Introduction

An employment contract can be terminated or discharged in a number of ways, namely, by mutual agreement, by notice, by payment in lieu, or even by constructive dismissal, etc.  Different ways of terminating the employment contract will often affect the parties’ respective obligations, rights and entitlements upon termination.  In Kwang Hung Sang Francis v Hong Kong Exchange and Clearing Ltd HCA 1498/2010, the Court had to determine whether the resignation of an employee was resulted from constructive dismissal or amounted to termination by mutual agreement.

Background

In a nutshell, the Plaintiff had been employed by the Defendant since 1995.  In the Plaintiff’s employment contract, it was provided that termination of the Plaintiff’s employment would be subject to four months’ notice or four months’ payment in lieu by either party at any time, and that all notices of termination must be in writing.

In March 2004, the Plaintiff was informed by the Defendant that he should resign forthwith, failing which he would be dismissed (“Threat”).  Faced with such “Threat”, as submitted by the Plaintiff, he had no choice but verbally informed the Defendant that he would resign immediately.

On the following day, the Plaintiff gave a formal notice of resignation to the Defendant.  He also signed a letter (“Acknowledgement Letter”) accepting that he would receive (1) salary for the full month of March 2004, (2) four months’ salary in lieu of notice, (3) salary in lieu of untaken annual leave pay, and (4) an ex gratia payment of $340,000 as the “full and final settlement of all claims” in respect of his termination of employment with the Defendant.

In around 2009, the Plaintiff brought proceedings against the Defendant claiming he was constructively dismissed by the Defendant.

Dispute

The dispute between the Plaintiff and the Defendant centered on whether the Plaintiff was constructively dismissed by the Defendant.  According to the Plaintiff, he was constructively dismissed by the Defendant when the Threat was made to him.  The Acknowledgement Letter was later signed by him under the Threat, and was therefore simply unenforceable.

According to the Defendant, the Plaintiff’s employment was terminated by mutual agreement of his own accord by way of a resignation letter.  Further, the Acknowledgement Letter formed a binding settlement agreement between the parties in relation to the termination of the Plaintiff’s employment.

Legal Principle

When an employer’s conduct might amount to a repudiation or fundamental breach which goes to the root of the employment contract, it might amount to a constructive dismissal despite resignation of the employee.  As to what amounts to a fundamental breach, it will often depend on the circumstances of each case and the terms of the employment contract.

For instance, if an employee is threatened that he would be dismissed unless he resigns, the Court may hold such “resignation” to be constructive dismissal.  However, as the UK authority Sheffield v Oxford Controls [1979] ICR 396 has established, if the resignation is motivated by other factors, such as the offer of financial benefits or a reference letter, the termination may be a voluntary resignation, notwithstanding that the employee was told either to resign or be dismissed.

Decision

The Court found that the Threat could lead to constructive dismissal.  However the Court found that the termination of the Plaintiff’s employment had to be in writing, as suggested in his employment contract.  Therefore, theoretically, the Plaintiff could have insisted on the following day that he had not indeed resigned.

The Court also observed that, on the day following the Threat, the Plaintiff submitted a letter to the Defendant stating that “he would like to resign”, and the Acknowledgement Letter stated that the Defendant was writing to acknowledge the Plaintiff’s letter in respect of his resignation.  The Court found that there was no evidence at all of any complaint from the Plaintiff that he had been threatened or forced to resign.  Moreover, the Court found that the Defendant offered benefits (in particular, the ex gratia payment) which it was not obliged to offer, and which the Plaintiff was not forced to accept.

In light of the above, the Court held that the Plaintiff was not constructively dismissed.  The Plaintiff’s employment was terminated by mutual agreement, and the Acknowledgement Letter served as a valid and binding agreement regarding the termination of the Plaintiff’s employment.

Conclusion

This case illustrates that, when deciding whether there is constructive dismissal, the Court will not only look at one single act of the employer or the employee, but would also take into account the circumstances surrounding the alleged “dismissal” as a whole.  It also demonstrates the significance of a well-drafted settlement agreement in relation to termination of employment, which employers and employees are encouraged to seek legal advice before they decide to enter into.