Jurisdiction - Hong Kong
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Cantor Fitzgerald Fails To Win Damages Against Departing Senior Management Staff.

2 April, 2012

 

Background
 
This was an action against former employees of Cantor Fitzgerald and concerned alleged breaches of employment contracts and fiduciary duties. Cantor Fitzgerald's case was that the four employees, who had all held senior management positions, had breached their duties of fidelity and fiduciary duties, by resigning on the same day and signing contracts with a competitor, Mansion House Financial Holdings Ltd ("Mansion House"). Cantor Fitzgerald also alleged that the Defendants had breached restrictive covenants in their employment contracts.
 
The 1st Defendant (D1) had been seconded from Cantor Fitzgerald Europe ("CFE") to Cantor Fitzgerald Hong Kong (CFHK) and was a director of CFHK. At the time of his resignation, he was one of the leading resident executives of Cantor Fitzgerald in Asia. The 2nd and 3rd Defendants (D2 and D3) were top revenue generators of CFHK's Cash Equities Desk, each holding the title of Managing Director of the Cash Equities Desk. The 4th Defendant (D4) was Managing Director, Chief Economist and Strategist (Asia) at CFHK.
 
Issues before the Court and Court's decision
 
The main issues before the Court and the Court's decision in relation to each of those issues were as follows:
 

1. Had any of the Defendants breached their fiduciary duties or duties of fidelity by procuring any of the other Defendants to resign and join a competitor or by acting in concert with any of the other Defendants to leave together to join a competitor?

 

  • D1 had an employment contract with CFE and owed a contractual duty of fidelity to his employer, CFE, but not to CFHK, to whom he had been seconded. As a director of CFHK, he also owed fiduciary duties to CFHK.

  • D2 and D3 had employment contracts with CFHK and each owed a contractual duty of fidelity to their employer, CFHK. Although they each held the title of "managing director", neither could be regarded as actual or substantive directors of CFHK. Neither actually sat as members of CFHK's board of directors or took decisions about the general management of CFHK. They did not, therefore, owe fiduciary duties to CFHK.

  • D4 had an employment contract with CFHK and owed a contractual duty of fidelity to his employer, CFHK.

  • Although each Defendant was fully aware that the others were negotiating to join Mansion House, all attended a lunch where the possibly of joining Mansion House was discussed, all engaged the same law firm to negotiate employment contracts with Mansion House (all of which contracts had near identical terms) and all resigned the same day (with resignation letters in near identical terms), it could not be inferred from this alone that they had acted in concert or procured each other to resign. It did not seem that they had persuaded or encouraged each other to resign, but rather that the Defendants had made up their minds separately from each other. 

 
2. Had D1 and D2 breached express provisions in their employment contracts with Cantor Fitzgerald requiring them to notify their employer if they were approached or invited to take up employment or enter a business relationship with a "competitor"? Had D2 breached an express provision in his employment contract with Cantor Fitzgerald to inform his employer as soon as reasonably practicable, if he became aware at any time that another employee had been approached or invited to take up employment or enter into a business relationship with a "competitor"? Did D1 and D2's duty of fidelity or (or in the case of D1, fiduciary obligations) require them to disclose the fact that they were leaving or had been approached?
 
No. Neither D1 nor D2 had breached these provisions in their employment contracts because Mansion House could not be regarded as a "competitor" of Cantor Fitzgerald. At the time the Defendants joined Mansion House, it was only emerging from insolvency and near de-listing of its parent company and was starting from scratch, whereas Cantor Fitzgerald was a leading and long established global enterprise.
 
In light of the principle that an employee is free to work (or not work) for a given employer, it was unclear what purpose would be achieved by imposing a general duty in law of informing an employer that he had been approached or was thinking of leaving. Upon receipt of such information, the employer would not be entitled to force the employee to work for it.
 
A duty to inform an employer of one's intended resignation or of having been approached to resign could only arise from (and must be strictly delimited by) express terms in an employment contract. Even where there is an express term to that effect, given that an employee cannot be forced to work where he is unwilling to, it would be difficult to establish damage consequent upon breach of such term.
 
3. Had D1 been entitled to tender a payment in lieu of notice to CFE when resigning, pursuant to sections 6 and 7 of Hong Kong's Employment Ordinance, notwithstanding that his employment contract was governed by English law?
 
Yes. D1's employment contract with CFE was stated to be governed by English law. That contract had been varied by a secondment letter, which stated that his employment was governed by English law "save for any mandatory laws of Hong Kong." Sections 6 and 7 of the Employment Ordinance form part of the mandatory employment laws of Hong Kong, binding on CFE. One could not attempt to get around the protection afforded by the Employment Ordinance to employees working here, through the choosing of a foreign law. Section 70 of the Employment Ordinance nullifies any term of an employment contract which purports to extinguish or reduce any right, benefit or protection conferred on an employee by the Employment Ordinance.
 
4. Had D1, D2 and D3 breached the restrictive covenants in their employment contracts?
 
No. The restrictive covenant in D1's employment contract prohibiting him, for 12 months after termination of his employment, from poaching certain Cantor Fitzgerald staff was unenforceable. Although such covenant was reasonable for the protection of Cantor Fitzgerald's legitimate interests, the 12 month period was not reasonable and there was no evidence justifying such period.
 
D1 was not in breach of the restrictive covenant in his contract prohibiting him, for 12 months after termination of his contract, from engaging in business in competition with Cantor Fitzgerald. Again, the restrictive covenant was unenforceable because 12 months was unreasonably long. Further, there was ambiguity as to precisely what constituted "a business….in competition", as at the relevant time, it was difficult to see how Mansion House could be regarded as being in serious competition with the well established Cantor Fitzgerald.
 
Similarly, restrictive covenants in D2 and D3's contracts prohibiting them, for a period of 12 months after termination of their contracts, from enticing away certain classes of Cantor Fitzgerald group employees and from enticing away certain classes of clients of the Cantor Fitzgerald group, were unenforceable, as 12 months was again too long, in light of a lack of evidence justifying the same.
 
5. Was D2 liable to pay liquidated damages for leaving Cantor Fitzgerald without the latter's consent prior to the expiry of his contract term, as provided in his employment contract?
 
No. A claim could not arise under this clause because D2 had not left his employment in breach of his employment contract. He had legitimately terminated his employment with Cantor Fitzgerald, in accordance with the Employment Ordinance. Even if the liquidated damages clause were enforceable in principle, it would still have to be shown that the liquidated damages constituted a genuine pre-estimate of damage suffered by CFHK as a result of D2's premature departure. In this case, it was not shown how the formula (30% of recent average gross revenues attributable to D2, multiplied by months of notice to run under his contract) was a genuine pre-estimate of CFHK's likely damages.
 
6. What damages would Cantor Fitzgerald have been entitled to recover had the Defendants been found to have breached their obligations to it?
 
It was not possible to conclude that CFE and CFHK had suffered anywhere near the alleged 29% loss of revenue due to the Defendants' departures (a figure quantified by CFHK's Chief Financial Officer, by comparing CFHK's monthly average revenue in the 5 months following the Defendants' departure with the monthly average revenue in the first 5 months of 2011). Had the Defendants been found to have breached their obligations to CFE and CFHK, the Court said that it would have been hard pressed to quantify damages at anything other than a nominal sum.
 
Important points for employers to note
 
The judgment highlights a number of important matters for employers to bear in mind, as follows:
 
  1. To ensure that any restrictive covenants in employment contracts are carefully drafted to ensure that they are reasonable in terms of scope, period of application and to protect the employer's legitimate interests or else they will be held to be unenforceable.

  2. To ensure that terms used in employment contracts are clear and unambiguous, such as the words "competitor" and "competition" used in restrictive covenants.

  3. Ensure that they do not include terms in an employment contract which purport to restrict or extinguish any rights, benefits or protection afforded to employees by the Employment Ordinance (even where the contract is stated to be governed by a law other than that of Hong Kong), as such clause is liable to be struck down by Section 70 of the Employment Ordinance.

  4. Ensure that in cases where employees have breached their obligations, giving rise to a claim for damages by employers, employers are able to accurately quantify their loss and justify the basis upon which it has been calculated or else the court is likely to award only nominal damages.

 
 

 

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