Kao Lee & Yip (A Firm) v. Lau Wing and Another

CACV 121/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 121 OF 2006

(ON APPEAL FROM HCA 1854 OF 2005)

______________________

BETWEEN:

Before : Hon. Stock and Yuen JJA and A. Cheung J in Court

Date of hearing : 22 November 2006

Date of Judgment : 4 July 2007

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JUDGMENT

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Hon. Stock JA:

1.I agree, for the reasons given by Yuen JA and A. Cheung J, that the appeal be dismissed. 

Hon. Yuen JA:

2.This is an appeal from a decision of Burrell J striking out the Plaintiff’s Amended Statement of Claim on the ground that the proceedings disclosed no reasonable cause of action and/or were vexatious.

3.The Judge also determined pursuant to Order 14A of the Rules of the High Court that

“the 1st and 2nd Defendants’ employment by the Plaintiff was terminated on 19 September 2005 by virtue of the 1st and 2nd Defendants each giving the Plaintiff of termination of such employment on 19 August 2005, and subsequently tendering payments in lieu of the period from 20 September to 18 November 2005 on 2 September 2005 and again on 17 September 2005, pursuant to the 1st and 2nd Defendants’ contracts of employment with the Plaintiff and Sections 6 and 7 of the Employment Ordinance (Cap. 57)”.

4.At the hearing before the judge, the Plaintiff had applied for leave to re-amend the Statement of Claim.  The judge ordered that application to be dismissed.   The Plaintiff did not pursue their appeal from that order.  

5.The appeal focussed essentially on the construction of s.7(1) and s.6(2A) of the Employment Ordinance.  All references to sections in this judgment are references to that Ordinance.  References to common law cases in England were of no material assistance.  

Facts

6.The facts were summarized by the judge in the following way (in paras. 2 and 5 of the judgment):

“The plaintiff is an established and well-known firm of solicitors in Hong Kong.  The defendants are two young, recently qualified solicitors who were in the plaintiff’s employ as assistant solicitors.  At the material time they had approximately one and two years’ post-qualification experience. ... In August 2005 the defendants purported to terminate their employment with the plaintiff.  Contractually, they were required to give three months’ notice.  They relied on sections 6 and 7 of Cap. 57, the Employment Ordinance to, in fact, terminate their employment in the following way.  On 19 August 2005 they gave three months’ notice in writing but stated that they would only work for one month, until 19 September 2005, and pay to the plaintiff two months’ wages in lieu of the remaining two months’ notice.  The plaintiff did not accept their notice of termination and refused to accept the cheques purporting to represent the two months’ wages”.

7.Section 6 provides (where material):

“	Termination of contract by notice
	(1)	Subject to subsections (2), (2A), (2B), ...and sections 15 and 33, either party to a contract of employment may at any time terminate the contract by giving to the other party notice, orally or in writing, of his intention to do so.
	(2)	The length of notice required to terminate a contract of employment shall be –
		...
		(c)	in every other case, the agreed period, but not less than 7 days in the case of a continuous contract.
	(2A)	Without prejudice to section 41D, annual leave to which an employee is entitled under section 41AA shall not be included under subsection (2) in the length of notice required to terminate a contract of employment.
	(2B)	The period of maternity leave to which a female employee is entitled under section 12 shall not be included under subsection (2) in the length of notice required to terminate a contract of employment”.
(Section 15 prohibits the termination of employment in respect of pregnant employees, and s.33 is concerned with the rights of sick employees and inter alia prohibits the termination of employment when an employee is sick).  Section 6(2A) is the subject of specific dispute in the present case.

8.Section 7 provides (where material):

“	Termination of contract by payment in lieu of notice
	(1)	Subject to sections 15 and 33, either party to a contract of employment may at any time terminate the contract without notice by agreeing to pay to the other party a sum equal to the amount of wages which would have accrued to the employee during the period of notice required by section 6.
	(2)	Either party to a contract of employment, having given proper notice in accordance with section 6, may at any time thereafter terminate the contract by agreeing to pay to the other party such proportion of the sum referred to in subsection (1) as is proportionate to the period between the termination of the contract and the time when the notice given would have expired”.

9.It is not disputed that the Defendants were seeking to apply s.7(2) when they gave notice to the Plaintiff on 19 August 2005 indicating that they were giving but would leave the firm on 19 September 2005 and pay wages in lieu for the subsequent two  months.  However the Plaintiff refused to accept their notices and returned the cheques which the Defendants proffered for wages in lieu of notice.

Proceedings

10.On 21 September 2005, shortly after the Defendants left the firm, the Plaintiff issued a writ in the High Court claiming inter alia:

(1)	a declaration that the Defendants’ contracts of employment have not been validly terminated;
(2)	a declaration that the Defendants have acted in breach of their employment contracts and their duties of fidelity and good faith;
(3)	damages for breach of the contracts of employment and the said duties;
(4)	alternative to (3), an account of profits derived by the Defendants as a result of their breaches of duty of good faith and fidelity, and an order for payment of sums found to be due on the taking of the account.

11.The Defendants filed a defence without prejudice to their entitlement to strike out the writ and statement of claim, a summons for which was issued shortly afterwards.

Issues on appeal

12.Before this court, the issues between the parties were reduced to these:

(1)	when s.7(1) provides that “either party to a contract of employment may at any time terminate the contract without notice by agreeing to pay to the other party a sum equal to the amount of wages etc”, do those words mean that a bilateral agreement is required?  or simply the terminating party’s undertaking to pay?
(2)	as the 1st Defendant went on leave on 20 August 2005, did s.6(2A) – which provides that “annual leave to which an employee is entitled under s.41AA shall not be included under subsection (2) in the length of notice required to terminate a contract of employment” – render her notice invalid in that it was short by one day?
(3)	as a “side issue” (as the Defendants’ counsel puts it), were the proceedings before the judge liable to be struck out in any event as they should have been brought in the Labour Tribunal?

(1) Meaning of “agreeing to pay”

Position before 1971

13.Before 1971, s.7 (which was then s.6) provided that either party to a contract of employment may terminate it by “paying” wages in lieu of notice. 

Employment (Amendment) Bill 1971

14.The word “paying” was replaced by “agreeing to pay” by an amendment to the Employment Ordinance enacted in 1971, namely Clause 3 of the Employment (Amendment) Ordinance, Ord. No. 44 of 1971. 

15.Did the amendment to replace “paying” with “agreeing to pay” have the effect of narrowing the operation of the section – by requiring a bilateral agreement?  Or did it have the effect of liberalising it  – so that the termination was effected sufficiently by an undertaking or promise to pay?

16.By way of observation only, it is interesting to note the Explanatory Memorandum for the bill, in which Mr Graham Sneath, the Acting Attorney General said:

“It was always intended that the sum payable under section 6 of the principal Ordinance [now s.7] where employment is terminated without notice might be paid at any time within seven days after the employment comes to an end.  Accordingly, section 15(2) [now s.25(2)] of the principal Ordinance refers to that sum as being included within the moneys payable to an employee within seven days.  However, some doubts have arisen as to whether section 6 [now s.7] of the principal Ordinance permits the employment to be terminated without notice unless the payment in lieu thereof is made at the time.  Clause 3 makes it clear that employment may be terminated without notice by an agreement to pay wages in lieu thereof”.  (Emphasis added).

Yip Wan-chiu

17.Be that as it may, the words “agreeing to pay” were the subject of disagreement within the Full Court in Yip Wan-chiu v Magnificent Industrial Ltd [1974] HKLR 183. 

18.It is necessary to understand the factual background against which the judgments of the Full Court were rendered.  The plaintiff employee was dismissed without having received from her employer either notice or payment in lieu or it appears, any promise of payment in lieu.  In other words, it was neither a s.6 nor a s.7 termination. 

19.The employee therefore clearly had a claim against the employer for breach of her contact of employment.  However she did not seek employment for two months after her dismissal.  At trial she admitted that she could have found employment in an equivalent occupation immediately afterwards (p.187) but she said she was not “interested in getting a job” at the time (p.186).  After two months she found another position where she was paid the same wages. 

20.She issued proceedings in the District Court claiming $600 as one month’s wages in lieu of notice.  The employer did not file a defence and judgment was entered in default. 

21.The district judge held however that damages for wrongful dismissal were at large, and as the employee had not mitigated the damage caused by the wrongful dismissal, she was only awarded nominal damages in the sum of $40.  It  should be noted that at the time s.8A had not been enacted. 

22.The employee appealed.  The employer did not appear at the appeal.  Counsel for the employee (whom McMullin J described as having to discharge a role “somewhere midway between amicus curiae and advocatus diaboli”) argued that the employee should be entitled to (as it were) the best of both worlds – that she should be awarded one  month’s wages as liquidated damages or a “pre-quantification of damages” (not subject to a duty of mitigation) and also have a claim for general and unquantified damages for wrongful dismissal (which would be subject to a duty of mitigation).

23.Not surprisingly, the entire bench (Huggins, McMullin and Pickering JJ) was unanimous in their disagreement with that argument.  Judgments were delivered by Huggins J. and McMullin J. (with whose judgment Pickering J. agreed).  Both Huggins J.  and McMullin J. held that as the employer was in breach of the contract of employment by dismissing the employee without notice or any agreement to pay wages in lieu, the employee was entitled to damages for breach and as such she came under a duty to mitigate her damage.  She having failed to do so, the judge was right to award nominal damages only.  That was the ratio decidendi of the judgments, and Mr Benjamin Yu SC for the Plaintiff in the present appeal agrees that when Huggins J. and McMullin J. gave their views on the construction of the words “agreeing to pay” in s.6 (now s.7) they were obiter dictum.

24.Huggins J held that s.6 (now s.7)  “contemplates a unilateral termination by one party or the other, for it is only one party to the contract who has to ‘agree’ to do something, i.e. to pay money, and I understand that to mean ‘indicate his willingness to pay’ or ‘promise to pay’”(p.194) .  

25.McMullin J. accepted that s.6 (now s.7) was a statutory “inroad” upon the old common law rule in contracts of employment, as the section enabled either party to “buy himself out” of the need to give notice by agreeing to pay wages in lieu, with the result that the contract is terminated without breach and consequently an action for damages for breach would not lie.  However McMullin J. was troubled by the fact that the statutory definition of “wages” did not include certain collateral or fringe benefits which an employee might enjoy, such as accommodation.  Construing the words “agreeing to pay” as a bilateral agreement, he said (p.191):

“The option offered by section 6 [now s.7] is however one of mutual agreement.  I understand that section [s.6, now s.7] to mean that the parties must agree through the ordinary process of offer and acceptance before the option can become effective.  It is always open to the employee, for example, who feels that his damage from instant dismissal is likely to be greater than could be compensated merely by the payment of one month’s wages in lieu of notice, because of collateral or fringe benefits secured to him under the terms of the contract, to ask for one month’s notice instead”. (Emphasis added).

Although McMullin J. acknowledged that he was first drawn to the idea that the words “by agreeing to pay” in s.6 were to be understood as meaning “by offering to pay” or “by undertaking to pay” (p.191) and that injustice might occur if construed otherwise, he said (p.192):

“As to the seeming injustice arising under the section if it is interpreted in the way that I have suggested, it must be remembered that there is another side to that coin.  Admittedly where the law has been obeyed and the claim to the statutory sum arises then, in a subsequent action, the non-terminating party need not account for his interim behaviour or bring his gains into reckoning; but what he recovers is solely what was agreed neither more nor less.  On the other hand where the law has been disobeyed [i.e. no notice or payment in lieu] and the action is for damages for breach the damages are at large and there may well be valuable claims in addition to wages such as to offset and perhaps to overtop any diminishment arising from the duty to mitigate”.  (Emphasis added).

Accordingly McMullin J. said (p.193):

“I do not think that the sum stipulated in section 6 [now s.7] can be regarded as liquidated damages in the sense that it is a pre-estimate of the expected consequences of a breach.  There may often be consequences of the abrupt termination of a contract which will not be adequately covered by a sum equivalent to a month’s wages and the injured party will therefore not be ‘put in as good a position’ as if the contract had been performed”.  (Emphasis added).

26.It is therefore clear that the reason for McMullin J.’s construction of s.6 (now s.7) was that wages might not cover the full extent of what an employee might stand to lose during the notice period, so an employee might prefer to claim damages for the employer’s breach in terminating without notice.  Put another way, it was thought that the legislature would not have intended to force all employees (irrespective of their collateral or fringe benefits) to accept only wages and thereby force them to give up their claim to collateral or fringe benefits.  Consequently, in McMullin J.’s view, s.7(1) only covered the situation where the employee was prepared to accept wages only and so the word “agreeing” was construed in the bilateral sense of the word. 

27.I have discussed Yip Wan-chiu in detail (even though the relevant parts of the judgments were obiter dictum) as it is relevant to the Plaintiff’s submissions of “tacit legislation”. 

New s.8A

28.After Yip Wan-chiu was decided in April 1974, in February 1975 the Employment (Amendment) Bill 1975 was passed, adding a new s.8A to the Ordinance.  This provides:

“	8A.	Damages for wrongful termination of contract
	(1)	Without prejudice to section 9, 10 or 11(2), where a contract of employment is terminated otherwise than in accordance with section 6 or 7, a sum equal to the amount of wages which would have accrued to the employee during the period of notice required by section 6 shall be payable by the party terminating the contract to the other party.
	(2)	Without prejudice to section 9, 10 or 11(2), where a party to a contract of employment, having given proper notice in accordance with section 6 thereafter terminates the contract before the expiry of the period of notice otherwise than in accordance with section 7, such proportion of the sum equal to the amount of wages which would have accrued to the employee during the period of notice as is proportionate to the period between the termination of the contract and the time when the notice given would have expired shall be payable by the party terminating the contract to the other party”.
(Section 9 deals with summary dismissal by the employer, s.10 deals with the equivalent situation for an employee and s.11(2) deals with suspensions).

Tacit legislation argument

29.Mr Yu argued that when the legislature passed s.8A yet chose not to amend the Ordinance to say explicitly that “agreeing to pay” meant a promise to pay, there was an implied approval of the relevant parts of McMullin’s judgment in Yip Wan-chiu in which he expressed the view that “agreeing to pay” meant a bilateral agreement.

30.Mr Yu referred us to Bennion, Statutory Interpretation (4^th ed.) in which the author wrote (p.603):

“	Section 235 Use of judicial decisions on Act
	Under the doctrine of precedent or stare decisis, dynamic processing of an enactment by the court produces sub-rules which are of either binding or persuasive authority in relation to the future construction of the enactment.  Where Parliament subsequently indicates that it adopts any such sub-rule, the status of the sub-rule becomes equivalent to that of legislation.
	COMMENT
	Sub-rules  As to sub-rules produced by dynamic processing see Code s.26.
	Tacit legislation Parliament is normally presumed to legislate in the knowledge of, and having regard to, relevant judicial decisions.  If therefore Parliament has a subsequent opportunity to alter the effect of a decision on the legal meaning of an enactment, but refrains from doing so, the implication may be that Parliament approves of that decision and adopts it.  This is an aspect of what may be called tacit legislation”.

31.When moving the second reading of the bill, Mr Price (the Commissioner of Labour) said:

“– Sir, a contract of employment may be terminated under the Employment Ordinance by the giving of notice of termination as required by section 6, or by an agreement to pay a sum of wages in lieu of notice in accordance with the provisions of section 7.

Until very recently it was thought that where a contract of employment is wrongfully terminated by either party to it – that is to say terminated otherwise than in accordance with the provisions I have just mentioned, a liquidated sum, that is a fixed or ascertained amount, equal to wages in lieu of notice was payable to the other party.

However the Full Court has recently held that this is not the case under the law as worded at present, and that the remedy available is the ordinary common law action for unliquidated damages for breach of contract.  Unliquidated damages cannot be predetermined because factors other than mere loss of wages arising from a breach of contract have to be taken into consideration.  Such damages have to be proved in each case.

This was not the intention of the law.  Therefore, clause 2 of the bill provides for a new section 8A which will restore the position to that which it was thought to be  – namely a right of action for liquidated damages for wages in lieu of notice

Clause 3 makes a minor change in the wording of section 25 of the principal Ordinance”.

32.The reference to the Full Court’s decision was obviously a reference to Yip Wan-chiu.  Mr Yu argues that notwithstanding the legislature’s awareness of that decision, the fact that the legislature has only amended the Ordinance by adding s.8A shows that (a) the legislature was primarily concerned with affording to the parties to an employment contract a right of liquidated damages and (b) the legislature implicitly adopted the construction of the majority in Yip Wan-chiu.

33.With respect, I do not agree.  First it is clear that the legislature was concerned with the ratio decidendi in Yip Wan-chiu, i.e. the unanimous decision that where an employer wrongfully dismisses an employee by failing to comply with the statutory scheme, i.e. without either notice under the present s.6 or agreement to pay wages in lieu under the present s.7, the employee has a claim to damages at large (which he has to prove and which he has a duty to mitigate).  The introduction of s.8A which provides that “ a sum equal to the amount of wages which would have accrued to the employee during the period of notice required by section 6 shall be payable by the party terminating the contact to the other party” (emphasis added) makes it clear that the legislature has fixed the damages payable for such a breach to the notice period’s wages.  As liquidated damages are stipulated, there is no need to prove damages and no duty to mitigate (McGregor on Damages, 17^th ed. p. 426, para.13-015).

34.As for McMullin J.’s construction of “agreeing to pay” in s.7(1), that was obiter dictum and as such it is questionable whether this is a situation for importing the concept of tacit legislation.

35.However in my view, a stronger point against tacit legislation is that s.8A strikes at the heart of McMullin J.’s reasoning for his construction of s.6 (now s.7).  As discussed earlier, the reasoning behind McMullin J.’s construction was that an employee with substantial collateral or fringe benefits not included in the statutory definition of “wages” would – if he had a choice – probably not accept wages only.  Accordingly, to accommodate the employee’s rights to collateral or fringe benefits, McMullin J. held that the words “agreeing to pay” meant a bilateral agreement, confined to situations where an employee was prepared to accept wages only.

36.In my view the introduction of s.8A removes the reasoning behind McMullin J.’s construction of the words.  Section 8A makes it clear that where an employer has terminated an employee’s contract of employment without notice or agreement to pay wages in lieu, an employee gets as damages for wrongful termination the notice period’s wages - no less but also no more.  The employee would not be entitled to claim the value of collateral or fringe benefits but neither would he need to prove or mitigate his damages.  With s.8A in place, there is no longer any basis for thinking that the employee had a choice (as McMullin J. thought) between “agreeing” to accept the notice period’s wages and not so “agreeing”, because the employee would not – after the introduction of s.8A – recover anything more than the notice period’s wages.

37.So analysed, the introduction of s.8A in my view also supercedes the obiter dictum of the majority in Yip Wan-chiu on the construction of the words “agreeing to pay” in s.7(1).

Other relevant legislation  

38.My understanding of s.7(1) is supported by other statutory provisions concerning termination or suspension.  Section 9 and  s.10 (termination of contract), s.10A (deemed termination of contract) and s.11 (suspension) all refer to situations of unilateral termination or suspension “without notice or payment in lieu”.  That is consistent with the construction of “agreeing to pay” in s.7 as a unilateral act of paying wages in lieu, similar to the giving of notice in s.6.

Position

39.As I understand the law the position now is that contrary to the obiter dictum of the majority in Yip Wan-chiu and in any event after the passing of s.8A, a contract of employment may be lawfully terminated by either party by giving notice (under s.6) or by “agreeing” (i.e. undertaking or promising) to pay wages in lieu of notice (under s.7).  If the terminating party having agreed to pay wages in lieu fails to do so, the cause of action would be for breach of that agreement.  But if a party terminates a contract of employment without either giving notice or agreeing to pay wages in lieu, that would be an unlawful termination and the innocent party’s cause of action would be for damages for wrongful termination, which is set by the legislature under s.8A at the notice period’s wages.

40.As a matter of completeness, I would only add that on my reading of Litton NPJ’s judgment in the Court of Final Appeal in Archer v Hong Kong Channel Ltd (1997-98) 1 HKCFAR 298, that court did not indicate any position on Yip Wan-chiu because the argument was raised too late.  I do not agree with the views expressed in paras. 8-9 of the unreported judgment of this court (Leong HCCJ and Chung J.) in Yeung Chi-wah v City University CACV 2958/2001 (unrep) that the Court of Final Appeal has expressed a view contrary to that of the majority in Yip Wan-chiu.

41.I would dismiss the Plaintiff’s appeal in respect of the 2^nd Defendant.

(2) 1st Defendant’s notice not invalidated by leave

42.I then come to the second issue which is whether the 1^st Defendant’s notice was short by one day because she was on leave on 20 August 2005.  The Plaintiff argues that the notice period was short because under s.6(2A),

“without prejudice to section 41D, annual leave to which an employee is entitled under section 41AA shall not be included under subsection (2) in the length of notice required to terminate a contract of employment”.

43.In para. 23 of his judgment, the judge said: “in fact it was contractual leave which I accept does not affect the calculation and does not invalidate the notice”.  However Mr Coleman counsel for the Defendants was unable to point us to any material that supported the judge’s finding that the 1^st Defendant was on contractual leave (although I suppose it might have been said that since it was the Plaintiff who was asserting invalidity, it had the burden of showing that she was taking statutory annual leave).  There does not appear to be any factual evidence on this issue in the affirmations, probably because it did not appear in the Plaintiff’s Amended Statement of Claim as a ground for the invalidity of the 1^st Defendant’s notice. 

44.However I do not see any substance in the Plaintiff’s argument in any event.  It is clear that s.6(2A) is for the protection of the employee only.  First, what are the parties’ positions when an employee is enjoying statutory annual leave?   The employee gets the benefit of being on leave and at the same time being paid his salary.  The employer derives no benefit.  He has to get someone else to do the holidaying employee’s work and he has to pay the holidaying employee during that period. 

45.Then, I consider what an employer has to do if he wishes to terminate an employee’s contract with immediate effect (without grounds for summary dismissal).  Apart from having to employ a replacement, he has to pay wages in lieu to the departing employee.  But if an employer could give notice to an employee during the latter’s statutory annual leave period, the employer would then be able to “get rid” of the employee with immediate effect – but avoid having to pay him the wages in lieu which he would normally have to do for the advantage of terminating an employee’s contract with immediate effect.  For the same reason, an employer is not permitted to give notice to an employee during the period when she is on maternity leave (see s.6(2B) which I have reproduced in para. 7).

46.So analysed, I think it is clear that it was for the employee’s benefit that s.6(2A) was enacted, so it would not apply when it is the employee who gives notice, or if it does apply, the employee can waive the exclusion of the leave period.

47.Accordingly I would dismiss the Plaintiff’s appeal in respect of the 1^st Defendant, not only on the “agreeing to pay” issue but also on this issue.

(3) Labour Tribunal?

48.Rightly or wrongly, the Plaintiff sought declaratory relief and an account of profits.  It may well be that this was done deliberately to avoid starting proceedings in the Labour Tribunal.  But be that as it may, both parties agree that even if the Plaintiff had started proceedings in the Labour Tribunal, it would have been referred to the High Court.  This issue is therefore entirely academic.

Order

49.For the reasons I have discussed, I would dismiss the appeal with an order nisi that the costs of the appeal be paid by the Plaintiff to the Defendants. 

Hon A Cheung J:

50.I have had the benefit of reading in draft the judgment of Yuen JA. For the reasons given in her judgment and those given below, I agree that the appeal should be dismissed with costs (nisi).  Since we are differing from the majority view in a Full Court decision which has stood undisturbed for over 30 years, I would like to add a few words of my own.

Yip Wan-chiu

51.McMullin J explained in Yip Wan-chiu that he was at first drawn to the idea that the words “agreeing to pay” were to be understood as meaning “by offering to pay” or “by undertaking to pay”, and he changed his mind subsequently for reasons that will be returned to below (p 191).  The initial reaction of his Lordship is not difficult to understand.  As Huggins J succinctly put it almost as a matter of commonsense at p 194, “[i]t would not have required a statute to lay down that a contract of employment, like any other contract, can be terminated by mutual consent”.

52.Mr Yu SC recognizes the force of that argument and seeks to meet it by contending that any mutual agreement between the employer and employee to terminate the contract of employment by a promise to pay wages in lieu of the notice required under section 6 (formerly section 5) may be struck down by section 70 of the Ordinance.  The section, added in 1970 (Ord 5 of 1970, s 8), reads:

“Any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by this Ordinance shall be void.”

53.Counsel’s submission may be summarized thus: without section 7 (formerly section 6), a mutual agreement between the employer and employee to terminate the contract of employment by a promise to pay wages in lieu of the notice required under section 6 may amount to the reduction of an employee’s right or benefit conferred by section 6, which gives him a statutory right to a minimum period of notice, within which he can continue to work and earn his “wages” and other collateral benefits under the contract of employment.  Without section 7, given that “wages” in the Ordinance may not include all such collateral benefits and to the extent that it does not, a mutual agreement to early or immediately terminate the contract of employment by a promise to pay the employee what he would have earned by way of “wages” only will not give him all that he would have earned by way of remuneration during the notice period required by section 6.  In that way, his right and benefit under section 6 will be compromised.  Therefore, that agreement is liable to be struck down by section 70.

54.The purpose of section 7, so the argument runs, is to specifically allow such a mutual agreement to be made, notwithstanding section 70.  In other words, the section is there to serve a purpose, and thus it is not correct to criticize the majority’s construction of section 7 as rendering it nothing more than a provision to make express what can always be done as a matter of basic contract law.

55.On Mr Yu’s argument, I have a number of observations to make.  First, as a matter of fact, McMullin J never justified his rejection of his initial view and change of mind in that way.  Section 70 was never mentioned in the judgment. 

56.Secondly, section 70 only applies to protect an employee from any attempted extinguishment or reduction of his right, benefit or protection conferred on him by the Ordinance.  It does not apply to the converse situation of an employer – even if the loss to the employer caused by the immediate or early termination of the contract of employment and departure of the employee were to greatly exceed the amount of wages payable to the employee during the notice period which is promised to be paid by the employee to the employer.  There is no question of such an agreement being struck down by section 70.

57.On the other hand, both sections 6 and 7 and indeed other relevant provisions in Part II of the Ordinance are provisions of general application, regardless of whether it be the employer or employee who is seeking to terminate the contract of employment.  To construe section 7, which applies equally to an employer and employee, by reference to section 70, which applies only to an employee, does not appear to be particularly convincing.

58.Thirdly, depending on the facts, there may or may not be any collateral benefits not covered by “wages” to be earned during the notice period.  In those cases where no such benefits are in question, which there must be many, section 70 is wholly irrelevant, and Huggins J’s argument based on commonsense applies with full vigour.

59.Lastly, section 70 only strikes down “[a]ny term of a contract of employment” which seeks to do what is prohibited.  An ad hoc agreement, arrived at by the employer and employee not at the beginning but only at the time when one of them wanted to terminate the contract of employment by an agreement for payment in lieu of notice – which is a common enough situation, is not a contract of employment.  It is a different and subsequent contract to terminate the prior contract of employment.  Section 70 simply does not apply to invalidate such an agreement.

60.For those reasons, I do not accept Mr Yu’s argument.  In other words, Huggins J’s commonsense argument (that it would not have required a statute to lay down that a contract of employment, like any other contract, can be terminated by mutual consent) is not met by any effective answer.  That is a strong factor in favour of his Lordship’s construction of section 7.

61.Taking a step further, even if it be the case that section 70 somehow reduces or even neutralizes the force of Huggins J’s point as counsel has contended, it does not therefore mean that the majority’s construction must be correct.  The crucial question of construction would still remain: what is the legislative intent behind section 7?

62.I therefore return to the reasons given by McMullin J in his judgment for changing his mind.  His Lordship said at pp 191-192:

“Although I was at first drawn to the idea that the words "by agreeing to pay" in section 6 were to be understood as meaning: "by offering to pay"; or "by undertaking to pay", yet on reflection it seems to me that such an interpretation raises a very real difficulty. Where the offer has been accepted no problem arises for then there is an agreement on which the defaulting party may be sued. But where, for example,  the employee refuses to accept the offer or undertaking and later, being perhaps unable to find other employment, wishes to pursue a claim against the employer he may find himself barred out of any approach to the Courts either by way of the statute or of the Common Law. For, as to the former he may be met with the answer that the offer having been refused and the situation of the parties having altered the employer was under no obligation to renew it; while as to the Common Law, the answer would be that there could be no action for breach since the contract had been lawfully terminated at the instant when the employer had done all that the Ordinance required of him by merely offering or undertaking to pay.”

63.With respect, I do not agree that the minority’s interpretation of section 7 will raise “a very real difficulty”.  The supposed difficulty will arise, according to the learned judge, when “the employee refuses to accept the offer or undertaking and later, being perhaps unable to find other employment, wishes to pursue a claim against the employer” and his dilemma will then be that “he may find himself barred out of any approach to the Courts either by way of the statute or of the Common Law”.

64.It must be firmly borne in mind that there his Lordship was seeking to illustrate what difficulty the minority’s interpretation would give rise to.  Therefore, in order to see whether there really is such difficulty arising, one must proceed on the assumption that the minority’s interpretation represents the correct construction of section 7, ie a unilateral undertaking or offer to pay satisfies section 7.

65.Viewed in that light, it is plain that the dilemma faced by the hypothetical employee who has refused to accept a unilateral undertaking or offer by his employer to make him payment in lieu of notice is of his own making.  For ex hypothesi, the employer, by making the unilateral undertaking or offer to pay, has already “done all that the Ordinance required of him”, as McMullin J recognized in the passage quoted.  The employee – if he knows the law and the correct interpretation of section 7 (as per, ex hypothesi, the minority’s interpretation) and he must be taken to know the law – must know that his employer is terminating lawfully the contract of employment in accordance with the requirements in section 7.  If he chooses to reject or ignore his employer’s undertaking or offer to pay, and finds himself subsequently trapped in difficulty under the circumstances described in McMullin J’s example, he only has himself to blame.  Put another way, his dilemma and hardship do not illustrate that there is anything intrinsically wrong or unfair with the minority’s interpretation.  Anyone who ignores the law does it at his own peril – and in this regard, no one can be heard to plead his ignorance of the law.

66.McMullin J went on to give further reasons in support of his interpretation in his judgment (at pp 192-193).  In gist, his Lordship’s point is that a payment of wages in lieu of notice may well not fully compensate an employee for his loss of an opportunity to work during the requisite notice period in terms of those collateral employment benefits not covered by the statutory definition of “wages”.  The learned judge was therefore reluctant to ascribe to the Legislature an intention to confine the employee to receiving such a payment even in the absence of his consent and thus effectively taking away his right to sue for common law damages – there being no breach to sue on in the first place if the minority’s interpretation be correct.  That line of reasoning has been dealt with in Yuen JA’s judgment when discussing the true purport of section 8A and I will not repeat the same here.  Some further observations of mine are set out below when I turn to section 8A.

67.All I would add here is that even putting aside section 8A which was enacted subsequently, the contrary view expressed by Huggins J at pp 195-196 appears to me, and I say it with great respect, to represent a more comprehensive and persuasive analysis of the situation:

“On consideration I see no difficulty arising from the fact that a master who terminates his servant's employment under s. 6 might have to pay more than he would if he wrongfully dismissed him without notice and the servant mitigated his loss: that is the price the Legislature has decided he should pay for his new right, a right which he may exercise or not at his will. On the other hand, the servant may receive less than he would have done had the contract been performed, or had he been wrongfully dismissed and been unable to mitigate his damage. That is the price he has to pay for having "the bird in the hand", i.e. for the certain entitlement to a whole month's wages not less than seven days after completion of the contract: s. 15(1).”

68.Coupled with the earlier commonsense point that it would not have required a statute to lay down that a contract of employment, like any other contract, can be terminated by mutual consent, against which Mr Yu has, as explained, failed to come up with an effective counter-argument, for my part, I would prefer the minority’s interpretation of section 7 even as the Ordinance then was back in 1974.

Section 8A and tacit legislation

69.I propose to look at them from two different perspectives, although in final analysis, they are inter-related and may well be two sides of the same coin.  In the first place, statutory construction.  Secondly, tacit legislation.

70.First, statutory construction.  One’s present task is to construe section 7(2) of the Ordinance as it is.  Section 8A has long been enacted and to properly construe section 7(2), one must take in account section 8A.

71.As has been pointed out by Yuen JA in her judgment, under section 8A, an innocent employee can only sue for the “wages” as statutorily defined that he would have earned during the notice period in case of wrongful termination of the contract of employment not in accordance with section 6 or 7.

72.That being the case, the concern of McMullin J that the employee will stand to lose his other collateral employment benefits not covered by the statutory definition of “wages” under the minority’s interpretation of section 7 will not be removed by adopting his Lordship’s interpretation that requires a mutual agreement to pay.  This is because an employer who insists on terminating the employment contract even in the absence of the employee’s agreement to accept his offer of payment in lieu of notice, and therefore acts in wrongful breach of it, will only be liable to pay the innocent employee damages measured by the amount of “wages” that would have accrued to the latter during the requisite notice period.  Still the employee will lose out in terms of the other collateral benefits not falling within the meaning of wages.  Thus the need or justification to adopt McMullin J’s interpretation is gone.

73.I recognize that the above analysis only holds true if section 8A provides an exclusive remedy for wrongful termination of a contract of employment, in the sense that it either bars any common law claim for breach of contract or limits the quantum of such a claim to the amount of “wages” that would have accrued to the innocent employee during the requisite notice period.  If it be otherwise, the employee will still be free to opt for making a common law claim for damages at large in respect of the other collateral employment benefits discussed above.  In that case, the force of McMullin J’s reasoning will still remain.

74.I accept that section 8A does not specifically say that it excludes common law claims or limits the amount of damages payable in a common law claim to the statutory amount set out in section 8A.  I am also aware that there have been first instances cases which have held that common law damages may be claimed in a wrongful termination situation: Ying Cheong Shoe Mfy v Yam Yuk Bing HCLA 102/1986, 1 May 1987, Rhind J; Precieux Garment Factory Ltd v Lam Kin Chung HCLA 5/1997, 18 July 1997, Cheung J (as he then was); De Nicolas v Lee Fung Lan HCLA 15/1997, 9 Oct 1997, Beeson DJ (as she then was).  I am not prepared to express any definite view on this point in the absence of thorough arguments from both sides. 

75.All I would say is that assuming McMullin J’s reasoning or concern can survive the enactment of section 8A, it is just one of the considerations to bear in mind in properly construing section 7.  The matters discussed by Huggins J in his judgment, the relevant part of which has been reproduced above, remain valid considerations.  As I said, I find those considerations to be weightier than those considered by McMullin J.  Coupled with the commonsense argument also discussed above, I am of the view that the minority’s interpretation of section 7 remains the correct interpretation of the provisions after the enactment of section 8A, just as before.  In other words, “agreeing to pay” simply means a unilateral undertaking or offer to pay.

76.Secondly, I would like to look at the matter from the perspective of tacit legislation.

77.As a general observation, I do not accept that tacit legislation means that whenever Parliament has a subsequent opportunity to alter the effect of a decision on the legal meaning of an enactment, but refrains from doing so, the implication is that Parliament approves of that decision and adopts it.  That is too sweeping a proposition to accept.  A watered-down version of it that an inference to that effect could sometimes be drawn is, in my view, nearer the mark.  I recognize that everything must ultimately depend on the circumstances of a particular case and very often general statements of principle are of little real help in practice.  For my part, I would be very slow to accept that tacit legislation is relevant at all unless the previous decision is substantially connected with or reasonably related to the subject matter of the subsequent legislation, which gives rise to the so-called “opportunity” that Parliament is said to have to correct the earlier decision.  Indeed Parliament can of course at anytime pass whatever law it likes and there is not much point in speaking in terms of “opportunity”.

78.As Bennion, Statutory Interpretation  (4^th ed) 132 has noted, “[t]he concept of ‘tacit legislation’ has been disputed, and must not be pushed too far”.

79.Take section 7(1) as an example.  It has been amended on no less than three occasions since Yip Wan-chiu was decided: Ord 57 of 1983, s 3; Ord 103 of 1995, s 2 and Ord 7 of 2001, s 3.  In a sense, on each of these occasions, the Legislature had an “opportunity” to alter the legal meaning the majority in Yip Wan-chiu had given to the words “agreeing to pay” appearing in section 7(1), which it was amending.  It did not do so.  Can one therefore argue that there has been “tacit legislation” endorsing the majority’s interpretation on all or some of those occasions?

80.Mr Yu does not see fit to put his argument on tacit legislation on that basis.  Rightly so, in my view.  What Senior Counsel does rely on is the amendment in 1975 whereby section 8A was introduced.  I accept that given the legislative history of that particular section which has been alluded to in Yuen JA’s judgment, tacit legislation is arguably in issue here.  Whether counsel’s argument should be accepted is, of course, quite another matter.

81.Yuen JA has fully explained in her judgment that section 8A has been enacted to deal with the ratio decidendi in Yip Wan-chiu.  It provides for payment of a statutorily fixed sum as damages for wrongful termination of a contract of employment, thus doing away with the need to prove actual loss or mitigation of loss.  If Yip Wan-chiu should have happened and been decided after section 8A was added, the plaintiff would not have been awarded only a mere sum of $40 as nominal damages for the wrongful termination of her contract of employment.  Whether section 8A provides for an exclusive remedy is neither here nor there under the present discussion.  The important point here is that it is not predicated or otherwise dependent on the correctness of the majority’s interpretation in Yip Wan-chiu.

82.What is therefore left of Mr Yu’s argument is the mere fact that the Legislature did not use the occasion to reverse the majority’s interpretation of “agreeing to pay”.  Can one reasonably read this to mean a tactic approval, endorsement or adoption of the majority’s interpretation as the correct interpretation of the words?

83.I do not think so.  Having considered the relevant legislative records that Mr Yu has invited this Court to look at, it is plain that the predominant concern of the Executive and Legislature was to “restore the position to that which it was thought to be – namely a right of action for liquidated damages for wages in lieu of notice”.  This makes perfect sense when read in the factual context of Yip Wan-chiu, where the unfortunate plaintiff was only awarded $40 as nominal damages when her average monthly income had been $600.  To the Executive and Legislature, the enactment would provide a quick and certain means for the innocent party (particularly a manual worker – back in those days, the Ordinance only applied to manual workers but not generally) to claim compensation for wrongful termination.  That was their immediate concern.  I do not believe that either the majority’s interpretation, or that of the minority’s, which are obiter views in any event, was at the forefront of the Executive’s or Legislature’s mind.  As I said, whether the majority’s or the minority’s interpretation be correct, section 8A is still required to restore the position to that which it was always thought by the Executive to be.

84.On the facts and materials available, I therefore reject Mr Yu’s argument based on tacit legislation.

85.In my view, the minority’s interpretation has always been and remains the correct interpretation of section 7.

D1’s notice short by one day?

86.For the reasons given in Yuen JA’s judgment, I also reject the     appeal based on this ground.  I have nothing useful to add.

Hon Stock JA:

87.Accordingly this appeal is dismissed, with a costs order nisi that the costs of the appeal be paid by the Plaintiff to the Defendants.

Mr Benjamin Yu SC and Mr Jin Pao instructed by Kao Lee & Yip for the Plaintiff (Appellant)

Mr Russell Coleman SC instructed by Sidney Austin for the Defendants (Respondents)