Amor Live Holdings Ltd and Another v. Tse Pak Kan and Others

DCMP000001/1979

Construction of "Service Agreement" for employment of nightclub managers - status of managers not decisive in their authority - managers' authorization to employ sub-servants - effect of provisions in Service Agreement reflected by conduct of managers.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

APPELLATE JURISDICTION

Labour Tribunal Appeal No. 1 of 1979

-----------------

-----------------

Labour Tribunal Appeal No. 2 of 1979

-----------------

-----------------

Labour Tribunal Appeal No. 3 of 1979

-----------------

-----------------

Labour Tribunal Appeal No. 4 of 1979

-----------------

-----------------

Labour Tribunal Appeal No. 5 of 1979

-----------------

Coram: Judge Liu, Q.C. in Court

Date of Judgment: 19 October 1979

-----------------

JUDGMENT

-----------------

1. The appellants are the 3rd and the 4th defendants before the Labour Tribunal. These proceedings were instituted by 22 claimants of whom 21 were successful in their claims for arrears of wages and Wages in lieu of notice. All the claimants were employees of the now defunct nightclub in the Magnolia Mansion, Tin Hau Temple Road, and each of them filed a claim against the 1st, 2nd, 3rd and 4th defendants. Judgment was given against only the 3rd and the 4th defendants who brought these five present appeals. The claims against the 1st and the 2nd defendants were dismissed. Such dismissal is not challenged, and none of the 1st and the 2nd defendants has been joined as a respondent. However, notice of these appeals was given to the 1st and the 2nd defendants by the direction of Judge Cruden, and they were present for part of the hearing.

2. Two preliminary matters may be instantly disposed of. First, one set of submissions were made in all the five appeals, and it was the consensus that these submissions were to be adopted for each of the appeals which concern common questions of law and fact. Consequently, one judgment is required of me in these five proceedings, all separate in form. Secondly, the 4th defendant is a wholly owned subsidiary of the 3rd defendant. These incorporated companies are legal entities on their own, but to all intents and purposes the 3rd and the 4th defendants, these appellants, had at all material times been taken as an inseparable establishment: First and foremost, the initial monthly payment under the agreement in suit with the 4th defendant was made by cheque, D7, to the 3rd defendant. This cheque was accepted and presented for payment by the 3rd defendant. After the cheque was dishonoured, the 1st and the 2nd defendants corresponded with the 3rd defendant by letters in "D6" dated the 22nd May and 27th May 1978 respectively. In these two letters, the 1st and the 2nd defendants claimed to be the employed managers of the 3rd defendant and referred to the terms of the agreement in suit signed by the 4th defendant in name, D2, as if it had been entered into with the 3rd defendant. Subsequent to the filing of the claims in the Labour Tribunal, it was the 3rd defendant which, by its letter dated the 14th June 1978, D5, sought to offer explanations to the learned Presiding Officer as if it had been directly involved. At the hearing before the Labour Tribunal, one of the representatives of the 3rd and the 4th defendants, Mr. Ng Wai-yip, gave evidence, the tenor of which drew no distinction between the 3rd and the 4th defendants. In my view, sufficient admission has been made to the Labour Tribunal of a fusion of interests of the 3rd and the 4th defendants, and in these appeals the 3rd defendant should not be heard to claim to have or retain an independent legal status which can have, in any case, little more than academic consequence. Furthermore, the adjudged liability of the 3rd defendant was not specifically made a separate ground of appeal, and counsel for the appellants never pursued this facet with much enthusiasm. Therefore, in these appeals the appellants are to be grouped and referred to as one.

3. The appellants were lessees of the 1st and the 2nd floors of the Magnolia Building in Tin Hau Temple Road. The 1st floor was used by the appellants as a restaurant and the 2nd floor as a nightclub previously known as the "Constellation Room". The head tenancy agreement was not produced, but suffice it to say that it prohibited subletting of the premises and subcontracting of the business conducted therein. By an agreement dated the 28th March 1978, D2, in the name of the 4th defendant "Amoy Coffee House Limited" the appellants permitted the 1st and the 2nd defendants to run the nightclub which was thereafter renamed "Lounge de Scorpio". The appellants claim that this agreement is not a service agreement despite its label and the expressions used in its provisions. The Court was warned against taking a telescopic view. Great emphasis was placed on the all too widespread local practice of transfer of business with its usual incidents and consequences, and the Court was urged not to overlook "that whether the contract is one of service depends in the last resort on whether an ordinary person would so consider it in the light of his experience and knowledge" (1)

4. Each of the successful claimants was interviewed by the 1st defendant and was invited to sign a form entitled "Application for Employment" for personal data. These forms are printed forms in English bearing the company name of the 3rd defendant in its heading. All these 21 successful claimants were employed subsequent to the singing of the agreement, D2. On or about the 1st May 1978, pursuant to this agreement, the 1st and the 2nd defendants paid to the 3rd defendant a post-dated cheque, D7, for the first month's guaranteed profits. This post-dated cheque was dishonoured on its presentation for payment on the 8th of May 1978, and the nightclub was locked up by the appellants and ceased to carry on business on the 16th of May 1978. Some claimants stopped to report for work as from that date with very few managing to work until the end of May.

5. In substance, the learned Presiding Officer found the 1st and the 2nd defendants to be employees of the 3rd and the 4th defendants, the appellants, and in turn the claimants to be employees of the appellants. It is quite unnecessary to deal with the Grounds of Appeal separately. The appellants claim that none of the claimants was in fact an employee of their companies. It was submitted on behalf of the appellants that the successful claimants were only sub-servants of the 1st and the 2nd defendants who operated the Night Club independently.

6. Much has been said of the true nature of the relationship created by the agreement, D2. It was contented that the 1st and the 2nd defendants were given de facto control of the Night Club in the capacity of an independent contractor with an undertaking to produce a minimum guaranteed monthly profit. Apart from "apparent authority", even a service agreement may specifically exclude any authority to engage workmen for and on behalf of the employer. Not every servant is given the power to take on workers for his employer. On the other hand, the power of employment may be delegated to one who is decidedly not a servant e.g. an employment agency. The concept of "servants" and "independent contractors" is primarily referable to the tortuous liability of the master of employer. That these successful claimants were engaged as servants of the Night Club is not disputed. What is also not in dispute is that the appellants did not directly employ these claimants. The real issue would appear to be whether these claimants had become employees of the appellants. Therefore the logical approach seems to involve first a consideration of whether the 1st and 2nd defendants were authorized to engage these claimants on behalf of the appellants and, if so, whether the 1st and 2nd defendants did in fact so employ them. Be it a service agreement or an agreement for a specified result without supervision, the bone of contention is whether or not the appellants may be bound by the acts of the 1st and the 2nd defendants. The nature of the relationship created by the agreement, D2, will not be decisive but would affect the scope and extent of the authority for engaging workers, if any, conferred on the 1st and 2nd defendants. In that limited aspect, one must not be solely guided by the label which the parties put on the relationship created by the agreement. "It is a pure question of law as to what is the reasonable inference based on the legal interpretation of the contract" Morren v. Swinton & Pendlebury Borough Council.(2)

7. It has been reaffirmed that there is no question of a sham. The agreement, D2, is described as a service agreement. The recital and the operative part of the agreement contained the usual provisions for the employment of a servant. Clause 1 required the 1st and 2nd defendants to "devote their whole time to their duties" and not to divulge confidential trade information which is an implied term in every contract of employment. Clause 9(g) prohibited the 1st and 2nd defendants to pledge the credit of the appellants as employers or to incur liabilities for them except with their written authorization. Clause 11 enjoined the 1st and the 2nd defendants to surrender all the accounts of the Night Club to the appellants for submission to the Inland Revenue. In fact, according to the evidence of the 1st defendant, he was obliged to hand over the accounts of the Night Club to the appellants at the end of every month. Subsequent to the dishonour of the $26,000 cheque on the 8th May 1978, all daily intakes were handed over to the 3rd defendant for the appellants. Lastly, Clause 16 of the agreement expressly stipulated that the presence of the 1st and 2nd defendants in and upon the premises was "merely because of their being servants" of the appellants. The intention of the parties was to have the Night Club run by the 1st and the 2nd defendants within the framework of the head tenancy agreement which contained some restrictions against subletting and subcontracting. A service agreement was intended to be signed, and with that in mind the parties had retained a firm of solicitors. Prior to the present claims for wages by the claimants, in their attempt to explain the dishonoured cheque, D7, the 1st and the 2nd defendants acknowledged their employment in their two letters, D6, in May 1978. Mr. Ng, the representative of the appellants, also testified before the learned Presiding Officer: "We understood that the contract was to employ D1 and D2 as managers. We agreed that D1 and D2 were to be our employees. In other words, by this agreement, we established the relationship of employer and employee." Earlier, Mr. Ng had explained: "We are bound by the tenancy agreement not to sublet or subcontract." "In order to avoid a break of the tenancy agreement, we created this contract so as to make D1 and D2 our employees." The 1st and the 2nd defendants were selected by the appellants who had power to terminate the service agreement if they should be "guilty of any gross default or misconduct" as provided for in Clause 20. The 1st and the 2nd defendants were given de facto control and management of the Night Club subject to the general directions contained in the agreement. "Superintendence and control cannot be the decisive test when one is dealing with ...... a man of some particular skill and experience". See Morren v. Swinton & Pendlebury Borough Council.(3) The 1st and 2nd defendants are person with recognized proficiency. Vide Recital of the agreement. The Night Club and its equipments were to be put to use as guided by the provisions in the agreement. The entire set-up was such that not only a front was to be put up but the 1st and the 2nd defendants were actually to be regulated in their duties and obligations as servants. They were to "carry out all the transactions of the Night Club on behalf and in the name of the Night Club of the employer and not in their own name." Vide Clause 1.

8. I have not been unmindful of the observation of Professor Atiyah that "it is more usual to exercise the control itself through the medium of the contract when one is dealing with an independent contractor, and through day-to-day instructions during the performance of the contract when one is dealing with a servant."(4) But I have had no real doubt that the 1st and the 2nd defendants were employees of the appellants under the agreement, D2. As I have indicated earlier, the crux of the matter is not so much what is the true nature of the relationship created by the document but how that relationship was to be regulated in the province of engaging workers for the Night Club. What has to be decided ultimately is whether the 1st and the 2nd defendants were authorised under the agreement, D2, to engage workers in the Night Club for the appellants.

9. Proviso (a) to Clause 9 of the agreement expressly empowered the 1st and the 2nd defendants to employ adequate staff for the running of the said Night Club. This proviso must be construed in the light of the overall stipulation in Clause 1 that the 1st and the 2nd defendants were to "carry out all the transactions of the Night Club on behalf and in the name of the name of the Night Club of the employer and not in their own name". The 1st and the 2nd defendants were not to incur any liabilities for the appellants without their written authorization. See Proviso (g) to Clause 9. For engaging staff for the Night Club, the written authorization came from Proviso (a) to Clause 9, and it was expressly provided by Clause 1of the agreement that the 1st and the 2nd defendants should do so in the name of the appellants which they did, as can be seen in the forms for "Application for Employment", D4, and in the I.O.U., C3 and C5, for advancing salaries to two of the claimants. The company name of the 3rd defendant was printed on all these forms. The real significance lies in the manner in which the 1st and 2nd defendants conducted themselves before any dispute had arisen. They complied with the contractual provisions, and their intention to engage staff on behalf of the appellants was fully reflected by the application and I.O.U. forms. The 1st and 2nd defendants were required to surrender all the accounts of the Night Club to the appellants for submission to the Inland Revenue under Clause 11 of the agreement. It is inconceivable that in their profits tax returns for the Night Club, the appellants could have overlooked a claim for staff wages as deductable expenses. In whatever capacity the 1st and the 2nd defendants operated the Night Club under the agreement, D2, I take the view that they were expressly authorized to engage staff on behalf and in the name of the appellants.

10. The evidence of the 1st and the 2nd defendants was that they were authorized by the agreement, D2, to employ staff and that the claimants were not their employees but employees of the overall employer, the 4th defendant. Their version must have been accepted by the learned Presiding Officer in his finding recorded in paragraph 9 of his written decision.

11. The legal relationship devised left no room for doubt that the successful claimants were employees of the appellants, although vis-a-vis the appellants and the 1st and the 2nd defendants the latter were to be first responsible for their wages. No conduct of the appellants has been shown to be inconsistent with the relationship of employer/employee so comprehensively committed into writing by their solicitors, Messrs. T.S. Tong & Co., whose letter, D8, dated 7th June 1978 reaffirmed such master and servant relationship. In my judgment, the 1st and the 2nd defendants acted in accordance with the provisions of the agreement, D2, and did employ the successful claimants on behalf and in the name of the 3rd defendant company, for the establishment of the appellants.

12. This Court has arrived at the same conclusion as that the learned Presiding Officer, and therefore the decision of the Labour Tribunal should be affirmed. These appeals must be dismissed with costs on the upper scale for the respondents legally represented, and for the unrepresented respondents, subject to counsel's observations, I would fix costs at $75 for the hearing and $25 for today for each of the respondents physically present. There will be no order as to costs for the 1st and the 2nd defendants.

Representation:

Mr. Patrick Chan instructed by Messrs. T.S. Tong & Co. for Appellants.

Mr. Charles Wong of Messrs. Raymond Tang & Co. for Respondents 1 and 3 in L.T.A. No. 1/79, Respondents 3,5 & 9 in L.T.A. 3/79 and Respondents 1,2,4,6. and 7 in L.T.A. 5/79. (Legal Aid)

Other Respondents in person.

Labour Tribunal Appeal Nos. 1-5 of 1979

Cases and authorities cited in Judgment:-

Cases referred to in submissions of Appellant's counsel:-

Representation:

Mr. Patrick Chan instructed by Messrs. T.S. Tong & Co. for Appellants.

Mr. Charles Wong of Messrs. Raymond Tang & Co. for Respondents 1 and 3 in L.T.A. No. 1/79, Respondents 3,5 & 9 in L.T.A. 3/79 and Respondents 1,2,4,6. and 7 in L.T.A. 5/79. (Legal Aid)

Other Respondents in person.

(1) Challinor v. Taylor, (1971) The Times, December 22 (N.I.R.C.)

(2) [1965] 1W.L.R. 576 at p.583

(3) [1965] 1 W.L.R. 576 at p.583

(4) Atiyah, Vicarious liability in the Law of Torts (1967) p.42