Hong Kong court confirms that a party cannot enforce a contract with a unilateral mistake which he/she knew or should have known did not reflect the other party’s intentions

Co-authored by Catherine Leung, Partner and David Kong, Senior Associate of Lewis Silkin

Facts

The plaintiff employee (“Zhang”) initially commenced employment with the defendant employer (“Cisco HK”) in its Beijing office in 2002. In 2005, Cisco HK issued a Repatriation Letter to Zhang requesting him to relocate to Hong Kong with an enhanced salary package. Despite that, Zhang brought a multitude of complaints to Cisco HK on his alleged incorrect grading, salary and job title from 2002 to 2005 (the “Complaints”). Following months of negotiation, Zhang eventually agreed to the relocation in April 2006, by signing the Repatriation Letter. Although the repatriation was tentatively scheduled for December 2006, Cisco HK had paid Zhang a relocation allowance and various expenses in advance.

Separately, Cisco HK also attempted to reach settlement with Zhang regarding the Complaints, by making him a settlement offer on a without admission of liability basis. Zhang accepted the settlement offer and entered into a Settlement Agreement with Cisco HK in August 2006 (“Settlement Agreement”). However, Cisco HK later discovered that the Settlement Agreement contained a few typo errors. In particular, one of the sums payable to Zhang (entitled “Notional ESPP Gain”) was wrongly stated as “HK$64,4910.46”, when the actual offer should be “HK$64,491.46”. Cisco HK informed Zhang of the typo errors and provided him with an updated letter. Zhang refused to sign the same and alleged that Cisco HK acted in breach of the Settlement Agreement by failing to pay the sums stated therein.

Meanwhile, Zhang refused to relocate to Hong Kong despite Cisco HK’s multiple requests and inquiries as to his whereabouts from November 2008. He refused to cooperate with Cisco HK’s visa agent and attend telephone meetings with the relevant staff of Cisco HK with regard to his relocation. In November 2009, Zhang informed Cisco HK that he was sick, but he failed to provide an appropriate medical certificate. On 11 December 2009, Cisco HK summarily dismissed Zhang pursuant to section 9 of the Employment Ordinance.

In March 2010, Zhang commenced legal action against Cisco HK claiming, amongst other things, the sums payable to him under the Settlement Agreement (including the allegedly wrongly stated “Notional ESPP Gain”), and damages for wrong termination. Cisco HK counterclaimed for, amongst other things, the relocation allowance that it paid Zhang in advance. The case was tried in October 2019, and the judgement was released in March 2021 (more than 10 years after Zhang commenced legal proceedings).

Issues

1. Was Cisco HK liable to pay Zhang the sums set out in the Settlement Agreement (including the allegedly wrongly stated “Notional ESPP Gain”)?

2. Was Cisco HK’s summary dismissal of Zhang justified?

3. Was Cisco HK entitled to repayment of the relocation allowance?

Findings

1. Was Cisco HK liable to pay Zhang the sums set out in the Settlement Agreement (including the allegedly wrongly stated “Notional ESPP Gain”)?

The Court held no.

Under common law, a party cannot enforce a contract on terms which he/she knew or should have known did not reflect the other party’s intentions. In case of a unilateral mistake in the contract under such circumstances, the effect is that either the apparent contract was void, or that there was never a contract at all for absence of consensus.

The Court accepted that the figure of the “Notional ESPP Gain” as stated in the Settlement Agreement (“HK$64,4910.46”) was a clerical mistake, because Cisco HK was able to explain, with support by contemporaneous internal emails and documents, the basis for the calculation of the “Notional ESPP Gain”. In fact, the calculation formula for the “Notional ESPP Gain” was also set out in a without prejudice letter from Cisco HK to Zhang during settlement negotiation, and had been properly explained to Zhang. During cross-examination, the Court also found that Zhang was aware of this mistake when he was first presented with the Settlement Agreement. Accordingly, he could not reasonably have supposed that the offer in the Settlement Agreement contained Cisco HK’s real intention. As there was no "meeting of the minds" between Zhang and Cisco HK with regard to the terms in the Settlement Agreement, the Court ruled that there was never a legally binding Settlement Agreement between the parties. Consequently, Cisco HK is not liable to make any payments to Zhang under the Settlement Agreement.

2. Was Cisco HK’s summary dismissal of Zhang justified?

The Court held yes.

Based on case law, in deciding whether summary dismissal is justified, the Court must decide whether the employee concerned had done something which amounted to express or implied “repudiation of the fundamental terms of the employment contract”, and failure to report back to the workplace for a prolonged period of time (and without reasonable explanation) was held to justify summary dismissal.

In the present case, Zhang absented himself from work for more than a month, and he failed to contact Cisco HK during the entire time. Although he alleged he was sick, he failed to submit medical certificates by the deadline requested by Cisco HK. The certificates he eventually submitted also did not meet the reasonable requirements imposed by Cisco HK. The Court considered that this was sufficient in itself to justify summary dismissal (not to mention Zhang’s other misconduct, such as his failure to follow Cisco HK’s lawful and reasonable instructions to relocate to Hong Kong, attend telephone meetings with Cisco HK’s staff regarding his relocation, and respond to the reasonable enquiries from Cisco HK as to his whereabouts).

3. Was Cisco HK entitled to repayment of the relocation allowance?

The Court held yes.

The Repatriation Letter expressly provided that the payment of the relocation allowance was conditional upon Zhang being relocated to Hong Kong. As Zhang failed to repatriate to Hong Kong before the termination of his employment, the condition on which the payment of the relocation allowance was made did not occur. As Zhang had been unjustly enriched, he was liable to repay the relocation allowance to Cisco HK.

Key takeaways

1. Before issuing any agreement to an employee for signing (be it an employment contract, a termination agreement or settlement agreement), always proofread it to ensure that all the terms are accurate and truly reflect the parties’ intention. Even though the Court may eventually rule in your favour in case of a mistake that ought to be known by the employee, it would likely take a disproportionately long time and incur financial resources to obtain judgement in your favour.

2. Whilst it is potentially justifiable to summarily dismiss an employee for being absent from work for a prolonged period of time without proper explanation, do always bear in mind that summary dismissal is a serious disciplinary action that should only be taken in the most extreme circumstances.

3. When providing relocation benefits/allowances to employees, always ensure that there are express terms in the relocation documentation stating that the provision of such benefits/allowances are conditional upon the employees actually relocating to the designated location, and the consequences if the repatriation does not materialize at the end (for example, the employees’ obligations to repay such benefit/allowances to the employer).

How we can help you

We can provide you with tailored advice in relation to termination of employment, and assist you with preparing tailored settlement agreements.

Please reach out to us if you wish to know more.

Zhang Qiang v Cisco Systems (HK) Ltd (HCA 1497/2010) [2021] HKCFI 694– full judgment here.