Court of Appeal Upholds Implied Term of Anti-Avoidance in Banker’s Employment Contract
In Tadjudin Sunny v Bank of America, National Association (CACV 12/2015), the Court of Appeal (CA) recently confirmed the decision of the Court of First Instance (CFI), which had held that the Bank of America, National Association (Bank) was in breach of an implied term when it terminated the employment of Ms Tadjudin (Tadjudin), thwarting her ability to earn a bonus for 2007.
Following the CA’s decision, employers in Hong Kong could face claims for breach of the implied term of anti-avoidance if they engage in conduct to prevent the operation of an express term in a contract, which would otherwise confer a certain or conditional benefit on the employee.
A summary of the legal proceedings is set out at Appendix I.
The Bank and Tadjudin both appealed the CFI’s decision. However, the interest in the case centred around whether the CA would confirm the existence of an implied anti-avoidance term in the employment contract.
This is primarily because such an implied term had never previously existed and the CFI’s judgment represented a significant legal development in Hong Kong where there is little statutory protection for employees who are dismissed without cause. The upholding of the implied term signals interesting times ahead in Hong Kong, as the judiciary have demonstrated that they are prepared to take important steps to redress the balance of rights between employers and employees in the absence of statutory protection against unfair dismissal.
Examining a handful of commercial cases, the CA also commented that an implied term to exercise a discretion in good faith existed outside of the employment context, which, whilst not central to the judgment itself (and therefore beyond the scope of this alert), appears to step away from the common law principle that parties to commercial arrangements can contract on whatever terms they think fit.
Key PointsEmployers now need to take care when dismissing an employee who is entitled to a benefit (such as a bonus) if that benefit will be lost as a consequence of the dismissal. Paying lip service to a ‘how to dismiss reasonably’ type checklist will not work if the decision to dismiss is made regardless of performance.
Employees are agents for the employer and their negative intentions will be attributed to the employer:
In this case, the Bank dismissed Tadjudin for failing to meet the goals set under a Performance Improvement Plan (PIP). The Bank had followed a prescribed process but the CFI found that Tadjudin’s manager, John Liptak (Liptak) had initiated the PIP as a vendetta and intended to dismiss her regardless of her performance under the PIP. Liptak’s malice resulted in the PIP process being conducted in bad faith and his malice was attributed to the Bank.
The CA held that even though the decision to dismiss Tadjudin had been taken collectively by senior managers, Liptak was the directing mind and thus his intentions, under the ordinary principles of agency, were attributable to the Bank.
Anti-avoidance term will not be implied into all employment contracts but…
Although the CA upheld the CFI’s finding that an implied anti-avoidance term existed in Tadjudin’s employment contract, it stressed that the finding was based on the particular facts and circumstances of the case, and it did not mean that this term should be implied into employment contracts generally. Where employers operate performance incentive plans and there is a reasonable expectation to receive a bonus for strong performance, it appears likely this anti-avoidance term will be implied into their relevant employment contracts (unless it is expressly excluded - see further below).
The CA confirmed that the right to be eligible for consideration for a bonus would be illusory without the existence of the implied term of anti-avoidance if it meant that the employer could dismiss an employee who was “utterly without fault” without paying a bonus. The CA took the view that such a position would be inequitable, so it appears courts are likely to find an implied term of anti-avoidance exists in employment contracts where employers are operating a performance incentive plan. This will affect an employer’s ability to exercise its contractual and statutory rights of termination as the employer will need to ensure that any dismissal is carried out in good faith for a valid reason and, on a practical level, will need a paper trail to prove it, if required.
Implications for Employers
1. Significant risk of courts finding implied term in employment contracts where bonus is a sizeable portion of remuneration
There is a high probability that the court will find that the implied term exists in the employment contract, particularly in sectors such as the financial services industry, where the bonus forms a significant part of the employee’s remuneration package. Following this decision, there is a real risk that employers dismissing part way through a discretionary bonus cycle will face claims for breach of the implied term of anti-avoidance.
The CA confirmed that if the implied anti-avoidance term is found to exist, then an apparently unqualified contractual term (in this case, a term entitling the employer to terminate without cause by payment of notice) should “generally be construed as being subject to the requirement that it can only be exercised in good faith, rationally and for a proper purpose and not arbitrarily or capriciously or in a manner that is not bona fide”.
2. Avoiding negative inferences regarding the real reason for dismissal
If an employee makes a claim, the burden of proof will be on the employee to demonstrate that the employer’s dominant intention in terminating the employment is in breach of the implied term of anti-avoidance. Where there is no direct proof of such an intention, the court will draw inferences.
In this case, inferences were drawn by rigorously probing the background to the dismissal including a review of all relevant documents over a number of years. The dismissal process was heavily scrutinised and the evidence relied upon to justify the decision was reviewed in detail.
Employers would benefit from subjecting their reason for dismissal to a robust and independent review, in relation to both the process leading to the dismissal and the justification for it. It would be prudent to take legal advice on whether such a review should be conducted under the protection of professional legal privilege.
3. Express exclusion of the implied term?
Under general contract law, a term cannot be implied into a contract (including an employment contract) if it contradicts an express term of the contract. As such, employers wishing to avoid the term of anti-avoidance could consider taking steps to exclude it by including an express provision in their employment contracts.
This will be easier with new contracts, as existing contracts can only be varied by agreement. Ultimately a costs/benefit analysis taking into account any potential adverse consequences to reputation and the impact on employee relations, will determine whether this is a realistic option for employers. Similarly it should be noted that the effectiveness of trying to exclude the operation of this implied term in this manner is untested.
At this stage we are not aware of whether the parties plan to lodge a further appeal against the findings of the CA. The position we are left with is that the implied anti-avoidance term may be found to exist in an employment contract depending upon the individual circumstances of the matter. This will require an adjustment to the approach employers take regarding terminations where a benefit will be lost as a result of the dismissal.
It will be interesting to see whether this case will be a catalyst leading the judiciary to further develop the common law in the absence of an unfair dismissal regime in Hong Kong. The CA commented that the Employment Ordinance is limited in both scope and application and does not give protection against unfair dismissal generally or dismissal with the intention of extinguishing or reducing an employee’s existing rights.
The CA’s clear affirmation of the CFI’s findings on the existence of the implied term of anti-avoidance, demonstrates that the courts are prepared to address the lacuna in statutory protection through creative use of the common law and will not fetter such development in its infancy. This signals exciting times ahead for employment law in Hong Kong.