HK CFI finds investment bank did not breach implied terms of employment contract

Background

Mr Yang Zhizhong was a senior banker of Nomura, holding various positions from 2011 to 2016, including Head of China and Chairman of IBD.

In May 2016, the Securities and Futures Commission (“SFC”) initiated an on-site inspection at Nomura’s offices in order to carry out a routine review into Nomura’s business practices. As part of its sample review, the SFC found that Mr Yang had set up a three-way meeting with a listing applicant and a research analyst when he was in the final stage of pitching for the book-runner role of an IPO transaction. The SFC found this to be “very worrying”, citing a potential conflict of interest and compliance regulation issues. In its Summary Report, the SFC mandated Nomura to critically review and take all necessary remedial actions to enhance controls between private and public side employees and to escalate the incident to management and report to the Commission all disciplinary actions to be taken against Mr Yang.

Following an extensive investigation, Yang was issued with a warning letter, removed as Head of China, and required to complete additional compliance training. Separation negotiations followed, where the parties were unable to come to an agreement in relation to a discretionary bonus for the financial year 2016/2017.

When settlement negotiations broke down, Nomura subsequently recommended a ‘zero bonus’ due in part to the warning letter, and offered Mr Yang a severance package that was rejected. Mr Yang was later deemed “no longer a human resource we [Nomura] wish to keep in our organisation” and his employment was terminated on the grounds of redundancy.

Plaintiff’s Case

It was Mr Yang’s case that by issuing the warning letter, failing to grant him a bonus award for his final year of service, and terminating his employment on the grounds of redundancy, Nomura was in breach of various implied terms of the employment agreement including the implied term of trust and confidence.

Mr Yang sought total damages in the amount of around US4 million comprising the 2016/2017 bonus award, annual base salary, and the loss of certain unvested bonus awards.

Judgment

The court was asked to consider the applicability of the pleaded implied terms. As for the implied term of trust and confidence, the court confirmed that there exists an implied obligation of mutual trust and confidence between the employer and its employee, and that the questions to be considered in determining whether there has been a breach of the term are:

(i) whether the employer’s conduct was likely to destroy or seriously damage the relationship of trust and confidence between employer and employee. This is to be assessed objectively, by reference to all the circumstances;

(ii) whether there was reasonable and proper cause for the conduct; and

(iii) whether the conduct was calculated to destroy or seriously damage the relationship.

The court was also asked to determine whether the term of trust and confidence applied to all of Nomura’s acts complained of. The court held that the implied term of trust and confidence applied to the decision to issue a warning letter and the decision not to award a bonus, but did not apply to Nomura’s decision to terminate Mr Yang’s employment.

Regarding the issuance of the warning letter, the court found that Nomura had valid and justifiable reasons for taking such actions, having considered Mr Yang’s conduct and performance. Additionally, the court was satisfied that Nomura had conducted a thorough investigation before issuing the letter, which in itself, did not breach the implied term of trust and confidence - it being within Nomura’s rights as an employer to address and rectify any conduct or performance concerns within the organisation.

In relation to the decision of a zero bonus, the court confirmed that the test for determining whether the decision constituted a breach of the implied duty of an employer to exercise its discretion in good faith, rationally and for proper purposes, and not arbitrarily or capriciously or in a manner which is not bona fide (‘the Braganza Duty’) is:

(i) whether, in making the decision, Nomura took into account all relevant considerations, excluding irrelevant considerations; and

(ii) whether the result was so outrageous that no reasonable decision-maker could have reached it. The focus is on whether there is some logical connection between the evidence and the reasons for the decision to award a nil bonus, without concentrating on the outcome, and without applying intensive scrutiny given the qualitative judgment involved in the decision.

Upon an examination of the evidence, the court found that Nomura did not take into account irrelevant factors in reaching its decision not to award Mr Yang a bonus. The decision, it was found, was made in the exercise of Nomura’s discretion and based on a combination of relevant factors, including Mr Yang’s conduct and performance and other concerns raised by the SFC.

As for Mr Yang’s termination, the court found that the only applicable implied duty was the Anti-avoidance Term – namely that Nomura would not exercise its right to terminate Mr Yang’s employment in order to avoid Mr Yang being eligible for or receiving a bonus award. In its decision to terminate Mr Yang, the court held that Nomura had followed proper procedures and was contractually entitled to terminate Mr Yang’s employment on the giving of notice, without cause. As such, Mr Yang’s termination did not constitute a breach of his employment contract.

In light of the court’s findings, issues of causation and quantum did not arise and the Plaintiff’s claim was dismissed.

Closing remarks

The court found that the implied term of trust and confidence existed between the parties, and applied to all of Nomura's acts complained of except for the decision to terminate Mr Yang's employment. The court emphasised that breach of the duty of trust and confidence requires conduct that is calculated and likely to destroy or seriously damage the relationship, and it must be assessed objectively taking into account all of the circumstances.