Ng Yan Kit Alfred and Another v. Ever Honest Industries Ltd and Another

HCLA 3/2020

[2022] HKCFI 1834

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO 3 OF 2020

(ON APPEAL FROM LABOUR TRIBUNAL

CLAIM NO. 3320 OF 2018)

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Before:  Hon Lok J in Court

Date of Hearing:  1 June 2021

Dates of Further Written Submissions:  9 & 10 August 2021

Date of Judgment:  17 June 2022

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J U D G M E N T

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1.This is an appeal against the order (“the Order”) of Deputy Presiding Officer, Ms Olivia Lai (黎寶珠) (“the Presiding Officer”), of the Labour Tribunal (“the Tribunal”) dated 12 May 2020. The Presiding Officer handed down the reasons for making the Order in the written decision dated 23 June 2020 (“the Decision”).

2.The Decision was written in Chinese. However, since the parties have made considerable references to various English materials (including cases and the relevant clause in the employment contract) and at least part of their legal submissions were made in English, I decide to hand down this Judgment in English.

3.The 1^st Claimant was employed as Vice-President (副總裁) and Director working for the “Defendants” under an employment contract contained in the Letter of Employment dated 11 January 2016 (“the 2016 Letter of Employment”).

4.Clause 6 of the 2016 Letter of Employment (“the Subject Clause”) provides:

“The Group cannot dismiss you within three years upon the commencement of this employment agreement. If the Group dismisses you within three years after this employment agreement commences, you will be paid two whole years’ salary as compensation. If this employment is terminated by you within three years, one month’s written notice or one month’s salary in lieu of notice is required, and after resignation, you will not be allowed to work in an organisation that is in the same or relevant industry or the compensation of two whole years’ salary will not be granted.”

5.By a letter dated 1 April 2016 issued by the 1^st Defendant, the 1^st Defendant terminated the employment of the 1^st Claimant with the last day of work on 31 March 2016. The 1^st Defendant also paid the 1^st Claimant 3 months of salary as payment in lieu notice, annual leave payment and year-end bonus.

6.In this action, the 1^st Claimant claims for 24 months of salary pursuant to the provision in the Subject Clause. His then monthly salary was $48,500 and so the total quantum of his claim is $1,164,000 ($48,500 x 24 months).

7.The 2^nd Claimant worked as the senior accountant for the “Defendants” and his claim is similar to that of the 1^st Claimant. The total quantum of his claim is $864,000.

8.After trial, the Presiding Officer dismissed the claim of the 1^st Claimant but granted judgment in favour of the 2^nd Claimant against both Defendants in the sum of only $36,000.

9.The 1^st Claimant now seeks to appeal against the Order made by the Presiding Officer. I granted general leave to appeal on 6 July 2020.

THE RESPECTIVE CASES OF THE PARTIES AND THE DECISION OF THE PRESIDING OFFICER

10.The 1^st Claimant’ case is as follows:

(i)  He was first employed by one Kith Holdings Limited (with provisional liquidators appointed) to work for the related companies of the Defendant’s group (“the Group”) from 1 August 2014. His then position was Deputy General Manager.

(ii)  By a Letter of Employment dated 27 March 2015 (“the 2015 Letter of Employment”), the 1^st Claimant was employed by the 1^st Defendant to work as a Director with the starting salary of $46,500 a month.

(iii)  In January 2016, the 1^st Defendant offered new terms of employment to the 1^st Claimant which were contained in the 2016 Letter of Employment (“the New Agreement”).

(iv)  Since: (a) the 1^st Defendant had undergone difficult times, including suspension of trading of its stocks, restructuring of its debts and resumption of trading of its stocks, and (b) the 1^st Claimant had made considerable contribution to the 1^st Defendant in passing through its stormy days, the then Chief Executive Officer of the 1^st Defendant, one Mr Cheung Hiu Fung (張曉峰) (“Cheung”), offered new terms of the employment to the 1^st Claimant as contained in the New Agreement. Apart from recognising his contribution, Cheung indicated to him that the 1^st Defendant hoped that the 1^st Claimant could work stably for the company for a period of at least 3 years and he would work together with Cheung to investigate some serious improper conducts relating to the company.

(v)  Later, there was disagreement between the senior management of the 1^st Defendant and Cheung and the 1^st Claimant relating to certain Mainland projects, and Cheung left his employment in March 2016. After that, the 1^st Defendant also terminated the employments of both Claimants. Since the 1^st Defendant terminated his employment within the 3 years’ period, the 1^st Claimant claims for 24 months of his salary as “compensation” pursuant to the Subject Clause.

11.On the other hand, the Defendants dispute the existence and the propriety of the New Agreement. They raise a number of queries relating to the claim and the New Agreement, including: (i) why the Defendants had to offer such favourable term as contained in the Subject Clause to the 1^st Claimant when there were no similar provisions in the contracts with the other employees (apart from the 2^nd Claimant); (ii) the 1^st Claimant did not raise any issue about the “compensation” at the time of the termination of his employment and he only made the claim about 2 years later; and (iii) if the new term in the Subject Clause were to reward the 1^st Claimant for his contribution, such term should have been offered to him much earlier, etc.

12.Further, the Defendants claim that Cheung had no authority to make the New Agreement on behalf of any of the Defendants.

13.In §12 of the Decision, the Presiding Officer listed out the issues of the present case as follows:

(i)  Whether the New Agreement existed and whether such agreement was a valid contract?

(ii)  Whether the Subject Clause is a penalty or liquidated damages clause?

(iii)  If it is a liquidated damages clause (I think the Presiding Officer has made a mistake here and what she meant is penalty clause[1]), what is the quantum of the Claimants’ damages and whether they had discharged the duty to mitigate their losses?

(iv)  Who should pay for such damages?

14.On the first issue, the Presiding Officer found that:

(i)  Relying on the evidence of Ms So Yee Har (蘇綺霞) (“So”), the secretary employed by the 2^nd Defendant and called by it as a witness, the 1^st Claimant and Cheung did make the New Agreement as contained in the 2016 Letter of Employment.

(ii)  Relying on all the evidence of the case including So’s testimony, Cheung did have the authority to make the New Agreement on behalf of the “Defendants”.

15.On the second issue, since there is no evidence to show that the parties have attempted to make a genuine pre-estimate of the loss in case of a breach of the New Agreement, the Subject Clause is a liquidated damages clause and not a penalty.

16.The Presiding Officer has made a serious error here. I think what she meant is that, as there is no evidence suggesting that the parties have attempted to make a genuine pre-estimate of the loss in the case of a breach, the Subject Clause is a penalty clause. That should have been the logical conclusion from her finding. Further, if the Subject Clause is a liquidated damages clause as literally stated in the Decision, the Presiding Officer should have awarded the “compensation” specified in the clause to the 1^st Claimant. There was no point for her to assess the damages or consider the duty of mitigation under the third issue as she did in §§20-28 of the Decision. In fact, this is also the understanding of the Defendants.

17.On the third issue, the Presiding Officer found that, as the 1^st Claimant was found to have suffered from cancer after the termination of his employment and he could not have worked in any event due to the treatment, 3 months’ salary in lieu of notice was an adequate compensation to the 1^st Claimant in the circumstances. In the case of the 2^nd Claimant, the Presiding Officer assessed the quantum of his claim in the sum of $36,000 which is equivalent to his then one month of salary.

18.On the fourth issue, the Presiding Officer found in §30 of the Decision that the 1^st Defendant was the direct employer of the 1^st Claimant. However, since the 1^st Claimant was first employed by the 2^nd Defendant (apparently in 2014) and the 1^st Claimant provided services to both Defendants, both Defendants should be regarded as the “joint employers” (共同僱主) of the 1^st Claimant.

19.I have problem with the finding under the fourth issue. The 2015 and 2016 Letters of Appointment were signed by Cheung on behalf of the 1^st Defendant, and the Presiding Officer found that the 1^st Defendant was the direct employer of the 1^st Claimant. In the course of one’s employment, it is possible for such employee to perform works (perhaps upon the instruction of their direct employer) for some third party, but that does not make that third party the employer of the relevant employee. The Presiding Officer’s finding about both Defendants being the joint employers of the Claimants is therefore open to serious question.

THE FOCUS OF THE APPEAL: WHETHER THE SUBJECT CLAUSE IS A PENALTY CLAUSE?

20.There is no challenge against the Presiding Officer’s findings on the first issue. Hence, this court proceeds on the basis that the New Agreement is a binding agreement made between the relevant parties.

21.The focus of this appeal is whether the 1^st Claimant is entitled to claim for 24 months of salary under the Subject Clause in the New Agreement for the 1^st Defendant’s termination of his employment.

(i)  The grounds of appeal under the penalty issue

22.On the penalty issue, the grounds of appeal relied on by the 1^st Claimant can be summarised as follows:

(i)  The Presiding Officer should have held that the Subject Clause is a liquidated damages clause and not a penalty clause. If she has applied the correct legal test, the payment under the Subject Clause should be held as a “payment on satisfaction of condition”. Further, in considering whether the Subject Clause is a liquidated damages clause, the Presiding Officer is not only required to consider whether the payment is a genuine pre-estimate of the loss, but also whether the Subject Clause is extravagant or unconscionable. As the Presiding Officer has just considered the question of genuine pre-estimation of the loss, she applied the wrong test in construing whether the Subject Clause is a penalty.

(ii)  The Presiding Officer has mixed up the effects of her finding. If the Presiding Officer has held that the Subject Clause is a liquidated damages clause as stated in §19 of the Decision, she should have allowed the 1^st Claimant to claim for 24 months of salary as compensation under the Subject Clause. It was not necessary for her to assess the damages or consider the duty of mitigation of loss.

(ii)  The legal principles on the penalty rule

23.For the proper approach in applying the penalty rule, the starting point must be the House of Lords’ decision of Dunlop Pneumatic Tyre v New Garage[2], in which Lord Dunedin laid down the following classic principles:[3]

(i)  The term used by the parties in describing the clause is not conclusive.

(ii)  The essence of a penalty is a payment of money stipulated as in terrorem of the offending party, and the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

(iii)  The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contact, not as at the time of the breach.

24.Lord Dunedin put forward 4 classic tests to assist the task of construction:[4]

(i)  It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

(ii)  It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.

(iii)  There is a presumption (but no more) that it is penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage.

(iv)  It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility.

25.The penalty rule is an interference with freedom of contract. There were some authorities after the Dunlop case which suggested that there should be some constraints in the application of the penalty rule.[5] In Philips Hong Kong Ltd v A-G of Hong Kong[6], the Privy Council made it clear that “the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts.”[7]

26.The penalty rule had been considered by the courts in the context of employment contracts.

27.In Abrahams v Performing Right Society Ltd[8], the plaintiff was employed by the defendant pursuant to a 5 years’ fixed term contract of employment under which he was entitled, except in the case of gross misconduct, to 2 years’ notice of termination, or salary in lieu of notice, at the end of, or during the last two years of, the contract. Following the expiry of that contract in March 1992, it was agreed that the plaintiff would remain in his post for a further two years “under the terms of existing contract”. In October 1992, the defendant summarily terminated the plaintiff’s employment. As a defence to the plaintiff’s claim for payment in lieu of notice, the defendant asserted, inter alia, that the plaintiff was under a duty to mitigate his loss.

28.The English Court of Appeal affirmed the lower court’s decision to strike out such plea. The court held that, as a matter of construction, there was no basis for excluding the terms as to notice and payment in lieu from the agreement of March 1992. In summarily terminating the plaintiff’s contract, the defendant acted lawfully under the contract and was effectively electing to pay money in lieu of notice under the terms of the contract. As the plaintiff was contractually entitled to such a payment, he was under no duty to mitigate his loss. The court affirmed that the concept of a duty to mitigate is entirely foreign to a liquidated damage claim, the whole object of which is to fix a certain sum to be paid irrespective of the actual damage suffered by reason of the breach.

29.Another employment-related decision is Murray v Leisureplay Plc[9]. The plaintiff (working as the Chief Executive Director) was dismissed by his employer the defendant. The dismissal prompted the plaintiff to sue under a clause in his service agreement, which provided that in the event of wrongful termination by liquidated damages, the defendant shall pay a sum equal to one year’s gross salary, pension contributions and other benefits in kind. The English Court of Appeal held that the clause was not a penalty.

30.In the judgement, Arden LJ gave a detailed analysis of the development of the jurisprudence in this area of the law after the Dunlop case, but found that the approach adopted by the courts had not always been consistent. Having considered all the relevant authorities, Her Ladyship suggested a practical step-by-step guide by asking the following 5 questions:

(i)  To what breaches of contract does the contractual damages provision apply?

(ii)  What amount is payable on breach under that clause in the parties’ agreement?

(iii)  What amount would be payable if a claim for damages for breach of contract was brought under common law?

(iv)  What were the parties’ reasons for agreeing for the relevant clause?

(v)  Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if they have shown the latter, is there some other reason which justifies the discrepancy between (ii) and (iii) above?

31.This approach therefore requires the court to focus the inquiry on the discrepancy between the actual loss and the agreed liquidated sum and the reason as to why the parties agreed on the liquidated damages clause. It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount.

32.Buxton LJ adopted a slightly different approach which was also endorsed by Clarke LJ. His Lordship approved the recasting of the classic test by Coleman J in Lordsvale Finance plc v Bank of Zambia[10] as follows:

“whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time of the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred.”

33.For this particular approach, the main focus of the inquiry is to ascertain the predominant contractual function of the provision. The comparison between the actual loss and the agreed loss is only a factor to be taken into account by the court in ascertaining the predominant contractual function of the provision.

34.The recent landmark decision in this area of the law must be Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis[11], which involved possible penalty provisions in a car parking contract and a sale of shares contract. The United Kingdom Supreme Court tried to clarify the law as follows:

“31. In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field. … … … The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party’s conduct is to be influenced are ‘unconscionable’ or (which will usually amount to the same thing) ‘extravagant’ by reference to some norm.

32. The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. … … …

33. The penalty rule is an interference with freedom of contract. It undermines the certainty which the parties are entitled to expect of the law. Diplock LJ was neither the first nor the last to observe that ‘The court should not be astute to descry a “penalty clause”’: the Robophone case [1966] 1 WLR 1428, 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41, 59, ‘the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be ‘upheld’, not least because ‘any other approach will lead to undesirable uncertainty especially in commercial contracts’.

34. Although the penalty rule originates in the concern of the courts to prevent exploitation in an age when credit was scarce and borrowers were particularly vulnerable, the modern rule is substantive, not procedural. It does not normally depend for its operation a finding that advantage was taken of one party. … … …

35. But for all that, the circumstances in which the contract was made are not entirely irrelevant. … … …”

35.The Supreme Court then proceeded to consider the question as to whether the penalty rule should be abrogated, but eventually concluded that judicial abolition of the rule would not be a proper course to take.[12] The Supreme Court also refused to extend the penalty rule by adopting the less formalistic Australian approach in considering the question of penalty.[13]

36.In Ip Ming Kin v Wong Siu Lan[14] and Brio Electronic Commerce Ltd v Tradelink Electronic Commerce Ltd[15], the Hong Kong Court of Appeal had the opportunities to consider the penalty rule and adopted a broad and flexible approach in determining whether a clause is a penalty. However, these decisions must now be examined in light of the most recent Court of Appeal’s decision in Law Ting Pong Secondary School v Chen Wai Wah[16], in which the court had the opportunity to consider the latest approach adopted by the Supreme Court in Makdessi and ParkingEye in applying the penalty rule.

37.In Law Ting Pong Secondary School, the Court of Appeal applied the dicta in Makdessi and ParkingEye and affirmed the two main principles established in that case:

(i)  The focus of the inquiry “is now placed on the legitimate interest of the innocent party and whether the detriment placed on the contract-breaker is out of proportion to such interest”.[17] In applying the test, the court should first identify the legitimate interest of the innocent party that is being protected by the clause, and then assess whether the clause is out of proportion to the legitimate interest by considering the circumstances in which the contract was made. Notions of whether the clause has a deterrent purpose or whether it is a genuine pre-estimate of loss would be subsumed by the broader enquiry into the legitimacy of the interest that supports the provision.[18]

(ii)  The doctrine of penalty is only engaged when there had been a breach of contract. It is not applicable to contractual provision which stipulates an obligation to pay certain amount of money by way of a primary obligation. In the case of the latter, the courts have no jurisdiction to review the fairness of the primary contractual obligations agreed by the parties.[19]

38.Law Ting Pong Secondary School is also a case concerning a possible penalty clause in an employment contract. The defendant signed a letter of appointment to work as a teacher for the plaintiff with a fixed term of employment. The defendant did not report for duty on the first day of work. The Court of Appeal held that the employment contract included a provision whereby either party could, before the expiry date of the employment contract, terminate the employment by giving three months’ notice in writing or by making payment in lieu of notice. One of the issues in the appeal was whether such provision was a penalty clause, which would then have an effect as to whether the defendant was liable to make the payment in lieu of notice to the plaintiff for failing to report for duty on the first day of work.

39.The Court of Appeal found that the employment contract provided an option to either party to terminate the employment by giving 3 months’ notice, or making payment in lieu of notice, or by means of a combination of the two. The payment of a sum in lieu of notice was a contractually agreed method of lawful termination of the employment contract and it was not in the nature of damages for breach of contract. In other words, it was a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance.

40.The Court of Appeal further held that, even if the payment-in-lieu provision were a liquidated damages clause, such provision was not an unenforceable penalty clause. Considering the facts of the case, in particular the possible disruption to the school schedule if the teacher did not give sufficient notice for the termination of employment and the difficulty faced by the school in finding replacement teacher, the school had a legitimate interest in enforcing the performance of the employment contract. Under the circumstances, the payment-in-lieu provision could not be said to be out of all proportion to the school’s interest in enforcing the employment contract. Hence, even if such provision were a liquidated damages clause, it could still be enforced as it did not offend the penalty rule.

41.The approach in Law Ting Pong Secondary School should now be regarded as the law in Hong Kong reflecting the modern judicial approach in considering the application of the penalty rule.

42.The modern approach involves a two-steps inquiry.

43.First, the court has to construe the relevant clause in the contract to determine whether it is a contractually agreed method of lawful termination of the contract, or whether the sum stipulated is in the nature of damages for breach of contract. In the case of the former, it is a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance which is the case for the latter.

44.Ultimately, this is a matter of construction. For such exercise, the starting point must be the wording used in the relevant provision itself. Using the Subject Clause as an example, it provides that the Group cannot dismiss the 1^st Claimant within three years upon the commencement of the New Agreement, otherwise two whole years’ salary would be paid as compensation. One can certainly argue that the payment is a secondary obligation arising upon the breach of a primary obligation of performance, as the provision is not worded in such a way that an option is given to the parties to terminate the agreement as it was in the Law Ting Pong Secondary School case.

45.Though the wording used in the contract plays an important part in the construction exercise, it is the substance and not the form that counts. In McGregor on Damages[20], the learned author said:

“Whether a clause operates conditionally upon a breach of contract is a question of substance, not form, and drafting techniques by the parties may not be effective if the true construction of a clause is that it is conditional upon breach.”

46.Hence, the court would not ignore other factors which may be relevant in determining the nature of the stipulated payment. After all, the circumstances under which a particular agreement was made is always relevant in construing the meanings of the terms of a contract and ascertaining the intended contractual function of the provision.

47.Second, in the event the payment is a secondary obligation arising upon the breach of a primary obligation of performance, the next step requires the court to identify the legitimate interest of the innocent party that is being protected by the clause, and then assess whether the clause is out of proportion to such legitimate interest by considering the circumstances in which the contract was made. An example as to how the court would apply such test can be found in Law Ting Pong Secondary School itself (see §40 above). This inquiry requires the court to look at all the circumstances of the case, including the background, the reason and the purpose as to why the parties agreed on the terms in the relevant provision.

(iii)  The fault of the approach adopted by the Presiding Officer

48.Having set out the latest and proper approach that should be adopted by the court in considering the application of the penalty rule, it is clear that the Presiding Officer has failed to apply the correct test in making the decision in the present case. Even that the Order was made before the handing down of the judgment in the Law Ting Pong Secondary School case, it is quite clear that the Presiding Officer has failed to consider the other authorities after the Dunlop case in making the decision. In fact, the reasoning of the Presiding Officer on the penalty issue is only contained in one simple sentence in §19 of the Decision. Just relying on the fact that there was no attempt by the parties to make a genuine pre-estimate of the loss, the approach adopted by the Presiding Officer is too simplistic. As observed by the United Kingdom Supreme Court in Makdessi and ParkingEye[21], the real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss.

49.Apart from failing to adopt the proper approach, the Presiding Officer has seriously mixed up the effects of her finding. If what she meant is that the Subject Clause is a liquidated damages clause and not a penalty, she should have allowed the 1^st Claimant to claim for 24 months of salary as the “compensation” specified in the clause. Hence, no matter how one is to analyse the reasoning, the decision of the Presiding Officer should not be allowed to stand.

50.The next question is whether this court can make a final determination on the 1^st Claimant’s claim based on the available materials or whether it should remit the case back to the Tribunal for reconsideration. Mr So, counsel for the 1^st Claimant, urges me to adopt the former. This is an attractive option which would reduce further costs and delay in the final adjudication of the dispute, but I do not think that the court can do so in light of the limited findings made by the Presiding Officer.

51.Applying the latest approach as set out in the Law Ting Pong Secondary School case, the first phase of the inquiry is to ascertain the nature of the Subject Clause and the payment to be made for the early termination of the employment under the New Agreement. As I see it, the Subject Clause provides for the following:

(i)  The 1^st Defendant has to employ the 1^st Claimant for a term of three years. If the Group terminates the employment anytime within such three years’ period, the 1^st Claimant would be entitled to two years of salary as “compensation”.

(ii)  On the other hand, the 1^st Claimant would have the option to terminate the employment within the three years’ period by giving one month’s written notice or paying one month of salary in lieu of notice. As no “compensation” is provided for under such circumstances, the 1^st Claimant would not be entitled to any “compensation” if he elects to terminate the employment himself.

(iii)  After resignation, the 1^st Claimant will not be allowed to work in an organisation that is in the same or relevant industry or the “compensation” of two years of salary will not be granted. As compensation will only be payable in scenario (i) above, such restraint of trade provision will only be applicable if the Group terminates the employment and not the 1^st Claimant.

52.This may also explain why the 1^st Claimant had waited for about 2 years before lodging the claim. He would only be entitled to such “compensation” if he did not work for any competitors for a period of time, apparently two years after the termination of the employment.

53.Obviously, the clause was poorly drafted. It was probably a home-made clause drafted without the benefit of legal advice. It is not clear from the clause itself as to what is the true nature of the “compensation”. On the one hand, it may serve as a “compensation” in the case that the Group terminates the employment of the 1^st Claimant. On the other, it may a serve as a “compensation” if the 1^st Claimant does not work for a competitor but only if the Group terminates the employment itself. The Presiding Officer has not made any inquiry about the true nature of the payment, in particular she has not addressed the question as to why the parties had agreed to include the restraint of trade provision near the end of the Subject Clause. In the absence of a proper inquiry about the true nature of the “compensation”, this court has no option but to remit the case back to the Tribunal for the conduct of a proper inquiry on such issue.

54.More importantly, in the case that the payment of the “compensation” is a secondary obligation upon breach, the court does not have sufficient information to make a finding about any legitimate interest of the Group that is being protected by the Subject Clause, and whether the Subject Clause is out of proportion to such legitimate interest in enforcing the performance of the agreement. This court cannot conduct the second phase of the inquiry without investigating these facts. As such investigation of facts can only be conducted by the Tribunal and not the appellate court, this court has to remit the case back to the Tribunal for reconsideration of the claim following the approach set out in this Judgment.

(iv)  The scope of the issues to be reconsidered by the Tribunal

55.To avoid doubt, I would set out the exact scope of the inquiry that I require the Tribunal to conduct.

56.As there is no appeal on the findings on the first issue, the Tribunal has to proceed on the basis that there was a binding New Agreement made by the parties.

57.As the appeal is only on the penalty issue, the Tribunal has to reconsider the nature of the Subject Clause following the latest approach set out in the Law Ting Pong Secondary School case. If the Tribunal concludes that the payment is a primary obligation not secondary to a breach, the Tribunal should allow the 1^st Claimant to claim for 24 months of salary as “compensation”. On the contrary, if the payment is secondary in nature, the Tribunal should conduct the second phase of the inquiry to determine whether the Subject Clause is caught by the penalty rule. In the event that the agreed compensation is not a penalty, the 1^st Claimant should succeed in his claim. If it is a penalty, since there is no appeal on the finding made by the Presiding Officer on the quantum of damages, the quantum of the 1^st Claimant’s claim should be limited to 3 months of salary. As he has already received such payment, his claim should be dismissed.

58.I have also considered the question as to who should pay for the “compensation” in the case that the 1^st Claimant succeeds in the inquiry. Though I have serious reservation as to whether the decision of the Presiding Officer on the issue of “joint employers” is correct (see §19 above), there is technically no cross-appeal on this particular matter. In fact, both Defendants do not seek to challenge the Presiding Officer’s finding on the fourth issue, and so both of them are jointly liable in the case that the 1^st Claimant succeeds in his claim.

59.For these reasons, I allow the appeal and set aside the Order in so far as it relates to the claim of the 1^st Claimant. I remit the case back to the Tribunal for reconsideration by another presiding officer who has to conduct the inquiry in accordance with the directions contained in this Judgment. I also make a costs order nisi that the costs of this appeal be paid by the Defendants to the 1^st Claimant which shall be made absolute 14 days after the date of the handing down of this Judgment.

Mr Simon S Y So, instructed by Y S Lau & Partners, for the 1^st Claimant Applicant (the Appellant)

Mr Michael Lok, instructed by Michael Li & Co, for the 1^st Defendant (the 1^st Respondent)

Ms Gloriane Hui, instructed by K K Lai & Co, for the 2^nd Defendant (the 2^nd Respondent)