Hong Kong court confirms that the implied duty of mutual trust and confidence cannot be relied upon to recover damages for loss arising from the manner of dismissal

Facts

Ms. Lam Siu Wai (“Ms. Lam”) was employed by the Equal Opportunities Commission as a Chief Equal Opportunities Officer (“EOC”).

After being employed for 22 years, Ms. Lam was informed by the EOC that her employment had been terminated with immediate effect by payment in lieu of notice and she was duly paid all of her statutory and contractual entitlements. The termination letter stated that the reason for the termination was due to Ms. Lam’s recent attitude and behaviour not closely matching with the requirements of her position (“Dismissal Reason”). It should also be added that the right to terminate a contract of employment was also provided under section 6 (termination of contract by notice) and section 7 (termination of contract by payment in lieu of notice) of the Employment Ordinance. 

Ms. Lam filed a claim against the EOC in the Labour Tribunal and sought damages resulting from wrongful termination of her employment in breach of the implied duty of mutual trust and confidence (“Duty”) in the sum of over HK$1.3 million (consisting of loss of income, loss of gratuity and loss of employer’s MPF contributions calculated up to the end of her fixed term contract). 

Ms. Lam claimed wrongful damages on the ground that the EOC acted in breach of the Duty in terminating her employment. She challenged that the Dismissal Reason was in bad faith and not for a valid reason under the Employment Ordinance. 

The EOC’s position was that the Duty could not override the EOC’s express contractual right under her employment contract and under the Employment Ordinance to terminate Ms. Lam’s employment without cause (by payment in lieu of notice).

The Labour Tribunal found in favour of Ms. Lam and held that the EOC had breached the Duty because the reason for Ms. Lam’s dismissal was not true. The EOC appealed.

Issue

Was the EOC’s right to terminate Ms. Lam’s employment subject to the Duty?

Findings 

No.

The Court noted that the implied duty of mutual trust and confidence requires 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 the employer and the employee. This Duty was about maintaining the employment relationship. Therefore, it was not appropriate to apply it to the termination of the relationship. It followed that an employee could not rely on the Duty to recover damages for loss arising from the manner of his/her dismissal. 

Further, the Court confirmed that a contractual right to terminate employment could be exercised capriciously or unreasonably provided that the right was exercised in accordance with the contract, and the Court was not concerned with the rightness or wrongness of a dismissal. The right of an employer to terminate employment by invoking contractual and/or statutory notice provisions was also not qualified by an implied duty to exercise such right in good faith.

The Court also confirmed that it was unnecessary and there was no legal requirement to state any reason in a termination letter. The EOC was entitled to terminate Ms. Lam’s employment in the manner it did irrespective of whether a reason was stated in the termination letter. However, by having unnecessarily provided a reason in the termination letter, the EOC opened itself to challenge by Ms. Lam.

Key takeaways

1. Employers often feel the urge to state a reason in the termination letter when terminating employment by notice or payment in lieu of notice but this case confirms that a reason is neither necessary nor legally required to be stated and if a reason is stated, it could be open to challenge by the employee.

2. Although it is not necessary or legally required to state a reason in the termination letter, employers should nevertheless ensure that the termination would be lawful and, if the employee has at least 2 years of continuous employment, there is a valid reason for termination underlying the decision to terminate employment.

3. When considering terminating employment, employers should be mindful of any circumstantial sensitivities. For example:

a. A sudden decision to terminate a long serving employee would more likely be subject to challenge than a decision to terminate an employee with a shorter tenure;
 
b. A decision to terminate an employee in close proximity to the employee having given evidence in an investigation or raising a grievance may give the impression that the termination was an act of retaliation.

If circumstantial sensitivities exist and the exit is not managed appropriately, even if the exit was lawful, the employer may need to incur substantial time and costs to resolve any dispute arising from the termination and may face reputational risk. 

How we can help you

Should you need to consider exiting an employee, we would be keen to assist you in relation to managing the exit in order to minimize the risk of the exiting employee challenging the termination. 

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

Lam Siu Wai v. Equal Opportunities Commission [2021] HKCFI 3092 ¬– judgment available here.