In the recent case Green Light Multiplex Co Ltd v Lam Shi Yan [2024] HKCFI 2101, the Court of First Instance (“Court“) awarded over HK$2 million to an employer for breach of contractual and fiduciary duties by a former employee who wrongfully diverted business opportunities away.

Background

The 1^st Defendant, Mr. Lam Shi Yan (“Lam“), was employed as the General Manager of the Plaintiff, Green Light Multiplex Co. Limited (the “Company“), which was originally engaged in the business of lighting components supply. Lam was hired to, among other things, expand the Company’s business into the project lighting business.

In this connection, Lam procured Abacus Lighting Limited (“Abacus“) to enter into an exclusive distributor agreement with the Company (the “EDA“). Under the EDA, the Company had the exclusive right to purchase, promote, and sell Abacus’ products and services in Hong Kong and Macau.

The relationship between Lam and the Company subsequently deteriorated in many respects. Lam alleged that Mr. Gordan Lai (“Lai“), the founder and Managing Director of the Company, stripped him of his powers and responsibilities through, for example, firing Lam’s subordinate without consulting him in advance. Lam contended that he had no choice but to resign given that the trust and confidence of the employment relationship had been undermined.

On the other hand, the Company, among other things, alleged that Lam wrongfully procured Abacus to breach the EDA, causing the Company to lose its exclusive distributorship to Pinetum Lighting Limited (“Pinetum“), a competitor of the Company which Lam later joined (although Lam denied that he had ever been employed by Pinetum). As a result, the Company lost further business opportunities in various construction projects.

In the circumstances, the Company claimed against Lam for breach of various implied terms of his employment contract and his fiduciary duties owed to the Company, which gave rise to loss of business opportunities and profits.

Implied terms of Lam’s employment agreement

Both the Company and Lam contended that certain terms had been implied into Lam’s employment contract.  The Court accepted the Company’s case that the following duties owed by Lam were indeed implied into his employment contract: (1) a duty of fidelity and good faith; (2) a duty not to divert business opportunities; (3) a duty not to solicit customers; (4) a duty not to disclose confidential information; and (5) a duty not to use information obtained in the course of or as a result of his employment with the Company to the detriment of the Company.

The Court also accepted Lam’s case that there was an implied term that he would not be demoted, provided that the change of title would lead to a fundamental change to the whole nature of the job.

Fiduciary duties owed by Lam to the Company

The Court held that in determining whether an employee who is not a director owes fiduciary duties to the employer, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interest of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached. An analysis is therefore required as to whether in all the circumstances, and by reference to the specific contractual obligations, the employee has undertaken to act solely in the employer’s interests.

Here, considering the two factors below, the Court had no hesitation in concluding that Lam, as the General Manager, owed fiduciary duties to the Company, even if he was not a director of the Company:

1. The Company recruited Lam to, among other things, expand its business into project lighting; and
2. The Company and Lai sought to utilise Lam’s connections with suppliers and customer in the project lighting industry.

Diversion of business opportunity and breach of duties by Lam

After considering a multitude of factual evidence adduced by the parties, it was held, among other things, that:

1. Lam breached his duty of fidelity and fiduciary duties owed to the Company. He lied to Abacus and said that the Company would cease its lighting business. Lam actively procured and induced Abacus to terminate the EDA and to deal with another company instead, causing the Company to lose its right as the sole distributor of Abacus’ products and services in Hong Kong and Macau; and
2. This led to a loss of multiple business opportunities and profits on the Company’s part. To this end, the Court allowed the Company’s claims in respect of the projects below and awarded damages in the sum of over HK$2 million to the Company:

Takeaways

Apart from the general duty of fidelity and good faith that all employees owe to the employer, employees of sufficient seniority may also owe fiduciary duties to their employer if they have undertaken to act solely in the interest of the employer under the employment contract, notwithstanding that they are not directors. In general, fiduciary duties are higher and stricter than duty of fidelity.

Further, even in the absence of post-termination confidentiality obligations and restrictive covenants (which are commonly provided for in employment contracts to prevent employees from joining a competitor and soliciting business from former clients immediately after termination), the Court is ready to award damages to the employer if an employee’s conduct is found to be in breach of the implied terms of his/her employment contract and/or fiduciary duties owed to the ex-employer.

The full judgment can be accessed here.