In Black Marble Securities Limited v. Lee Yan Chi [2023] HKCFI 1084, the employer (Company) sought to recover financial losses by enforcing a contractual indemnity against a former account executive (Broker) for a sum in excess of HK$3 million pursuant to a broker cooperation agreement (Broker Agreement).
The Broker denied liability and challenged the enforceability of the indemnity provision on the basis that it was void for breach of the Employment Ordinance (EO) or otherwise unenforceable at law.
Facts
The Broker commenced employment with the Company in August 2015 and was licensed to carry out Type 1 regulated activities. The Broker subsequently entered into the Broker Agreement with the Company which included, among other things, an agreement that if any of the Broker's clients fail to make payment in relation to dealing in securities or futures, service charges and interests on time, then any loss caused to the Company will be borne by the Broker and the Company may recover that loss from the Broker (Indemnity Provision).
The Broker claimed that at around the same time as she was asked to execute the Broker Agreement, the parties had orally agreed that any compensation payable to the Company under the Indemnity Provision would be made by way of deduction of her wages (Oral Agreement).
By July 2016, two of the Broker's clients failed to settle in full their outstanding margin with the Company. As a result, the Broker executed two separate written undertakings (Undertakings) authorising the Company to "freeze" her monthly income/commission income until those clients fully repaid the arrears owed to the Company. The Company withheld HK$329,512.18 from the Broker's salary and commission income.
The Company subsequently sought to enforce the Indemnity Provision against the Broker claiming over HK$3 million.
Court Decision
The Broker's primary argument was that the Oral Agreement was a supplement to the Broker Agreement and it rendered the Indemnity Provision void because it breached section 32 of the EO, which prohibits an employer from making deductions from wages and any sums payable to the employee unless they fall within one of the exceptions permitted by the EO.
The Court found that based on the evidence the Oral Agreement was only reached after the Broker Agreement had been executed; and the Broker did not enter into the Broker Agreement on the understanding that her liability under the Indemnity Provision would be discharged by wage deduction. As such, the Court held that the Oral Agreement was not made as a supplement to (or as part of) the Broker Agreement.
In any event, the Court found that the Oral Agreement lacked legal consideration and therefore, was unenforceable. In other words, the Oral Agreement could not in any way affect the Broker Agreement's operation, let alone render the Indemnity Provision void for breach of the EO.
In the absence of an enforceable Oral Agreement, it would appear that the Company's withholding (or in the Broker's case, deduction) of HK$329,512.18 may also amount to a breach of section 32 of the EO. However, the Court noted that this was not the Broker's case and practically speaking, it would not have made any material difference to the overall outcome of the case if the Broker was unable to challenge the validity of the Indemnity Provision in light of the Company's claim for set-off.
As an alternative argument, the Broker sought to argue that the Indemnity Provision was a penalty clause and thus, unenforceable. Under Hong Kong law, a clause would be penal in nature if it was a secondary obligation (which operates on a breach of contract) that imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of a primary obligation. In this case, the Court rejected the Broker's contention that the Indemnity Provision was a secondary obligation triggered by a breach of a primary obligation and held that the Indemnity Provision did not amount to a penalty clause.
Given the above findings, the Court found in the Company's favour, ruling that the Indemnity Provision was enforceable. The Broker was therefore ordered to repay the Company around HK$3 million, with credit to be given for the sum withheld pursuant to the Undertakings.
Takeaway for Employers
Employers who intend to recover financial losses from their employees should include a carefully drafted indemnity provision in the contract of employment to minimise potential disputes between the parties.
Employers should also ensure that the relevant payment/repayment mechanism being put in place complies with the EO. For instance, if the employer intends to recover financial losses from its employee through deduction of their wages, this should be dealt with cautiously, as a breach of section 32 of the EO could give rise to both civil and criminal liabilities.
The judgment is available here.
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