Introduction

An employment relationship, in itself, does not attach fiduciary duties. What about senior executives or employees, who are not company directors? Do they owe fiduciary duties to their employer company? The Court of First Instance (“CFI”) said it depends on whether there is a legitimate expectation between the employer and the employee, and the employee’s role and function. See our article on “Do senior executives who are not directors owe fiduciary duties to their employers?” Click here to read more.

In the recent case Green Light Multiplex Co Ltd v Lam Shi Yan [2024] HKCFI 2101, the CFI awarded over HK$2.5 million to a former employer for breach of contractual and fiduciary duties by its former general manager who wrongfully diverted business opportunities away and interfered with the employer’s business relationships with its customers.

Background

The plaintiff, Green Light Multiplex Co Limited (“Employer”), was established in 1991 and has all along been carrying on business in lighting. The defendant, Lam Shi Yan (“Employee”), had more than 30 years’ experience in the lighting field, especially in project lighting. He had good connection in the project lighting industry. By an employment agreement dated 10 June 2010 (“Employment Agreement”), the Employer employed the Employee as its General Manager until 2014. Apart from daily management and administrative matters, the Employee was also responsible for building up the sales and project management team of the Employer’s lighting business. Through the Employee’s efforts, the Employer successfully procured an exclusive distributor agreement with Abacus Lighting Limited (“Supplier”) to exclusively purchase, promote and resell the lighting products in Hong Kong and Macau for a fixed term (“EDA”).

During his employment, the Employee was caught handing out to various other parties his business cards as the general manager of Pinetum Lighting Limited (“Competitor”), the Employer’s competitor. The Employee also sent an email to the customer of the Employer asking it to consider doing business a company owned by the majority shareholder of the Competitor instead of the Employer. The Employee even approached the Supplier in person and by email correspondence, lied to the Supplier that the Employer would cease the lighting business, and asked the Supplier to issue an authorization letter to engage the Competitor for the EDA in place of the Employer.

The relationship between the Employer and the Employee collapsed in 2014 when the Employer stripped the Employee of his powers and responsibilities by excluding him from management duties and meetings. Subsequently, the Employee tendered a resignation letter to the Employer on 29 September 2014.

Following the Employee’s departure and relying on the Employee’s lies, the Supplier terminated the EDA with the Employer and subsequently appointed the Competitor in place of the Employer. As a result of losing the exclusive distributorship of the Supplier’s products, the Employer lost various business opportunities and the profits that the Employer would have derived from the supplies.

The Employer claimed against the Employee, for breach of the implied terms of the Employment Agreement and fiduciary duties he owed to the Employer by:

·           diverting business away from the Employer during the last months of his employment;

·           procuring the termination of the EDA, which caused the loss of business and contracts; and

·           disrupting the Employer’s business relationships and opportunities with other parties through his conduct and representations in meetings and correspondences.

The Employee counter-claimed against the Employer for repudiatory breach of the implied term of mutual trust and confidence by stripping him of powers and excluding him from management duties and meetings, which allegedly changed the nature of his employment drastically.

Implied terms in the Employment Agreement

Both the Employer and the Employee contended that there were certain implied terms in the Employee’s Employment Agreement.

The CFI held that the following duties were implied in the Employment Agreement in favour of the Employer:

·           a duty of fidelity and good faith;

·           a duty to protect the interests of the Employer and not to divert business opportunities to himself or other parties;

·           a duty not to solicit customers;

·           a duty not to disclose trade secrets or confidential information which he learnt by reason of his employment with the Employer; and

·           a duty not to use information obtained in the course of or as a result of his employment with the Employer to the detriment of the Employer. 

The CFI also accepted that there were implied terms of (1) mutual trust and confidence and (2) that the Employee would not be demoted provided the change of title would lead to a fundamental change to the whole nature of the job. Nonetheless, the CFI held that the Employer did not breach the implied term as there was no demotion nor fundamental change to the whole nature of the Employee’s job.

Can an employee who is not a director
owe fiduciary duty to an employer?

In the event that an employee who is not a director, whether such an employee owes fiduciary duties depends on the circumstances. The CFI applied the leading authority of University of Nottingham v Fishel [2000] ICR 1462, an English case, and held that:

1.      it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interest of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached; 

2.      an analysis is required as to whether in all the circumstances, and by reference to the specific contractual obligations, the employee has undertaken to act solely in the employer’s interests; and

3.      instead of paying attention to a particular type of employment relationship, the Court will look at the specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations.

In the present case, the CFI found that the Employee owed fiduciary duties to the Employer for the following reasons:

1.      the Employee was recruited by the Employer as a General Manager to, inter alia, expand the Employer’s business into the project lighting business; and 

2.      the Employee was expected to introduce and bring over all his business connections with suppliers and customers in the project lighting industry to the Employer.

The CFI’s decision

Based on the factual evidence and the above legal analysis, the CFI held that the Employee breached the implied terms of the Employment Agreement and the fiduciary duties he owed to the Employer by attending various meetings and sending correspondence with third parties to the detriment of the Employer. The Employee’s breaches resulted in the termination of the EDA, which in turn caused the loss of the Employer’s right as the sole distributor of the lighting products, loss of multiple projects in which the Employer was originally involved and loss of business opportunities in potential projects.

The CFI awarded the Employer damages in the sum of over HK$2.5 million (being the loss of gross profits suffered by the Company), which was offset against the Employee’s outstanding performance bonus payable by the Employer in the sum of just less than HK$200,000. As a result, the Employee was liable to pay the Employer a net sum of HK$2,370,039.87.

Takeaway

Fiduciary duties can arise in employment relationships, even for employees without directorships; it depends on the employee’s roles and responsibilities. When the employer intends to impose fiduciary duties on senior employees with significant authority, the employer may consider clearly outlining these duties in the contracts, in order to protect the employer in case the Court finds that the employee owes no fiduciary duties and to strengthen the employer’s position in case of breaches.

In situations where an employee leaves to join a competitor, the employers often rely on post-termination restrictive covenants and confidentiality obligations to protect its legitimate business interests. The present case shows that the employer may also claim against the employee for breach of fiduciary duty and breach of implied terms under the employment contract, especially when the enforceability of these covenants is uncertain. As always, if in doubt, it is advisable to seek legal advice. Our Employment team wishes the readers a Happy New Year.

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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 © 2024