Court awards damages against former manager for wrongful diversion of business opportunities

In a recent judgment handed down by the Hong Kong High Court¹ on 16 August 2024, the court awarded substantial damages to an employer which sued its former employee and general manager for breach of fiduciary duties in diverting business opportunities away from the company and interfering with the company's business relationships with its customers.

The Defendant, Mr Lam, was employed by the Plaintiff, Green Light Multiplex Co Limited (Green Light), as a General Manager between 2010 and 2014. According to Mr Lam, he had some 30 years of experience in the lighting field and was persuaded by the founder of Green Light, Mr Lai, to join the company to build up its sales and project management team. Through his efforts, the company secured various business opportunities including signing an exclusive distributor agreement with Abacus, a major manufacturer and supplier of lighting columns and high masts in Hong Kong and Macau.

The relationship between Mr Lam and Mr Lai broke down in or around 2014, with Mr Lam accusing Mr Lai of stripping him of his powers and responsibilities and excluding him from management affairs. He decided to resign and, unsurprisingly, ended up working with a competitor of Green Light, Pinetum. In fact, Mr Lam was caught handing out business cards describing himself as the General Manager of Pinetum while he was still in employment with Green Light, a fact he initially denied in his witness statement but subsequently admitted at trial. What followed was Abacus terminated its exclusive distributor agreement with Green Light and appointed Pinetum in its place. As a result of losing supplies from Abacus, Green Light lost out on various business opportunities and the profits that would have derived from them. Green Light further accused Mr Lam of, inter alia, interfering with its business relationship with one customer and diverting a separate business opportunity away from Green Light.

The basis of Green Light's claim against Mr Lam was that as an employee and General Manager of the company, he owed fiduciary duties to his employer and that there were various terms implied into the employment agreement which he breached. They were that he would:

• serve the company with fidelity and in good faith;
• protect the interests of the company and not divert business opportunities to himself or other parties;
• not solicit customers of the company;
• not disclose trade secrets or confidential information which he learnt by reason of his employment with the company; and
• not use, to the detriment of the company, any information which he had obtained in confidence in the course of or as a result of his employment.

The court found that, as the General Manager of Green Light, Mr Lam did owe fiduciary duties to the company. According to Mr Lam himself, he was recruited by Green Light to, inter alia, expand the company's business into the project lighting business. Mr Lai also wanted him to introduce and bring over all his business connections with suppliers and customers in the project lighting industry to the company. Therefore, taking these matters into account, the court concluded Mr Lam did owe fiduciary duties to Green Light. Furthermore, the court also found the implied terms mentioned above were indeed a part of the employment agreement.

However, the court held that not every employee who is not a director would owe fiduciary duties to the company, citing Elias J in University of Nottingham v. Fishel,²"[...]in determining whether a fiduciary relationship arises in the context of an employment relationship, 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.

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. In Fishel, Elias J further explained that fiduciary duties "arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken".

Following a 10-day trial during which the court heard from a number of witnesses, the court found Mr Lai to be more credible as a witness than Mr Lam and that Mr Lam had not been forthcoming and truthful with his evidence. Having proven the quantum of a number of its claims against Mr Lam, Green Light succeeded in obtaining an award of damages of more than HK$2 million against Mr Lam, representing the profits the company would have earned but for Mr Lam's breaches.

Typically, when an employee leaves his employer to join a competitor, the employer would seek to protect its legitimate business interests by enforcing appropriate post-termination restrictive covenants or relying on the general confidentiality obligation which survives the termination of an employment relationship. This case now demonstrates that an additional cause of action based on breach of fiduciary duty could be invoked in appropriate circumstances to strengthen an employer's claim, particularly where there are concerns regarding the enforceability of post-termination restrictive covenants.

1. Green Light Multiplex Co Ltd v. Lam Shi Yan [2024] HKCFI 2101.
2. [2000] ICR 1462.