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Good and Valid Reason Needed for Contractual Termination of Employee ?
2 March 2022

It has been established that there is a common law implied duty of mutual trust and confidence which applies to both employer and employee (the “Duty”). It is accepted principle that an employer shall not without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee : see Malik v BCCI [1998] AC 20, 45F-G.

The Duty is apt to cover a great diversity of situations in which a balance has to be struck between an employer’s interest in managing his business as he sees fit and the employee’s interest in not being unfairly and improperly exploited.

The Duty was recently discussed and clarified in Hong Kong in the case of Lam Siu Wai v Equal Opportunities Commission [2021] HKCFI 3092.

Background

The Plaintiff, Lam, was employed as the Chief Equal Opportunities Officer by the Defendant, Equal Opportunities Commission (“EOC”), under a fixed term employment contract. The contract provided terms and conditions allowing EOC to dismiss Lam without cause “by giving her a minimum of three months’ notice or by paying her three months’ salary in lieu of notice”. These terms are consistent with sections 6 and 7 of the Employment Ordinance (“EO”), respectively.

During the fixed term of the employment contract, EOC terminated Lam’s employment without cause and paid Lam three months’ salary in lieu of notice including all accrued entitlements (cash allowance, pro rata gratuity and payment in lieu of leave), in accordance with the employment contract.

Lam filed a claim to the Labour Tribunal against EOC for an order for her reinstatement pursuant to section 32K of the EO and damages for wrongful dismissal. The Tribunal did not order reinstatement but found that EOC had not discharged the onus to prove that the reason for dismissing Lam was “good and valid” and found the discussed reason for the termination to be “not true”. Therefore, there was a breach of the Duty by EOC. Lam was awarded damages in the amount consisting of loss of income, loss of gratuity, loss of employer’s MPF contributions calculated up to the end of her employment term, interest and costs. EOC appealed.

The Appeal

The main issue on appeal was whether an employer’s right to terminate employment was subject to the Duty.

The Court of First Instance (“CFI”) examined the Hong Kong case of Tadjudin Sunny v Bank of America, National Association (CACV 12/2015, [2016] HKEC 1128, 20 May 2016) and found that as the law stands, this Duty is only concerned with preserving the relationship between the employer and the employee and does not extend to the termination of an employment. The Duty cannot be applied to water down an employer’s right to terminate the employment of a worker without cause by invoking the notice provisions (contractual and / or statutory).

Although the Tribunal found that the dismissal reason given by EOC was not of good faith, the CFI was of the view that it was unnecessary for an employer to give a reason for dismissal. The employer’s right to termination without cause is provided for in sections 6 and 7 of the EO and in this case in Lam’s employment contract. Even if an employer chooses to give a reason regardless, it is well within its contractual right to terminate an employment contract unreasonably or capriciously, as long as the exercise was done in accordance with the employment contract. The CFI also made it clear that the court has no interest in whether a dismissal reason was rightful or not. However, even if it was wrongful dismissal in breach of contract, the damages would only be up to the amount of the employee’s salary which should have been paid during the contractual period of notice.

The CFI expressed obiter that extending the Duty to termination of employment would yield far-reaching effect on employment law. Reason(s) for termination may well have to be given for the exercise of such right, they may then be subject to scrutiny by the Labour Tribunal and litigation complexity and costs may increase significantly, not to mention to the delay which may be caused.

The CFI overturned the Tribunal’s decision and awards were set aside.

Conclusion

In conclusion, the CFI’s reasoning and decision are merely a confirmation of the scope of the Duty and the following :-

1. An employer is entitled to not give reason for dismissal / termination of employment contract without cause by notice. It is legally preferred not to state a reason in the termination letter when terminating employment by notice or payment in lieu of notice. If a reason is given, it may be subject to challenge;
2. Even if the employer chooses to give the reason for dismissal, it does not matter that the reason was unreasonable or capricious; and
3. The common law implied duty of mutual trust and confidence between the employer and employee only applies to the preservation of the continued relationship between both parties and is not applicable to termination of employment.

If you have any questions on the above case or relating to employment law matters, experienced employment lawyers in our firm would be happy to assist you.

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