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In the case Dock Brian v. Pacific Gourmet Holdings Ltd [2022] HKCFI 444, the Hong Kong Court of First Instance (CFI) heard an appeal from the Labour Tribunal (LT) concerning a purported settlement agreement that the Employee entered into on termination of employment. The CFI found that the LT had erred in law by holding that it had no jurisdiction to hear the case on the ground that the dispute concerned a 'settlement agreement'.

Background 

The employee was employed as a member of the Employer's food service staff until his employment was terminated in April 2021 with one month's notice. The employee claimed that he was dismissed because he refused to sign an agreement to increase his work hours. On the day he was given his last month's salary and accrued holiday pay, he was asked to sign a document dated 28 April 2021 (28/4/2021 Document), which stated: 

"I checked the above calculation and hereby confirmed the final payment of my remuneration is correct and also confirmed there is no other outstanding amount owing to me by the company.

The employee signed the 28/4/2021 Document. 

The LT's Decision

The employee commenced proceedings in the LT claiming that he was dismissed with no valid reason or by reason of redundancy which entitled him to severance payment, terminal payment and/or damages under the Employment Ordinance (EO). He claimed a total sum of around HK$142,700. 

The LT held that the 28/4/2021 Document was on its face a valid settlement agreement, and that it would have to be declared void or set aside first (which the LT had no jurisdiction to do) before the employee could proceed with the claim in the LT. The LT adjourned the case sine die (which means that it was adjourned indefinitely with no future date appointed to resume the case). 

Appeal to the CFI, and the CFI's Decision

The employee appealed to the CFI against the LT's decision. The appeal was allowed by the CFI on the grounds of an error in law namely that the LT did have jurisdiction over the claim. The CFI held that the Presiding Officer failed to inquire into the nature of the alleged settlement agreement, and the case was referred back to the LT for re-consideration and determination. 

The CFI held that the LT took the wrong approach of finding that the existence of the 28/4/2021 Document meant that the employee had to seek some non-monetary relief (i.e., to declare that the 28/4/2021 Document void) which was something that the LT had no power to order, before it could proceed with the claim. This was an error of law. The employee had only sought monetary relief under the EO and had not sought any declaratory relief. 

So, What Do You Need to Include in a Valid Settlement Agreement?

In examining the 28/4/2021 Document, the CFI clarified the following key elements for a valid settlement agreement:

  • Fresh consideration: Settlement agreements must be supported by legal consideration in order to be valid. Consideration means something of value to which the parties are not already entitled. Mere payment of what is already owed to an employee will not be considered consideration. Consideration is usually monetary (e.g., an ex-gratia payment), although the courts have found that practical benefits may also constitute consideration. In the present case the 28/4/2021 Document was not supported by any "fresh consideration" since the payment received by the employee on his last day was something to which he was already owed by the Company. 

  • Clear terms: The CFI found that the 28/4/2021 Document simply confirmed or acknowledged the calculations of the employee's final payment, rather than settle or waive some other claims. A valid settlement agreement must therefore have clear settlement terms and not merely an acknowledgement of existing duties. 

  • Statutory rights take precedent: Under common law, the 28/4/2021 Document, being a private agreement, generally would not trump the statutory rights and protections in the EO. However, if a settlement agreement is properly drafted and executed, it may be possible for an employee to 'release' claims against the employer. 

  • 'Extinguishing' of rights under the EO prohibited: Section 70 of the EO provides that any term of a contract of employment that purports to extinguish or reduce any right, benefit or protection conferred upon the employee by the EO shall be void. However, there have been a number of cases on whether s.70 applies to a settlement agreement entered into on termination of employment. 

    Since s.70 of the EO applies to terms of the employment contract, it will not apply to a valid settlement agreement that is properly negotiated at the end employment relationship dealing with cessation of employment and post-termination obligations. This has been recognised as being a different and subsequent contract to a contract of employment (as confirmed in the Court of Appeal case of Kao, Lee & Yip (A Firm) v. Lau Wing & Another [2007] HKCA 275).

The judgment is available at the following link:

https://legalref.judiciary.hk/doc/judg/word/vetted/other/en/2021/HCLA000014A_2021.doc 

For more articles on settlement agreements, please see https://www.mayerbrown.com/en/perspectives-events/publications/2021/04/typo-kills-the-deal-and-hong-kong-court-upholds-employees-summary-dismissal and https://www.mayerbrown.com/en/perspectives-events/publications/2020/08/employee-separation-agreements-in-hong-kong--when-the-employee-asks-for-a-mutual-release-and-confidentiality-obligation.