Leatra Co Ltd v. Alfred Lee Kwok Wing and Another

Case No.DCMP 10/1977

Court

District Court

Date—

Judge—

Case Document

100%Judiciary

DCMP000010/1977

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

APPELLATE JURISDICTION

Labour Tribunal Appeal No. 10 of 1977

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BETWEEN
	Leatra Co. Ltd.	Appellant/ Defendant
	and
	1. Alfred Lee Kwok Wing	1st Respondent/ Claimant
	2. Lee Kwok Hung	2nd Respondent/ Claimant

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Coram: His Honour Judge LIU, Q.C. in Court

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JUDGMENT

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1. This is an appeal by the employer company against awards made by the Labour Tribunal in favour of two of its former employees (hereinafter called the "1st claimant" and the "2nd claimant" respectively).

2. Both claimants seek redress from the employer company in the stipulated sum described as "aggregated sum" in Clause 5 of their respective contracts which is in the following terms:

"5.

In case of termination of this agreement initiated by either side, the following aggregated sum must be paid by the initiator to the other party:

	(a)	during first year of this agreement: a sum equivalent to 18 months salary.
	(b)	during second year of this agreement: a sum equivalent to 12 months salary.
	(c)	during third year of this agreement: a sum equivalent to the total salary of unfulfilled period of this agreement."

3. The initial defence raised by the employer company was twofold: First, for a variety of reasons, there was no contract. Secondly, each of the claimants was dismissed for misconduct viz. frequent absence without leave. In addition, the employer company charged that there was a conspiracy between one of its former directors and persons including the claimants.

4. On the 10th February, 1977, the learned Presiding Officer found against the employer company on all issues so raised and, in paragraphs 9 and 16 of his written decision delivered on the same day, considered a question of law which has since found its way twice into this Court on appeal. Clause 5 was held to be enforceable as a provision for a pre-estimate of damage. On that very point of law, the employer company was granted leave to and did appeal to this Court on the 4th of July 1977. In the course of the previous proceedings on appeal, it was the consensus of opinion that whatever determination made by the learned Presiding Officer on the nature of Clause 5, be it a penalty or a pre-estimate of damage, it ought to be set aside with a consequential direction that the case be remitted back to the Labour Tribunal for further evidence to be taken on the circumstances of and relating to the respective contracts as at the time of their formation with a view to ascertaining whether the same clause provided in truth for a penalty or liquidated damages. An order was made accordingly. Pursuant to that order, further evidence was received by the Labour Tribunal, and a decision was duly given by the learned Presiding Officer on the 25th October 1977. From that decision, the employer company now appeals.

5. The substantive ground of appeal is that the learned Presiding Officer erred in law in holding Clause 5 as a provision for a genuine pre-estimate of damage.

6. In 1976, the 1st claimant was 31, the 2nd claimant 29. The 1st claimant had since April 1972 been engaged by the employer company presumably throughout as manager. The 2nd claimant was in the employ of the employer company since July 1971 and was an assistant manager in 1976. Shortly before the 1976 Annual General Meeting held subsequent to an increase of capital, on the 1st of March 1976 all the then staff of the employer company attended at a meeting summoned by a director, Mr. Ma. Another director, Mr. Yeung Chun-kong, who served as an accountant was also present and whose evidence was accepted without reservation by the learned Presiding Officer. Also present at the same meeting were the claimants, one LAI Shing-chau and one Louis LAI Shing-tung who joined the company in 1972 as a clerk and was in 1976 the Traffic Manager. He was 25.

7. The ex-director/accountant, Mr. Yeung, testified:

"	The purpose of the meeting was to ensure the staff to remain in their post after the change over of the directorship of the board. ..... At the meeting it was decided to retain all the staff including C1 and C2."
"	At the meeting, LAI Shing-tung, the Traffic Manager, and LAI Shing-chau were each given a three years' contract together with C1 and C2."

8. Mr. YEUNG Chun-kong explained the motive behind Clause 5, and his evidence, as summed up in paragraph 8 at page 4 of previous decision of the learned Presiding Officer, is of significance:

"

The meeting on 1st March 1976 was called to retain the staff members of the defendant company and to give them tenure of employment so that Paul Ma could go to Canada for a period of time to settle his family down and later to return to the defendant company. In this way the business of the defendant company would not be left unattended during Paul Ma's absence."

9. The 1st claimant confirmed in his written statement, "Ex. C1", that the terms in Clause 5 were held out by Mr. Ma "with a view to inducing the staff to work in the company in a settled manner". In his statement "Ex. C11", the Traffic Manager who was then 25 also confirmed that "with a view to inducing us to work for the company in a settled manner, Mr. Paul Ma wished to award all of us with a three years' contract." Naturally, the Traffic Manager referred to the inducement offered in Clause 5.

10. The employer company dealt in the purchase and sale of cowhide and served as local agents for various Japanese leather exporters. At this particular meeting on the 1st of March 1976, a written contract containing the said clause was offered to and accepted by each of the employer company's staff. It was not simply a three years' contract but a three years' contract with the benefit of tenure as fortified by clause 5 which provided the real incentive.

11. Both claimants were dismissed within the first year and claimed an "aggregated sum" as much as 18 months' salary. The 1st claimant's pay was $5,500 per month, and his claim was $99,900; his claim was purportedly satisfied by an award of $99,000. The 2nd claimant's claim was $60,300, being 18 months at $3,350 each. However, he was given one month's pay in lieu, and $60,300 less $3,350 is $56,950, being the award made in his favour by the learned Presiding Officer.

12. The guiding principles have been laid down in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.(1) for which we need go no further than the propositions summarized in Chitty on Contracts:(2)

	"(1) Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages ......
	(2) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage.
	(3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of the breach.
	(4) To assist this task of construction various tests have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are:

	(a)	It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach.
	(b)	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 .....
	(c)	There is a presumption (but no more) that it is a 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.'

On the other hand:

(d)

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. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties."

14. It is a fundamental concept that the party who challenges the validity of a contractual obligation has the burden of proof. I find myself at variance with the submission that there is sufficient material in these proceedings to shift the onus onto the claimants to establish that the clause in question is one for liquidated damages. If the shoe were on the other foot i.e. the claimants had resigned of their own volition, payment of 18 months' salary to the employer company might never be justified, but I do not accept such atrocious demand stipulated to be met by an ex-employee leaving on his own accord as being, by itself, capable of raising a presumption of a penalty against the claimants. The clause in question is a double-edged provision, and the position of the employer company as the victim of a deliberate breach should also be subjected to scrutiny, particularly in the light of a statement in McGregor on Damages:(3)

Further, these cases illustrate that type of contractual provision which stipulates one identical sum for breach by either party: such a stipulation can hardly ever constitute liquidated damages."

Although the present representative of the employer company stated in his further evidence before the Labour Tribunal:

I am not aware of the circumstances under which the clause in relation to compensation in case of breach prior to the expiry of the contract term was inserted."

Mr. Yeung, the ex-director/accountant, may well be in a position to throw more light on the expectant loss of the company which was made a recipient of some 18 months' salary from a defaulting employee.

15. In his further written decision on the 25th of October, 1977, the learned Presiding Officer seemed to have confined his consideration to the position of the claimants as victims of alleged breaches. The other side of the coin was never examined. If I were unable to come to the following conclusion, I would with reluctance remit the whole proceedings back to the learned Presiding Officer, yet for a second time, for further enquiry to be conducted in that direction. After all, this very point was specifically canvassed on the last appeal by the then counsel for the employer company as appellant in the following words:

I submit: it cannot be pre-estimated damages for the employer, thus also not for the employee."

16. The learned Presiding Officer appeared to have laid unwarranted, if not exclusive, emphasis on quantum judged from the standpoint of a claiming ex-employee. It would seem that his conclusion was based on the narrow premise that the sums to be paid or payable under the clause in questions were by no means extravagant or unconscionable in proportion to the possible maximum loss of the claimants as envisaged at the time of the making of the written contracts. It is indisputable that other factors deserve to be given equal prominence and that the clause is to be construed "upon the terms and inherent circumstances" of the contract.

17. Counsel for the claimants was driven to concede that an 18 months' pay for an unilateral termination of a three years' contract is unusual and that such measure calls for the strongest justification. The claimants enjoyed the conventional legal remedy in damages for wrongful termination of their three years' service contracts. An "aggregated sum" equivalent to 18 months' pay is, to say the least, out of the ordinary, and it is not surprising that such uncommon and controversial provision drew an immediate cry of conspiracy from the present management of the employer company which commenced business with a humble working capital of $100,000.

18. A common sense path must be steered. In an address in 1971, lord Reid said:

A court should have regard to common sense, legal principle and public policy in that order."(4)

19. The scenario offered no support for an extraordinary duration of 18 months such as that in this case. None of the claimants had been with the employer company for any great length of time, one started in 1971 and another in 1972. They are young officers of 29 and 31. If indeed their basic remuneration could be taken to reflect their responsibility, at $5,550 per month and $3,350 per month respectively. it is no match for that at top management level. I have not lost sight of the commissions potentials of the 1st claimant, but if their services had been or had been thought to be irreplaceable to the establishment, it must have been grossly neglectful of the company to have incoperated no provision for a reasonable restraint of trade. The employer company had never seen fit to resort to written contracts of employment with its staff before the 1st March 1976. Clause 5 adopted an ambiguous terminology of "aggregated sum". The clause is couched in terms which suggest that if "liquidated damages" was intended to be provided for, the author did not even have the courage of his conviction.

20. Last but not least, the tenor of the evidence shows that these written contracts were devised to suit the personal convenience of the ex-director. I have not overlooked the finding of the learned Presiding Officer that the claimants were holding positions of responsibility, but these contracts were given indiscriminately to all the then staff of the employer company, high and low, including a Traffic Manager who was merely a clerk in 1972. A more crucial aspect of the case can be found in the very fact that clause 5 was offered as an inducment to the staff of the employer company as at the 1st of March 1976. The staff were each given a three years' contract. Thus, they acquired security of tenure with the inherent protection of a right to damages for wrongful dismissal. If Clause 5 had offered no more than a pre-estimate of damage, it would have provided little further incentive than that already secured by the three years' employment contracts and could hardly have served as an inducement. An inducement is generally understood to mean an additional advantage to what one could legitimately claim. A permissible clause for liquidated damages aims primarily at a genuine pre-estimate of loss, and the security of tenure sought to be implemented by the sanction of a payment up to an employee's 18 months' remuneration is an inducement foreign to the nature of such a clause and introduces an element of extra benefit. Clearly, Clause 5 was intended to and did give more than just liquidated damages. In essence, clause 5 stipulated for a payment of a sum of money large enough to deter any attempted earlier termination of the claimants' contracts of service by the employer company with a view to securing tenure of employment to the employees and was not a provision for genuinely estimating future loss.

21. Common sense must prevail. In my view, the conclusion of the learned Presiding Officer cannot be supported. For all these reasons, I hold that the clause in question is a penalty clause and thus unenforceable. The appeal is allowed, and I would now entertain submissions on costs and on the desirability of remitting this case back to the Labour Tribunal for damages to be assessed in accordance with the result of this appeal.

	( B. Liu )
	Judge of the District Court

Representation:

Mr. Allman-Brown instructed by Messrs. Deacons for Appellant/Defendant.

Mr. R.E. Mayne instructed by Messrs. Walter Woo & Co. for Respondents/Claimants.

(1) [1915] A.C. 79 at p.p. 86 & 88.

(2) Para. 1603 at p.p. 758 - 760, Vol. 1 24th Ed.

(3) Para. 356 at p.p. 254 & 255, 13th Ed.

(4) The Journal of the Society of Public Teachers of Law Vol.12, No.1 in January 1972.