GM diverts business, leaks confidential information
A Hong Kong court recently dealt with an employment dispute involving allegations of breach of contract, fiduciary duties, and diversion of business opportunities.
The case centred on a lighting company and its former general manager, highlighting issues that can arise when high-level executives transition to new roles.
The former general manager presented several key arguments in his defence. He claimed that he did not owe fiduciary duties to the company, despite his senior position. He also argued that his actions in preparing for future employment were within acceptable limits and did not breach his obligations to the employer.
The general manager contended that certain business decisions he made were actually in the best interests of the company, despite appearances to the contrary. Additionally, he asserted that he was entitled to performance bonuses and unpaid salary, countering the company's claims against him.
The court's decision emphasised the importance of loyalty and good faith in employment relationships, particularly for senior management positions.
Allegations against the general manager
The employer, a company established in 1991 and carrying on business in lighting, accused its former general manager of breaching implied terms of the employment agreement and fiduciary duties. The allegations included:
- Wrongfully inducing a supplier to terminate an exclusive distributor agreement
- Diverting business opportunities to another company
- Disclosing confidential information to a competitor
- Causing the employer to supply products on consignment to its detriment
The former general manager denied these allegations and counterclaimed for unpaid performance bonuses and salaries.
The employment relationship began in June 2010 when the general manager joined the company. He was responsible for daily management, logistics, and administrative matters, as well as developing the company's project lighting business.
A senior officer’s duties
The court found that several implied terms existed in the employment agreement, including:
- Serving the employer with fidelity and good faith
- Protecting the employer's interests and not diverting business opportunities
- Not soliciting customers or disclosing confidential information
The judge stated:
"While [the manager] was appointed as the General Manager of [the employer], he denied that he owed any fiduciary duties to [the employer]. ... Taking these matters into account, I have little doubt that [the manager] did owe fiduciary duties to [the employer]."
This ruling emphasised that senior executives can owe fiduciary duties to their employers, even if not explicitly stated in their contracts.
Diversion of business
The court found that the former general manager had breached his duties in several instances, particularly regarding an exclusive distributor agreement with a supplier called Abacus. The general manager had allegedly induced Abacus to terminate its agreement with the employer and appoint another company as its exclusive distributor.
The judge noted:
"I am of the view that [the employer's] loss of such a right was plainly because of [the manager's] active procurement/inducement. In fact, he lied to [the supplier's representative] for this purpose. Such actions on the part of [the manager] were apparently done in breach of his duty of fidelity and fiduciary duties owed to [the employer]."
This highlighted the severity with which courts view attempts to divert business opportunities away from an employer, especially when still employed.
Damages and counterclaims
The court awarded damages to the employer for lost profits on specific projects, including the Univision Project and the HKZM Bridge Project. However, it also allowed the former general manager's counterclaim for unpaid performance bonuses. The judge explained:
"Apart from stipulating how gross profit is calculated, it only provides that [the manager] is entitled to 5% of the gross profit earned by [the employer] as his performance bonus. It does not say that [the manager] has to complete a full financial/calendar year before he is entitled to performance bonus."
This demonstrated that courts will enforce contractual bonus provisions, even when other breaches have occurred.
The judge concluded:
"To conclude, I would allow [the manager's] counterclaim for performance bonus for the sum of $196,520.78."
"[The manager] is therefore liable to pay [the employer] the net sum of 2,370,039.87."
"Having considered the partial success of [the employer's] claim and of [the manager's] counterclaim, I provisionally take the view that: (1) [The manager] should pay 70% of [the employer's] costs of the action; (2) [The employer] should bear 50% of [the manager's] costs of the counterclaim."
