Amendments to an employment contract – whether there is “real benefit” to an employer

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Introduction

In our previous newsletter “Amendments to an Employment Contract Must Be Supported by Fresh Consideration” (September 2017), we discussed the ruling of the Court of First Instance (“CFI”) in Wu Kit Man v Dragonway Group Holdings Limited HCLA 15/2016, where the CFI held that amendments to an existing employment contract were unenforceable due to lack of fresh consideration. The employee appealed to the Court of Appeal (“CA”) under CACV 170/2017. The CA allowed the appeal and remitted the question of consideration to the Labour Tribunal for retrial.

Background

On 12 May 2015, Ms Wu Kit Man (the “Employee”) was employed by Dragonway Group Holdings Limited (the “Employer”) as a senior manager in its internal control department pursuant to an employment contract (the “Original Employment Contract”), assisting the Employer in its listing application. On 19 October 2015, the Employer added an addendum (the “Addendum”) to the Original Employment Contract, which provides, among others, as follows:

“A cash bonus of HKD1,500,000 will be offered to [the Employee] as soon as possible after completion of the IPO of [the Employer] or its holding company on or before 31 December 2016. If [the Employer] or its holding company ceased the listing plan or [the Employee] leave [the Employer] for whatever reason before 31 December 2016, a cash bonus of HKD350,000 will be offered to [the Employee] within 10 days after the cessation or termination and in any event no later than 31 December 2016. If [the Employee] leave [the Employer] by [her] own reason, [the Employee] will hand over [her] listing work to the [the Employer].”

On 21 December 2015, the Employer terminated the employment of the Employee, and the Employee lodged a claim at the Labour Tribunal for the cash bonus. Considering the Addendum as valid and binding, the Labour Tribunal made an award in favour of the Employee.

The Employer appealed the Labour Tribunal’s decision to the CFI. The CFI reversed the decision of the Labour Tribunal on the basis that the amendments to the Original Employment Contract were not supported by consideration, as the Employee was not required to fulfill any extra duty that was not stipulated in the Original Employment Contract.

The test for consideration: whether there is “real benefit” to the employer

The CA considered the principle of law for amendment of contracts from Williams v Roffey Brothers & Nicholls (Contractors) Ltd [1991] 1 QB 1, which provides that:

  1. If Party A has entered into a contract with Party B to do work for, or to supply goods or services to, Party B in return for payment by Party B; and
  2. at some stage before Party A has completely performed his obligations under the contract Party B has reason to doubt whether Party A will, or will be able to, complete his side of the bargain; and
  3. Party B promises Party A an additional payment in return for Party A’s promise to perform his contractual obligations on time; and
  4. as a result of giving his promise, Party B obtains in practice a benefit, or obviates a disbenefit; and
  5. Party B’s promise is not given as a result of economic duress or fraud on the part of Party A; then
  6. the benefit to Party B is capable of being consideration for Party B’s promise, so that the promise will be legally binding.

Overall circumstances of the case have to be considered to see if the continuance of employment of an employee did provide a “real benefit” to the employer, which in turn provided the consideration for the amendment of an employment contract. The CA considered that it is possible that the non-exercise of the right of termination of an employment contract by an employee amounts to good consideration for amending the employment contract, even the employee is only performing its existing contractual obligations.

Example of special contexts where continuance in employment provides good consideration for the amendments of employment contracts includes Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd [2011] 1 HKLRD 10. In that case, standard terms of employment contracts of cabin attendants were amended in the context that there was competition from other airlines offering similar packages. Enhanced remuneration package was provided to encourage loyalty of the cabin attendants. It was held that there was benefit to the employer by retaining the services of its cabin attendants in light of competition from other airlines.

  • At the CFI, the Employee’s Counsel contended that the Addendum was supported by consideration by alleging change of duties of the Employee (which was rejected by the CFI as a matter of facts). The CA considered that in the appeal at the CFI, the Employee’s Counsel did not present to the CFI case authorities in support of the propositions that the non-exercise of the right of termination of an employment contract by an employee can be good consideration notwithstanding the lack of change of duties of the employee. There was insufficient exploration of the facts by the Labour Tribunal to assess whether or not the Employer had obtained a real benefit or obviated a disbenefit in practice in making the Addendum. Acknowledging the significance of the context of the case in determining whether an employer has obtained a real benefit or obviated a disbenefit, the CA considered that it is necessary to remit the case back to the Labour Tribunal for a re-trial on the question of consideration for the Addendum.

Conclusion

The CA’s ruling clarifies that, in determining whether there is consideration to support amendments to employment contracts, the subject matter is not confined to the finding of change of duties on the part of the employee. In the absence of such change of duties, the circumstances and the context of the case are crucial for the court to determine whether or not, in practice, the employer obtains any real benefit or obviates any disbenefit. To minimize the risk relating to enforceability of amendments to employment contracts, before making any such amendments, the employers/employees should consult their legal advisers as to whether or not the intended amendments to employment contracts are well supported by fresh consideration.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019