The Court of First Instance (CFI) in Hong Kong has overturned a decision of the Labour Tribunal which held that an employer who failed adequately to prove that a stated reason for dismissal was "true and valid" had breached the implied duty of mutual trust and confidence.

The Facts of Lam Siu Wai v. Equal Opportunities Commission

The employer, the Equal Opportunities Commission (the EOC), terminated the employment of Lam Siu Wai (Lam) in May 2018 by payment of wages in lieu of notice in accordance with section 7 of the Employment Ordinance (EO). In the termination letter, the EOC stated "your recent attitude and behaviour do not closely match with the requirements of [the senior role you occupy]" (the "Stated Reason").

In the Labour Tribunal, Lam argued that the Stated Reason was untrue and that it amounted to a breach of the implied duty of mutual trust and confidence which exists in every employment contract. After hearing the evidence (which, tellingly, did not include any evidence at all from the key decision makers at the EOC) the Labour Tribunal concluded that: 

  • the EOC had an obligation to prove that the Stated Reason was true,
  • the EOC had failed to discharge such burden, and
  • the Stated Reason was not true and that the real reason for the termination was that Lam had made various complaints against Mr. Alfred Chan (Lam's supervisor).

As such, the Labour Tribunal held that the EOC had breached the implied duty of mutual trust and confidence, and awarded Lam substantial damages of over HK$1 million.

It is worth noting that Lam did not bring a claim under Part VIA of the EO (unreasonable termination), presumably because the damages available under such statutory provision are limited.

The Appeal to the CFI

The EOC appealed the Labour Tribunal's decision to the CFI on the basis that:

  • section 7 of the EO gave an employer the right to terminate by wages in lieu of notice which is unfettered by the reason for such termination,
  • in the absence of a claim under Part VIA of the EO, an employer has no obligation to give a reason for terminating an employee's employment, and
  • the implied duty of mutual trust and confidence cannot apply in a manner which would require an employer to prove a stated reason for termination.

The Decision of the CFI

The CFI upheld the appeal and in so doing clarified that:

  1. The implied duty of mutual trust and confidence should generally apply only when the employment relationship is ongoing, not on its termination. Note: In this regard the Court confirmed that the decision in Tadjudin Sunny v Bank of America, National Association should be applied in a "narrow and specific" manner.
  2. A contractual right to terminate can be exercised unreasonably (or even capriciously) so long as the exercise is in accordance with the contract. The court "is not concerned with the rightness or wrongness of a dismissal".
  3. It is for the legislature to determine the extent to which it wishes the courts to consider the rightness or wrongness of an employer's decision to terminate a contract; the courts should not take this point upon itself by implying a new duty which operates on termination of employment.

Commentary

The decision of the underlying Tribunal was likely driven primarily by the apparent point-blank refusal by the EOC to justify the reason it had given for the termination (i.e. the Stated Reason). We anticipate that this would have infuriated the Tribunal's Presiding Officer and resulted in a decision which may be described as more emotional than rational. 

The CFI has restored a rational approach and in so doing has made it crystal clear that, in the absence of a Part VIA EO (unreasonable dismissal) claim, an employer is under no obligation to explain any decision to terminate an employee.