Tadjudin Sunny v. Bank of America, National Association

CACV 12/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 12 OF 2015

(ON APPEAL FROM HCA NO. 322 OF 2008)

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J U D G M E N T

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Hon Kwan JA, Barma JA and Chow J:

A. INTRODUCTION

1.On 24 December 2014, To J handed down his judgment after a trial lasting for 20 days in January and February 2014 in an action for breach of a contract of employment.  He gave judgment for the plaintiff, Ms Sunny Tadjudin, in the sum of HK$3,900,000 (equivalent to US$500,000) as damages for loss of bonus for 2007, but dismissed her claims for underpayment of her bonuses for the years of 2005 and 2006.  The plaintiff was awarded 85% of the costs against the defendant, the Bank of America, National Association (“the Bank”).

2.After considering the written submissions of the parties, the judge handed down his decision on interest on the judgment sum on 2 June 2015 ([2015] 3 HKLRD 331).  He awarded pre-judgment interest on HK$3,900,000 at 2.85% per annum from 1 March 2008 until the date of judgment and thereafter at judgment rate until payment, with costs of the application to the plaintiff.

3.The Bank appealed against the award of HK$3,900,000, contending that the judge was wrong to find that the plaintiff’s employment was terminated with the intention to avoid her being eligible for the discretionary bonus of 2007.  Further, the judge was wrong in law to hold that there was an implied term in the contract of employment that the Bank “shall not exercise its right to terminate the Plaintiff’s employment by giving one month’s notice or by paying one month’s salary in lieu of notice in order to avoid her being eligible for the performance incentive programme” (“the implied anti-avoidance term”).  The Bank also challenged the quantum of damages.

4.The plaintiff cross-appealed against the dismissal of her claims for underpayment of the discretionary bonuses for the years of 2005 and 2006, contending that the judge should have found that the Bank’s administration of its performance incentive programme and performance evaluation for those two years were irrational, perverse and in bad faith such that no reasonable employer could have arrived at such amounts for the bonuses paid[1].  She challenged the quantum of damages assessed for the loss of bonus for 2007.  She also appealed against the pre-judgment interest rate, contending that the judge should have awarded 8% per annum, being 3% over prime rate.

5.Thus, the holdings of the judge on every material issue are the subject of challenge in this appeal.  Other than the issue on whether there should be the implied anti-avoidance term, the main challenges are to the findings of fact of the trial judge.

B. THE JUDGMENT BELOW

B1.    The background facts

6.The non-controversial and relevant facts for the purpose of the appeal and cross-appeal may be stated as follows.  They are all taken from the judgment.

7.The plaintiff joined the Bank on 5 June 2000 as an analyst at the level of vice president in the Distressed Debt Trading Group, which was subsequently re-named as the International Special Situations Group (“ISSG”).  Clause 3 of her letter of employment provided that either party may terminate the employment by one month’s notice in writing or payment of one month’s salary in lieu of notice.  Clause 1 provided that she was eligible to be considered for a bonus under the Bank’s performance incentive programme, subject to her being employed by the Bank at the time of payment of bonuses.  The plaintiff had received very substantial bonuses from 2000 to 2006.  Her employment was terminated by the Bank on 28 August 2007 by giving her a month’s salary in lieu of notice, without any bonus for 2007.

8.The annual bonus formed a very substantial part of the plaintiff’s remuneration package.  Her bonus for 2001 was more than double her annual basic salary.  Her bonuses for 2002 to 2006 were between two to three times her annual salaries.  As stated by the judge, the base salary in her remuneration package was the ‘sauce’, whereas the performance bonus was the ‘meat’[2].

9.One of the expressed purposes of the performance incentive programme was to compete for business and talent.  The programme included the following salient features: the Bank was committed to a ‘pay for performance’ environment in which an employee’s performance was a key consideration in determining his remuneration package; it rewarded the highest performers with the greatest rewards through basic salary, incentives, equity and rewards and recognition; managers should aggressively compensate high performing employees; the focus was on the results the employee achieved against his specific goals; pay was related directly to performance and awards were highly differentiated based on performance; total compensation was market-informed and driven by the final results of the Bank and the line of business as well as the employee’s performance results.  There was an undisputed correlation between the size of the bonus and profit contributed by the employee.

10.The programme was administered through a continuous performance evaluation.  Evaluations were done twice a year, once in mid-year and once at year end.  Evaluation began with the employee submitting a performance and development plan to his manager.  Performance was assessed on two criteria: (a) results measured against the plan, in other words the employee’s contribution to profit – the “What”; and (b) conduct, attitude, leadership qualities and teamwork – the “How”.  Each criterion was rated on a three-point scale: “Exceeds”, “Meets” and “Does Not Meet”.  An employee awarded a “Does Not Meet” for his “What” and “How” was unlikely to receive any salary increase, bonus or equity.  The Bank practised a policy in which 20% of the staff in a team would be given an “Exceeds” rating, 70% would be given a “Meets” rating, and no more than 10% would be given a “Does Not Meet” rating (“the 20/70/10 policy”).  Management would strictly limit “Exceeds” rating to 20%, it would not however strictly force managers to rate 10% of his staff as “Does Not Meet”.

11.Whilst the eligibility to be considered under the programme was contractual, the bonus to be paid under the programme was not.  There was no expressed formula on which the bonus was to be assessed.  Even in respect of an employee’s contribution to profit, that contribution was the result of multiple touches and what weight to be given to each factor was solely a matter for the employer.  There was no dispute whether to award a bonus and the amount to be awarded was discretionary.  But that did not mean the discretion of the Bank was unfettered.  The judge held that the discretion had to be exercised in accordance with the principles set out in the programme, and it was not to be exercised in an irrational, perverse or arbitrary manner that was not bona fide[3].  To impugn that discretion, it would not be sufficient for the employee to establish that the employer had acted unreasonably.  It has to be shown that no reasonable employer in the same field would have exercised his discretion in that way or that the employer has acted irrationally.  In support of this, the judge cited Keen v Commerzbank AG [2007] ICR 623 at §59; Clark v Nomura International Plc [2000] IRLR 766 at §40; and CCSU v Minister for the Civil Service [1985] 1 AC 374 at 410.  The burden of showing irrationality is very high[4].  These holdings are not challenged on appeal.

12.The plaintiff initially worked under Peter Young until 2004 when Ken Schneier took over the Hong Kong Desk of ISSG.  John Liptak joined the Hong Kong Desk at the level of principal in 2001 and was appointed the Head of the Hong Kong Desk in 2005.  John Liptak took a different approach from that of Ken Schneier.  He insisted that an analyst’s contacts belonged to the employer and adopted the policy that an analyst who sourced a deal would not necessarily be assigned the deal, and assignment should be made by the Head of Desk on the basis of ability and availability.  Since 2005, the plaintiff’s relations with John Liptak became very rough.  The discord arose out of her belief that John Liptak took away her deals and contacts and she expressed reluctance to loop him in for her projects.  John Liptak criticised the plaintiff for lack of teamwork and being protective of her contacts, while the plaintiff was troubled that by sharing her contacts her contribution would not be adequately acknowledged.

13.For 2005, the plaintiff received a “Meets” rating for “What” and “How”.  She was awarded a bonus of US$615,000.  For 2006, she received a “Meets” rating for “What” and “Does Not Meet” for “How”.  ISSG had a bad year in 2006.  The Hong Kong Desk ended with a loss of US$1.36 million.  However, the plaintiff had a shining performance and made a profit of US$7.23 million.  John Liptak, who incurred personal loss and loss for the entire Desk, was awarded a bonus of US$1 million but the plaintiff was only awarded US$550,000 for her shining performance.  She alleged that her bonuses for those two years were irrationally low and claimed damages for the perverse, irrational and mala fide evaluations.  Her claims were made on these bases: in transferring the distress debt assets of Asia Pulp and Paper Group in Indonesia (“APP”) from John Liptak’s portfolio to her, John Liptak and Ken Schneier intended to dump the loss in those assets on her (“the loss dumping charge”); when she found out about the hidden loss in the APP assets and pointed that out to Ken Schneier, he downgraded her performance evaluation rating in retaliation from “Exceeds” to “Meets” in relation to “What” (“the retaliatory downgrading charge”); and the disparity between the bonus figures of John Liptak and hers in light of their respective profit contribution.

14.In February 2007, ISSG merged with the United States Special Situations Group of the Bank to be run as a single business unit under the name of Global Special Situations Group (“GSSG”).  Peter Santry became the head of GSSG and took over the management of the Hong Kong Desk of ISSG from Ken Schneier.  John Liptak then replaced Ken Schneier as the plaintiff’s immediate manager.  He wrote to Peter Santry and Ken Schneier on 14 February requesting a discussion on the plaintiff’s position on the Desk and her interaction with him and the team in general.

15.In April 2007, Peter Santry had a meeting with the plaintiff with the view to resolve the discord between her and John Liptak.  He then invited comments from John Liptak and Ken Schneier on his draft note to be sent to the plaintiff.  John Liptak thought the note was too soft in tone and disagreed with Ken Schneier it would be desirable for the plaintiff to stay.  As a result of John Liptak’s objection, Peter Santry withdrew his draft note and decided to issue an official warning.  This was done by John Liptak on behalf of the Bank with the input and assistance of the Human Resources Department.  The official warning letter issued on 29 June 2007 to the plaintiff listed her unacceptable behaviour and enclosed a Performance Improvement Plan (“the PIP”), setting out specific goals which the plaintiff was required to meet within four weeks.  The warning letter stated that if the plaintiff failed to make immediate improvement as specified in the PIP, the Bank would take further disciplinary actions including summary dismissal.

16.John Liptak considered that the plaintiff did not meet the specific goals in the PIP.  On 14 August 2007, he sent a draft PIP review to Peter Santry suggesting that the plaintiff did not meet the goals set out for her in some areas.  He then had a telephone discussion with Peter Santry and concluded that enough opportunities had been given to the plaintiff to change her behaviour but she did not meet the goals set for her.  Peter Santry agreed that John Liptak would go over the PIP review with the plaintiff and offer her the option to resign or to have her employment terminated by the Bank.  John Liptak completed the final PIP review on 17 August and on 20 August 2007, he and an officer of the Human Resources Department interviewed the plaintiff.  He went through the PIP review with her and told her that she failed to comply fully with the goals set out.  He gave her the option to take the rest of the week off and decide if she wanted to resign or, if not, the Bank would start the termination process.  The plaintiff refused to accept either option.  On 27 August 2007, the Bank issued a letter to terminate her employment with effect from 28 August 2007 by giving her one month’s wages in lieu of notice.

17.The plaintiff claimed she was dismissed in breach of the implied anti-avoidance term.  She alleged that John Liptak orchestrated her termination.  He had no cause to invoke the PIP process and the specific goals under the PIP were designed in such a way to fail her.  Despite she had achieved the specific goals, John Liptak terminated her on the pretext she failed the PIP.  Had her employment not been so terminated, she would have been eligible for the performance incentive programme and would have been awarded a bonus for 2007.

B2.   The judge’s findings

18.The judge took the view that the anti-avoidance term should be implied in the plaintiff’s contract of employment.  It was not inconsistent with the express terms, or with the statutory right of the employer to terminate the employment by notice or payment in lieu under sections 6 and 7 of the Employment Ordinance, Cap 57, or with the protection given to employees under Part VIA of Cap 57.  He held the implied term reasonable, equitable, necessary to give business efficacy to the employment agreement, and capable of clear expression[5].

19.The plaintiff was the only one to testify in support of her case.  The judge found her protective and selective in her evidence, probably prompted more by her paranoid interpretation of events than dishonesty[6].

20.The Bank’s witnesses were John Liptak, two team members of the Hong Kong Desk Ms Harumi Hiyamuta and David Sbarro, and several officers from its Human Resources Department.  Ken Schneier declined to come to Hong Kong to testify because of his health.

21.The judge found John Liptak was “decidedly dishonest” with the plaintiff when he transferred the distress assets of APP to her, and that he was “acting maliciously” in invoking the PIP and in his conduct of the PIP.  He did not consider John Liptak a credible witness[7].

22.Harumi Hiyamuta impressed the judge as “decidedly biased” in favour of John Liptak and “manifestly biased” against the plaintiff.  This badly damaged her credibility and the reliability of her evidence.  The judge accepted that part of her evidence about the plaintiff’s general reluctance in disclosing her contacts to John Liptak in 2005 and 2006, which was well documented, but gave little weight to her evidence about the plaintiff’s behaviour in 2007[8].

23.David Sbarro was found not to be a reliable witness.  Little weight was given to his evidence and the judge rejected his evidence about the plaintiff’s conduct in 2007 entirely[9].

24.The evidence of the officers of the Human Resources Department was mainly formal in nature and was accepted by the judge[10].

25.The judge considered the disparity between the bonus figures of the plaintiff and John Liptak and held that this could not provide any basis for an allegation of irrationality or perversity regarding the bonus payments of the plaintiff for 2005 and 2006[11].

26.He found that both John Liptak and Ken Schneier knew that the distress assets of APP carried a potential loss before transferring them to the plaintiff but there was no loss dumping, as it was confirmed that the profit and loss of the distress assets of APP was attributed to John Liptak so the transfer of those assets to the plaintiff’s portfolio had no effect on her profit figures.  The loss dumping charge was not made out, although the incident exposed John Liptak’s mala fide which dented his credibility[12].

27.The judge declined to draw the inference that Ken Schneier downgraded the plaintiff’s rating a few hours after the plaintiff had reported to him the mistake about the valuation of the distress assets of APP in retaliation of her exposing the hidden loss.  He found the inference based on timing “very tenuous”.  There was evidence showing Ken Schneier’s choice to be “obviously rational and the plaintiff’s downgrading inevitable”.  Ken Schneier was subsequently required to downgrade nine more team members from “Exceeds” to “Meets” in compliance with the 20/70/10 policy[13].

28.As for the “Does Not Meet” rating given for “How” in 2006, the judge considered it was open to Ken Schneier to give her such rating in light of his comments which were supported by a number of incidents during that year and Ken Schneier’s decision could not be attacked as irrational[14].  In respect of the “Meets” rating for “What” in 2006, the judge held this was nothing but justified[15].

29.For all the above reasons, the claims for underpayment of bonuses for 2005 and 2006 were dismissed.

30.In respect of the claim for breach of the implied anti-avoidance claim, the issues were: (1) whether, having regard to the plaintiff’s performance under the PIP, the reason given for the termination was genuine; and if it was not, (2) whether it was to be inferred that the dismissal was made with the intention to avoid her being eligible under the performance incentive programme[16].

31.On the totality of the evidence, the judge was fully satisfied that the plaintiff’s conduct was “substantially improved” since January 2007 and was no longer confrontational, as a result of Ken Schneier’s counselling on 5 January 2007[17].  It was John Liptak who took the view in 2007 that time had come to terminate the plaintiff’s employment.  He found that John Liptak had misled Peter Santry into thinking that the plaintiff’s situation was unacceptable and unsustainable, and had exaggerated or even misrepresented the situation to put pressure on Peter Santry to take action against the plaintiff[18].  He found that Peter Santry was misled and manipulated into authorising the PIP process when there was no basis to do so.  He drew the inference that John Liptak initiated the PIP process “as a vendetta for the plaintiff’s conduct in 2005 and 2006” and it was “clearly instituted with malice”[19].

32.As for the plaintiff’s performance of the specific goals set in the PIP, the judge found that (1) she had failed to provide weekly summaries of her projects; (2) she had failed to provide comparables in respect of only one unique project (the Harbin Electric deal), for which no comparables were available from the investment houses; and (3) there was one minor neglect in properly applying for leave of one day’s absence.  Applying an objective test of significant improvement, the judge held these shortfalls cannot be described as anything but insubstantial which should fairly be excused and the plaintiff had passed the PIP by a “comfortable margin”.  He held that a termination on the ground of her failing the PIP could not have been a genuine reason[20].

33.The judge found there was clear evidence from John Liptak that the PIP was just a pretext to terminate the plaintiff’s employment and the PIP process was “manifestly not conducted in good faith”.  From John Liptak’s distancing himself from the drafting of the PIP, the judge drew the only reasonable inference that he was trying to conceal his malicious intention of terminating the plaintiff regardless of how she performed under the PIP[21].  And as Peter Santry was manipulated by John Liptak into authorising the plaintiff’s termination on behalf of the Bank, the judge attributed John Liptak’s malice to the Bank[22].

34.From the above findings and surrounding circumstances, the judge drew the only reasonable inference that “one of the dominant intentions” of the Bank in terminating the plaintiff was to avoid her being eligible for consideration under the performance incentive programme for 2007[23].

35.The judge rejected the plaintiff’s pleaded case on quantum that she should be awarded 16.6% of her profit figures by way of damages for the loss of bonus[24].  Having regard to the criteria that may be properly taken into account in assessing the amount of discretionary bonus in Horkulak v Cantor Fitzgerald International [2004] IRLR 942, the judge used the bonuses awarded to the plaintiff in 2005 and 2006 as reference, and awarded damages of US$500,000 or HK$3,900,000, which was equivalent to a bonus percentage of 8.25% of the plaintiff’s profit contribution up to June 2007[25].

36.We will first consider the arguments on the point of law arising out of the implied anti-avoidance term before dealing with the parties’ challenges to the findings of fact.

C. IMPLIED ANTI-AVOIDANCE TERM

C1.    Relevant legal principles

C1.1  Implication of contractual terms generally

37.The starting point for the test of whether a term may be implied into a contract is the well known decision of the Privy Council in BP Refinery (Westernport) Pty Ltd v President, Councillors and Rateplayers of the Shire of Hastings (1977) 180 CLR 266.  At 282-283, Lord Simon of Glaisdale, giving the advice of the majority of the Board, stated that 5 conditions (which may overlap) must be satisfied before a term can be implied into a contract, namely:-

(1)   it must be reasonable and equitable;

(2)   it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3)   it must be so obvious that “it goes without saying”;

(4)   it must be capable of clear expression; and

(5)   it must not contradict any express term of the contract.

38.The question of whether any particular term ought to be implied into a contract must not, however, be approached by going through a mechanical process of considering these 5 conditions independently to see whether they can each be satisfied.  As pointed out by Lord Hoffman, giving the advice of the Board in Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 1 WLR 1988 at paragraph 27, “this list is best regarded, not as [a] series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so”.

39.The rationale for adopting this approach of treating the implication of a term as an exercise in the construction of the contract as a whole was explained by Lord Hoffmann in the same case, as follows:

“16 Before discussing in greater detail the reasoning of the Court of Appeal, the Board will make some general observations about the process of implication. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means….

17 The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

18 In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.

…

21 It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer - the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on - but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

40.The judgment of Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd is also valuable in providing an insight into what one should properly be focusing on when considering questions such as whether the implied term is “necessary to give business efficacy to the contract” or whether it is so obvious that “it goes without saying”:-

“22   There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is “necessary to give business efficacy” to the contract…

23    The danger lies, however, in detaching the phrase ‘necessary to give business efficacy’ from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case, at p 459, when he said that in that case an implication was necessary ‘to give effect to the reasonable expectations of the parties’.

25   Likewise, the requirement that the implied term must ‘go without saying’ is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean. Any attempt to make more of this requirement runs the risk of diverting attention from the objectivity which informs the whole process of construction into speculation about what the actual parties to the contract or authors (or supposed authors) of the instrument would have thought about the proposed implication. The imaginary conversation with an officious bystander in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 is celebrated throughout the common law world. Like the phrase ‘necessary to give business efficacy’, it vividly emphasises the need for the court to be satisfied that the proposed implication spells out what the contact would reasonably be understood to mean. But it carries the danger of barren argument over how the actual parties would have reacted to the proposed amendment. That, in the Board’s opinion, is irrelevant. Likewise, it is not necessary that the need for the implied term should be obvious in the sense of being immediately apparent, even upon a superficial consideration of the terms of the contract and the relevant background. The need for an implied term not infrequently arises when the draftsman of a complicated instrument has omitted to make express provision for some event because he has not fully thought through the contingencies which might arise, even though it is obvious after a careful consideration of the express terms and the background that only one answer would be consistent with the rest of the instrument. In such circumstances, the fact that the actual parties might have said to the officious bystander ‘Could you please explain that again?’ does not matter.”

41.Hence, instead of asking whether the term sought to be implied is necessary in the sense that without it the contract would become unworkable in practice, the correct question to ask is whether it is necessary to give effect to the reasonable expectations of the parties.

42.Likewise, instead of asking whether the actual parties to the contract would have regarded the term sought to be implied as being obvious (or immediately apparent) although the contract does not expressly say so, the correct question to ask is whether it is what a reasonable person would understand the contract to mean.

43.Lastly, it should be borne in mind that when one is undertaking the exercise of construing a contract for the purpose of determining whether a term ought to be implied into it, one must take into account the proper contextual background against which the contract was entered into by the parties.  We shall return to this point later in this judgment when we come to consider whether the anti-avoidance term ought to be implied into the employment contract between the Bank and the plaintiff in the present case.

44.Mr Adrian Huggins SC (for the Bank) has drawn our attention to the judgment of the House of Lords in Geys v Société Générale, London Branch [2013] 1 AC 523, where Baroness Hale of Richmond JSC pointed out, at paragraphs 55 and 56, a distinction between two different kinds of implied terms, namely, those which are implied into a particular contract and those which are implied into a class of contractual relationship.  For the former kind of implied terms, Baroness Hale said that they are implied because, on the proper construction of the contract in question, the parties must have intended to include them; whereas for the latter kind of implied terms the courts have implied them as a necessary incident of the relationship concerned, unless the parties have expressly excluded it.  Baroness Hale said that a great deal of the contractual relationship between employer and employee is governed by implied terms of the latter kind, some of which are of long-standing (such as the employer’s duty to provide a safe system of work) while some are of more recent discovery (such as the mutual obligations of trust and confidence). Baroness Hale also referred to the judgment of Dyson LJ (as he then was) in Crossley v Faithful & Gould Holdings Ltd [2004] ICR 1615, who described the “necessity” involved in implying such terms as “somewhat protean” and pointed out that some well established terms could scarcely be said to be essential to the functioning of the relationship.  In the words of Dyson LJ, at paragraph 36:-

“It seems to me that, rather than focus on the elusive concept of necessity, it is better to recognise that, to some extent at least, the existence and scope of standardised implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations.”

45.In the present case, we are only concerned with an implied term of the former kind, ie one implied into the particular employment contract between the Bank and the plaintiff.

C1.2  Implied restrictions on exercise of apparently unqualified contractual power or discretion

46.It is well established that an apparently unqualified power or discretion given to a party to a contract should generally be construed as being subject to some implied restrictions regarding the exercise of that power or discretion.

47.In Clark v BET plc and Another [1997] IRLR 348, the relevant service agreement provided that the employee’s salary “shall be reviewed annually and be increased by such amount if any as the Board shall in its absolute discretion decide.”  It was held by Timothy Walker J that the word “shall” governed “be increased” and thus there was a contractual obligation on the employer to provide, and a contractual right of the employee to receive, an annual upward adjustment in salary.  In relation to the amount of the increase, it was held that, notwithstanding the express provision in the contract that the amount of the increase was to be in the absolute discretion of the employer’s board, the exercise of that discretion was not completely unfettered, but was subject to the requirement that it could not be exercised in bad faith or capriciously.  In the words of Timothy Walker J:-

“Accepting the principle that a defendant in an action for breach of contract ‘is not liable for not doing that which he is not bound to do’ per Diplock L.J. in Lavarak v. Woods of Colchester [1967] 1 Q.B. 278, 294B–C, if the Board had capriciously or in bad faith exercised its discretion so as to determine the increase at nil and therefore to pay Mr. Clark no increase at all, that would have been a breach of contract.”

48.In Clark v Nomura International plc [2000] IRLR 766, the contract provided for a “discretionary bonus scheme which is not guaranteed in any way and is dependent upon individual performance”.  It was held by Burton J that the exercise of the discretion was subject to the test of irrationality or perversity (of which caprice or capriciousness could be a good example).  The reasoning which led to that conclusion appeared in paragraph 40 of the judgment of Burton J, as follows:-

“Quite apart from the additional contractual straitjacket for the discretion in this case[26], the employer’s discretion is in any event, as a result of the authorities, not unfettered, as both sides have accepted to be the law in this case. Even a simple discretion whether to award a bonus must not be exercised capriciously. (United Bank Ltd v. Akhtar [1989] IRLR 507 EAT, Clark v. BET plc [1997] IRLR 348 and Midland Bank plc v. McCann 5/6/1998 unreported EAT) or without reasonable or sufficient grounds (White v. Reflecting Road Studs Ltd [1991] ICR 733 EAT, and McLory v. Post Office [1992] ICR 758). I do not consider that either of these definitions of the obligation are entirely apt, when considering whether an employer was in breach of contract in having exercised a discretion which on the face of the contract is unfettered or absolute, or indeed even one which is contractually fettered such as the one here considered. Capriciousness, it seems to me, is not very easy to define: and I have been referred to Harper v. National Coal Board [1980] IRLR 260 and Cheall v. APEX [1982] IRLR 362. It can carry with it aspects of arbitrariness or domineeringness, or whimsicality and abstractedness. On the other hand the concept of ‘without reasonable or sufficient grounds’ seems to me to be too low a test. I do not consider it is right that there be simply a contractual obligation on an employer to act reasonably in the exercise of his discretion, which would suggest that the court can simply substitute its own view for that of the employer. My conclusion is that the right test is one of irrationality or perversity (of which caprice or capriciousness would be a good example) i.e. that no reasonable employer would have exercised his discretion in this way. I canvassed this provisional view in the course of argument with both counsel, and neither appeared to dissent, and indeed Mr Temple QC in his closing submissions expressly adopted and used a test of irrationality. Such test of perversity or irrationality is not only one which is simple, or at any rate simpler, to understand and apply, but it is a familiar one, being that regularly applied in the Crown Office or, as it is soon to be, the Administrative Court. In reaching its conclusion, what the court does is thus not to substitute its own view, but to ask the question whether any reasonable employer could have come to such a conclusion. Of course, if and when the court concludes that the employer was in breach of contract, then it will be necessary to reach a conclusion, on the balance of probabilities, as to what would have occurred had the employer complied with its contractual obligations, or, as Timothy Walker J put it in Clark v. BET plc, assess, without unrealistic assumptions, what position the employee would have been in had the employer performed its obligation. That will involve the court in assessing the employee's bonus, on the basis of the evidence before it, and thus to that extent putting itself in the position of the employer; but it will only do if it if is first satisfied, on the higher test, not that the employer acted unreasonably, but that no reasonable employer would have reached the conclusion it did acting in accordance with its contractual obligations, and the assessment of the bonus then of course is by way of an award of damages.”

49.Horkulak v Cantor Fitzgerald International [2004] IRLR 942 concerns a discretionary bonus clause in an employment contract which provided that the employer “may in its discretion, pay [the employee] an annual discretionary bonus … the amount of which shall be mutually agreed … however the final decision shall be in the sole discretion of the president …  It is a condition precedent to any payment hereunder that … [the employee] shall still be working for and not having given notice to or attempted to procure [the employee’s] release from this agreement …”. Mr Horkulak resigned from his employment, giving as his reason the bullying and abusive behavior of the company’s chief executive, and subsequently began proceedings for wrongful dismissal.  His claims included payments which it was said he would have received under the discretionary bonus clause but for the termination of his employment.  One of the defences raised by the employer was that because the bonuses payable were discretionary, no sums were due. Rejecting this defence, Potter LJ (giving the judgment on behalf of the English Court of Appeal) stated the following:

“46. In our view, the judge was correct in his general approach to the construction of the bonus clause and to hold that the claimant was entitled, had he remained in the defendants' employment, to a bona fide and rational exercise by CFI of their discretion as to whether or not to pay him a bonus and in what sum. It is correct, as Mr Béar has emphasised, that the contractual discretion is drafted in wider terms than those employed in the earlier cases. The use and positioning of the word ‘may’ attaches the discretion to the obligation to pay a bonus at all rather than to the assessment of the amount payable (cf Clark v BET plc) and it lays down no specific criterion of ‘individual performance’ (cf Clark v Nomura) and no prima facie formula for calculation (cf Mallone v BPB). Nonetheless, the clause is one contained in a contract of employment in a high-earning and competitive activity in which the payment of discretionary bonuses is part of the remuneration structure of employers. In this case, the objective purpose of the bonus clause on the evidence … was plainly to motivate and reward the employee in respect of his endeavours to ‘maximise the commission revenue of the Global Interest Rate Derivatives Business’ of CFI. Further, the condition precedent that the employee should still be working for CFI and should not have given notice or attempted to procure his release, demonstrates that the bonus was to be paid in anticipation of future loyalty. In such a case, as it seems to me, the provision is necessarily to be read as intended to have some contractual content, i.e. it is to be read as a contractual benefit to the employee, as opposed to being a mere declaration of the employer’s right to pay a bonus if he wishes, a right which he enjoys regardless of contract.

47. It is of course the position that the contract in this case leaves at large the amount of such bonus or the rate at which it will be payable; there is no particular formula or point of reference for its calculation. It does however, provide for a process of attempted mutual agreement as between the employee, the chief executive and the president prior to the making of any final decision in the discretion of the president. This provision emphasises the obligation of CFI to consider the question of payment of a bonus (and amount) as a rational and bona fide, as opposed to an irrational and arbitrary, exercise when taking into account such criteria as CFI adopt for the purpose of arriving at their decision. Failure so to construe it would strip the bonus provision in clause 3(b)(ii) of any contractual value or content in respect of the employee whom it is designed to benefit and motivate. It would fly in the face of the principles of trust and confidence which have been held to underpin the employment relationship.”

50.Birmingham City Council v Wetherill [2007] IRLR 781 is a case concerning a local authority’s power to vary the terms of a motor car allowance scheme which was incorporated through a circular into the contract of employment of its staff.  The English Court of Appeal held that under the scheme, the local authority had the power to vary the allowance unilaterally, but its power to vary was subject to an implied restriction that it could not be exercised for an improper purpose, capriciously or arbitrarily, or in a way in which no reasonable employer, acting reasonably, would exercise it.  The rationale for this implied term was that it was necessary “in order to give effect to the reasonable expectations of the parties” (at paragraph 34 per Chadwick LJ, with whom Laws and Evans-Lombe LJJ agreed).

51.Outside the employment context, the court has also shown a willingness to construe an apparently unqualified or unrestricted contractual power or discretion as being subject to some implied restrictions.

52.In Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s Rep 397, a vessel was time chartered for six months with the intention of the charterer that it be used to carry oil from the UAE during the Iran-Iraq war.  The question which arose for consideration was whether the shipowner’s discretion under a “war risks” clause to decline to permit the vessel from entering a “dangerous” port was subject to an implied term that such discretion had to be exercised honestly and in good faith and not arbitrarily, capriciously or unreasonably.  Holding that it did, Leggatt LJ (with whom Balcombe and Mann L JJ agreed) explained the basis of such implied term as follows:-

“Mr Hallgarten Q.C. argued for the Owners that the exercise of the discretion under clause 40 is purely subjective, involving only that it should be exercised bona fide; but that if and in so far as it is objective, it must not be exercised arbitrarily or capriciously. He also relied on Associated Provincial Picture Houses, Limited v. Wednesbury Corporation [1948] 1 K.B. 223 for his proposition that the court should not interfere with the exercise of discretion by owners under clause 40 unless they have come to a conclusion so unreasonable that no reasonable owners could ever have come to it.

For the purposes of judicial review the Court is concerned to judge whether a decision-making body has exceeded its powers, and in this context whether a particular decision is so perverse that no reasonable body, properly directing itself to the applicable law, could have reached such a decision.  But the exercise of judicial control of administrative action is an analogy which must be applied with caution to the assessment of whether a contractual discretion has been properly exercised. The essential question always is whether the relevant power had been abused. Where A and B contract with one another to confer a discretion on A, that does not render B subject to A’s uninhibited whim.  In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it must be conferred, it must not be exercised arbitrarily, capriciously, or unreasonably.  That entails a proper consideration of the matter after making any necessary enquiries.  To these principles, little is added by the concept of fairness: it does no more than describe the result achieved by their application.”

53.In Gan Insurance v Tai Ping Insurance [2001] EWCA Civ 1047, [2001] 2 All ER (Com) 299, where a contract of reinsurance provided that “[n]o settlement and/or compromise shall be made and liability admitted without the prior approval of Reinsurers”, it was held:-

“as a general qualification, that any withholding of approval by reinsurers should take place in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance” (at paragraph 67 per Mance LJ, with whom Latham LJ agreed).

54.In Paragon Finance Plc v Nash [2002] 1 WLR 685, a mortgage condition provided that the interest rate shall be such “as the [mortgagee] shall from time to time apply … and may accordingly be increased or decreased by the [mortgagee] at any time and with effect from such date or dates as the company shall determine”.  It was held that this power of the mortgagee to set the interest rate from time to time was not completely unfettered but was subject to an implied term, in order to give effect to the reasonable expectation of the parties, that the discretion to vary interest rate should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way which no reasonable person, acting reasonably, would do: see paragraphs 30, 32, 36, 41-42 of the judgment of Dyson LJ, within whom Thorpe LJ and Astill J agreed.

55.In all, a power or discretion given to a party to a contract which on its face is unqualified is generally to be read as being subject to an implied requirement that it can only be exercised in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner which is not bona fide.  Such restrictions are implied in order to give effect to the reasonable expectations of the parties to the contract.

56.In the present case, the Bank accepts that its employment contract with the plaintiff contains 2 implied terms relevant to the performance incentive program, namely, that:-

(1)   the Bank should not implement its performance evaluations in respect of the plaintiff in an irrational, perverse or arbitrary manner or in a manner that was not bona fide; and

(2)   the Bank should not administer its performance incentive program in respect of the plaintiff in an irrational, perverse or arbitrary manner or in a manner that was not bona fide.

57.The critical question is whether clause 3 of the employment letter, which on its face permits the Bank to terminate the plaintiff’s employment without cause by giving one month’s notice or by paying one month’s salary in lieu of notice, ought to be read as being subject to some implied restraints, in particular, an obligation not to exercise the power of termination in order to avoid the plaintiff being eligible for the Bank’s performance incentive program.

C1.3  Duty of mutual trust and confidence

58.It is now well recognized, at least in the United Kingdom and in this jurisdiction[27], that there exists an implied obligation of mutual trust and confidence between employer and employee: see Malik v Bank of Credit and Commerce International SA (in compulsory liquidation) [1998] 2 AC 20 (HL); Evelyn Semana Bachicha v Poon Shiu Man Henry [2000] 2 HKLRD 833 (CA); Ko Hon Yue v Liu Chung Leung and Others [2011] 1 HKLRD 733 (CA).

59.The obligation of mutual trust and confidence between employer and employee has been said to be “an overarching obligation implied by law as an incident of the contract of employment”: see Johnson v Unisys Ltd [2003] 1 AC 518 at paragraph 24, per Lord Steyn.  In the same case, Lord Hoffmann said, at paragraph 35, that the contribution of the common law to the employment revolution has been the evolution of implied terms in the contract of employment, of which the most far reaching is the implied term of trust and confidence.

60.Nevertheless, the majority of the House of Lord (Lord Steyn dissenting on this issue) held that this implied obligation of mutual trust and confidence cannot be utilised to form the platform to allow an employee to recover damages for loss arising from the manner of his dismissal, essentially for two reasons.  First, it was said that the obligation of trust and confidence is concerned with preserving the continuing relationship which should subsist between employer and employee and thus it is not appropriate for use in connection with the way that the relationship is terminated (see paragraph 46 per Lord Hoffmann, and paragraph 78 per Lord Millet).  Second, it was said that it would be an improper exercise of the judicial function to develop the common law to permit such claims to be made in the light of the evident intention of Parliament that they should be heard by the industrial tribunal and the remedy should be limited in application and extent as provided for in Part X of the Employment Rights Act 1996 (see paragraphs 55 to 58 per Lord Hoffmann, and paragraph 80 per Lord Millet).

61.The decision of the House of Lords in Johnson v Unisys is strongly relied upon by Mr Huggins in his argument that the anti-avoidance term cannot, or should not, be implied into the employment contract between the Bank and the plaintiff.  We shall come back to this decision later when we consider whether the implication of the anti-avoidance term in the present case is precluded by the employment protection provisions in Part VIA of the Employment Ordinance (Cap 57).

62.In passing, it is of interest to note that although Lord Hoffmann considered (at paragraphs 46 and 47) that it would be inappropriate to use the obligation of trust and confidence as the foundation for a claim by an employee for damages for loss arising from the manner of his dismissal, he referred to the minority judgment of McLachlin J in Wallace v United Grain Growers Ltd (1997) 152 DLR (4^th) 1 at 44-48 and expressed the view that it is jurisprudentially possible, and a more elegant solution, to achieve that result at common law by implying a separate term that “the power of dismissal will be exercised fairly and in good faith”.

C2.    The anti-avoidance term ought to be implied into the plaintiff’s employment contract

63.When considering whether the anti-avoidance term ought to be implied into the employment contract between the Bank and the plaintiff in the present case, we consider the following contextual background to be crucial:-

(1)     The plaintiff was employed in the Bank’s “Distress Debt Trading Group” (“the ISSG”), which operated in a highly competitive environment in relation to both business and talents.

(2)     An expressed purpose of the Bank’s performance incentive program was to compete for business and talents, which was of particular relevance to the ISSG and the employees working in that group.

(3)     The Bank’s performance incentive program helped the Bank attract and retain talents, while giving the employees the motivation to perform so as to maximize profits for the Bank.

(4)     The Bank made it clear to its employees, including the plaintiff, that it was committed to a “pay for performance” policy under which an employee’s performance was a key consideration in determining his/her remuneration package, and that the Bank rewarded the highest performers with the greatest rewards through basic salary, incentives, equity and rewards and recognition.

(5)     Performance bonus formed a major part of the remuneration of an employee working in the ISSG.  In the case of the plaintiff, her bonuses for the years from 2002 to 2006 were between two to three and half times her annual salary.  In the words of the Judge, the basic salary was the “sauce” while the performance bonus was the “meat”.

64.It is in the light of these matters that the plaintiff’s right, under clause 1 of the employment letter, to be eligible for the Bank’s performance incentive program should be considered.  In our view, this right of the plaintiff was plainly intended, and understood, by both parties to constitute an important benefit for the plaintiff and an integral part of her remuneration package.  That being so, we are satisfied that the anti-avoidance provision is necessary in order to give effect to the common, reasonable, expectation of both the Bank and the plaintiff that the former could not exercise the power of termination under clause 3 of the employment letter (or the corresponding powers under sections 6 and 7 of the EO) in order to avoid the plaintiff being eligible for the Bank’s performance incentive program.  We are equally satisfied that a reasonable person, looking at the terms of the employment letter and the whole contextual background objectively, would have no difficulty in coming to the conclusion that the contract of employment between the Bank and the plaintiff meant that the Bank’s power of termination of the plaintiff’s employment must be subject to such restriction.

65.As found by the Judge (at paragraph 34 of his judgment), without the anti-avoidance term, the plaintiff’s contractual right to be eligible for consideration under the Bank’s performance incentive program would become illusory and could be easily taken away by the Bank exercising its right of termination under clause 3 of the employment letter, even if she was utterly without fault.  Such conclusion would be wholly unreasonable and inequitable and could not possibly, in our view, have been what the parties intended to be the effect of their employment contract.

66.The anti-avoidance term is, in our view, consistent with, and supported by the legal principle mentioned in paragraph 55 above, namely, that an apparently unqualified contractual power (in this case the power of termination without cause by one month’s notice or payment of one month’s salary in lieu of notice) should generally be construed as being subject to the requirement that it can only be exercised in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner which is not bona fide.  To exercise the power of termination in order to avoid the plaintiff being eligible for the Bank’s performance incentive program can, in our view, aptly be described as an exercise of the power arbitrarily or capriciously or in a manner which is not bona fide, or otherwise than in good faith, rationally and for a proper purpose.

C3.    The Bank’s objections to the anti-avoidance term being implied into the employment contract

67.We shall now deal with various objections raised on behalf of the Bank to the anti-avoidance term being implied into the plaintiff’s employment contract.

68.First and foremost, Mr Huggins argues, in reliance upon the reasoning of the majority of the House of Lords in Johnson v Unisys, that there is no scope for the court to imply the anti-avoidance term into the plaintiff’s employment contract with the Bank in view of the existence of the employment protection provisions in Part VIA.

69.The Bank’s detailed argument on this ground is set out in paragraph 23(c) of its Amended Notice of Appeal, as follows:-

“The specific statutory protection in Part VIA of the EO (a) in relation to dismissals with the intention of extinguishing or reducing the right, benefit or protection conferred upon the employee by the Ordinance and (b) against specific forms of discrimination related to participation in trade union or pregnancy. In relation to such Part VIA protection there are specific provisions for a limitation period (s.32I), for remedies (s.32M, s.32N & s.320) and for forum (s.32J). The Legislature has chosen to provide deliberately limited statutory protection against wrongful termination, and a specific statutory right to terminate a contract of employment subject to such limited protection. It is not intended to provide a cause of action for unfair dismissal generally but only relief from dismissals designed and intended to avoid the statutory rights, entitlements and benefits under the EO and dismissals without valid reasons. An employee's remedy for unfair or unreasonable dismissal in Hong Kong is defined, limited and confined by Part VIA of the EO and confined to Part VIA of the EO. In the light of the express statutory regime in the EO there is no room for any contractual implied term at common law as contended for by the Plaintiff. The Legislature has carried out a balancing of interests of employers and employees with proper regard not only to the individual dignity and worth of the employees but also to the general economic interest in Hong Kong. In these circumstances it would be inappropriate for the Hong Kong Court to imply any prohibition against any other forms of ‘unfair’ or ‘unjust’ or ‘unreasonable’ dismissal. It is not for the judiciary to say that the legislature has not gone far enough or has provided inadequate protection in relation to unfair or unreasonable dismissals and to substitute its own views as to what would be socially just and a fair balance of the relevant interests. It is not for the courts to extend further a common law implied term when this would depart significantly from the balance set by the legislature. To treat the statutory code as prescribing a floor and not a ceiling would do just that. This is not affected by the fact that the UK legislature has provided for more extensive protection than the Hong Kong legislature.”

70.In his oral submissions, Mr Huggins further argued that the court is precluded from implying the anti-avoidance term into the plaintiff’s employment contract with the Bank because Part VIA occupies the “field” of employment protection against unfair dismissal.  According to Mr Huggins, the field occupied by Part VIA can be looked at in terms of three levels of generality:-

(1)   unfair dismissal generally;

(2)   dismissal with the intention of extinguishing or reducing an employee’s existing rights; and

(3)   dismissal with the intention of extinguishing or reducing an employee’s right in relation to annual bonus.

71.Mr Huggins said that the present case falls squarely within (3) above.  In support of this argument, he drew attention to the following provisions of the EO:-

(1)   under section 11A(1) in Part IIA of the EO, “end of year payment” is defined to mean “any annual payment … or annual bonus of a contractual nature but does not include any annual payment or annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer”;

(2)   under section 32O(1) in Part VIA, subject to section 32M (which is not relevant for the present purpose), if no order for reinstatement or re-engagement is made under section 32N, the court or Labour Tribunal may make an award of “terminal payments” to be payable by the employer to the employee as it considers just and appropriate in the circumstances;

(3)   by section 32O(2), “terminal payments” refer to (inter alia) the statutory entitlements under the EO that the employee has not been paid and that the employee is entitled to upon the termination of the contract of employment;

(4)   by section 32O(3), “terminal payments” include (a) any end of year payment payable under Part IIA (sub-paragraph (c)) and any other payments due to the employee under this Ordinance and under his contract of employment (sub-paragraph (i)).

72.Recognising that the Bank’s performance incentive scheme provides for payment of bonus which is payable only at the discretion of the employer and therefore outside the definition of the expression “end of year payment” in Part IIA of the EO, Mr Huggins argued that by excluding discretionary bonus from Part IIA of the EO, it is to be inferred that the legislature did not intend there to be protection in relation to such discretionary bonus.  Otherwise, the law would be providing a greater degree of protection to discretionary bonus than contractual bonus, which Mr Huggins said could not have been intended by the legislature.

73.In our view, it is incorrect to suggest that Part VIA occupies the field of employment protection against unfair dismissal at any of the three levels of generality mentioned by Mr Huggins.  It is apparent from section 32A(1)(a)[28] of the EO that the scope of the protection provided is limited to the situation where an employee is dismissed because the employer intends to extinguish or reduce “any right, benefit or protection conferred or to be conferred upon the employee by” the EO, such as severance payments under Part VA, long service payments under Part VB, maternity leave under Part III, etc.

74.It is clear that Part VIA does not give protection against (i) unfair dismissal generally, or (ii) dismissal with the intention of extinguishing or reducing an employee’s existing rights.  Neither can it be said that Part VIA occupies the field of dismissal with the intention of extinguishing or reducing an employee’s right in relation to bonus, because:-

(1)   an employee’s right (if any) in relation to annual bonus is generally a right conferred on him by contract; it is not a right, benefit or protection conferred or to be conferred upon the employee by the EO;

(2)   in any event, it is not disputed that the Part VIA does not provide any protection against an employer dismissing an employee with the intention of extinguishing or reducing the employee’s right in relation to “discretionary” bonus, which is what we are concerned with in the present case.

75.It is true that Part IIA of the EO contains provisions relating to (inter alia) annual bonus of a contractual nature and may be said to confer some right, benefit or protection on an employee in respect of such bonus in limited and specified circumstances, eg the right to be paid the bonus where the employment of an employee, who has been employed for the whole of a payment period, is terminated after the expiry of the payment period but before the bonus becomes dues on the day specified in the contract under section 11E(2), or the right to be paid a proportion of the bonus where an employee who has not been employed by the same employer for the whole of a payment period but has been so employed for a period of not less than 3 months in the payment period under section 11F(1). However, the employee’s basic right or entitlement to be paid a contractual bonus is not a right, benefit or protection conferred or to be conferred upon the employee by the EO.  Thus, if an employer dismisses an employee with the intention of extinguishing or reducing the employee’s right to be paid a contractual bonus due and payable under the contract of employment (outside those limited and specified circumstances referred to in various provisions in Part IIA), such dismissal would fall outside the scope of protection under Part VIA.

76.In so far as the jurisdiction of the court or Labour Tribunal to make an award of terminal payments (which by definition include any end of year payment payable under Part IIA) under section 32O is concerned, it relates only to the question of remedies in circumstances where an employee has successfully established a claim under Part VIA against his employer.  The jurisdiction to make of an award of terminal payments cannot, in our view, be taken to enlarge the field or scope of protection afforded by that part of the Ordinance.

77.The decision of the House of Lords in Johnson v Unisys can, in our view, validly be distinguished on the following grounds:-

(1)   Part X of the Employment Rights Act 1996 cannot properly be compared to Part VIA of the EO.  As pointed out by the judge at paragraph 60 of his judgment, the 1996 Act provides a very comprehensive statutory regime of employment protection against unfair dismissal generally, whereas Part VIA of the EO, as we have seen, is much more limited in scope and application.

(2)   The issue before the House of Lords was whether the implied obligation of mutual trust and confidence could be used as the platform to allow an employee to recover damages for loss arising from the manner of his dismissal, whereas the issue before us is whether the plaintiff’s employment contract with the Bank contains a specific implied term, namely, that the Bank is under an obligation not to exercise the power of termination in order to avoid the plaintiff being eligible for the Bank’s performance incentive program.

(3)   In Johnson v Unisys, the House of Lords was asked to develop the common law with far reaching consequences in relation to claims by an employee for damages for loss arising from the manner of his dismissal.  In the present case, we are not called upon to decide whether the anti-avoidance term, or a term to similar effect, should be implied into employment contracts generally.  The issue before us is narrow and specific, namely, whether, on the particular facts and circumstances of this case, the anti-avoidance term ought to be implied into the plaintiff’s employment contract with the Bank.

78.Mr Huggins also argued that the anti-avoidance term cannot be implied into the plaintiff’s employment contract because it is inconsistent with the Bank’s contractual right to terminate the employment at any time by giving notice or payment in lieu of notice, with or without identifying any reason or cause for doing so, under clause 3 of the employment letter, or the corresponding statutory powers under sections 6 and 7 of the EO.  In our view, the answer to this argument can be found in Lord Steyn’s judgment in Johnson v Unisys, at paragraph 24, as follows:-

“Conflict with express terms. Counsel for the employers was asked to place the employment contract of the employee before the House. It was done. It revealed that either party was able to terminate the contract by giving four weeks’ notice… relying on the notice provision, counsel for the employers submitted that to apply the implied obligation of mutual trust and confidence in relation to a dismissal is to bring it into conflict with the express terms of the contract… In any event, the argument of counsel for the employers misses the real point. The notice provision in the contract is valid and effective. Nobody suggests the contrary. On the other hand, the employer may become liable in damages if he acts in breach of the independent implied obligation by dismissing the employee in a harsh and humiliating manner. There is no conflict between the express and implied terms.”

79.Although Lord Steyn was in the minority on the issue of whether the employee had a reasonable cause of action to recover damages for loss arising from the manner of his dismissal, the majority of the House of Lord differed from Lord Steyn not because the implied term of mutual trust and confidence in relation to a dismissal was thought to be inconsistent with the the express term of the contract giving the employer the right to terminate the employment by notice, but because it was considered that the common law should not be developed to permit such claim being brought having regard to the statutory regime that had been put in place under Part X of the Employment Rights Act 1996.

80.In fact, Lord Hoffmann (with whom Lord Bingham and Lord Millet agreed) did not consider that there was any inconsistency between an express term that the employer could terminate an employment on notice without any reason and an implied term that the power of termination could only be exercised in good faith.  In the words of Lord Hoffmann:-

“42 My Lords, in the face of this express provision that Unisys was entitled to terminate Mr Johnson’s employment on four weeks’ notice without any reason, I think it is very difficult to imply a term that the company should not do so except for some good cause and after giving him a reasonable opportunity to demonstrate that no such cause existed.

43 On the other hand, I do not say that there is nothing which, consistently with such an express term, judicial creativity could do to provide a remedy in a case like this. In Wallace v United Grain Growers Ltd 152 DLR (4th) 1, 44-48 , McLachlin J (in a minority judgment) said that the courts could imply an obligation to exercise the power of dismissal in good faith. That did not mean that the employer could not dismiss without cause.  The contract entitled him to do so. But in so doing, he should be honest with the employee and refrain from untruthful, unfair or insensitive conduct.  He should recognise that an employee losing his or her job was exceptionally vulnerable and behave accordingly.  For breach of this implied obligation, McLachlin J would have awarded the employee, who had been dismissed in brutal circumstances, damages for mental distress and loss of reputation and prestige.”

81.Another reason advanced by Mr Huggins as to why the anti-avoidance term cannot, or should not, be implied into the plaintiff’s employment contract with the Bank is the lack of mutuality or reciprocity of such a term.  For the purpose of this submission, Mr Huggins relied on Commonwealth Bank of Australia v Barker (2014) 312 ALR 356 where the High Court of Australia expressly declined to follow the decision of the House of Lords in Malik and held that the implied obligation of mutual trust and confidence could not be supported under Australian law.  One of the reasons for reaching this conclusion was that the suggested implied term would impose obligations not only on employers but also on employees whose voices about the consequence of such implication had not been heard in the appeal, and that it was for the legislature, not the judiciary, to make law which entailed far reaching consequences in industrial relations: see paragraphs 38 to 40 of the combined judgment of French CJ, Bell and Keane JJ.

82.We do not consider the decision of the High Court of Australia in Commonwealth Bank of Australia v Barker to be an obstacle to the implication of the anti-avoidance term in the present case.  As we have observed earlier in this judgment, for the purpose of disposing of the present appeal, it is not necessary for us to find that the anti-avoidance term, or a term to similar effect, should be implied into employment contracts generally.  The anti-avoidance term, as presently formulated, imposes an obligation only on the Bank, but not the plaintiff.  Whether there ought to be implied some obligation(s) on the plaintiff in the exercise of her corresponding right of termination under clause 3 of the employment letter is not a matter that we need to decide in this appeal.

83.Mr Huggins next argued that it was wrong of the judge to find, at paragraph 36 of his judgment, that the plaintiff could succeed on the basis of breach of an unpleaded implied term “not to terminate her employment without good reason and in order to deprive her of her bonus” [emphasis added].  In our view, this complaint is based on an incorrect reading of paragraph 36 of the judgment.  What the judge was doing there was to consider whether the anti-avoidance term ought to be implied into the plaintiff’s contract of employment with the Bank by reference to some of the well known tests for implication of contractual terms.  In no way can paragraph 36 of the judgment be read as meaning that the judge was adding the component of “without good reason” to the anti-avoidance term as pleaded by the plaintiff.  That the judge’s focus was on the plaintiff’s pleaded implied term is clear from his conclusion, at paragraph 68 of the judgment, that the term that ought to be implied was the following: “not to terminate the Plaintiff’s employment by notice or payment in lieu in order to avoid her being eligible for consideration under the performance incentive programme” (see also paragraphs 4(1), 17(2), 33, 34, 45, 185 of the judgment).

84.Lastly, Mr Huggins argued that that it was wrong of the judge to hold that there was no need for the plaintiff to have pleaded the implied term of mutual trust and confidence as a basis for her pleaded case of an implied term not to dismiss the plaintiff to avoid her being eligible to be considered for a performance bonus, and that the court was entitled to employ the obligation of mutual trust and confidence to find in favour of the plaintiff.  Since we have come to the conclusion that the anti-avoidance term ought to be implied into the plaintiff’s contract of employment with the Bank on the particular facts and circumstances of this case without having to rely specifically on the implied obligation of mutual trust and confidence, it is not necessary for us to say anything further about this ground of complaint.

85.In all, we reject the Bank’s appeal in respect of the implication of the anti-avoidance term.

D. 2007 BONUS – IF THERE WAS BREACH OF IMPLIED ANTI-AVOIDANCE TERM

86.As stated by the judge, the burden rests on the plaintiff to establish that the Bank was in breach of the implied anti-avoidance term.  She has to prove that she was dismissed by the Bank with the intention of avoiding her being eligible for consideration under the performance incentive programme for discretionary bonus.  Her case rests entirely on inference[29].

D1.   Approach on challenging inferences of fact on appeal

87.In the appeal and cross-appeal, both sides have challenged the judge’s inferences of fact, as well as his findings of primary fact on which the inferences were based.

88.Mr Huggins, SC[30] submitted on behalf of the Bank that an appellate court would be less reluctant to form an independent opinion about the proper inference to be drawn from “undisputed facts or findings” made by the judge, citing Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §34, in which Bokhary PJ stated that appeals against findings of primary fact are approached very differently from appeals against findings of fact made by a process of inference and quoted from Viscount Simonds’ speech in Benmax v Austin Motor Co Ltd [1955] AC 370 at 374, a patent case concerning an issue of fact whether the invention claimed involved an inventive step in which no question of credibility arose.

89.This is not the situation in the present case.  The credibility of the witnesses played an important role in the judge’s assessment of the oral testimony, which he tested against the inherent probability and the contemporaneous documents[31].  In Pang Ketian Sally v Tam Yuk Hung Annie, CACV 147/2013, 25 April 2014, at §§26 to 32, the Chief Judge gave a clear explanation of Viscount Simonds’ statements as mentioned by Bokhary PJ in Ting Kwok Keung.  He concluded that the “plainly wrong” test in Ting Kwok Keung is nonetheless applicable to a finding of secondary fact based on a process of inference, unless the finding is based purely on inferences, or otherwise has nothing to do with the witnesses’ demeanour or the trial judge’s having received the evidence at first hand.

90.The Chief Judge said this at §31 of Pang Ketian Sally:

“This “plainly wrong” test, in other words, is applicable unless the finding of fact is based purely on inferences, or otherwise has nothing to do with the witnesses’ demeanour or the trial judge’s having received the evidence at first hand. In this regard, it is worth remembering that when Bokhary PJ referred to the dichotomy between a finding of primary fact and a finding of fact made by a process of inference in paragraph 34 of the judgment, he referred to Benmax v Austin Motor Co Ltd [1955] AC 370 as an example to illustrate the second category of finding of fact based on inference. As explained by the judge, the issue of fact in that patent case was whether the invention claimed involved an inventive step. No question of credibility arose. By a process of inference, the trial judge found that the invention claimed involved an inventive step. Also by such a process, the Court of Appeal reversed the finding. The House of Lords affirmed the Court of Appeal’s decision and pointed out that whilst there is a universal reluctance to reject a finding of specific fact, particularly where the finding could be founded on the credibility or bearing of a witness, there is no less a willingness to form an independent opinion about the proper inference of fact, subject only to the weight which should, as a matter of course, be given to the opinion of the trial judge (per Viscount Simonds at page 374).”

91.Similar statements were made by Lord Hodge in Beacon Insurance Co Ltd v Maharaj Bookstore Ltd [2014] UKPC 21 at §17:

“Where a judge draws inferences from his findings of primary fact which have been dependent on his assessment of the credibility or reliability of witnesses, who have given oral evidence, and of the weight to be attached to their evidence, an appellate court may have to be similarly cautious in its approach to his findings of such secondary facts and his evaluation of the evidence as a whole.”

92.Lam VP in China Gold Finance Ltd v CIL Holdings Ltd, CACV 11/2015, 27 November 2015, at §22 also emphasized the “greater appreciation of the need to exercise restraint in respect of findings of secondary facts based on inferences drawn from findings of primary fact”.

93.In the present case, the judge made crucial findings of fact by a process of inference drawn from findings of primary fact.  It is clear that such findings were not based on inferences alone without involving any question of credibility or the demeanour of witnesses.  So for this court to overturn such findings of fact, the party challenging such findings would have to satisfy us that they are “plainly wrong”.

94.The phrase “plainly wrong” in this context does not address the degree of certainty of the appellate judges that they would have reached a different conclusion on the facts.  Rather, it directs the appeal court to consider whether it was permissible for the trial judge to make the findings of fact in the face of the evidence as a whole.  That is a judgment that the appeal court has to make in the knowledge that it has only the printed record of the evidence.  The court is required to identify a mistake in the judge’s evaluation of the evidence that is sufficiently material to undermine his conclusions (Beacon Insurance Co Ltd v Maharaj Bookstore Ltd, §12 per Lord Hodge).

95.In Henderson v Foxworth Investments Ltd [2014] 1 WLR 2600 at §§62 to 68, Lord Reed made these pertinent observations about the criterion for appellate intervention that the trial judge must have gone “plainly wrong”.  The adverb “plainly” does not refer to the degree of confidence felt by the appeal court that it would not have reached the same conclusion as the trial judge.  It does not matter, with whatever degree of certainty, that the appeal court considers that it would have reached a different conclusion.  What matters is whether the decision under appeal is one that no reasonable judge could have reached.  Hence, in the absence of some other identifiable errors, such as (without attempting an exhaustive account) a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appeal court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified.

96.We now consider the various arguments advanced by the Bank to overturn the finding that the only reasonable inference to be drawn was that one of the dominant intentions of the Bank in terminating the plaintiff’s employment in 2007 was to avoid her being eligible for consideration under the performance incentive programme for that year.

D2.   Attribution of John Liptak’s malice and intention to the Bank

97.John Liptak carried out the measures to terminate the plaintiff’s employment on behalf of the Bank, with the authority of Peter Santry, the head of GSSG.  The judge found John Liptak was acting maliciously in invoking the PIP and in his conduct of the PIP.  He found clear evidence that the PIP was just a pretext to terminate the plaintiff’s employment and that a termination on the ground of the plaintiff failing the PIP could not have been a genuine reason.  The judge had “no doubt” it was not the intention of Peter Santry or the Bank’s senior management to do “anything so mean or so lacking in commercial sense as to dismiss a performing employee to avoid paying her bonus”[32].  But as Peter Santry was misled and manipulated by John Liptak into authorising the plaintiff’s termination, the judge attributed John Liptak’s malice and intention to the Bank[33].

98.Mr Huggins recognised the difficulty of challenging the judge’s primary findings of fact about John Liptak.  He contended that the judge was wrong to attribute John Liptak’s malice and intention to Peter Santry or the Bank’s senior management.  He submitted that the decision to terminate the plaintiff’s employment was not made by John Liptak, who had no power to terminate, but by the senior management.  Hence, the directing mind and will for the act of terminating the plaintiff’s employment was Peter Santry and other senior management.  And for the plaintiff to argue that John Liptak’s intention ought to be attributed to the Bank, she would need to show for the purpose of this particular act, John Liptak was the person having management and control in relation to the act in issue and that he was the Bank’s directing mind and will in terminating the plaintiff’s employment.  In support of his contention, he cited Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at §74.  To play down the role of John Liptak, it was further submitted that the decision to terminate the plaintiff was made by Peter Santry after he had consulted other senior management, being Thomas White and Rajeev Syal.

99.We do not think the judge had erred on the facts or the law.

100.Concerning the facts, the judge had analysed the relevant emails and found that Ken Schneier, who had been the plaintiff’s manager for four years up to February 2007 and whose opinion ought to have carried more weight, did not consider it appropriate to terminate the plaintiff because of her conduct in 2006 and thought it appropriate to allow the plaintiff to stay[34].  Peter Santry was initially in favour of giving the plaintiff a chance.  After his meeting with the plaintiff in April 2007, he had drafted an email to her in a rather encouraging and complimenting tone, saying that he wanted her behaviour to change but his email was not sent after John Liptak objected to it as “too soft” in his email of 27 April 2007.  The judge found much of what John Liptak said about the plaintiff was untrue or at least did not reflect the situation in 2007.  And those allegations misled Peter Santry into authorising the PIP process when there was no basis to do so[35].  It was only John Liptak who was adamant that the plaintiff’s employment should be terminated[36].

101.As for Peter Santry’s discussion with his colleagues on whether to terminate the plaintiff, it is apparent that the senior management was swayed by John Liptak, as shown in the chain of email exchanges involving John Liptak, Ken Schneier, Peter Santry, Thomas White and Rajeev Syal on 14 February 2007.  In the penultimate exchange which was from Rajeev Syal to Peter Santry and Thomas White, he wrote:

“Then let’s get him [John Liptak] to decide what he wants to do about it and we’ll support him through it.”

102.Mr Westbrook, SC, who appeared for the plaintiff in this appeal[37], referred us also to the testimony of Tommy Fung of the Human Resources Department, which was accepted by the judge.  Tommy Fung said it was a “collective decision” to terminate the plaintiff’s employment, and he and Emily Cheung of the Human Resources Department worked with John Liptak to carry out the decision[38].  Tommy Fung gave evidence that from a human resources perspective, if an employee did make improvement in the PIP process, they would see no reason of going down the route of termination of employment, but he had no wish to speculate on what John Liptak was thinking[39].

103.As the judge had found, John Liptak initiated the PIP process, having misled and manipulated Peter Santry into thinking that the plaintiff’s situation was unacceptable and unsustainable.  It was John Liptak who drafted the performance goal of the PIP, with a template provided by the Human Resources Department.  The judge mentioned[40] a telling email from John Liptak on 28 June 2007 in reply to Tommy Fung and Emily Cheung after they received the draft performance goal from him.

104.Tommy Fung had asked in his email:

“One thing you have to consider is that if Sunny fulfil all three objectives, i.e. deliver the client details to you and behave herself, are you happy to help her in long run?”

105.And John Liptak’s instant reply was:

“I think we would all be happier if she left, so if you have any ideas to make this work to that end let us know.”

106.Other emails of John Liptak to the same effect were the exchanges he had with Emily Cheung dated 3 August 2007, after the performance period of the PIP had expired. John Liptak asked Emily Cheung what would be the process if the Bank were to take the step of terminating the plaintiff’s employment.

107.Emily Cheung’s reply was:

“John – if we proceed with performance dismissal, first and foremost, we would need to confirm that Sunny does not pass her PIP. …”

108.John Liptak then asked:

“Thanks – so are you saying we have to make a case to dismiss her? Does the PDP [performance development plan] for 2006 enter into that?”

109.And Emily Cheung responded:

“I am afraid Sunny’s 2006 PDP would be weak if presented to the labour tribunal.

The fact that Sunny received an incentive award for her 2006 performance would underpin Sunny’s disagreement to her performance dismissal in front of the labour tribunal. Sunny can claim that the Bank gave her contradictory messages in relation to her 2006 performance with a backdrop of the firmwide Pay for Performance process in place. Sunny has a lot in her favour because of this. …”

110.These emails of 3 August were not mentioned specifically by the judge, but we have no reason to think he had not read and considered them.

111.The PIP review was drafted by John Liptak on 14 August and sent to Peter Santry.  It was after John Liptak’s discussion with Peter Santry that the latter agreed John Liptak should go over the review with the plaintiff and give her the option to resign or have her employment terminated.  John Liptak completed the final PIP review on 17 August.  The judge found that on an objective test, the plaintiff should be regarded as having passed the PIP by a comfortable margin.  Instead, John Liptak failed her by applying his absolute standard of ‘100 per cent or nothing’.  The judge found he was determined to bring about the termination of the plaintiff regardless of her performance of the PIP and was trying to conceal his malicious intention in doing so.

112.It is clear on the facts that John Liptak was the driving force behind the decision to terminate the plaintiff’s employment.  As submitted by Mr Westbrook, the whole process was tainted by John Liptak’s malice, no matter what those in the higher echelons might think.  It would be startling if his intention and malice, as found by the judge, could not be attributed to the Bank in these circumstances.  Nor do not we think that is the law.  Nothing that was said in Moulin Global Eyecare could be regarded as support for the proposition that John Liptak’s intention and malice in terminating the plaintiff’s employment could not be attributed to the Bank.

113.First and foremost, John Liptak was an agent expressly authorised to act on behalf of the Bank in the termination of the plaintiff.  Applying the ordinary principles of agency, the intention of John Liptak could clearly be attributed to his principal, the Bank, under the “general rules of attribution” in Lord Hoffmann’s tripartite classification in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506G.  It is not necessary to rely on the “primary rules of attribution” (Meridian Global Funds at 506C) and apply the “directing mind and will” test in order to attribute John Liptak’s intention to the Bank.

114.Besides, even if it is necessary to rely on the “primary rules of attribution” and the concept of “directing mind and will” is to be applied, the conduct or state of mind of one or more natural persons may be attributed to a company for the purpose of determining the company’s legal liability (Moulin Global Eyecare at §61).  Here, the decision to terminate the plaintiff’s employment was made collectively.  In arriving at that decision, the senior management was manipulated and swayed by John Liptak and decided to support him.  There is no reason why John Liptak’s intention should not be attributed to the directing mind and will of the Bank in that situation.

D3.   Whether irrational inferences were drawn

115.The plaintiff has no direct proof to establish that the Bank’s intention in terminating her employment was to avoid her being eligible for consideration under the performance incentive programme for 2007.  The key issue was whether there was sufficient material in the circumstances appearing in the evidence to give rise to a reasonable and definite inference that one of the dominant intentions of the Bank in terminating her employment was in breach of the implied anti-avoidance term as alleged.  The judge found in her favour that such an inference should be drawn.

116.Mr Huggins contended that the circumstances appearing in evidence gave rise to no more than conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture.  He submitted that the judge’s reasoning was manifestly flawed and the judge was indulging in conjecture where the primary evidence does not logically and reasonably justify the inference drawn.  He reminded the court of these propositions established in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§185 to 187.  Firstly, there is the need for a disciplined approach to the drawing of inferences and in particular for inferences of serious misconduct to be drawn only where such inferences are compelling.  Secondly, there must be a proper foundation for the inference.  It is not permissible merely to choose what may be considered to be the more likely of two guesses if neither is properly justified by the primary facts found.  The court may not choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others.  The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied.

117.Mr Huggins submitted that the judge was plainly wrong in drawing the only reasonable inference at §259 that one of the dominant intentions of the Bank in terminating the plaintiff was to avoid her being eligible for consideration under the performance incentive programme.  In this regard, he took issue with these sentences in the first half of §257 and with §258:

“257. From John Liptak’s malice and his concealing the true reason of the Plaintiff’s dismissal, the inference may reasonably be drawn that John Liptak, and therefore the Bank, intended all the foreseeable consequences that termination would bring, including depriving the Plaintiff of her eligibility of being considered for the performance incentive programme. That intention, along with John Liptak’s intention to get rid of the Plaintiff, must be one of the dominant intentions or purposes of the dismissal. …”

“258. Mr Huggins SC argues the Plaintiff’s theory that she was targeted and ultimately dismissed on what she says were spurious grounds because John Liptak was jealous and concerned about her outperforming him and wanted to get rid of her for her contacts is inconsistent and materially different from an intention to avoid paying her a performance bonus. The Plaintiff’s theory is inconsistent with an intention to avoid paying her a bonus, but that cannot prevent the inference of such intention from being drawn from the surrounding circumstances including concealing the true reason for termination of a performing employee with malice. In any event, it is not the Bank’s case that the reason for the Plaintiff’s dismissal was that John Liptak was jealous and concerned about being outperformed.”

118.Mr Huggins argued that the judge made a quantum leap in wrongly and unjustifiably inferring, from his finding of John Liptak’s malice and concealment of the true reason for dismissing the plaintiff, that John Liptak “intended all the foreseeable consequences that termination would bring, including depriving the Plaintiff of her eligibility of being considered for the performance incentive programme”.  The judge then further inferred “that intention, along with John Liptak’s intention to get rid of the plaintiff”, regardless of her performance as an analyst and whether she passed or failed the PIP, “must be one of the dominant intentions or purposes of the dismissal”.  Mr Huggins contended it was inherently improbable that John Liptak would have considered at all the plaintiff’s eligibility for a bonus if he was determined to get rid of her in any event.

119.As to §258, he submitted that this was indicative of the judge indulging in conjecture and choosing between guesses of the theory for the plaintiff’s dismissal.  The plaintiff had advanced the theories that John Liptak was jealous and concerned about her outperforming him and wanted to get rid of her for her contacts.  The judge rejected these as “spurious grounds” and “inconsistent with an intention to avoid paying her a bonus”, having found earlier that John Liptak was determined to terminate her as a vendetta for her conduct in 2005 and 2006[41], when all these theories gave rise to no more than conflicting inferences of equal degrees of probability.  And the ground given in §258 for rejecting the other theories (that “it is not the Bank’s case that the reason for the Plaintiff’s dismissal was that John Liptak was jealous and concerned about being outperformed”) was patently bad.

120.These were the main contentions of Mr Huggins in attacking the inference of dominant intention.  We will consider his other arguments later.

121.To understand how the judge drew the inference he did in §259, one must follow through his whole thinking process in the critical paragraphs from §251 to 259.

122.The judge began with recapping his trenchant findings that the reason given for terminating the plaintiff was not genuine but was made up by John Liptak out of malice.  He bore in mind the burden is on the plaintiff to prove, as a matter of inference, that the Bank terminated her with the intention to avoid her being eligible for the performance bonus.  He rejected the plaintiff’s argument in equating knowledge of consequence with intention.

123.The judge misquoted Mr Huggins’ argument in §253 when he said:

“He submits that where the employer can show that he had a valid reason under section 32K of the Employment Ordinance or a reason which is on any view wholly unobjectionable at common law, nevertheless if the employer knew that the inevitable consequence would be that the employee would be deprived of a performance bonus for that year, then he had an intention to avoid paying a bonus was opportunistic and exploitative and therefore wrongful.”

124.In fact, the submissions of Mr Huggins were to the contrary[42].

125.But we do not think this error is of much consequence as in these words in the next paragraph, the judge showed he has correctly understood the arguments of the Bank:

“If the Bank can establish a valid reason for termination, then it cannot be taken to have intended the natural or foreseeable consequences of the termination. But, if the Bank cannot show a valid reason, what is left is a concealment of the true reason for termination which is open to inferences to be drawn from the circumstances.”

126.We do not read the above as the judge placing any onus on the Bank to prove anything or to negative the intention alleged by the plaintiff, as contended by Mr Huggins.  The judge had stated clearly and repeatedly in two earlier paragraphs that the burden was on the plaintiff to establish the relevant intention[43].

127.The judge went on to say in §254:

“If the Plaintiff could go a step further to show that her termination was brought about by malice, it is all the easier for adverse inference to be drawn, including all the negative foreseeable consequences that termination may bring.”

128.This appears to us to accord with common sense.

129.The judge reasoned from there in §§255 and 256:

“255. This proposition is not difficult to understand. Take the case of an employer who dismissed his employee knowing that if the employee stayed in employment he would have to pay the employee certain employment benefit in the foreseeable future. If he dismissed the employee, not for cause or the employee’s unacceptable conduct or redundancy, but for absolutely no reason or no genuine reason at all, can it not reasonably be said that he dismissed the employee to avoid paying him the benefit? If he conceals the reason for the dismissal, would it not make it easier for adverse inference to be drawn? The fact that the employee had been providing useful and profitable service would give further force to the inference. The nearer it is to the date of payment of the benefit, the stronger is the inference of the intention to avoid the payment. If the dismissal was actuated by malice, the inference to be drawn is all the stronger. It is all a matter of common sense.

256. What inference to be drawn depends on the surrounding circumstances.  The inference to be drawn is highly fact sensitive.  I accept the Bank’s case that from 2005 through to 2006 the Plaintiff had not been a good team player, was not willing to share contacts, and was confrontational to John Liptak as Head of Desk.  But, I find as a fact and for good reasons, which I am not going to repeat, that the Plaintiff substantially improved her conduct since Ken Schneier’s counselling on 5 January 2007 and that there was absolutely no basis for John Liptak to complain about the Plaintiff’s conduct in 2007 and to initiate the PIP process.  I find as a fact that the PIP process was instituted not for its proper purpose but was conducted in bad faith with intention to fail the Plaintiff regardless of her performance.  I find as a fact that the Plaintiff should have, on an objective view, passed the PIP.  The reason given by the Bank or John Liptak for the Plaintiff’s dismissal could not be a genuine reason.  The PIP was just a pretext to bring about her termination and the smooth transfer of her accounts.  On the other hand, the Plaintiff was a performing employee, consistently making good profits for six and half years straight! By the time of the termination, two-thirds of the year lapsed with the Plaintiff having made significant profit contribution.  John Liptak and the Bank must have foreseen that she would be awarded substantial bonus for 2007.”

130.It was from this reasoning process that the judge arrived at the critical finding the Bank complained of in §257 we have quoted earlier.  In §259, he stated that the only reasonable inference that one of the dominant intentions of the Bank in terminating the plaintiff was the relevant intention and it need not be the sole intention.

131.In our view, the inference drawn by the judge was one that was reasonably open to him.  The judge had explained his reasoning process, giving the basis for his inference.  It is evident that the evaluation he formed of the testimony of the material witnesses and the entirety of the evidence that unfolded at the trial played a most significant part in the shaping of his thinking.  On his evaluation of the evidence, he was entitled to reject the theories advanced by the plaintiff for her dismissal.  We agree with the judge that rejection of the plaintiff’s theories for her dismissal could not prevent him from drawing the correct inference from the surrounding circumstances that one of the dominant intentions was the relevant intention.  This is not a situation of choosing between conflicting inferences of equal degrees of probability.  As the judge had sought to explain, on the particular findings of primary fact that he made, as the dismissal was actuated by malice, the surrounding circumstances leading to the termination are sufficiently compelling for him to draw that inference.  That one may not have reached the same conclusion he did does not mean he had made a quantum leap.  That another judge might not have drawn this inference with the same readiness or espoused the same degree of conviction is beside the point.  We do not think it could be said that this is an inference no reasonable judge could have drawn.

D4.   Other arguments on the propriety of drawing inferences

132.Mr Huggins criticised the judge for stating in §254 that the defence arguments were “premised on the Bank successfully showing it had a valid reason for termination”.  He read that as meaning that the defence depended on the Bank establishing successfully it had a valid reason for termination.  So the judge was wrong in proceeding on the basis that if the Bank failed to establish it had a valid reason for terminating the plaintiff, it could then be inferred that the Bank’s intention was to terminate in order to avoid the plaintiff being considered for a bonus.  And it was unfair to hold there was no valid reason for termination, as that was not the pleaded case of the plaintiff and the Bank had not marshalled its evidence to meet the case of showing there was a valid reason for the plaintiff’s termination, such as by calling the witnesses overseas from the senior management.  The judge was wrong to assume that the termination was based entirely on the plaintiff failing the PIP review.  Mr Huggins contended that the senior management was likely to have taken a broader view in deciding to terminate the plaintiff’s employment.

133.We do not think the way Mr Huggins interpreted §254 is a fair and proper reading of it.  The judge was merely addressing the Bank’s arguments and pointing out that they rested on a particular premise, which was not made out on the findings of primary fact he had made.  He was not making any statement about the onus that would be borne by any party on the material issue he had to decide, namely, whether an inference of the alleged intention should be drawn.

134.As for the Bank not having marshalled its evidence to meet an unpleaded case, we do not think there is substance in this.  In gist, the plaintiff had pleaded that the reason given by the Bank for her termination was failing the PIP, that her employment was not terminated for the reason given by the Bank, and that her termination was in breach of the implied anti-avoidance term.  It was for the Bank to make positive averments in its pleading, if it should decide to run a defence there was valid reason to terminate the plaintiff, instead of just relying on the plaintiff failing the PIP and putting her to prove her case that a dominant reason for her termination was to avoid her being considered for a bonus.  The Bank could not justifiably complain it had not marshalled or fully marshalled its evidence to support a case for which it had made no averment in its defence.  The express reason given by the Bank for the plaintiff’s termination was that she had failed the PIP.  It was not the Bank’s case as pleaded that there were broader reasons for her termination.  The judge can hardly be criticised for not applying his mind to whether the senior management had broader considerations when no evidence was adduced in support of a contention which formed no part of the Bank’s pleaded case.

135.Mr Huggins repeated his argument before the judge that there is a material distinction between a specific intention and an incidental but foreseeable effect or consequence, that any termination prior to the year end of 2007 for any of the valid reasons under section 32K of the Employment Ordinance or indeed any reason wholly impregnable at common law would have had that same incidental effect of removing the plaintiff from any consideration of a performance bonus for 2007, and that would not make such foreseeable consequence the effective cause for the dismissal.  There was therefore no justification for finding that the alleged intention was one of the Bank’s dominant intentions.

136.We do not think the judge was in error in rejecting the argument for the reasons he gave in §254.  As mentioned earlier, the judge had rejected the plaintiff’s argument in equating knowledge of consequence with intention.  He was alive to the distinction between specific intention and incidental effect and was clear as to the requirement that it was for the plaintiff to establish the alleged specific intention.  He was entitled to take the view that on the evidence before him, there was no basis for a factual finding that the plaintiff was dismissed for a valid reason under section 32K.  It matters not whether the specific intention he found was described as a “dominant” or an “effective” reason for the plaintiff’s dismissal.

D5.   Findings about the PIP

137.Mr Huggins criticised the judge for a flawed process of reasoning, namely that if the Bank failed to establish that the plaintiff had not made significant immediate improvement in relation to the specific matters identified in the PIP review, and/or that any improvement was not likely to be sustained, then termination by reference to the PIP review was irrational and therefore not genuine, and therefore it was to be inferred that the true reason for the termination was to avoid the plaintiff being eligible for consideration for a bonus for 2007.

138.We have addressed the latter part of this submission when we dealt with the propriety of drawing the inference of the relevant intention.  We do not think the above criticism of Mr Huggins is justified.  The judge stated in §186 that the Bank was relying on the plaintiff’s conduct to justify invoking the PIP process and in accordance with this process, if the plaintiff failed to meet the improvement goals, she would be dismissed.  He then reasoned if there was no cause to justify invoking the PIP process, or if there was no justification in failing the plaintiff in the PIP process, the inference may be drawn that the reason for the termination was not genuine.  This is an inference that may fairly be drawn by the judge.

139.The judge went on to say in §187 that the test for the Bank’s intention is not reasonableness but genuineness, even though the reason was not substantiated.  He said the reason need not be one “which commends to a reasonable man and may even be irrational, provided it is genuine and one which is sufficient to negative the intention to avoid her being eligible for consideration under the performance incentive programme”, and “the further the reason moves away from the realm of reasonableness to irrationality, the easier it is for the inference to be drawn that the reason given by the Bank was not genuinely held”.  Again, we see nothing to criticise in these statements.  Nor was the judge placing any burden on the Bank to negative the alleged intention.

140.The inference drawn by the judge that the termination of the plaintiff for failing the PIP was not a genuine reason had its foundation in his findings of primary fact, after a detailed analysis of the evidence, that the PIP process was initiated without valid grounds and was determined to bring about the termination of the plaintiff regardless of her performance of the PIP and that the PIP process was not conducted in good faith.  We reject the submission the judge’s reasoning was flawed.

141.Mr Huggins mounted a two-pronged attack on the findings of primary fact regarding the initiation and performance of the PIP.  Firstly, he said the judge’s approach in general was wrong.  Secondly, he contended that certain specific findings were in error by relying on his detailed closing submissions at the trial.

142.On the judge’s general approach, Mr Huggins argued that in holding the plaintiff had substantially achieved the goals of the PIP, the judge had substituted his own view for the view of the Bank as to whether the plaintiff had performed to the requirements of the PIP, when the Bank should have been given a “substantial margin of appreciation”, especially in relation to such a specialised field.  The judge disbelieved the Bank had genuinely formed the view that the plaintiff had failed the PIP and was in error because of this wrong approach.

143.We reject the above contention.  Mr Huggins had made similar submission to the judge and the judge dealt with this correctly in this manner at §212:

“While I agree that the court cannot be expected to enter into a microscopic examination of that issue in what is a pretty specialized field, that does not mean John Liptak’s or the Bank’s decision as to whether the employee has met the specific goals under the PIP is conclusive and beyond review by the court.  Whether the employee has met the goals is a question of fact and not a matter of the employer’s discretion.  It is a matter capable of objective analysis.  In respect of technical issues, the court will respect the employer’s “margin of appreciation”.  But, in respect of non-technical issues, the court’s fact finding powers are unfettered.”

144.The judge had reviewed the evidence most carefully in coming to the conclusion at §235 all that the plaintiff failed were (1) failing to provide weekly summaries of her projects; (2) failing to provide comparables in respect of the Harbin Electric deal which was a unique project for which no comparables were available from the investment houses; and (3) one minor neglect in applying for leave.  On an objective test of significant improvement, which was the standard to be applied according to the evidence of Wang Wei Wei of the Human Resources Department, the judge found that “these shortfalls cannot be described as anything but insubstantial which should fairly be excused”.  The judge did not substitute the Bank’s view with his subjective view.

145.Regarding the attack on the specific findings, we do not propose to mention the detailed submissions made at length at the trial on behalf of the Bank, save to say that we have considered them and do not find any basis for saying that the judge’s findings were plainly wrong.  As deprecated by the court in China Gold Finance Ltd v CIL Holdings Ltd at §16, this is not a helpful approach.  A challenge on findings of fact does not get off ground by contending that the judge should have reached some other conclusion because of points advanced in the closing submissions at the trial.  We are not persuaded there is any palpable error in the judge’s evaluation of the evidence that is sufficiently material to undermine his findings of fact, an example of which is the complaint about the statement in §237 that Ken Schneirer “connived” at the plaintiff taking a proprietary view of her deals and contacts in 2005 to 2006.  We do not think there is any error about that statement when it is read with the rest of §237, and even if there were no evidential support for that statement as contended by Mr Huggins, it was not sufficiently material in the overall context and was not directly relevant to the events of 2007.  We see no basis to interfere with the findings of primary fact of the judge based largely on his evaluation of the oral testimony of the witnesses.

146.Lastly, we reject the contention that the delay of over ten months in delivering the judgment must have contributed to errors in the judge’s findings of fact.  There is nothing in the judgment to indicate that “there are omissions, errors, misunderstandings, inconsistencies and the like which invalidate [the trial judge’s] findings, render the judgment unsafe, and have led to injustice to the Appellant” (Mak Kang Hoi v Ho Yuk Wah David (2007) 10 HKCFAR 552 at §57).  Whether the delay of over ten months in preparing a judgment of 141 pages after a 20 day trial could justifiably be said to be inordinate is neither here nor there.

E. 2007 BONUS – QUANTUM

147.Both the Bank and the plaintiff have appealed against the damages assessed for the bonus in 2007.

E1.   The Bank’s appeal

148.Mr Man, SC made these arguments on behalf of the Bank.

149.First, he took a pleading point.  In the amended statement of claim, the only pleaded basis of assessing damages is applying a percentage of 16.6% (from 2002 to 2004, the total of the performance bonuses paid to the plaintiff amounted to 16.6% of her profit contribution over that period) to US$13.2 million (being the cumulative revenue her portfolio, which had a profit of US$6.06 million as at 27 June 2007, would have generated from January to December 2007, assuming no addition to or disposal of assets in the portfolio following the termination of her employment in August 2007).  The judge had rejected the pleaded basis at §263.  Mr Man submitted therefore there is no reason for the judge to make an award of damages on an unpleaded basis.  He emphasised it was for the plaintiff to plead and prove any alleged loss.  He took issue with the statements in §263 that the Bank was to blame “by not pleading a positive case” and in “not providing proper discovery” of documents relating to the bonuses received by other employees of ISSG or GSSG, particularly when the plaintiff’s application for specific discovery of such documents was dismissed by Deputy Judge M Chan (as she then was) on 22 December 2011.  He contended there was insufficient evidence to enable the judge to arrive at the figure he did and complained that no opportunity was afforded to the Bank to adduce evidence or make submissions in respect of the judge’s assessment.

150.We reject the above arguments.  As the judge had said at §263, although the plaintiff’s pleaded basis for assessment of the bonus had collapsed, that does not necessarily mean her claim must fail or that she is only entitled to nominal damages.  She claimed damages at large to be assessed by the court.  The inadequacy of the pleading does not prevent the court from doing what it can to assess damages on the basis of the available evidence.  It is all a matter of fairness to both parties, and we do not think the Bank was taken by surprise.

151.There is clearly sufficient evidence available to the judge to make a proper assessment, even though he did not have the evidence of the bonuses paid to employees of ISSG or GSSG, other than the plaintiff and John Liptak.

152.We think the judge’s criticism of the Bank regarding its pleading and discovery in respect of quantum is justified.  Although the plaintiff’s application for specific discovery of documents relating to the bonuses paid to other employees was rejected by Deputy Judge M Chan on the basis that these documents were not necessary to her case on liability, there is nothing to prevent the Bank from making discovery of such documents voluntarily, if it was of the view that such documents are relevant to its case on quantum.  Having resisted the plaintiff’s application for discovery successfully on the ground of irrelevance to liability but failing to disclose such documents which would be relevant to quantum, the Bank could have no cause for complaint.  As noted by the judge at §273, evidence of the range of bonus payments to the plaintiff’s colleagues of the same title and status was exclusively known to the Bank.  The judge was correct in stating that if the Bank chose not to plead that the bonus percentage claimed by the plaintiff was excessive and out of line with that given to the then current employees and chose not to adduce relevant evidence, he was entitled to assume that such evidence would have insignificant impact in assessing the plaintiff’s bonus.

153.Next, Mr Man argued that the judge failed to take account of the fact that since John Liptak received a bonus of US$350,000 for 2007, there was no basis for finding that the plaintiff would have received a bonus of US$500,000, given that the bonus would depend on the performance of the group and of the Bank and market factors.

154.There is nothing of substance in this submission.  The judge had considered John Liptak’s bonus at §274, noting that there is “nothing to suggest that a team member’s bonus should be capped by the bonus awarded to the Head of Desk or that the total bonus pay-out should be subject to a certain amount or percentage or the team’s overall profit”.  In §270, he had taken into account that ISSG “only made an overall profit of US$2.53 million” for 2007, that the profit of GSSG “was very low in 2007” and that “the Bank must have been less generous with its award in view of the small profit made by ISSG as a whole”.

155.Lastly, Mr Man argued that the judge was wrong in failing to pro-rate the amount awarded to the plaintiff to take account of the fact that she had not worked for a full year in 2007.  We reject this submission as well.  In §§269 and 270, the judge took US$6.06 million as the multiplicand, which was the profit earned by the plaintiff as at 27 June 2007, and multiplied it by 7.66% and 9% to arrive at US$464,196 and US$545,400 respectively as the range of figures the Bank would have awarded a bonus to the plaintiff on a proper exercise of its discretion.  As Mr Westbrook pointed out, the plaintiff was not awarded any further sum corresponding to what she could or would have earned for the remaining six months of 2007 and that was one of the grounds of her cross-appeal.  In view of the multiplicand used by the judge, there was no need to pro-rate further.

E2.   The plaintiff’s cross-appeal

156.Mr Westbrook advanced these arguments in the cross-appeal on quantum.

157.Leaving aside the multiplicand for the time being, he reiterated the plaintiff’s contention that damages should have been assessed on the basis of a bonus percentage of 16.6%, taking the figure only from the bonuses from 2002 to 2004, instead of a bonus percentage of 8.25% as found by the judge, based on the bonuses received for 2005 and 2006.  We see no basis to interfere with the judge’s decision in using the bonuses awarded for those two years, as “the bonuses awarded in the more proximate years would provide a more reliable guide” (at §266).  He was clearly justified in taking the view that a bonus percentage of 16.6% is “grossly excessive and not supported by the overall profit of GSSG in 2007” (at §271).

158.Mr Westbrook submitted that the judge should have used a multiplicand of US$13.2 million, instead of US$6.06 million, on the unchallenged evidence of the plaintiff that her portfolio would have generated US$13.2 million by December 2007, assuming no addition to or disposal of assets in the portfolio following the termination of her employment in August 2007.

159.We are persuaded by Mr Man we should not interfere with the judge’s assessment.  In taking US$6.06 million as the multiplicand, what the judge did was to make a rough and ready assessment doing the best he could on the available material.  It would be speculative to assume that the plaintiff would not do anything to her portfolio if her employment had not been terminated in August 2007.  The judge chose not to use US$13.2 million as the multiplicand as this was premised on the speculative assumption that there would be no addition to or disposal of the assets as from 27 June 2007.  This seems to us entirely reasonable.

F. 2005 BONUS – IF THERE WAS UNDERPAYMENT

160.We turn to consider the plaintiff’s cross-appeal on the dismissal of her claims for underpayment of bonuses for 2005 and 2006.  The judge has found that these claims were “quite unmeritorious” (at §277).

161.We would first dispose of the plaintiff’s argument that some of the figures in Tables 1 and 2 in the judgment (at §§28 and 121) are wrong in that the judge had taken the figures from the evidence of Tommy Fung of the Human Resources Department when he should have adopted the figures compiled by her from raw data.  The plaintiff asserted that her evidence was unchallenged whereas Tommy Fung had accepted in cross-examination he could not confirm which set of figures – his or the plaintiff’s – was more accurate.  It is unnecessary to deal with this as the differences between the two sets of figures are not very significant and they are not material to the resolution of the crucial issues.

162.Mr Westbrook submitted that the judge was wrong to hold at §119 that the plaintiff’s claim must fail as “there is no evidence that the Plaintiff singularly received an irrationally low bonus compared with most or all members of ISSG”.  He argued that as such evidence which the judge found lacking was clearly in the possession of the Bank, and as the Bank had successfully resisted the plaintiff’s application for specific discovery of such documents before Deputy Judge M Chan, in the light of the Bank’s failure or refusal to disclose such relevant documents relating to the bonuses of other employees of ISSG, the judge was wrong not to draw an adverse inference against the Bank and erroneously found no evidence that the plaintiff “singularly received an irrationally low bonus compared with most or all members of ISSG”.  For good measure, he relied on the judge’s criticism of the Bank at §263 in failing to give discovery when the judge considered quantum as mentioned earlier.

163.This submission is misconceived.  As Mr Huggins rightly pointed out, the party who bears the burden of proof must adduce evidence of sufficient cogency to raise a prima facie case before any adverse inference can be drawn against the other party (Nina Kung v Wong Din Shin, at §369).  The burden of showing irrationality is very high.  No prima facie case has been demonstrated in respect of the plaintiff’s case that the bonuses paid to her for 2005 and 2006 were irrational and perverse.

164.Mr Westbrook submitted that the bonus of US$615,000 awarded to the plaintiff for 2005 was irrationally low, relying on the plaintiff’s allegations of the loss dumping charge and the retaliatory downgrading charge.  His submissions were essentially the same as those made to the judge by the plaintiff’s trial counsel.  The judge had considered the evidence carefully and found that the charges were not made out.  There was plainly no loss dumping as the transfer of the distress assets of APP had no effect on the plaintiff’s profit figures.  The judge was entitled to take the view that an inference of retaliatory downgrading based on timing is very tenuous and to decline to draw that inference.  We do not agree with the contention that the judge was in error in taking the view that the plaintiff would have been downgraded in any event as a result of Ken Schneier being required to comply with the “20/70/10” policy and nine more members were downgraded subsequently on 14 January 2006.  There is no basis at all to impugn the judge’s finding of fact.

165.As the plaintiff has failed to establish liability for her claim of underpayment of bonus for 2005, her arguments on the quantum of damages for the 2005 bonus do not arise.

G. 2006 BONUS – IF THERE WAS UNDERPAYMENT

166.Mr Westbrook relied on his earlier submission that the judge was wrong in finding that the plaintiff’s claim for underpayment of the 2006 bonus must fail on the basis there is no evidence that she “singularly received an irrationally low bonus compared with most or all members of ISSG”.  We have addressed and rejected that argument.

167.He submitted that the 2006 bonus of US$550,000 was irrationally low in that the plaintiff should have been given an “Exceeds” rating for “What” as she had outperformed John Liptak and all other members of the Asian team of ISSG in 2006 which was a particularly bad year.  He sought to impugn the rationality of the bonus of US$550,000 in that the plaintiff had made a profit of US$7.23 million, whereas John Liptak had incurred a loss of US$1.36 million but was awarded a bonus of US$1 million that year.

168.All these arguments were made to the judge and he had dealt with them adequately in the judgment.  The judge is clearly right in holding that these were management decisions and the court is not entitled to substitute its view for the view of the Bank.  There is no basis to impugn the judge’s finding.

169.As the plaintiff has failed to establish liability for her claim, it is not necessary to address her arguments on quantum for the 2006 bonus.

H. PRE-JUDGMENT INTEREST RATE

170.In a separate ruling dated 2 June 2015, the judge awarded the plaintiff pre-judgment interest on the 2007 bonus award at the rate of 2.85% per annum, representing 2% over HIBOR at 0.85%.  This rate is substantially lower than the usual rate of pre-judgment interest that is conventionally awarded of 1% over the HSBC Best Lending Rate, often referred to as the “prime rate”, which has stood since about 2009 at 5%.

171.In her Amended Respondent’s Notice filed on 18 December 2015, the plaintiff appealed against the award of pre-judgment interest, contending that the judge was wrong to have departed from the usual practice of awarding interest by reference to the prime rate, and further, that having regard to the fact that the plaintiff was an individual, who was after her dismissal by the Bank unemployed and without any stable income, the appropriate rate of interest was 3% over prime rate rather than the 1% over prime rate conventionally used in most cases.

172.The Bank contended that the plaintiff should not be permitted to argue this ground of appeal on the basis that the appeal was brought out of time (some six months after the judge’s ruling on interest) and that leave for doing so had not been obtained.  With respect, we do not think that such leave was required.  The plaintiff was entitled to amend her Respondent’s Notice without leave provided she did so more than 21 days before the hearing of the appeal.  Even if leave had been required, we would have readily granted it as the point raised involves a matter of practice of wide application, and it would be desirable for the matter to be considered by this court.

173.The practice of awarding pre-judgment interest at the rate of 1% over prime can be traced back to Komala Deccof v Pertamina [1984] HKLR 219.  In that case, Cons JA observed (at p.222I) that there was not yet any established practice as to the rate at which pre-judgment interest should be awarded, and went on to say (at p.223B-C) that while the rate of interest was a matter for the discretion of the trial judge, it was undesirable that there should be arbitrary variations between similar cases.  Having considered the practice in England, Cons JA suggested (at p.223G-H) that the courts should adopt a rate of 1% above prime as representing appropriate compensation to a party for being kept out of his damages, although he indicated that if experience should show that this rate was not realistic, the guideline could be adjusted accordingly, and also pointed out that a different rate could be awarded in any particular case if there was evidence in the case to justify it.

174.Since Komala Deccof, the courts have consistently awarded pre-judgment interest at the rate of 1% above prime, although there have been cases in which some other rate has been awarded.  This has been described by the Court of Final Appeal as the “theoretical cost to the plaintiff of borrowing the sums withheld”[44]. Recently, there have been three decisions of the Court of First Instance[45] in which it has been suggested that in the currently prevailing lending environment, prime rate is no longer the appropriate benchmark or starting point, and that a more appropriate approach would be to use HIBOR as a starting point, adding to it a suitable margin to reflect the general costs of borrowing with which a successful plaintiff may be faced.  On the other hand, Mr Westbrook drew our attention to some 17 cases in the last two years in which interest was awarded by reference to prime rate, usually at 1% over prime (and occasionally at a higher rate).

175.In deciding to award interest at 2% over HIBOR (which he determined to be 0.85% over the relevant period), the judge referred (in paragraph 9 of his decision on interest to Libertarian Investments v Hall (2013) 16 HKCFAR 681, where pre-judgment interest was awarded at 2% over the Bank of England base rate, and the Waddington ruling on interest.  As appears from paragraph 10 of his decision, the judge did not regard Libertarian as involving a departure from the Komala Deccof approach, but as a case involving a realistic assessment of the appropriate interest rate to be applied having regard to “prevailing money market conditions”.  He reiterated that the guiding principle was to compensate a successful plaintiff for being kept out of his money.  He went on to say:-

“There are many different interest rates in the money market, such as prime rate, Interbank rate or “HIBOR”, mortgage rate, saving rate, fixed deposit rate etc. For very many years, Hong Kong has found itself in a persistently low interest rate environment with money in good supply. Saving rate and fixed deposit rate are ridiculously low. Under such an environment, prime rate seems to have fallen out of favour. HIBOR, particularly for 12 months, seems to be more reflective of the money market condition and a more realistic index to use in assessing the cost of money. It is used as a base rate for a lot [of] borrowing. Interest for many mortgages and commercial lending is expressed in terms of HIBOR plus, with or without a cap based on prime plus or prime minus. That fixed percentage is a matter for negotiation depending on the bargaining power of the borrower, the size of the loan and the money market condition. It is below one percent for a borrower with good security and repayment ability and higher for ordinary consumer borrowing. Prime plus or minus nevertheless continue to be used for consumer mortgages and lending. I think as a rule of thumb 12-month HIBOR plus two percent (which is equivalent to prime minus 2%) would more realistically represent the average cost of consumer borrowing. I therefore adopt this formula as a starting point for fixing the pre-judgment interest rate. But bearing in mind the principles in Komala, I would adjust this rate upwards or downwards depending on the actual circumstances. …”

176.The judge then concluded that treating HIBOR over the relevant period as being 0.85%, an appropriate rate for pre-judgment interest would be 2% above that, or 2.85%.  As the plaintiff had not put in any evidence to show that she had had to borrow at a higher cost, he declined to award any higher pre-judgment interest rate.

177.Mr Westbrook submitted that the judge was wrong to take this approach.  He submitted that:-

(a)   As a matter of fairness, it was important that there should be consistency in the rates of pre-judgment interest awarded in different cases, at least so far as the starting point is concerned.  Having regard to the fact that with very few exceptions the position in Hong Kong since Komala Deccof was decided in 1984 has been that pre-judgment interest is awarded by reference to prime rate, absent cogent evidence it would not be right to sanction a move away from prime rate as the base from which pre-judgment interest is awarded.

(b)   Further, in the absence of evidence that the actual circumstances of the plaintiff were such that she could borrow on an unsecured basis at less than prime rate plus 1%, pre-judgment interest should be no less than that rate.

(c)    Commercial rates were not relevant to the plaintiff’s position, as she was an individual consumer, and mortgage rates (for loans which would be secured by a mortgaged property) were also irrelevant.  The judge’s references to these types of interest rates as being fixed by reference to HIBOR (for which there was in any event no evidence before him) were therefore misguided, and led him into error.

(d)   Indeed, having regard to the plaintiff’s personal circumstances, in particular the fact that she was unemployed after the termination of her employment with the Bank, and had no stable income, it was to be expected that her cost of borrowing would be higher than 1% over prime, and would be more likely to be in the region of 3% over prime.

178.Mr Man, who argued this point for the Bank, acknowledged that there was no actual evidence before the judge on the question of interest, whether as to the general practice of banks with respect to the choice of starting point for interest rates on unsecured loans (i.e. whether the starting point was HIBOR or prime rate), or as to the particular interest rates that might be available to the plaintiff should she have sought to borrow the amount of the shortfall in her finances as a result of not being paid the damages to which she was entitled.  However, he submitted that the judge was entitled to have regard to the decision in Waddington, in which there was some evidence before the court as to the rate of interest at which the plaintiff in that case might be able to borrow.  He stressed that there was a tension between certainty and consistency across the board, and the proposition that an award of pre-judgment interest is intended to be compensatory, and suggested that the latter was an important principle that should not be lost sight of.

179.We are unable to agree with Mr Man.  With respect to the judge, we are of the view that having regard to the long standing practice of taking 1% over prime as the starting point for the award of pre-judgment interest, any suggestion that this starting point should be changed is something that should be considered only where there is evidence before the court to support such a change.  It is, with respect, not satisfactory to proceed on the basis of the impressions (however well founded they may turn out to be) of the individual judge.  In the present case, there was simply no evidence to support the suggestion that prime plus 1% was no longer an appropriate point from which to start.  On this basis alone, we would be minded to interfere with the judge’s award of pre-judgment interest.

180.Further, we think there is force in Mr Westbrook’s complaint that the judge appears to have referred interchangeably to prime and HIBOR as starting points for the consideration of the appropriate rate of pre-judgment interest in the case of an individual who would be borrowing as a consumer.  This further undermines the judge’s conclusion as to the appropriate rate of interest to be awarded.

181.Moreover, we do not think that either Libertarian or Waddington would provide support for the judge’s conclusions in this case.  Libertarian was a case where the subject matter of the claim was investments denominated in sterling.  The relevant rate of interest to consider was therefore that pertaining in the UK.  The choice of a rate fixed by reference to the Bank of England base rate, which would be appropriate in the circumstances of that case, does not in our view provide support for a switch from prime rate to HIBOR in Hong Kong.  So far as Waddington is concerned, that decision is itself under appeal, and it suffices to say for present purposes that whatever the outcome of that appeal, the decision is distinguishable as there was some evidence available to the Recorder on the basis of which he might have been entitled to conclude that a rate of interest lower than prime plus 1% was appropriate to be used there.  In any event that case concerned a listed company and not an individual, and is thus readily distinguishable from the present case.

182.Further, we would observe that the fact that HSBC continues to publish its Best Lending Rate, which continues to be used as a proxy for prime rate, tends to suggest that it is still a rate in use by banks for the purpose of fixing rates of interest for lending, and as such it is not clear to us that it can be regarded as having been supplanted by HIBOR for such purposes.

183.That is not to say that there may not be a case in the future in which the necessary evidential foundation (which might, for example, consist of banking evidence as to the manner in which rates for unsecured lending are fixed, that shows clearly that prime rate is no longer, or very rarely used as a starting point) will be laid for a consideration of whether or not the time has come to move away from prime rate plus 1% as the starting point for the awarding of pre-judgment interest.  However, that is not this case.

184.We would therefore set aside the judge’s award of pre-judgment interest at 2.85% per annum.  However, we would not accede to the plaintiff’s suggestion that the appropriate rate of interest should be as high as 3% over prime rate.  While it is true that the plaintiff is an individual, and was unemployed after she was dismissed by the Bank, there was no evidence before the court as to the rate of interest that she might actually be expected to incur had she sought to borrow the amount of the damages which she has been awarded.  In those circumstances, we see no reason to order a rate higher than the usual rate of prime plus 1% in respect of pre-judgment interest in these proceedings.

I. CONCLUSION AND ORDERS

185.For the above reasons, we dismiss the appeal of the Bank on liability and quantum in the plaintiff’s claim for damages for loss of bonus for 2007.

186.We allow the plaintiff’s cross-appeal only in respect of the order for the pre-judgment interest rate.  We set aside the judge’s order of pre-judgment interest at 2.85% per annum from 1 March 2008 until the date of judgment and substitute it with an order of 1% over the HSBC prime lending rate from 1 March 2008 until the date of judgment.  We dismiss her cross-appeal against the dismissal of her claims for underpayment of bonus for 2005 and 2006 and in respect of quantum for the loss of bonus for 2007.

187.We would make a costs order nisi.  We think it appropriate to make a global order in respect of the costs of the appeal and cross-appeal.  Taking into account the extent of the plaintiff’s success, and that much of the time in court was taken up with the arguments in the Bank’s appeal, we would award 50% of the costs to the plaintiff, with a certificate for two counsel.

Mr Simon N Westbrook SC and Ms Ebony Y N Ling, instructed by Gall, for the Plaintiff (Respondent)

Mr Adrian Huggins SC and Mr Bernard Man SC, instructed by Mayer Brown JSM, for the Defendant (Appellant)