Introduction

Agreements reduced into writing provide greater protection to the parties concerned than oral agreements in terms of certainty and enforceability. Yet, it is not uncommon for parties to conclude their agreement orally when the parties are too eager to move on to the next stage of their business relationship; thinking that, “Oh, we can deal the small details later through lawyers. We can sign after.” Needless to say, this may result in disputes as to whether certain terms have been agreed and what exactly they are when the relationship deteriorates.

In Anthony Mackay v Chi-X Asia Pacific Holdings Ltd [2024] HKCFI 2901, the Court of First Instance (“CFI”) dealt with this kind of dispute in the context of an employment contract.

Background

Mr Mackay (“Employee”) commenced employment with Chi-X Asia Pacific Holdings Limited (“Employer”) as Chief Executive Officer on 1 March 2016 when the terms of his written employment contract were still under negotiation between them and their solicitors. They eventually entered into a written employment contract and an amended employment contract on 11 July 2016 and 1 September 2016 respectively (collectively, the “Employment Contracts”). However, because of their clash in views on management strategies, the Employer terminated the Employee’s employment on 11 November 2016.

The main crux of the dispute lied in the Employee’s assertions that on or about 28 February 2016, prior to the commencement of his employment, he reached oral agreements with the Employer’s representatives under which the Employee would be entitled to an annual salary of US$500,000 and certain core entitlements including a guaranteed first-year bonus of US$500,000 (“Guaranteed Bonus”) and participation in a Long-Term Incentive Plan (“LTIP”) regardless of whether his employment was terminated before the conclusion of the first year.

Guaranteed Bonus

Despite the Employee’s reliance on the response of one of the Employer’s representatives in cross-examination and an email discussion that there was an oral agreement on the Guaranteed Bonus (“Guaranteed Bonus Oral Agreement”), the CFI found insufficient evidence to support his assertion that such a promise was made and accepted by the Employer, on the following grounds:

1.    The discussions relied upon by the Employee did not amount to a definite agreement. Instead, they merely suggested that the Employee asked for a minimum bonus of US$500,000 in January 2016 and the parties had “finally landed” in February 2016 on an understanding that if there was to be a bonus, it would be for at least that amount.

2.    None of the term sheets of the Employee’s remuneration package produced before his commencement of work refer to the Guaranteed Bonus in the first year.

3.    The Employee’s claim for the Guaranteed Bonus contradicted with the bonus structure explicitly defined under Clause 6.3 of the Employment Contracts. Under the said clause, the Employee “shall be entitled to payment of a bonus based on his performance and the profitability of the Company and the Group for each financial year ended 31^st March. The payment of any such bonus and the amount thereof will be determined by the Board in its absolute discretion.”

4.    The Employee’s pleading on the Guaranteed Bonus has morphed over time. His assertion changed from:

(a)  “would be eligible to receive an annual cash bonus of up to US$500,000 per annum, paid, at the discretion of the board with consideration to the established payout ratios of the Defendant’s subsidiaries, after the financial year end” in the original Statement of Claim, to;

(b)  “shall receive a cash bonus of US$500,000 for his first year of employment” and only “in subsequent years of employment” would he “be eligible to receive an annual cash bonus of up to US$500,000 per annum paid, at the discretion of the board with consideration to the established payout ratios of the Defendant’s subsidiaries, after the financial year end” in the Re-Amended Statement of Claim, and then to

(c)   “It was agreed that the amount of bonus reflects [the Employer] recognition of [the Employee’s] efforts and contributions in the Acquisition, including [the Employee’s] successful introduction of the sale of [the underlying asset of the Acquisition] to JCF as well as [the Employee’s] efforts in securing the Acquisition Terms” in Re-Re Amended Statement of Claim.

LTIP

Regarding the LTIP, the Employee asserted that although he did not sign on to the LTIP scheme in the meeting on 1 September 2016, he orally communicated his acceptance of the share allocation under the LTIP scheme by 2 September 2016 (“LTIP Oral Agreement”). The CFI found it challenging to uphold his assertions in the absence of clear documentation or acceptance. Apart from that, the Employee indicated or seemed to have indicated in various occasions that he had yet to make up his mind as follows:

1.       On 7 September 2016, when the Employer’s representative asked the Employee whether he had a proposed LTIP split by email, the Employee emailed back “I will finish it on the weekend”.

2.       On 12 September 2016, the Employee emailed the Employer’s representative “I’m about to send you the LTIP allocation as well as the correspondence that I believe included the 22.5%...”.

3.       On 14 September 2016, the Employer’s solicitors emailed the Employee’s solicitors “On a separate note, did Tony confirm the amount of LTIP shares for the purposes of the schedule to the LTIP plan? When he was in our offices he did say that he was going to double check that the number was correct.” 

4.       On 6 October 2016, the Employee’s solicitors sent a reply email that “I am still awaiting to hear back from Tony regarding the number of LTIP shares to be granted and will follow up with him again now.” 

Notwithstanding these emails, the Employee tried to suggest that the solicitors were simply unaware of the LTIP Oral Agreement because neither party had bothered to tell their respective solicitors. The CFI found such suggestion implausible and surprising. The CFI found, on the balance of probability, it is more likely that the solicitors were not so informed because there was no agreement.

On the facts, the CFI found there was no Guaranteed Bonus Oral Agreement or LTIP Oral Agreement, and dismissed the Employee’s claims for Guaranteed Bonus and LTIP.

Takeaway

Under Hong Kong employment law, there is no statutory requirement for employment contacts to be in writing. Employment contracts can be made orally or in writing; this is entirely up the parties. It is good practice, however, to have a properly drawn up written employment contract in place that clear sets out the rights, duties and obligations between the employer and the employee. This provides clarity and certainty, and helps reducing unnecessary disputes.

The Anthony Mackay case serves as a reminder of the danger of oral employment contracts. It is often difficult for a party to enforce it. The party enforcing an oral employment contract has the burden of proof, where in the past, it can be challenging for one to prove the existence of certain terms especially when there is not much (or, in some cases, no) paper trail. In which case, this will result in a “he-said/she-said” type dispute and, generally speaking, the party enforcing the oral employment contract will have a disadvantage as he has the burden of proof.

Whilst one may be at a disadvantage, it may not be the end of the day. The law does recognise oral employment contracts. Whilst it may not be easy to prove the existence of certain terms, or in some cases, whether there was actually a contract, the court will look at all the facts and circumstances. This includes the relevant contemporaneous documents, such as the parties’ correspondence by emails or instant messengers (WhatsApp, WeChats and the likes). So, unlike the old days, there is much more paper trail, some of which may shed light to whether certain terms were indeed agreed. There are also other factors that the court will consider and perhaps this is a topic that we may discuss further in another article or webinar. As always, if in doubt, it is advisable to seek legal advice. Our Employment team wishes the readers a Merry Christmas in advance.