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Senior employees may owe fiduciary duties to their employers

2018-12-31

Introduction

Under both Hong Kong legislation and common law, a director owes various fiduciary duties to the company, including but not limited to:

1.       duty to act in good faith in the best interests of the company;

2.       duty not to divert a maturing business opportunity to another person/company; and

3.       duty to avoid conflicts of interests with the company.


In a recent case South China Media Ltd v Kwok Yee Ning [2018] HKDC 194, the District Court reiterated how fiduciary duties are not confined to directors and ruled that a misbehaving senior employee was liable for breach of fiduciary duties.

Facts

In this case, the plaintiffs, namely a holding company and its two subsidiaries, claimed against Ms Kwok, a former employee, for breach of (1) contract (a letter of undertaking) and (2) fiduciary duties.  Ms Kwok was employed by South China Management Limited (“Employer”), a management service company and one of the subsidiaries of South China Media Limited, as the “advertising director” in the advertising department.  She was primarily responsible for the advertising business of a magazine called Whiz-Kids Express Weekly (“Magazine”) published by the other subsidiary, Whiz Kids Express Weekly Limited (“Whiz Kids”).  South China Media Limited is the parent company of the Employer and Whiz Kids.

The plaintiffs alleged that Ms Kwok was in breach of her fiduciary duties by:

1.       allowing unauthorized use of the logo and name of the Magazine in various promotional materials free-of-charge,

2.       diverting business opportunities away to Greens PR, Promotion & Events Company Limited (“Greens PR”); and

3.       soliciting the business of Mongson Trading Co Ltd (“Mongson”), a former customer of Whiz Kids, to Greens PR and Marcois Group Limited (“Marcois”) after termination of her employment in breach of a non-solicitation clause in a letter of undertaking.

 

The plaintiffs also sued Greens PR, Marcois and Ms Kwok’s husband (“Husband”) on the grounds that they had dishonestly assisted in Ms Kwok’s breach of her fiduciary duties and unlawfully procured her in breaching the letter of undertaking.  The Husband was the manager of Greens PR, and a former director and the founder of Marcois.   He was also the apparent controller of Greens PR and Marcois.  

Decision

(1)  Ms Kwok was a de facto director and owed fiduciary duties

Although Ms Kwok had not been formally appointed as a company director of any of the plaintiffs, the Court held that she was a de facto director of Whiz Kids at all material times prior to her resignation in December 2014 by reason of her role and responsibilities she performed for Whiz Kids.  In reaching its decision, the Court took into account the following factors:

1.       Ms Kwok held the title of “advertising director” and presented herself to clients as the “advertising director” of Whiz Kids; and

2.       Ms Kwok had the authority to negotiate and enter into contracts on behalf of Whiz Kids.

 

On the facts of the case, the Court found there was overwhelming evidence against Ms Kwok that she had breached her fiduciary duties owed to Whiz Kids.  For instance, she provided the Husband details of negotiations between Whiz Kids and its prospective client, as well as a copy of a draft contract of Whiz Kids so that the Husband could make a similar offer to the prospective client for and on behalf of Greens PR, which was in direct competition with Whiz Kids.  Ms Kwok also allowed Greens PR to use the name and logo of the Magazine for a promotional campaign free-of-charge.

The Court held that Ms Kwok breached her duties of loyalty and fidelity owed to Whiz Kids by placing herself in a position of conflict and acting for the benefit of third parties without the consent of Whiz Kids.

(2)  The Non-Solicitation Clause for 12 months
 was reasonable and enforceable

By a letter of undertaking dated 6 January 2010, Ms Kwok agreed that she would not solicit any customer or client of the plaintiffs for a period of twelve months from the termination date of her employment (“Non-Solicitation Clause”).

Ms Kwok argued that the Non-Solicitation Clause was excessively unreasonable, wide and restrictive, and therefore should be held unenforceable.

It is trite that a restrictive covenant is unenforceable unless it can be shown to be reasonable in the interests of the parties and in the public interest.  The party seeking to enforce the restrictive covenant must satisfy the Court that the restrictions are no more than reasonably necessary for the protection of its business.

The Court held that the Non-Solicitation Clause was necessary to protect Whiz Kids’ trade connections and goodwill in the event of departure of an employee as senior as Ms Kwok.  As the effective time period of the Non-Solicitation Clause was only twelve months, the Court found that on the facts of the case the restriction on Ms Kwok under the Non-Solicitation Clause was no more than reasonably necessary.

On the facts of the case, the Court also found ample indisputable evidence that Ms Kwok had indeed solicited Mongson to Greens PR and Marcois.  For instance, Ms Kwok was discovered to have an email address with Greens PR one month after she resigned and have been dealing with Mongson on behalf of Greens PR. 

(3)  Accessories were liable

The plaintiffs sued the Husband and Greens PR for dishonestly assisting in Ms Kwok’s breaches of fiduciary duties.

Four basic elements must be proven in order to establish a claim for dishonest assistance:

1.       there was a breach of trust or fiduciary duty by the primary wrongdoer;

2.       the third party assisted in the breach of the primary wrongdoer;

3.       in giving that assistance, the third party acted dishonestly; and

4.       the third party’s dishonest assistance resulted in loss suffered by the plaintiffs.

 

The Court found that the requirements for dishonest assistance were satisfied.  The Husband was fully aware of Ms Kwok’s role as the advertising director of Whiz Kids.  Although there was no direct evidence to prove that the Husband was aware of the precise contractual terms of Ms Kwok’s employment contract with the Employer, common sense and reasonable commercial acumen would have informed the Husband that it was unlawful for a senior employee like Ms Kwok to divert business opportunities to a competitor without the plaintiffs’ prior authorization.  Therefore, the Husband was found to have acted dishonestly in collusion with Ms Kwok to cheat the plaintiffs.

Furthermore, the Husband clearly participated in the negotiations leading up to unlawful use of the logo and name of the Magazine, as well as the execution of the diverted contracts.  As the recipient of the diverted contracts, Greens PR was also found to be dishonest.  Since the Husband was the directing mind of Greens PR in relation to the diverted contracts, the Husband’s knowledge and dishonesty were imputed to Greens PR.

The plaintiffs also sued the Husband, Greens PR and Marcois for procuring Ms Kwok’s breach of the Non-Solicitation Clause.  The elements of the tort of procuring a breach of contract are as follows:

1.       the relevant defendant has procured or induced the breach of a term in an existing contract;

2.       the defendant has knowledge of the existence of the relevant term or has turned a blind eye to the existence of such a term; and

3.       the defendant must have realized that the conduct being procured would cause a breach of the term.

 

On the facts, the Court was satisfied that Ms Kwok would not have been able to solicit a potential customer of Whiz Kids to Greens PR and Marcois without the two of them being willing parties to Ms Kwok’s solicitation.  Furthermore, common sense would have told Greens PR and Marcois that Ms Kwok was likely to be subject to a non-solicitation clause.  Therefore, it is clear that Greens PR and Marcois turned a blind eye to the existence of the Non-Solicitation Clause and procured Ms Kwok’s breach of her contractual duties. 

As Greens PR and Marcois were relatively new companies when compared with Whiz Kids, the Court was of the view that Mongson would not have agreed to retain Greens PR and Marcois for their services without Ms Kwok’s solicitation.  As such, Greens PR and Marcois must have realized that their provision of services to Mongson would result in Ms Kwok’s breach of the Non-Solicitation Clause. 

As for the Husband, he was found to be responsible for directing Marcois’s provision of services to Mongson, and therefore was liable for procuring breach of contract as well.

As a result, the Court ruled in favour of the plaintiffs awarded equitable compensation and damages to the plaintiffs for their loss of business opportunities and profits.

Takeaways

This case serves as a useful reminder for senior officers who are not formally appointed as a director of the risk of being liable as de facto directors once they are handed key responsibilities and/or assume certain authorities of a director.  If, as a matter of fact, such senior officers perform the duties and functions of a director, they may be considered as a fiduciary of their companies and are subject to a duty of undivided loyalty owed to their companies. 

Therefore, in the event that senior officers are found to have conducted serious misconduct, their employers may claim against them on the ground of breach of fiduciary duties regardless of whether there is any express term in their employment contracts stating that they owe such duties, or whether they honestly believe that they were not acting in the capacities of directors.

As such, it is necessary for senior officers to look at what they actually do to consider whether they have assumed the role and responsibilities of a director in relation to the company.


For enquiries, please feel free to contact us at:

E: employment@onc.hk                             T: (852) 2810 1212

W: www.onc.hk                                           F: (852) 2804 6311

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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© 2018


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