HU YANGYONG v. ALBA ASIA LTD

HCA 1135/2019

[2020] HKCFI 2773

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1135 OF 2019

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DECISION

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Introduction

1.  There are 2 summonses for determination taken out by ALBA Asia Limited (“the Defendant”) in this action[1] commenced by Hu Yangyong (“the Plaintiff”) for damages for wrongful dismissal:

(A) An Amended Summons dated 6 May 2020 (“the Amended Summons”) seeking

(1)    a declaration that this Court should not exercise any jurisdiction it may have against the Defendant; alternatively,

(2)    a stay of all further proceedings and an interim stay of proceedings pending the determination of the present action; and

(3)    an order that §§25, 38 and 39 of the Statement of Claim (“SOC”) be struck out on the ground that they are without prejudice communications.

(B) A summons dated 23 September 2020 (“the Expunge Summons”) for an order expunging

(1)    various paragraphs of the affirmation of the Plaintiff dated 28 June 2020 filed in opposition to the Amended Summons and

(2)    certain pages within exhibit HY-1.

Background facts

2.  This is a wrongful dismissal case brought by the Plaintiff who was engaged by the Defendant, a Hong Kong company, as its Chief Operating Officer for 3 years under an Employment Agreement dated 6 April 2017 with an annual salary and working bonus totaling RMB 2 million or HK$2.25 million.

3.  On the same day, the Plaintiff entered into a Service Agreement with ALBA Hong Kong Limited (“ALBA HK”) also for 3 years to provide consultancy services for a fixed annual fee of RMB 200,000 or HK$225,000.

4.  The Service Agreement but not the Employment Agreement contained an exclusive jurisdiction clause in favour of the Shanghai courts.

5.  The Defendant terminated the Plaintiff’s employment on 7 September 2018. That led to the termination of the Service Agreement.

6.  The Plaintiff’s claim is for wrongful dismissal. The defence is that the Plaintiff was terminated for cause.

7.  What transpired at meetings between the Plaintiff and the Defendant’s representatives on (i) 23 April 2018 (“the April meeting”); and 6 September 2018 (“the 2018 meeting”) are at the heart of the strikeout and expunge applications.

The Court’s directions of 25 September 2020

8.  At the close of business on 23 September 2020, the date the Expunge Summons was taken out, the Defendant made an urgent request by letter for the early determination of the Expunge Summons on the basis that the matters sought to be expunged are inadmissible for the purposes of the hearing of the Amended Summons. 

9.  In view of that request, on 25 September 2020, the Court directed that the Expunge Summons be heard immediately prior to the Amended Summons. At that stage, the hearing bundles had not been lodged.

10.  Having obtained those directions on an urgent basis, the Defendant appears to have changed its mind. Its written submissions addressed the stay application sought in the Amended Summons first rather than the Expunge Summons. It now takes the view that the “grounds for expunging … mirrors (sic) the reasons” for strike out relief prayed for in §3 of Amended Summons.

11.  The upshot is that the directions were totally unnecessary. It was a waste of judicial resources and the Court’s time in giving directions which, in the event, the Defendant decided was unnecessary. Such irresponsible conduct is to be deprecated.

12.  Mr Justin Ho, counsel for the Plaintiff, submitted that the Expunge Summons is entirely redundant because it adds nothing to §3 of the Amended Summons[2]. I accept that submission: if the materials covered by the strikeout application are without prejudice materials, they will be inadmissible for the future conduct of the action, or if they are not, they will remain admissible. 

13.  The Expunge Summons can only be addressed if the Defendant first establishes that the April and September meetings were without prejudice meetings. In other words, its fate hinges on the outcome of the strikeout application. If the Defendant were to succeed in the strikeout, it follows that the materials that go to the subject matter of those meetings would be inadmissible at trial.

The Amended Summons

14.  Although the Amended Summons seeks a stay of all further proceedings, it now transpires from the Defendant’s written submissions that the Defendant does not require a stay as there are no pending proceedings in the Shanghai courts.

15.  In respect of §2 of the Amended Summons, a stay is sought but only in relation to the Plaintiff’s claim for the loss of service fees under the Service Agreement.

16.  The “loss of service fees for the Service Agreement” from 1 September 2018 to 31 May 2020 was one of the various items of loss claimed by the Plaintiff for wrongful termination of the Employment Agreement.

The stay application

17.  The Defendant’s stay application is grounded on its entitlement to rely on the exclusive jurisdiction clause notwithstanding the fact that it is not a party to the Service Agreement.

18.  To facilitate a better understanding of the issues arising,the Organisation Chart of the Defendant and Related Companies[3] is reproduced below:

19.  As earlier noted, the Plaintiff’s Employment Agreement was terminated by the Defendant on 7 September 2018.

20.  3 days later, by letter dated 10 September 2018 (“the ALBA HK termination letter”), ALBA HK terminated the Service Agreement with immediate effect. §4 of that letter reads as follows:

“It was a common understanding that your employment contract with [the Defendant] and the service agreement with [Alba HK] are closely tied to each other. The summary dismissal issued by [the Defendant] on 10[4] September 2018 has led to the termination of the service agreement with [Alba HK] (under the Clause VI. 2[5] of the service agreement) with immediate effect.”

21.  There is no dispute and it is common ground that the Service Agreement was lawfully terminated and as stated in the ALBA HK termination letter of 10 September 2018, the termination of the Employment Agreement “led to” the termination of the Service Agreement.

22.  Mr Singh, counsel for the Defendant, submitted that the Employment Agreement and the Service Agreement are separate and independent contracts, albeit closely linked. The cause for the Plaintiff’s summary dismissal was the Plaintiff’s misconduct in failing to comply with the legal and contractual requirements for claiming reimbursement expenses under §§2 and 3(b) of the Employment Agreement and the same cause was used to terminate both Agreements.

23.  The point sought to be made was that the termination of the Service Agreement was not “automatic” upon the termination of the Employment Agreement. The termination of the Service Agreement was said to be for cause under Clause VI. 3(a).

24.  Sub-clause 3 (a) gives ALBA HK the right, inter alia, to terminate the Service Agreement with immediate effect if: “a) [the Plaintiff] fails to comply with any obligation of this AGREEMENT”.

25.  The “Agreement” referenced[6] would be the Service Agreement. That is clear from the opening line of the Service Agreement which states:

“This service agreement (hereinafter referred to as “AGREEMENT”) …

26.  The difficulty with the Defendant’s submissions is that the misconduct complained of arose in relation to the provisions of the Employment Agreement. It did not arise in relation to any of the provisions of the Service Agreement: there was no breach of any Service Agreement provision.

27.  Implicit in the ALBA HK termination letter is the submission that because the Defendant is part of the ALBA Group, its wholly-owned subsidiary (ALBA HK) is entitled to “piggyback” on and/or take advantage of any breach of an Employment Agreement provision on the basis that the duties were also owed to parent, namely, the ALBA Group. Further, that had the effect of enabling its wholly-owned subsidiary ALBA HK to treat the misconduct as arising under the Service Agreement although the basis for reaching that conclusion is not evident.

28.  The Defendant went to great lengths to highlight the copious references to the ALBA Group in the Employment Agreement to demonstrate that the Plaintiff’s duties were not only owed to the Defendant but to the ALBA Group.

29.  So far as the Service Agreement is concerned, other than reciting that ALBA HK is a member of the ALBA Group, the only references to the ALBA Group are in Clause II. 5 (prohibiting the Plaintiff from accepting gifts from any person/company who/which has a business relationship with the ALBA Group) and Clause V. 1 and 2 (which concern post termination restrictions). The Employment Agreement is not even mentioned.

30.  What the Organisation Chart shows is that while both the Defendant and ALBA HK have a common parent, namely, the ALBA Group and in that sense they are related/associated companies, the ALBA Group’s interest in the Defendant is a 40% minority interest in a Joint Venture by the name of ALBA International Recycling GmbH between Chengdu Zhongde Techcent Investment Co (“Techcent”) and ALBA International Holding GmbH (“ALBA International”) (“the JV”). The JV owns 100% of the Defendant. ALBA Group’s interest is therefore an indirect interest through the JV.

31.  It is a central pillar of the Defendant’s submission that because of this linkage through a common parent, not only could ALBA HK invoke and rely on the alleged breach of the provisions of the Employment Agreement as triggering Clause VI. 3 of the Service Agreement, the Defendant is similarly entitled to rely on the exclusive jurisdiction clause in the Service Agreement.

32.  No authority was cited to support the submissions made in §§27-28 and 31 above.

33.  Reference was made to Lord Scott’s speech (at §60) in Donohue v Armco Inc [2002] CLC 440. In that case, the alleged fraudulent misrepresentation had been made by 2 individuals jointly, one of whom but not the other was party to the agreement entitled to the benefit of an exclusive jurisdiction clause. It was held that the nonparty could benefit from an anti-suit injunction sought by the party to the agreement when both parties were being sued.

34.  I cannot see how Donohoe can assist the Defendant since, in the present case, only the Defendant and not also ALBA HK is party to the action.

35.  It is the Plaintiff’s case that the two agreements formed one overall package for the Plaintiff’s employment with the ALBA Group. The Plaintiff explained that that the need for 2 agreements arose from his requested and agreed salary of RMB 2.2 million per annum for his services.

36.  Techcent, the Chinese majority shareholder in the JV was only agreeable to paying RMB 2 million per year as stipulated under the Employment Agreement. The additional RMB 200,000 would be paid under the Service Agreement with ALBA HK which is part of the ALBA Group and unlike the Defendant is not a JV company.

37.  According to the Plaintiff, the Service Agreement was an administrative arrangement and that it was the common understanding that the 2 agreements were closely tied and termination of the Employment Agreement would constitute a good cause for the early termination of the Service Agreement.

38.  The question as to which of the competing versions is correct is a matter to be resolved at trial.

39.  For present purposes, the only issue to be decided is whether the Defendant has made out a case for a stay.

40.  Given the structure of the ALBA Group, the notion that the Defendant which is wholly owned by the JV and in whichthe ALBA Group only has an indirect minority interest is entitled to invoke the exclusive jurisdiction clause contained in a separate agreement is novel and runs contrary to the basic principles of contract law.

41.  As the ALBA HK termination letter itself states, the termination of the Employment Agreement “led to” the termination of the Service Agreement. In other words, the termination of the Service Agreement was a consequence or result of the summary dismissal.

42.  If the Plaintiff were to succeed in his claim for wrongful dismissal, prima facie, his loss of remuneration under the Service Agreement would be an item of consequential loss.

43.  The Defendant’s contention (that it is entitled to invoke the jurisdiction clause to stay the claim for loss of remuneration), if correct, would mean that the Plaintiff would have to commence proceedings in the Shanghai courts to recover that item of loss. But who would he sue? And what would be his cause of action when it is not his case that ALBA HK had wrongfully terminated the Service Agreement?

44.  The Defendant submitted that if the “agreement” is covered by Shanghai law it would be a question of Shanghai law (being the law with the closest and real connection) as to who is to be sued and how and is not a question to be answered by the Hong Kong courts based on Hong Kong law.  

45.  But the “agreement” referred to in §44 above is the Employment Agreement. The Defendant’s submission is premised on the exclusive jurisdiction clause being applicable when that is the very question to be determined. It is nothing short of trying to pull oneself up by one’s own bootstraps.

46.  In my view, the Defendant’s submissions are misguided and have no proper legal basis. I see no reason for staying this head of claim. It follows that the stay application must be dismissed.

The strikeout application

47.  This relates to §§25, 38 and 39 of the SOC:

(1) §25 concerns a meeting held on 23 April 2018 between Stephen Schwartz (“Mr Schwartz”), Stefan Schmierer (“Mr Schmierer”), Huinink Tobias (“Mr Tobias”) and the Plaintiff (“the April meeting”).

(2) §§38 and 39 concern a meeting held on 6 September 2018 between Mr Schmierer and Mr Loren (lawyers representing the Defendant) and the Plaintiff (“the September meeting”).

48.  The Defendant seeks to strike out those paragraphs on the basis that they refer to “without prejudice” communications.

49.  The principles applicable to the determination as to what constitutes without prejudice communications are set out in Poon Loi Tak v Poon Loi Cheung Desmond [2019] HKCFI 3003 at §13 (1). A party claiming without prejudice privilege on a communication would have to show that it was made (i) at a time when there was an existing dispute between the parties; (ii) legal proceedings had been commenced or were contemplated; (iii) the communication was made in a genuine attempt to further negotiations to settle the dispute; (iv) it was made with the intention that if negotiations failed it could not be disclosed without the consent of the parties.

(1) The April meeting

50.  According to the Plaintiff, on 14 March 2018 he met with Mr Schwartz (“the March meeting”) who told him that Axel Schweitzer (“Mr Schweitzer”) had ‘wanted’ to terminate the Plaintiff’s employment due to poor performance at the Baosteel ELV yard project. The Plaintiff informed Mr Schwartz that if the Defendant were to do so, it would have to pay the Plaintiff his outstanding wages for the remainder of the contract. Mr Schwartz replied that he would relate that response to Mr Schweitzer.

51.  Mr Schwartz’s affirmation dated 15 May 2020 (“Schwartz 1”) filed in support of the strikeout application made no mention of the March meeting at all.

52.  Rather, it was Mr Schwartz’s ‘understanding’ that in early April, the Defendant was concerned about potential misconduct[7] on the Plaintiff’s part and his poor performance. In §7 of Schwartz 1, he stated that the dissatisfaction led to the Defendant’s “decision to terminate” the Plaintiff’s employment; that with a view to easing the Plaintiff into such a decision, the Plaintiff was “informally” informed of such intention; that the Plaintiff did not agree with the decision which quickly descended into “a state of dispute”.

53.  The difficulty with that evidence is the lack of specifics: no particulars were given as to when the “decision” was taken and in what form, how the Plaintiff was “informally” informed, and when the “state of dispute” arose.

54.  For the communications at the April meeting to be without prejudice, it has to be shown that there was an existing disputebetween the parties at the time.

55.  Although it is asserted in Schwartz 1 that the Plaintiff was invited to attend a “without prejudice negotiation” on 23 April 2018, the email exchanges between 19 and 23 April 2018 only show that the Plaintiff was asked to attend a meeting in Hong Kong on 23 April. There was no statement that the meeting was to be “without prejudice”.

56.  §25 of the SOC sought to be struck out is the Plaintiff’s account of the communications at the April meeting.

57.  On the basis of the matters described in §52 above, the “dispute” existing at the time of the April meeting would be whether the decision to terminate the Plaintiff’s employment was justified. But for there to be a dispute, there must first be clear evidence of the decision to terminate and communication of that decision to the Plaintiff.

58.  In the absence of evidence to pinpoint a specific time when the decision was made and evidence to show how that decision was communicated to the Plaintiff, viewed objectively, there was no existing dispute at the time of the April meeting.

59.  The Defendant attached significance to the fact that a lump sum offer was made to the Plaintiff at the April meeting, citing Forster  v Friedland [1992] WL 1351421 where Hoffman LJ (as he then was) remarked that:

“…parties are free to make open offers or negotiate openly to settle their differences. The fact that a communication is aimed at settlement may be an indication - even a strong indication - of an intention that it should be without prejudice but the rule will not apply if the court concludes that the communication was in fact intended to be open.”

60.  However, those observations were made in the context of the Court having found that the discussions were initiated by the defendants at a time when litigation had been threatened by the plaintiffs and there was a dispute between them as to whether there was a legally binding agreement in relation to the acquisition of shares. That is not the case here.

61.  Moreover, no legal proceedings were on foot or contemplated at the time of the April meeting. Although the Defendant sought to characterise the Plaintiff’s response at the 14 March meeting (that the Defendant would have to pay the remaining wages for early termination) as a ‘threat’ of legal proceedings, all the Plaintiff was doing was to point out the natural consequences of early termination without cause.

(2) The September meeting

62.  The following is a summary of events leading up to the September meeting:

(a)      The Defendant failed to reimburse the Plaintiff for his June 2018 out-of-pocket expenses under the Employment Agreement.

(b)      On 1 August 2018, the Plaintiff filed a claim in the Labour Relations Division (LR-11-2018-0973) against the Defendant for reimbursement of, inter alia, the June 2018 out-of-pocket expenses.

(c)      The first occasion the Defendant took issue with the out-of-pocket expenses claimed was on 10 August 2018 on the basis that they were unacceptable.

(d)      Following an unsuccessful conciliation meeting on 14 August 2018, the Plaintiff filed a claim at the Labour Tribunal (LBTC 2470/2018) against the Defendant on 15 August 2018 for overdue reimbursement of June and July 2018 expense payments.

(e)      The Plaintiff was suspended from work for 14 days on 23 August 2018. His request made on 25 August 2018 for the grounds for suspension went unanswered.

(f)      On 4 September 2018, the Plaintiff was asked to attend a meeting on 6 September regarding the issue of his suspension.

63.  When the September meeting was convened, the Plaintiff though suspended from work was still the Defendant’s employee. He was only given a letter of termination on 7 September 2018.

64.  By the date of the September meeting, the evidence concerning the decision to terminate remained as described in §58 above.

65.  There were legal proceedings on foot in the form of the Labour Tribunal claim for overdue reimbursement of out-of-pocket expenses. The Plaintiff had still not been told the grounds for his suspension other than that the Defendant considered them unacceptable and the September meeting was convened to discuss that issue.

66.  On those facts, while it could be said that there was an existing dispute over the Plaintiff’s entitlement to overdue reimbursement of expenses, there was no existing dispute relating to early termination when the September meeting commenced.

67.  If I am wrong in finding that the communications at the April and/or September meetings are not privileged, it will be necessary to consider whether the exceptions to inadmissibility of without prejudice communications apply.

(3) Exceptions to inadmissibility

(a) Unambiguous impropriety

68.  This requires an evaluation of whether the threats unambiguously exceeded what was “permissible in settlement of hard fought commercial litigation”: see Ferster v Ferster [2016] CP Rep 42 at §23 and Boreh v Republic of Djibouti [2015] 3 All ER 577 at §132.

69.  In Ferster, the reasons[8] for the finding that the threats did unambiguously exceed what was proper were the following: (i) it was a threat of criminal action; (ii) the threats were said to have serious implications for the other party’s family; (iii) the threats were of immediate publicity being given to the allegations; (iv) the purpose of the threats was to obtain immediate financial advantages which should accrue if they had basis in fact to a party other than the person making the threats; and (v) there was no attempt to make any connection between the alleged wrong and the increased demand.

70.  The Court was provided with a transcript of the September meeting.

71.  Mr Lorenz repeatedly stated that “we do have an ICAC case here” in relation to the documents submitted by the Plaintiff for reimbursement. He threatened to file a criminal complaint to the ICAC, noting the latter’s 90% success rate, a decision of the Court of Final Appeal in favour of the ICAC and emphasising that severe consequences would follow from an ICAC investigation: see §§35-37 and 40 of the transcript.

72.  As regards the other elements stated in Ferster, the following extracts from the transcript of statements made by Mr Lorenz are particularly informative:

(i)     §41: “ … but think about the consequences, they can disappear, our costs to clean the mess up you created are pretty high because many of the books have been opened up … And the point is if you want to take it on, do it, or if you say, you know what, you have other things to do, we talk about a number.”

(ii)     §100: ... I honestly am not aware of any official investigation, not from the tax department, not from ICAC, even in China … As we talk, nothing has started yet so nothing yet to be afraid today. I think you can be pretty sure that it can remain as such, I mean if you don’t submit documents nothing happens, then nobody really knows about it … So if you say it might make more sense to continue life and we talk about the number and that’s okay … I can honestly promise you that we are not going to submit anything and we will take all the documents under lock and destroy it.

(iii)     §114: “At the moment, the ICAC doesn’t know anything about it, the crime division doesn’t know anything about it. The tax department does not know anything about it … but we can take it out. …We clean it up …”

(iv)     §120 : “Do you want the company to start now with Mr Schmierer the ICAC procedure, do you want that?”

(v)     §143: “… The door is open. If you come up with another proposal, maybe it doesn’t make sense for the next 2 years to have trouble with all the authorities in China, Germany and in Hong Kong, the police, ICAC. It is still possible if you are reasonable, I think it is possible to sit together …”.

73.  The passages highlight repeated pressure being put on the Plaintiff to settle his claim with the Defendant who would otherwise be contacting the ICAC.

74.  As the Defendant had intimated on 10 August that the expense claims submitted were ‘unacceptable’, the natural consequence would have been to reject those claims and continue to contest the Labour Tribunal claim. In so far as it was considered to be a ground for summary dismissal, the matter would be resolved in the present action. I agree with the Plaintiff, there was no attempt to tie the threat to make a criminal report to the settlement of the civil dispute.

75.  The Plaintiff further submitted that the threat did not have any basis as it is unclear what criminal complaint there would be. Although there was a reference to “section 9 of the ordinance[9]” there was no explanation as to why the Plaintiff would have contravened that provision.  

76.  The extracts from §§100 and 114 of the transcript (see §72 (ii) and (iii) above) speak for themselves: they show the intention to destroy allegedly incriminating evidence should the Plaintiff agree to settle his claim with the Defendant.

77.  In my view, the Plaintiff has discharged the burden of showing “unambiguous impropriety” and the exception to inadmissibility of without prejudice communications applies.

(b) Waiver

78.  The Plaintiff’s backstop submission is that without prejudice privilege has been waived.

79.  In the Labour Tribunal claims filed by the Plaintiff, he relied specifically on the contents of the April meeting on 5 occasions and the contents of the September meeting on 3 occasions. The Defendant who was legally advised throughout the LT proceedings made no objection to the Plaintiff’s reliance on those matters to advance his case. In fact, the Defendant also deployed the contents of the meetings in its defence.

80.  It was held in Faithorn Farrell Timms LLP v Bailey [2016] ICR 1054 that without prejudice privilege could be waived with the agreement of both sides. In that case, the claimant had openly referred to the material in question in her claim to the employment tribunal, as had the respondent in the response, without either party objecting and it was held that it clearly demonstrated that the parties had agreed that any privilege should be waived.

81.  In Briggs v Clay & Others [2019] EWHC 102 at §80, after reviewing relevant authorities Fancourt J held that those cases establish that

“when a party to without prejudice negotiations deploys the content of without prejudice negotiations as evidence on the merits of the claim, even for a limited purpose, he thereby waives his right to insist on the protection of the rule in relation to those negotiations if the counterparty accepts that the negotiations may be referred to.”

82.  Mr Singh sought to distinguish the Faithorn case on the basis that the materials were referred to at the hearing on the merits and in the present case there had been no hearing on the merits in the Labour Tribunal.

83.  He also relied on the obiter dictum in Brunel University v Vaseghi [2007] EWCA Civ 482 at §40 where Smith LJ suggested that waiver of without prejudice privilege by deploying material in Tribunal documents was not irrevocable in that it might be retracted by an application to amend those documents.

84.  However, Smith LJ’s observations did not stop there. He noted (in §40) that whether a party would be granted leave to amend (i.e. to retract) was up to the tribunal who had a discretion to grant or refuse such relief and in his view the time at which the application was made would be highly relevant. If made shortly after it had been filed, it might have a good chance of success. So also would the extent of the consequential amendment of the case be significant. If the “without prejudice” material were peripheral to the case the amendment might be allowed morereadily than where the effects of amendment were to be radical. 

85.  In the present case, the Labour Tribunal proceedings were transferred to this Court in June 2019. As no application has even been made by the Defendant to withdraw/revoke references to without prejudice material, it seems to me that it is now far too late for it to do so. Moreover, the “without prejudice” material were hardly peripheral to the Plaintiff’s case. The effects of amendment would be radical.

86.  In summary, it is my view that the without prejudice privilege (if any) has been waived by the Defendant.

Conclusion

87.  For the reasons set out above,

(1) the Defendant’s applications (a) to stay the loss of service fees claim and (b) to strike out §§25, 38 and 39 of the SOC, and

(2) the Expunge Summons

must be dismissed.

88.  There is to be an order nisi of costs in favour of the Plaintiff with certificate for 2 counsel such costs to be summarily assessed and payable forthwith. Directions will be given separately for summary assessment.

89.  The parties are directed to submit agreed minutes of order for approval within 14 days of this Decision.