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Contract


Article exclusively contributed by Johnson Stokes & Master

Employer unable to enforce contract if in breach

By Hong Tran, Registered foreign lawyer, Employment and Employee Benefits Group, Johnson Stokes & Ma

A key principle was applied in the December 2004 case of Ng Chung Man, Joe v Rever Expression Salon Limited ("Rever"), where the employer sought to enforce post-termination restrictive covenants, as well as a provision in the contract of employment requiring the terminated employee to repay training fees. The case showed that an employer will generally be unable to enforce a specific term of a contract of employment if it is found that the employer is in breach of that contract.

The background was that Rever employed Mr Ng as an art director. They were not satisfied with his performance and therefore dismissed him. The contract of employment contained, among other things, restrictive covenants that applied after the termination of employment.

It also required Mr Ng to repay the costs of in-house training he had received if he left Rever's employment ("Training Fee Clause"). The clause provided that the amount to be repaid would be equivalent to six times the average aggregate monthly remuneration earned by Mr Ng during the six months immediately preceding termination of employment.

Clauses requiring repayment of training fees are not uncommon but the method of calculating the amount to be repaid may vary between employers.

In dealing with the case, the District Court referred to a decision by the House of Lords which said that, where a contract had been terminated due to a breach by one party, the innocent party is "discharged" from any primary obligations under the contract. Also, the party in default will be liable for any unperformed obligations under the contract (i.e. to pay monetary compensation to the other party for any loss sustained).

In relation to the restrictive covenants, the District Court referred to the earlier decision of Rever (AMA) Salon Limited v Kung Wai For, Danny & Others (No 2), which stated the following propositions:

(a) Notwithstanding the term of the contract of employment, an employer is not entitled to protection from mere competition by a former employee;
(b) An employee is entitled to benefit from any personal skill or experience acquired whilst in the services of a former employer;
(c) Clauses which restrict the employee from taking employment of his choice after he has left his employer will be struck down unless the employer can show that they:
(i) protect his legitimate interests, and
(ii) are reasonable in all the circumstances.

The District Court found on the facts that Mr Ng had been constructively dismissed by Rever, as they had varied unilaterally the terms and conditions of his employment (namely, reduced his salary, changed the nature of his post and failed to pay salary in some months). In the circumstances, as Rever was in breach, the District Court found that they were not entitled to rely on the restrictive covenants, based on the principles laid down in the House of Lords case discussed above.

Regarding the Training Fee Clause, the District Court found that this was in restraint of trade and therefore void. This was because:
(i) it restricted Mr Ng's freedom to take alternative employment in that he would have to pay a sum equivalent to his last six months' earnings (which was found to be a substantial sum) if his job ended. The effect of the clause could have adverse consequences for Mr Ng.
(ii) it required him to compensate Rever for the training he had received. Principle (b) expressed in the judgement on the earlier Rever case cited above was therefore breached.

Further, the amount supposed to be paid under the Training Fee Clause was so large that it was not commensurate with the costs of the in-house training which the employer had provided for the employee. For this reason, the clause was also found to be unenforceable.

Q & A on enforcing certain terms in a contract of employment
Q1 When will training fees not be recoverable from an employee after termination of employment?
A1 An employer will be unable to enforce contractual rights if found to be in breach of the contract. Furthermore, even if not in breach, training fees will not be recoverable if these are so excessive as to amount to a restrictive covenant. Decisions on this will depend on all the facts and circumstances.

Q2 When will a restrictive covenant be enforceable?
A2 A restrictive covenant will be enforceable if it is necessary to protect the legitimate business interests of the employer and is reasonable in all the circumstances. What is reasonable will generally be considered by reference to the nature of the restraint e.g. non-solicitation of clients/customers or non-competition, the duration of restraint and the geographical area of restraint.

Q3 How do employers maximise the prospects of recovering training fees?
A3 The contract of employment should contain an express provision allowing recovery of training fees. The amount to be recovered should be calculated by reference to the actual amount spent by the employer and not arbitrary amounts which may act as restrictions on the employee moving to work elsewhere.


Taken from Career Times 18 February 2005

(Last review date: 23 August 2013)


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