CAPTAIN J V McCARTHY v. CATHAY PACIFIC AIRWAYS LIMITED and Another

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

LABOUR TRIBUNAL APPEAL NO.152 OF 1995

(ON APPEAL FROM CLAIM NO. E1139 OF 1995)

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J U D G M E N T

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1. The Respondent was a pilot first employed by Cathay Pacific Airways Ltd (CPA) in August, 1974. From 29 March, 1994 until August 1994, he became employed by the Appellant when he elected to join the Basings Programme. This was a programme introduced by CPA to enable an employee of CPA to become an employee of the Appellant and thus able to reside in his home country. At the same time, when the employee leaves CPA to join the Appellant, he would have his entitlement from the Provident Fund, which is not subject to tax, paid to him. The other terms of employment would remain the same upon transfer to the Appellant. The Respondent's employment was terminated in January 1995.

2. The practice of CPA is that each year there would be negotiations between CPA and the staff unions on pay rise and other terms of employment. Following this practice, negotiations for the pay rise for 1994 started towards the end of 1993 and they continued through to 1994 until they broke down in July 1994.

3. The offer from CPA was 5% + $150 for all employees and there was also a proposal on "increasing productivity". The HKAOA was the union representing the pilots who at the time were paid on two different scales: A scale and B scale depending on experience. The HKAOA suggested that the two scales system should be abolished and there should be only one scale and that was the A scale. CPA rejected this suggestion from the HKAOA. With the exception of the HKAOA, all other unions accepted the offer of 5% + $150 and the increase on that basis was credited to all employees of these other unions. By March, 1994, no agreement was reached on the increase with the HKAOA. All members of the HKAOA were not given an increase for the time being pending the outcome of the ongoing negotiations.

4. The Respondent was a member of the HKAOA and because he was to be transferred to the Appellant from end of March, 1994 as a result of his electing to join the Basings Programme, he became anxious to ascertain what the increase would be. The increase would have a significant effect on his Provident Fund calculations which are based on his last salary with CPA. In fact on 14 March 1994, the Director of Flight Operations had informed the Respondent that his Provident Fund calculations would be based on the salary he was receiving, i.e. without the 5% + $150. Being alarmed of his impending loss, on 15 March 1994, the Respondent wrote to the Director of Flight Operations on the following terms:

"Provident Payment

I am one of those taking a base late this month. My last date in CPA Hong Kong is the 28th March.

I could not attend AOA meetings on salary for 1994 but I have read your letters on the subject and so I am aware of the 'withholding' of the general 5% award. Rather more alarming for me, as I am sure you are aware, is that the Provident Fund calculation has been made on the lower monthly salary.

I would be very obliged if you would authorise that, for the calculation of the Provident Fund sum, the 5% be included in my salary. I believe no precedent would be set by this action."

5. The following day, 16 March 1994, the Director of Flight Operations wrote back in the following terms:

"As requested, the Company offer of 5% plus HK$150 will be included in your salary and Provident Fund calculation without prejudice."

6. It is not disputed that the letter of 16 March 1994 was acted upon by CPA. When the Respondent, left CPA, he was paid Provident Fund and salary according to the terms of that letter, i.e. with the increase included in the salary and Provident Fund calculations. During his time with the Appellant, the Respondent's salary was also on the new scale.

7. The negotiations between CPA and HKAOA broke down in July, 1994. CPA then came up with its own offer to the pilots of an increase of 5% from January to June 1994 and a further increase of 3% from July 1994 onwards but with a demand for higher productivity. If this was not accepted, they would have no increase and there would be no demand for higher productivity. The Respondent did not accept this offer. CPA took the view that there was an overpayment to the Respondent because they regarded the Respondent who did not opt for the new terms of service, was still on the old salary. Without prior notice, the Appellant deducted from the Respondent's salary for August 1994 the amount of $53,608.75 which was said to be the total amount of over-payments from January, 1994. The Appellant subsequently acknowledged that it was not justified in deducting this whole amount from the salary for the month of August of the Respondent because it was in excess of 25% of the Respondent's salary for the month and therefore against the law.

8. The Respondent claimed at the Labour Tribunal this sum on the ground that the deductions were not justified.

9. At the hearing before the Presiding Officer at the Labour Tribunal, the Respondent relied on the two letters of 15 March and 16 March and contended that these form a binding agreement between the parties. The case of the Appellant was that these did not create any binding agreement in view of the words "without prejudice" at the end of the DFO's letter. There was some arguments as to whether such a letter could be produced in evidence because of these words in it. The letters were in any event adduced in evidence and the parties agreed that they could be relied upon by the Tribunal. As to the meaning of the words "without prejudice", the Presiding Officer held they had the same meaning as in correspondence between lawyers in the sense that it serves to protect the writer and to prevent the other party from relying on it if the terms proposed are not accepted. He found that there was a binding agreement and cited in support the following passage from Walker v Wilsher (1889)23 QBD 335:

"If the terms proposed in the letter are accepted a complete contract is established, and the letter, although written without prejudice, operate to alter the old state of things and to establish a new one. A contract is constituted in respect of which relief by way of damages or specific performance would be given."

10. The main ground of appeal is that on a true construction the words "without prejudice" in the letter dated 16 March 1994 meant that CPA would be entitled to revoke the pay award referred to in the letter and to require the Respondent to repay; the letters do not constitute a binding contract between them. A subsidiary ground is that the letter was from CPA and not the Appellant and the Appellant never agreed to the increase.

11. Mr Chan for the Appellant submitted that the words "without prejudice" in the letter of 16 March 1994 were there to indicate that the acceptance of the request by the Respondent was conditional, i.e. if the final award reached in the negotiations was less than 5%, then CPA was entitled to ask for a refund. Alternatively, these words meant that the acceptance was an interim measure pending the outcome of the negotiations or it was just a temporary agreement. Further, he submitted, the request was for the inclusion of the increase for the calculations of the Provident Fund and by that, I take it that he meant that CPA had no intention to give the increase to the Respondent and it was included notionally for the purpose of calculations only. The intention he submitted was that the arrangement was not irrevocable and CPA could change the arrangement in the letter when an agreement with the HKAOA was reached. However, Mr Chan conceded that without the words "without prejudice", there would be a binding agreement between the parties.

12. Mr Coleman for the Respondent submitted that the language used by the parties in the two letters taken against the factual matrix, clearly show they intended to form a binding contract. Though negotiations were between CPA and the unions, an individual employee may be employed on different terms. Mr Coleman submitted what CPA was worried was that the agreement between CPA and Respondent might form a precedent on which other employees might rely to bind CPA and the words "without prejudice" were directed to indicate that this was not to set up a precedent. It is unlawful to calculate Provident Fund on a notional salary, and the calculations of the Respondent's Provident Fund must be on his actual salary.

13. The language of the two letters of 15 and 16 March 1994 is clear. The letter of the 15th was a request to have the increase included in the Respondent's salary. Against the background that increase for pilot for 1994 was still pending an agreement between CPA and the HKAOA, the Respondent in his letter of the 15th was in effect asking CPA to treat his case independent of any future agreement reached between CPA and the HKAOA. Because of his forthcoming departure to join the Appellant, he was prepared to accept the 5% + $150 originally offered to everyone and which CPA was quite prepared to give if there was no such suggestion by the HKAOA on the change in the A and B scales for pilots. The Director of Flight Operation must be aware that calculations of Provident Fund was based on actual salary at the end of the employment and could not have been on a notional salary. In his letter of the 16th, he unequivocally accepted the request to treat the Respondent individually and include the increase in the calculations of the Provident Fund as well as the Respondent's salary. It was clear that the parties intended to be bound by this agreement. This arrangement could not be said to be temporary or conditional, revocable or subject to change when the negotiations reached an agreement. It may be that the words "without prejudice" were included in the letter of the 16th by the Director to prevent the case from becoming a precedent since there was no precedent at the time, these words do not change the binding effect of this agreement. In any case, this agreement was acted upon by the parties with CPA paying the Respondent his Provident Fund and salary on the new scale and the Appellant paid the respondent similarly on the new scale. The Presiding Officer was right in holding the letters created a binding agreement.

14. The Appellant continued to employ the Respondent after 28 March 1994 on the same terms and conditions of employment. The Appellant paid his salary on the new scale. Appellant deducted from the Respondent's salary the increased amounts for the months of January 1994 to August 1994 and this period included the period the Respondent was employed by CPA. All the evidence show that Appellant agreed to pay the Respondent on the basis of the agreement between the Respondent and CPA. Appellant is bound by this agreement and the deductions cannot be justified.

15. The award made by the Presiding Officer is correct and the appeal must be dismissed. There shall be costs to the Respondent.

(Arthur Leong)

Judge of the High Court