This is the first in a series of employment law updates for Commonwealth jurisdictions. In this installment, we highlight recent notable decisions from Singapore regarding an employer’s exercise of discretion, the United Kingdom on negotiating damages in an employee’s breach of a noncompete, and Hong Kong, where sufficient legal consideration is needed for the variation of employment terms to be valid.
In the recent case of Leiman, Ricardo & anor v Noble Resources Ltd & anor [2018] SGHC 166, the Singapore High Court (SGHC) upheld the employer’s exercise of its discretion not to give its former employee certain employment benefits and bonuses.
Facts
In 2006, the first plaintiff, Ricardo Leiman (Leiman), was employed by the first defendant, Noble Resources Ltd (NRL), to hold various executive positions at the second defendant, Noble Group Ltd (NGL). During Leiman’s employment, he was given shares and share options in NGL as part of his remuneration, and was paid an annual discretionary bonus. The award of these employment benefits was determined by NGL’s Remuneration and Options Committee (ROC).
Leiman resigned at the end of October 2011, and on 9 November 2011, he entered into a Settlement Agreement (SA) and an Advisory Agreement (AA) with NRL, effective 1 December 2011 for a period of minimum nine months.
According to the SA, Leiman would be entitled to exercise the outstanding options he held in NGL (Clause 3(c)), and the restricted shares and all accrued dividends of Leiman would vest and become free of transfer restrictions (Clause 3(d)), provided Leiman “[did] not act in any way to the detriment of Noble and the [ROC] shall make a final determination in the event of any dispute.” Leiman was also entitled to be considered for a 2011 discretionary bonus under the SA. In addition, the SA, AA, and Leiman’s Employment Agreement (EA) contained market-standard noncompetition clauses.
In 2011 and 2012, it was discovered that Leiman had approached clients, counterparties, advisors, and other employees of NRL and NGL with the intention of setting up a competitor to NRL and/or NGL. This caused the ROC to decide to not approve Leiman’s request to exercise his share options and to release any transfer restrictions on his shares pursuant to Clause 3(c), on the basis that Leiman had acted to the detriment of NGL. The ROC also decided not to award Leiman a 2011 discretionary bonus.
Leiman sued and sought, inter alia, a declaration that the ROC decisions were invalid. His claims alleged the following:
SGHC’s Holding
Claim 1
Even in an employment context, where one party to the contract is given the power to exercise a discretion, the court will seek to ensure that such contractual powers are not abused by implying a term that the contractual discretion must be exercised in good faith and not arbitrarily or capriciously, unless there is very clear language to the contrary. However, the court will not step into the shoes of the decisionmaker and conduct a de novo review, as it must not substitute its own decision for that of the decisionmaker.
The SGHC dismissed Claim 1. The ROC understood that Leiman’s relevant contractual obligations were at issue even though the agreements were not laid out during meetings, and there was evidence showing that Leiman had actively engaged in acts that were in competition against and detrimental to the interests of NRL and/or NGL.
Claim 2
The SGHC dismissed Claim 2.
Clause 3(c) is not a straightforward damages clause. The question is thus whether the secondary obligation “imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation,” per the UK Supreme Court decision of Cavendish Square Holding BV v Makdessi [2016] AC 1172.
Clause 3(c) is not a penalty clause because the secondary obligation stipulated therein (i.e., forfeiture of the share options) does not impose a detriment on Leiman that is out of all proportion to Noble’s legitimate interest in ensuring that Leiman did not compete against it or otherwise act to its detriment. Instead, as Clause 3(c) conferred upon Leiman additional benefits that he otherwise would not have had, it would be unfair to Noble if Leiman were allowed to breach his obligations under the SA while still enjoying the benefits. Furthermore, Leiman is an experienced businessman and had comparable bargaining power, and the agreements were entered into after numerous discussions.
Claim 3
The SGHC dismissed Claim 3.
Clause 3(e) does not guarantee that Leiman will be paid a bonus, but only that he will be considered for a bonus. In such a situation, the employer is obligated to consider the question of its employee’s bonus, but may well enjoy a very broad discretion in the decision reached. However, the decision should be made rationally and not arbitrarily or capriciously.
The ROC had considered the issue of the bonus and reached a decision that no bonus would be awarded.
Takeaways
Even if the employment contract confers a wide discretionary power on the employer, the employer’s exercise of discretion must be in good faith and not arbitrary or capricious. Employers should ensure that there is sufficient evidence and justifications for the decisions reached and proper documentation of the decisionmaking process. As long as this is done, it would seem that courts would generally avoid intensive scrutiny of the employer’s decisionmaking process and uphold the employer’s decision.
In the case of Morris-Garner & anor v One Step (Support) Ltd [2018] UKSC 20, the UK Supreme Court (UKSC) restricted the situations in which Wrotham Park damages—damages that are awarded based on a hypothetical sum that a claimant would have charged in exchange for releasing a defendant from a restrictive covenant—would be awarded.
Facts
In 2002, the first defendant was appointed director of and held shares in the claimant, One Step. In August 2006, the first defendant set up another company, Positive Living (PL). In December 2006, the first defendant sold her One Step shares and resigned as director. The first defendant also agreed to be bound by a restrictive covenant that required her to keep business information confidential, and prohibited her from engaging in a business that was in competition with the claimant or soliciting its clients for a period of three years. In August 2007, PL began business at places that were in competition with the claimant. By early 2008, the claimant’s business had experienced a significant downturn. The claimant sued for, inter alia, breach of restrictive covenants.
The trial court and the UK Court of Appeal (UKCA) held that the restrictive covenants were breached and the claimant was entitled to damages to be assessed on a Wrotham Park basis.
UKSC’s Holding
The UKSC overturned the UKCA in its approach to assessment of damages. At the outset, the UKSC adopted the term “negotiating damages” in place of Wrotham Park damages. The UKSC held that negotiating damages should be awarded only when it is appropriate to measure the claimant's loss by reference to the economic value of the right that has been breached, with that right being treated as an asset with commercial value. Such circumstances can exist in cases where the breach of contract results in the loss of a valuable asset created or protected by the right that was infringed; for example, where there is a breach of a restrictive covenant over land, an intellectual property agreement, or a confidentiality agreement. In such cases, since the claimant has in substance been deprived of a valuable asset, his loss can therefore be measured by determining the economic value of the asset in question.
The UKSC held that such circumstances do not arise in the present case. The claimant’s case was essentially that the defendant had exposed the claimant’s business to competition, causing loss of profits and goodwill. Damages should thus be on a compensatory basis. Although hard to quantify, the claimant’s alleged loss is not in the nature of a valuable asset protected by the contractual right that was infringed. Thus, negotiating damages should not be awarded.
Takeaways
Although negotiating damages have not been wholly rejected by the UKSC, it seems that employers will now find it nearly impossible to claim negotiating damages for an employee’s breach of a noncompete clause. Employers should still engage an expert to ascertain the actual loss of profit or goodwill suffered by the employee’s breach. The deliberate nature of the employee’s breach and the difficulty of establishing precisely the loss will no longer justify the award of negotiating damages.
In Wu Kit Man v Dragonway Group Holdings Ltd [2018] HKCA 107, the Hong Kong Court of Appeal (HKCA) held that an employee’s continued employment was sufficient consideration for variation of the employment contract terms to provide the employee with an increased bonus.
Facts
The claimant, Wu, was employed by Dragonway, the respondent. The initial employment contract between the parties was on 12 May 2015 (Letter of Appointment). Later on 19 October 2015, the respondent issued an addendum to the Letter of Appointment that provided for the respondent to pay a cash bonus to the claimant. It was further provided that the obligation remained even if the claimant left the respondent company before 31 December 2016. The respondent terminated the claimant’s employment on 21 December 2015. The claimant did not receive the bonus.
The Labour Tribunal held the claimant was entitled to the bonus because the addendum was valid and binding. On appeal, the lower court reversed the Tribunal’s decision. The claimant sought leave to appeal on the basis that the matter involved a point of law of general importance.
HKCA’s Holding
The HKCA held that the addendum is valid and binding because the claimant’s continued employment with the respondent was valid consideration for the bonus payment.
The court applied the Williams v Roffey Brothers principle: When an employer has reason to doubt whether the employee will, or will be able to, complete his employment obligations and thus offers additional payment to the employee in return for his promise to do so, and as a result of this promise the employer obtains a benefit or obviates a nonbenefit, there will be sufficient consideration by the employee for the additional payment.
However, the court emphasized that “the ultimate test for consideration for the variation of the terms of employment is still one of real benefit.” Thus, the court would still have regard for the overall circumstances of the case to see if the continuance in employment did provide a real benefit to the employer that could amount to consideration for the variation of terms.
Takeaways
Employers may need to change terms of employment to improve or reduce an employee’s entitlements and obligations. This case is a good reminder to employers to ensure that there is sufficient legal consideration for variation of employment terms in order for the contract to be valid. Alternatively, employers can consider executing the variation in the form of a deed, which does not require consideration to be binding on the parties.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Hong Kong
Charles Mo
London
Matthew Howse