Hong Kong Court Finds Former GM Breached Fiduciary Duties by Diverting Business Opportunities

In the case of Green Light Multiplex Co. Limited v. Lam Shi Yan [2024] HKCFI 2101, the Hong Kong Court of First Instance held a former General Manager (GM) liable for wrongfully diverting business opportunities away from his employer (Company) in breach of his fiduciary duties owed to the Company. The court awarded damages in excess of HK$2 million to the Company. 

Facts

The GM joined the Company in or around June 2010. According to the GM, he was recruited to develop its project-lighting business from the ground up, since he had more than 30 years’ experience in the industry. Apart from overseeing the daily management and performance of the Company, the GM was also responsible for building-up the sales and project management team. 

The GM expanded the Company's project-lighting business and brought in business, customers and suppliers. Among other things, he secured on behalf of the Company an “Exclusive Distributor Agreement” (EDA) with Abacus (i.e. a major manufacturer and supplier of lighting products) to exclusively purchase, promote and resell their products and services in Hong Kong and Macau for a fixed term. 

However, the initially positive working relationship turned sour around mid-2014 when the Company's founder and managing director (Founder) allegedly started removing the GM's powers and responsibilities. 

The GM claimed that the way the Company had unilaterally chiselled away his powers and duties severely undermined the trust and confidence of the employment relationship and that he was effectively being "forced out". In September 2014, the GM resigned and joined a competitor. 

Subsequently, the Company commenced proceedings against the GM claiming that he had breached his fiduciary duties owed to the Company as well as certain implied terms of his contract of employment by (among other things) inducing or procuring Abacus to breach the EDA and wrongfully diverting business opportunities, resulting in loss of profits for the Company. 

The GM denied the claim and counterclaimed against the Company for:

1. Damages on the basis that the Company had breached the terms of his contract of employment (including those implied terms pleaded by him);
2. Outstanding salary for the three months' notice period on the basis that he had been constructively dismissed by the Company; and
3. Payment of an outstanding performance bonus under his contract of employment. 

Did the GM Owe Fiduciary Duties to the Company? 

It is well established that directors owe their companies fiduciary duties. However, these fiduciary duties do not automatically arise in all employment contracts. 

Whether an employee owes fiduciary duties depends on the circumstances, including if the contract of employment imposes a duty on the employee to act solely in the employer's interest. 

Fiduciary duties do not arise from the mere fact that there is an employment relationship. Rather, they result from the fact that within a particular contractual relationship there are specific contractual obligations which place the employee in a situation where fiduciary duties arise.

Where this occurs, the scope of the fiduciary duties arises out of and is circumscribed by the contractual terms.

In the present case, the learned Judge held that the GM did owe fiduciary duties on the following grounds:

1. The GM was hired to expand the Company's business into the project lighting business; and 
2. The Founder wanted the GM to introduce and bring over all his business connections with suppliers and customers in the project lighting industry to the Company. 

What Contractual Terms Had Been Implied into the GM's Contract of Employment? 

The court had no hesitation in accepting the Company's claimed implied duty that as an employee, the GM owed the Company a duty of fidelity and to act in good faith.

The GM argued that in addition to the (usual) implied duty of mutual trust and confidence, the Company also owed an implied obligation to (i) not unilaterally change his job duties (including by removing important duties from him), and (ii) give prior notice of any changes in the Company's personnel to him and/or consult him upon such changes.

However, the court refused to imply those two duties into the GM's contract of employment on the following basis:-

1. On (i), the learned Judge found that the proposed term to be too broad and general to be accepted and suggested that there could (at most) be an implied term that an employer would not unilaterally change the “whole nature” of the GM’s job; and
2. On (ii), the court held that such proposed term, if accepted, would elevate the GM's status to that of a quasi-partner of the Founder which cannot be right.

Decision

Based on the evidence, the court held:-

1. The GM was in breach of his (contractual) duty of fidelity and fiduciary duties owed to the Company. As a result, the Company not only lost its right as the sole distributor of Abacus in the region, it also suffered loss of business opportunities in multiple projects; 
2. It was inherently improbable that the Founder would do anything to deliberately undermine the GM's position and status within the Company, given the Company's heavy reliance on his connections and experience in the project lighting field. In any event, the Company's alleged action or course of conduct leading up to the GM's departure from the Company did not amount to repudiatory breach of his contract of employment and/or constructive dismissal;
3. The GM's contract of employment simply provided that he would be entitled to 5% of gross profit earned by the Company as his performance bonus; and nothing in the contract indicated that such entitlement was subject to his completing a full financial/calendar year with the Company. So the court allowed the GM's counterclaim for the outstanding performance bonus.

The court awarded the Company damages in excess of HK$2 million (being the loss of gross profits suffered by the Company), which was offset against the GM’s outstanding performance bonus payable by the Company.

Key Takeaways

It is trite that not all types of employment relationship will give rise to fiduciary duties. Whether or not an employee is required to discharge fiduciary duties will depend on the facts and circumstances of each case (including the employee's role and function). 

Where an employer intends to impose fiduciary duties on senior employees, they should consider expressly including the following obligations (not exhaustive) in their contract of employment:-

1. To not place themselves in a position where their interest may conflict with the duties owed by them to the employer,
2. To act in the employer's best interest,
3. To not engage in or be concerned with any other business other than the employer's, and
4. To not profit from their position.

Setting out these obligations in the contract of employment will not only help support the employer's argument that the senior employee ought to discharge fiduciary duties, it will also better manage the employee's expectations.

Even if the court finds that the relevant employee does not owe any fiduciary duties, the employer may still rely on the express contractual provision to protect its position in the event of breach. 

Employers should also bear in mind that additional remedies may arise from a breach of fiduciary duties, namely, they may seek an account of profits which do not depend on the employer being able to demonstrate loss. 

The judgment is available here.