract, the Claimant was paid 3 months’ wages in lieu of notice and all benefits due to her.  

On 7 August 2018, the Claimant filed a claim in the Labour Tribunal (the “Tribunal”) alleging that the Dismissal Reason was false and invalid. She sought, amongst others, common law damages resulting from wrongful termination by the Commission of her employment in breach of the Duty[2].

The Tribunal found in favour of the Claimant.  The Commission lodged an appeal against the Tribunal’s decision.  The key issue of the appeal is the interplay of the Duty and the Commission’s contractual right to terminate the Claimant’s employment without cause.

Decision

The Honourable Mr Justice Anthony Chan allowed the Commission’s appeal and set aside the Tribunal’s award.  The main points to note in His Lordship’s judgment are:

  1. As the law stands, the Duty cannot be applied to water down an employer’s right to terminate the employment of a worker without cause by invoking the notice provisions.
  2. The Duty was about maintaining the relationship between employer and employee, and therefore inappropriate to be applied in the context of termination of the same. The Tribunal was wrong to apply the Duty to the termination of Claimant’s employment.
  3. It is reasonably well-established that a contractual right to terminate an employment (on the part of either employer or employee) can be exercised unreasonably or capriciously so long as the right is exercised in accordance with the contract. The court is not concerned with the rightness or wrongness of a dismissal.
  4. The Court of Appeal case of Tadjudin Sunny v Bank of America, National Association (CACV 12/2015) concerns the implied term of anti-avoidance. The Court of Appeal made it clear that its decision was limited to Ms Tadjudin’s contract and based on the particular facts and circumstances of the case.  Fundamentally, it was not an authority for the proposition that the right to terminate without cause was qualified by an implied duty to exercise such right in good faith.  At the highest, it may be said that the door for further development in the common law in this regard was left ajar by the Court of Appeal[3].
  5. In His Lordship’s view, to imply a duty of good faith in the termination of employment without cause would have far reaching effect on the law of employment. Reason(s) for termination may well have to be given for the exercise of such right. The stated reasons may be subject to scrutiny by the Tribunal and litigation complexity. Costs may increase significantly, not to mention the delay which may be caused.  Further, it is arguable that there is no room for judicial innovation in view of the statutory rights provided under section 6 (termination of contract by notice) and section 7 (termination of contract by payment in lieu of notice) of the Employment Ordinance (Cap 57).
  6. If the Commission exercised its right to terminate without cause in accordance with the contract, and it matters not whether the exercise of such right was unreasonable or capricious, there is no basis for the Dismissal Reason to have any bearing on the termination. As a matter of law, the Commission could not be in a different position than having given no reason for the termination.

Comments

This case reconfirms the employers’ right to dismiss an employee without cause in accordance with the contract.  Practically speaking, in exercising such contractual right, the employer may be better off to stay silent as to the termination reason(s).   

This case also serves a useful reminder of the nature of the Duty, namely preserving the continuing relationship between employer and employee. The Duty therefore cannot be utilised to form a platform to allow an employee to recover damages for loss arising from the manner of his dismissal.

Whilst the Court of Appeal in Tadjudin left open the possibility to imply the obligation of good faith in the termination of employment without cause, there is no binding legal authority on this issue in Hong Kong.  Speaking for himself, His Lordship expressed his concern that to imply such an obligation of good faith might open the floodgate of proceedings in the sense that the Tribunal would be asked to scrutinise the termination reason(s) given by the employer.  This would increase the costs incurred by the parties and cause substantial delay in proceedings.  Such an exercise, in His Lordship’s view, should be one for the legislature.

It remains to be seen what other judges’ view would be.  We await further judicial guidance on this issue from the courts.

 

[1] See Malik v Bank of Credit and Commerce International SA [1998] AC 20, at 40F-G, per Lord Steyn.

[2] While the Claimant initially formulated her claim in reliance of Part IVA of the Employment Ordinance.  Such a claim was not further advanced at the Labour Tribunal trial and the subsequent appeal proceedings.

[3] See paragraphs 78-80 of the Court of Appeal judgment in Tadjudin Sunny v Bank of America, National Association, unrep, CACV 12/2015, 20 May 2016