Introduction

It is common for companies in the securities trading industry to enter into commission-sharing schemes with its employees, under which the employees can receive commission by introducing clients to their employers. However, employees should be aware of the legal implications and potential liabilities arising from such commission-sharing schemes. In the recent case Hao Tian International Securities Ltd v Ng Shui Cheong [2020] HKCFI 1590, a licensed individual (“Employee”) employed by Hao Tian Financial Holdings Limited (“Employer”) was found liable to indemnify Hao Tian International Securities Limited (“Subsidiary”), a subsidiary of the Employer, for the amount of over HK$4.4 million for the default by a client.

Background

Before joining the Employer, the Employee had been working in the securities business for over 10 years and was licensed under the Securities and Futures Ordinance. The Employee was employed as Deputy Manager for Dealing in February 2017 and became Deputy Manager of Business Development in April 2017. He was later promoted to Vice President of Futures Business in May 2018.

On 1 March 2018, the Employee signed an Account Executive Agreement (“Agreement”) with the Subsidiary, which was the basis of the Subsidiary’s claim against the Employee. The Agreement set out the terms of a commission sharing arrangement between the Subsidiary and the Employee, where the Subsidiary agreed to pay the Employee a commission for the clients he introduced. Under the Agreement, Employee agreed to guarantee and indemnify the Subsidiary for the liabilities owed by clients introduced by him.

The incident

The Employee procured Well Born Industrial Group Limited (“Well Born”) to agree to transfer its shares in Hosa International Limited (“Hosa”) to a securities trading account with the Subsidiary (“Account”). The account opening documents were signed and handled by the Employee as the relevant Account Executive and licensed person.

The Subsidiary then granted a margin facility to Well Born, which was also handled by the Employee. In March 2018, Well Born withdrew HK$10,000,000 as a loan from the Account under the margin facility and 15,029,032 shares of Hosa (“Hosa Shares”) were transferred into the Account as collateral for the loan.

Subsequently, the market value of the Hosa Shares dropped significantly below the margin limit for the Account. The Subsidiary issued multiple margin calls to Well Born but all were unmet. The Subsidiary then called for the repayment of the loan but its demands were all unmet. As of 15 August 2018, the outstanding amount due and owing from Well Born totalled HK$4,456,325.73 (after deducting the proceeds from the sale of the Hosa Shares).

When Well Born failed to pay, the Subsidiary claimed the outstanding amount against the Employee based on the guarantee and indemnity given by him under the Agreement.

The Employee’s arguments and the Court’s decision

In his defence, the Employee argued that he was not liable under the Agreement because (1) the Agreement was an unconscionable contract, and (2) he was under undue influence when he signed the Agreement. The Court disagreed with the Employee on both grounds.

Argument 1: the Agreement was an unconscionable contract

The Employee alleged that he felt pressured as an employee to obtain more business to appease his bosses, and therefore he felt bound to sign the Agreement. He also alleged that he was not warned about the risks and the exorbitant amounts under client accounts that involved margin financing for which he could be liable for, and he had relied upon the Subsidiary to assess the risks of Well Born’s transactions. Further, he argued that he did not have the opportunity to seek independent legal advice and was not warned that he should do so.

Whilst there is no unifying principle or comprehensive requirements for the operation of the unconscionable bargain principle, for a contract to be regarded as unconscionable, three criteria would generally be considered under common law:

1.        whether there was any disadvantage of the exploitee (i.e. the person being exploited), for example, age, poverty, ignorance, lack of assistance, inability to judge what is in his best interest etc., giving rise to the opportunity for the exploiter to take unconscionable advantage of him;

2.        whether the terms of the bargain was oppressive; and

3.        whether the exploiter’s conduct was morally culpable.

Having considered that the Employee was a licensed person who had already had more than 10 years of experience in the securities industry, and that he had signed three other similar agreements with the Employer’s group companies before the Agreement, the Court was of the view that the Employee could not raise a credible or believable assertion that he was in a position of special or serious disadvantage. The Court clarified that an employer-employee relationship in itself does not and cannot constitute a “special disadvantage” relationship.

Argument 2: the Employee was under undue influence

Under the common law, there are three categories of undue influence, namely:

1.        actual undue influence;

2.        presumed undue influence in relationships which raise the presumption of undue influence; and

3.        presumed undue influence in de facto relationships of trust and confidence between the complainant and the wrongdoer.

As the Employee was pursuing a defence of category 3 undue influence, he had to show that (i) he had placed trust and confidence in the Subsidiary or that the Subsidiary had acquired an ascendancy or domination over him, and (ii) the signing of the Agreement cannot be readily explicable by their employment relationship on top of the above elements.

After considering all the facts and evidence, the Court held that the relationship of employer-employee in and of itself cannot give rise to a relationship of trust and confidence. The Agreement could be readily explicable by the parties’ relationship, especially in light of the three other similar agreements willingly signed by the Employee previously. Therefore, the Employee failed in establishing the defence of undue influence.

Conclusion and takeaways

The Court emphasised the trite principle that parties of full age and ordinary understanding will be held to agreements that they have chosen to sign unless there is a recognised legal basis for the Court to disregard the parties’ apparent consent; or that reliance on that agreement by some other person falls within some category of unconscionable conduct justifying relief in equity.

In this case, the Employee was held liable for paying the outstanding sum owed by Well Born to the Subsidiary pursuant to the Agreement as he had agreed to guarantee and indemnify the Subsidiary for clients’ default. When being asked to sign on agreements by the employers, employees should be mindful of the terms and conditions of such agreements. When in doubt, employees should seek independent legal advice on the legal implications and the potential responsibilities before entering into any agreement with their employers.