ICAP (HONG KONG) LTD v. ELAINE CHAN

HCA 636 & 637/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 636 & 637 OF 2007

(On transfer from Labour Tribunal Claim Nos. LBTC 1125 & 1126 of 2007)

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J U D G M E N T

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Introduction

1.  These actions were consolidated by order of Mr Registrar Chan on 2 May 2007.

2.  The plaintiff is a company incorporated in Hong Kong carrying on the business of inter-dealing broking.  The plaintiff is a subsidiary of ICAP plc which is the world’s premier and largest inter-dealer broker.

3.  The 1^st defendant (“Chan”) was formerly an employee of the plaintiff on its equity desk.  She was the head of the equity desk.

4.  The 2^nd defendant (“Kwok”) was also formerly an employee of the plaintiff on its equity desk.  He was the deputy head of the equity desk.

5.  By letters dated 29 November 2006 Chan and Kwok respectively gave advanced notice to the plaintiff of their resignations and of the termination of their employment with the plaintiff at the end of the notice period specified in their employment contract with the plaintiff.  They also reserved their right under s. 7(2) of the Employment Ordinance Cap, 57 (“the Ordinance”) to leave the plaintiff earlier by paying or agreeing to pay the plaintiff wages in lieu of notice for the balance of the unserved notice period.

6.  By letters dated 30 November 2006 Chan and Kwok respectively notified the plaintiff that each of them agreed to pay wages in lieu of notice for the balance of their unserved notice period from 30 November 2006 until the expiry of the notice period thereby terminating their employment with immediate effect under s. 7(2) of the Ordinance.

7.  The undisputed evidence is that on the same day as Chan and Kwok sent their letters dated 29^th November 2006, 5 other brokers also sent almost identical letters terminating their employment with the plaintiff.  Chan and Kwok and the 5 other brokers all left to join Nittan Capital (Hong Kong) Limited (“Nittan HK”).  This was almost the whole of the plaintiff’s equity desk.

8.  On 8 December 2006 Messrs Tanner de Witt on behalf of Chan enclosed with their letter to the plaintiff a cheque in the sum of HK$3,049,354.80 in payment of wages in lieu of the remaining 13 months and 8 days of the notice period (from 30 November 2006 to 8 January 2008).

9.  The sum of HK$3,049,354.80 was calculated solely by reference to the monthly salary of HK$230,000 which would have accrued to Chan for the balance of the notice period, which was taken as being 13 months and 8 days.  It is undisputed that in fact Chan’s then monthly salary was only HK$225,000 and that the balance of the notice period was only 13 months and 9 days.  Chan has therefore tendered an excess of HK$58,790.30 in respect of which the plaintiff is prepared to give credit to Chan.

10.  Also on 8 December 2006 Messrs Tanner de Witt on behalf of Kwok enclosed with their letter to the plaintiff a cheque in the sum of HK$1,988,709.60 in payment of wages in lieu of the remaining 13 months and 8 days of the notice period from 30 November 2006 to 8 January 2008.

11.  The sum of HK$1,988,709.60 was calculated solely by reference to Kwok’s then monthly salary of HK$150,000 which would otherwise have accrued to him for the balance of the notice period, which was taken as being 13 months and 8 days when in fact it was 13 months and 9 days.  There is a shortfall of HK$5,000 which was tendered to the plaintiff by cheque on 6 August 2008.

12.  As I have said, the sums tendered on behalf of Chan and Kwok respectively were calculated solely by reference to their monthly salary.  It did not take into account any bonus or any loyalty payments that had been made to them in February 2005 to which I shall refer below.

The plaintiff’s claims

13.  The plaintiff’s case is that under s. 7(2) of the Ordinance, as it was at the material time in 2006, the payments of Chan and Kwok in lieu of notice ought to have included a payment equivalent to the bonus that they would each otherwise have respectively earned during the balance of the notice period i.e. from 30 November 2006 to 8 January 2008 under their contracts of employment.

14.  As its primary case (“the primary case”), the plaintiff claims against Chan and Kwok on the premise that the equity desk would have earned no less revenue from 1 October 2006 to 31 March 2007 and from 1 April 2007 to 30 September 2007 as was achieved in the same periods in the previous year.  On this basis the plaintiff’s case is that Chan and Kwok would have earned no less remuneration by way of the bonus for those periods as was achieved in the same periods in the previous year.  On the primary case the claim against Chan is for the sum of HK$19,480,000 being the total bonus paid to her for the same period in the previous year.  The claim against Kwok is for the sum of HK$13,401,000 being the total bonus paid to him for the same period in the previous year.

15.  The plaintiff’s alternative case (“the alternative case”) is on the basis that since almost the entire equity desk left the plaintiff to join Nittan HK it may be appropriate to assess the amount of bonus to Chan and Kwok respectively by reference to the brokerage revenue generated by their new employer Nittan HK.  On the evidence Nittan HK generated brokerage revenue in the total sum of HK$74,802,244.79 from 1 December 2006 to 30 September 2007 and the plaintiff estimates the bonus pool to be HK$35,342,000.  On the undisputed evidence Chan and Kwok had been receiving an average of 52.33% and 37.78% respectively of the bonus pool from October 2004 to September 2006 when employed by the plaintiff and on this basis the alternative case is that the estimated bonus payable to Chan and Kwok respectively during the balance of the notice period would have been HK$18,496,000 and HK$13,351,000 respectively.  On the alternative case the plaintiff claims these sums from Chan and Kwok respectively.

16.  Chan and Kwok deny that the payments they made in lieu of notice ought to have included any bonus.

17.  There were also claims by the plaintiff for the repayment of the loyalty payments of HK$9,000,000 and HK$5,000,000 made by the plaintiff to Chan and Kwok respectively on 15 February 2005.  On 31 July 2007 the plaintiff applied for summary judgment for repayment of the loyalty payments.  This was withdrawn on 3 September 2007 after payment into court of the sums claimed and their subsequent acceptance of the same by the plaintiff.  Other than the question of costs there is no issue as regards the loyalty payments.

The issues

18.  The issues are

(1)     Whether bonuses payable under Chan’s and Kwok’s contracts of employment and the plaintiff’s bonus scheme referred to therein constituted “wages” within the meaning of s. 2 of the Ordinance.

(2)     In particular, whether the said bonuses were payable as a matter of contractual obligation or were of a gratuitous nature, payable only at the plaintiff’s discretion.

(3)     Whether for the purpose of s. 7(2) of the Ordinance (as it was in December 2006), the “wages which would have accrued……” to Chan and Kwok respectively during their respective periods of notice should have included any bonuses payable during those respective periods of notice (had Chan and Kwok been employed by the plaintiff throughout their respective periods of notice);

(4)     If so :

(a)     what is the appropriate mode which should be adopted for calculating the bonuses which would have been payable to Chan and Kwok respectively in the periods of notice;

(b)     what amounts should have been included in the sums respectively tendered  on behalf of Chan and Kwok in lieu of notice;

(c)     whether there should be any set-off against any such amounts.

The witnesses

19.  I heard evidence from Vince Wong Kwan Yin (“Vince Wong”) the Chief Executive Officer and a director of the plaintiff and from Kenny Wong Kwok Keung (“Kenny Wong”) the Financial Controller of the plaintiff.  I also heard evidence from Chan and Kwok.

20.  In my view all the witnesses gave their evidence honestly and truthfully.  I accept their evidence as being truthful and reliable.

Background

21.  The relevant background facts are undisputed.

22.  Both Chan and Kwok are experienced brokers.  Before November 2002 they both worked for Nittan HK.  Chan was the head of its equity derivates desk.  Kwok was a broker on the same desk.

23.  In 2002 the plaintiff purchased Nittan HK.  As part of the sale to the plaintiff, Nittan HK by letters dated 15 November 2002 terminated the employment of Chan and Kwok respectively with effect from 30 November 2002.  At the same time also by letters dated 15 November 2002 offers of employment were made by the plaintiff to Chan and Kwok respectively on the terms set out therein.  The terms of the offer were no less favourable than the terms of their employment contract with Nittan HK. 

24.  The offers of employment from the plaintiff were accepted by both Chan and Kwok.  Since that time until termination of their employment with the plaintiff both Chan and Kwok have been employed by the plaintiff.

25.  The plaintiff’s income is derived from commissions earned matching principal to principal in trading equity products.  Needless to say, its income is highly dependent on the success of the individual brokers carrying out the trades.  The more and larger the transactions they perform thereby increasing the volume of business that the plaintiff does, the greater the profit that the plaintiff achieves.

26.  Vince Wong said that brokers’ remuneration has traditionally been and remains linked to their success and performance.  The more successful the broker the greater the underlying fixed salary of that broker.  However, the most successful brokers make their money from the bonus structure that the plaintiff and its competitors in the industry have set up.

27.  Though there may be different methods of producing a bonus calculation, invariably successful brokers can earn very substantial sums of money for themselves derived from the amount of business they generate for their employer and the profit produced on the business that they generate.

28.  Prior to the termination of their employment with the plaintiff Chan and Kwok were amongst the highest paid of the plaintiff’s brokers.  They consistently outperformed other brokers on other desks as well as on the equity desk.  They were consistently paid very large sums by way of both basic salary and bonuses. Bonuses paid to them far exceeded the basic salary that they received.

29.  According to the table supplied to the court in the course of the opening submissions of Mr Burns SC, with Ms Lau, for the plaintiff, the salaries and the bonuses paid to Chan and Kwok respectively for the years 2003 to 2006 are :
 

Chan	Salary (HK$)	Bonus (HK$)
From 1 April 2003 to 31 March 2004	1,800,000	5,100,800
From 1 April 2004 to 31 March 2005	2,455,645	12,200,000
From 1 April 2005 to 31 March 2006	2,700,000	19,480,000
From 1 April 2006 to 29 November 2006	1,800,000	10,000,000  (up to September 2006)
	__________________	_____________________
Total	8,755,645	46,780,800
Kwok
From 1 April 2003 to 31 March 2004	1,200,000	4,214,000
From 1 April 2004 to 31 March 2005	1,637,097	9,809,100
From 1 April 2005 to 31 March 2006	1,800,000	13,801,000
From 1 April 2006 to 29 November 2006	1,200,000	7,100,000 (up to September 2006)
	__________________	______________________
Total	5,837,097	34,924,100

30.  The above figures are undisputed and clearly demonstrate that the substantial portion of the income of Chan and Kwok over the said years was in the bonuses paid to them.

The contracts of employment

31.  At the time that both Chan and Kwok took up the offer of employment from the plaintiff they had been employed by Nittan HK under their respective contracts of employment with Nittan HK.

32.  The contracts of employment of Chan and Kwok respectively with Nittan HK contained in the letters dated 24 September 2001 provided for a monthly salary to be paid to each of them.  In addition to that they were each entitled to a bonus.  Clause 2 provided that

“ In addition, you are entitled to a discretionary profit sharing scheme offered by [Nittan HK] payable every 6 months.”

33.  The same wording appears in their contracts of employment with Nittan HK contained in the letters dated 18 September 2002.

34.  The contracts of employment of Chan and Kwok respectively with the plaintiff contained in the letters dated 15 November 2002 after the sale by Nittan HK to the plaintiff also provided for a monthly salary payable to each of them. In addition to that they were each entitled to a bonus.  Clause 2 provided that

“ In addition, you are entitled to a discretionary profit sharing scheme offered by [the plaintiff] payable every 6 months.”

35.  The entitlement to a bonus was in the same terms as in their contracts of employment with their previous employer Nittan HK.

36.  In August 2003 and in July 2004 Chan and Kwok each signed employment contracts with the plaintiff contained in the letters dated 7 August 2003 and 9 July 2004 to each of them.  The entitlement to a bonus was in the same terms as before.

37.  There is no dispute that the profit sharing scheme was the creation of a bonus pool of 50% of the profits of the equity desk distributed at the discretion of the plaintiff as the employer.

38.  It is accepted by the plaintiff that under the above contracts of employment Chan and Kwok were each entitled to a discretionary bonus but that there was no contractual right to a bonus.

The revised contracts of employment

39.  In February 2005 their contracts of employment were amended by agreement.  The terms and conditions of their original employment contracts were varied by revised contracts of employment contained in the letters dated 3 February 2005 to each of Chan and Kwok.

40.  At that time Vince Wong had just been appointed as the Chief Executive Officer of the plaintiff.

41.  The revised contract of employment of Chan in the letter dated 3 February 2005 (“Chan’s revised contract”) provided as follows :

“1. You will report to Vince Wong - CEO ICAP (Hong Kong) Ltd;

2. Your employment may be terminated by either you or the Company giving to the other party not less than 6 months’ prior written notice, subject to an initial period commencing with the date hereof, such that such notice may not expire before 8 January, 2008. This supersedes and replaces paragraph 4 of the Offer Letter;

3. The Company shall pay to you a Loyalty Payment of HK$9,000,000 (the “Payment”) within 14 days of the date of this letter. The Payment will be repayable in full should you terminate your employment with the Company before 8 January 2008;

4.    The Equity Desk will be entitled to a bonus of 50% of profits (before bonus) payable every six months in April and October.  Distribution of this bonus to the brokers on the desk will be based on your recommendation to be approved by Vince Wong.”

42.  The revised contract of employment of Kwok in the letter dated 3 February 2005 (“Kwok’s revised contract”) provided as follows :

“1. You will report to Vince Wong - CEO ICAP (Hong Kong) Ltd;

2. Your employment may be terminated by either you or the Company giving to the other party not less than 6 months’ prior written notice, subject to an initial period commencing with the date hereof, such that such notice may not expire before 8 January, 2008. This supersedes and replaces paragraph 4 of the Offer Letter;

3. The Company shall pay to you a Loyalty Payment of HK$5,000,000 (the ‘Payment’) within 14 days of the date of this letter. The Payment will be repayable in full should you terminate your employment with the Company before 8 January 2008.

4.    You will be entitled to participate in the bonus scheme which will allocate 50% of profits (before bonus) payable every six months in April and October.  Your proportion of this bonus ‘pool’ will be determined by your desk manager.”

43.  It is clear that by their revised contracts of employment Chan and Kwok each agreed that their employment may be terminated either by them or the plaintiff giving to the other party not less than 6 months’ prior written notice subject to an initial period from 3 February 2005 to 8 January 2008 in respect of which such notice may not expire before 8 January 2008.  The plaintiff also agreed to pay each of them a loyalty payment which was repayable in full should they terminate their employment before 8 January 2008.

44.  In respect of the bonus that they were entitled to this was differently worded in Chan’s revised contract and in Kwok’s revised contract.  In Chan’s revised contract it was provided that the equity desk would be entitled to a bonus of 50% of profits (before bonus) payable every 6 months in April and October and the distribution of this bonus to the brokers would be based on her recommendation to be approved by Vince Wong.  In Kwok’s revised contract it was provided that he would be entitled to participate in the bonus scheme which would allocate 50% of profits (before bonus) payable every 6 months in April and October and that his proportion of this bonus pool would be determined by his desk manager namely, Chan.

45.  On 15 February 2005 Chan received a loyalty payment of HK$9,000,000 and Kwok received a loyalty payment of HK$5,000,000. 

46.  The above facts are undisputed and I find them proved.

The Ordinance

47.  It is common ground that the Ordinance as it was at the material time in 2006 is what should be construed and not the Ordinance after the amendments which were made in 2007.  References to the sections in the Ordinance are therefore to the Ordinance as it was in 2006.

48.  S. 7(1) provided that

“ 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.”

49.  S. 7(2) provided that

“ 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.”

50.  S. 7(3) provided that :

“ In the case of an employee whose remuneration is calculated by the piece or task the amount of wages which would have accrued to such employee during the period of notice referred to in subsection (1) shall be deemed to be the amount of wages earned by the employee during the equivalent period immediately prior to the giving of the notice or, if for any reason it is impracticable to compute the amount in this manner, it may be calculated by reference to the amount earned during such equivalent period by a person in the same trade or occupation at the same work in the same district.”

51.  As I have said, by their letters dated 30 November 2006 Chan and Kwok notified the plaintiff that each of them agreed to pay wages in lieu of notice for the balance of their unserved notice period from 30 November 2006 to 8 January 2008 thereby terminating their employment under s. 7(2).

52.  It is important to bear in mind that the plaintiff’s claims in these actions are on the basis that in making a payment representing wages in lieu of the balance of the notice period from 30 November 2006 to 8 January 2008 pursuant to s. 7(2) of the Ordinance Chan and Kwok should have paid to the plaintiff the sums representing the bonuses which on the plaintiff’s primary case or alternative case would have accrued to them respectively during the balance of the notice period (paragraph 20 of the re-amended statement of claim).  The plaintiff’s claims are not for common law damages for breach of contract.

53.  The central dispute between the parties is whether any bonus payable to Chan and Kwok during the unserved notice period should have been included in their payments tendered by MessrsTanner De Witt on 8 December 2006.  That depends on whether they are “wages” within the meaning of s. 2 of the Ordinance and whether they “would have accrued” to Chan and Kwok during the unserved notice period.

54.  The meaning of “wages” is contained in s. 2(1) of the Ordinance.  This provides that in the Ordinance, unless the context otherwise requires

“ wages subject to subsections (2) and (3) means all remuneration, earnings, allowances including travelling allowances and attendance allowances, attendance bonus, commission, overtime pay, tips and service charges, however designated or calculated, capable of being expressed in terms of money, payable to an employee in respect of work done or to be done under his contract of employment, but does not include-

(a) …………………………………………………………

(da) any end of year payment, or any proportion thereof, which is payable under Part IIA;

(e) …………

(f)    any annual bonus, or any proportion thereof, which is of a gratuitous nature or which is payable only at the discretion of the employer.”

55.  The definition is a wide one embracing all remuneration payable in respect of work done or to be done but does not include the matters set out in (a) to (f).

56.  I shall first consider whether the exclusions in (da) and (f) are applicable.

57.  S. 11A in Part IIA of the Ordinance defines “end of year payment” as “any annual payment (whether described as “nineteenth month payment”, “fourteenth month payment”, “double pay”, “end of year bonus” or otherwise) or annual bonus of a contractual nature, but does not include any annual payment or any annual bonus, or any proportion thereof which is of a gratuitous nature or any proportion thereof, or which is payable only at the discretion of the employer”.

58.  Mr. Burns submitted that the bonuses under the revised contracts of Chan and Kwok were payable every 6 months in April and October each year and hence they were not “annual bonus” or “end of year payment” to bring it within the exclusions in the definition of “wages” in s. 2(1). 

59.  Mr. Coleman SC, for Chan and Kwok, relied on the evidence of Vince Wong who confirmed that both the salary and the bonus payable to a broker like Chan and Kwok were part of the annual remuneration package.  He submitted that the bonus was an annual bonus or end of year payment and was within the exclusion in (da). 

60.  It seems to me, and I so find, that the bonuses were not payable annually but were payable every 6 months in April and October.  Paragraph 13 of the defence to the re-amended statement of claim pleads that Chan and Kwok “were each contractually entitled to participate in the bonus scheme each six months in April and October”.  The revised contracts make it plain, in my view, that the bonus was “payable every six months in April and October”.   I reject Mr Coleman’s submission and I find that the bonuses were not “annual bonus” or “end year payment” to bring it within the exclusion in (da).

61.  Mr. Burns further submitted that the bonuses under the revised contracts were neither “of a gratuitous nature” nor “payable only at the discretion of the employer” to bring it within the exclusion in (f).

62.  In Clark v Nomura International plc [2000] IRLR 766 the claimant was employed as a senior proprietary trader in equities from July 1995.  His remuneration consisted of a salary supplemented by a bonus award under a discretionary scheme which according to the terms of his employment was not guaranteed in any way and was dependent upon individual performance and after the first 12 months of his remaining in the employment on the date of payment.  He was dismissed in February 1997.  Although he was still in employment at the date of payment of the annual bonus and had earned substantial profits for the company during the relevant period, he was not paid his bonus.  In his claim for damages it was held that his employers were in breach of contract for not awarding him any bonus for the nine month period prior to his dismissal.  It was held that an employer exercising a discretion which on the face of the contract is unfettered or absolute will be in breach of contract if no reasonable employer would have exercised the discretion in that way.  

63.  Having analysed the evidence in that case Burton J said at paragraph 40

“ Quite apart from the additional contractual straightjacket for the discretion in this case, the employer’s discretion is in any event, as a result of the authorities, not unfettered, as both sides have accepted to be the law in this case. Even a simple discretion whether to award a bonus must not be exercised capriciously (United Bank Ltd v Akhtar [1989] IRLR 507 EAT, Clark v BET plc [1997] IRLR 348 and Midland Bank plc v McCann 5/6/1998 unreported EAT) or without reasonable or sufficient grounds (White v Reflecting Roadstuds Ltd [1991] IRLR 331 EAT, and McClory v Post Office [1993] IRLR 159). I do not consider that either of these definitions of the obligation are entirely apt, when considering whether an employer was in breach of contract in having exercised a discretion which on the face of the contract is unfettered or absolute, or indeed even one which is contractually fettered such as the one here considered. Capriciousness, it seems to me, is not very easy to define: and I have been referred to Harper v National Coal Board [1980] IRLR 260 and Cheall v APEX [1982] IRLR 362. It can carry with it aspects of arbitrariness or domineeringness, or whimsicality and abstractedness. On the other hand the concept of ‘without reasonable or sufficient grounds’ seems to me to be too low a test. I do not consider it is right that there be simply a contractual obligation on an employer to act reasonably in the exercise of his discretion, which would suggest that the court can simply substitute its own view for that of the employer. My conclusion is that the right test is one of irrationality or perversity (of which caprice or capriciousness would be a good example) ie that no reasonable employer would have exercised his discretion in this way.”

64.  And at paragraph 41 he said

“ In this case, of course, the defendant had two contractual obligations, to assess the bonus dependent upon individual performance by the claimant, and not to do so irrationally or perversely (or capriciously).”

65.  In Horkulak v Cantor Fitzgerald International [2004] IRLR 943 the claimant was employed as senior managing director of interest rate derivatives for the defendant, a firm of inter dealer brokers.  His contract provided for a basic annual salary.  Provision was made for a “once only” bonus on his signing the contract plus a further guaranteed bonus in respect of a period.  Additionally it provided that the defendant “may in its discretion pay you an annual discretionary bonus which would be paid within 90 days of the financial year-end (30 September) the amount of which shall be mutually agreed by yourself, the chief executive of the company and the president of Cantor Fitzgerald Ltd Partnership, however the final decision shall be in the sole discretion of the president of Cantor Fitzgerald LP.”

66.  The claimant was awarded damages including sums in respect of payments which the judge held he would have received under the discretionary bonus clause if the claimant had remained in employment.  On appeal it was held that the judge had not erred in awarding damages for wrongful dismissal on the basis that had the claimant remained in employment he would have received payments under the discretionary bonus clause.  It was held that a discretion provided for in a contract which is prima facie of an unlimited nature will be regarded as subject to an implied term that it will be exercised genuinely and rationally.  That is presumed to be the reasonable expectation and therefore the common intention of the parties, even though they are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising the discretion.

67.  It was also held that the judge had correctly held that the claimant was entitled to a bona fide and rational exercise by the employers of their discretion as to whether or not to pay him a bonus and in what sum.  The bonus clause was contained in a contract of employment in a high-earning and competitive activity in which the payment of discretionary bonuses is part of the remuneration structure.  The objective purpose of the bonus was plainly to motivate and reward the employee in respect of his endeavours to maximise commission revenue, and the condition precedent that the employee should still be working for the employers demonstrated that the bonus was to be paid in anticipation of some future loyalty.  The provision was necessarily to be read, therefore, as having some contractual content, ie as a contractual benefit to the employee, as opposed to being a mere declaration of the employers’ right to pay a bonus if they so wished, a right which they enjoyed regardless of contract.  Although the clause left the amount of the bonus at large, it provided for a process of attempted mutual agreement prior to the making of any final decision.  This emphasised the employers’ obligation to consider the question of payment of a bonus, and the amount, as a rational and bona fide, as opposed to an irrational and arbitrary, exercise when taking into account such criteria as the employers adopted for the purpose of arriving at their decision.  Failure so to construe it would strip the bonus provision of any contractual value or content in respect of the employee whom it was designed to benefit and motivate and would fly in the face of the principles of trust and confidence which have been held of underpin the employment relationship. 

68.  Whether the bonus that Chan and Kwok were each entitled to was a discretionary bonus or a contractual right to a bonus depends on the proper construction of Chan’s revised contract and Kwok’s revised contract.  The subjective intention of the parties is neither relevant nor admissible for the purpose of construction of the revised contracts.

69.  It is important to consider why there were such revisions to their contracts of employment at that time.  The relevant factual matrix at the relevant time is of considerable importance.

70.  The unchallenged evidence of Vince Wong is that in late 2004 and running into the 1st quarter of 2005 there was considerable uncertainty and disquiet in the inter-dealing broking industry within the Asia Pacific region because of the recent move into the region by a company or group of companies.  In Hong Kong this comprised of BGC Securities and BGC Capital Markets (Hong Kong) Ltd.  In late 2004 and early 2005 within a short space of a few months BGC has successfully poached a large number of brokers from various of its competitors including the plaintiff.  In January 2005 the Australian subsidiary of ICAP plc lost 20 brokers.  Subsequently the plaintiff lost 37 brokers in Hong Kong which resulted in the plaintiff bringing proceedings against BGC Securities (Hong Kong) LLC and others for injunctive and other relief.

71.  Chan and Kwok were undoubtedly the two most successful brokers in the equity desk of the plaintiff.

72.  Vince Wong said that because of the value of Chan and Kwok to the plaintiff’s business in Hong Kong and because of the uncertainty created by BGC’s poaching activities in the Asian region the management of the plaintiff felt that it was necessary to secure the most profitable brokers employed by the plaintiff.  He said that this meant offering them new terms of employment and improving their remuneration structure by offering them loyalty payments in significant sums provided they remained employed with the plaintiff for a reasonable period and enhancing their bonus entitlement so that they became contractually entitled to a fixed bonus pool.  

73.  It was Chan’s understanding and her experience that payment of any bonus and the size of the bonus is usually at the discretion of the broking company unless the individual broker has agreed to receive a guaranteed bonus for a particular period. 

74.  Chan and Kwok both considered that the bonus provision in their revised contracts operated the same way as before and that there was no change.  

75.  I would observe, however, that the evidence that the plaintiff subjectively intended that a contractual rather than discretionary bonus be awarded to them is neither admissible nor relevant for the purpose of construction of the revised contracts.  Likewise the evidence that Chan and Kwok considered that the bonus provision in the revised contracts operated as a discretionary rather than a contractual bonus is also neither admissible nor relevant for the purpose of construction of the revised contracts.

76.  Kenny Wong joined the plaintiff in 2005 and since then he has been responsible for calculating and arranging the payment of wages to the plaintiff’s employees. The undisputed evidence was that he would calculate the amount of the bonus pool for the equity desk which he said was calculated at 50% of the desk operating profits, which was the profits before bonus and payable every 6 months in April and October.  He would normally calculate the amount of the bonus every month before the month end closing by ascertaining the desk operating profits earned by the equity desk for that month.  He did this by calculating the total revenue earned by the equity desk less total desk direct costs and other miscellaneous costs incurred by the equity desk, a proportion of total overhead costs allocated to the equity desk, excluding management bonus.  The management bonus was a bonus payable to two directors and was excluded from the calculation.

77.  There is no dispute that the way in which the bonus pool for the equity desk was calculated and distributed to the brokers before the revised contracts and after the revised contracts was the same.  

78.  Chan gave evidence that the plaintiff would allocate and pay a performance bonus to the equity desk every year payable every 6 months in April and October.  This was based on 50% of the profits (before bonus) earned by the desk in the preceding 6 months i.e. from October to March and from April to September.  The bonus pool would then be distributed to members of the equity desk with the amount paid to each broker being at the discretion of the head of the equity desk namely, Chan subject to management approval.  At the end of every 6 months the managing director would inform Chan and tell her the figure allocated to the equity desk for the performance bonus for the 6 months’ period.  It was left to Chan to make recommendations as to how the figure should be allocated between members of the desk including herself.  She was exercising her discretion in making her recommendations to the managing director for approval.  There were no guidelines or directives as to how she should exercise her discretion or what factors she should take into account.  Chan said that she personally based her decisions and recommendation on what she perceived to be the contribution of each broker to the business of the desk.

79.  On the evidence it is abundantly clear that during the years that she was in the employ of the plaintiff, Chan and Kwok were consistently the highest performers of the equity desk.  For that reason, Chan recommended that significantly higher bonuses be distributed to herself and to Kwok.  Although ultimate approval of the bonus allocated and paid to each broker rested with the managing director, on the evidence, which I accept, the plaintiff did not change any of Chan’s recommendations during her years with the plaintiff.

80.  I find the above facts proved.

81.  Mr Coleman submitted that as the whole process of calculating the bonus pool and the recommendation of Chan of the amount of bonus each broker would receive remained the same as before, there was no change in the revised contracts as regards the bonus entitlement.  He submitted that the entitlement of each of Chan and Kwok to a discretionary bonus was not changed to a contractual right to a bonus by the revised contracts of employment.

82.  He further submitted that on the evidence the parties in effect regarded the bonus as being a discretionary and not a contractual bonus at all times before and after the revised contracts.  He referred to the management accounts where the bonuses in question were described as “Discretionary Bonuses”.  

83.  In my view, the fact that the management accounts described the bonuses as “Discretionary Bonuses” cannot assist in the proper construction of the revised contracts as to whether they were discretionary or contractual bonuses. 

84.  Mr Burns submitted that it was significant that the bonus provision was differently worded in the revised contracts.  Whereas before Chan and Kwok were each entitled to a “discretionary profit sharing scheme”, the word “discretionary” was omitted in the revised contracts.

85.  I accept Mr Burns’ submission and find that it is significant that the word “discretionary” was no longer used in the revised contracts.  In my judgment as a matter of construction of the revised contracts the bonus that was payable was not a discretionary bonus but a contractual right to a bonus.

86.  It is clear that bonuses were payable to each of Chan and Kwok from the bonus pool which was calculated at 50% of the desk operating profits before bonus.  In my view, on the evidence, little or no discretion is involved in calculating the bonus pool.  Although Chan was undoubtedly exercising her discretion in making her recommendations as to how much each individual broker including herself on the equity desk should receive, it was not an absolute and unfettered discretion.  

87.  And although Vince Wong was also exercising his discretion in deciding whether or not to accept Chan’s recommendations, it was also not an absolute and unfettered discretion.

88.  In my judgment the bonuses payable to each of Chan and Kwok under the revised contracts were neither of a gratuitous nature nor payable only at the discretion of the plaintiff as the employer to bring it within the exclusion in (f).

89.  Issue (2) is resolved in favour of the plaintiff.  The bonuses payable under Chan’s and Kwok’s contracts of employment were in my judgment payable as a matter of contractual obligation and were not of a gratuitous nature payable only at the plaintiff’s discretion. 

90.  Mr. Burns also relied on s. 8A(1) of the Ordinance which provides that 

“ where a contract of employment is terminated otherwise than in accordance with section 6 or 7, a sum equal to the amount of wages that would have been payable had the contract been terminated in accordance with section 7 shall be payable by the party terminating the contract to the other party.”

91.  He submitted that the amount of damages under s. 8A is intended to match the amount of payment in lieu of notice that a party would have received under s. 7.  

92.  In Kin Man Garment Factory v Lam Suk Ching (HCLA 58/1982, 1 February 1984, Clough J) the employer claimed a sum from the employee under s. 8A(1) of the Ordinance alleging that the employee had wrongfully left her employment without giving a month’s notice under s.  6 or payment of a month’s wages in lieu of notice under s. 7.

93.  Clough J (as he then was) in considering s. 8A said at page 3 of his judgment

“ The words in s.8A quantifying the sum to be paid by the employee are the same as the words appearing in s.7(1) to quantify the sum payable to the employer if the employee elects to terminate the contract of employment without notice but on payment in lieu of notice. The same words occur in s.7(3) which provides the method of calculating the quantum of the payment to be made by an employee whose remuneration has been calculated ‘by the piece or task’.

The combined effect of s.6, 7 and 8A is therefore to provide that the parties to a contract of employment may terminate it by notice (s. 6) or payment in lieu of notice (s. 7) and that if either party terminates otherwise than in accordance with s. 6 or 7, he or she is to pay a sum described in exactly the same terms as the sum payable under s. 7(1) in lieu of notice.

Construing these provisions in accordance with s. 19 of the Interpretation and General Clauses Ordinance (Cap. 1), I conclude that it is necessarily to be inferred that the intention of the legislature is that the sum payable under s. 8A on wrongful determination of a contract of employment is to be calculated in the same way as the sum payable in lieu of notice under s. 7(1) and that therefore s. 7(3) also governs the sum payable under s. 8A.

  Put another way, if a party terminates the contract of employment without notice but does not make payment in lieu of notice under s. 7, then s. 8A obliges that party to make the same payment as if he had elected to comply with s. 7.”

94.  In Kin Man the employee was paid wages on a piece rate basis and Clough J found that as the relevant data was available in that case, the sum payable by the employee to the employer in that case was governed by s. 7(3) and was the amount of wages earned by the employee during the period of one month being the period equivalent to the notice period immediately prior to the wrongful termination of the contract by the employee.  He therefore calculated the sum payable by the employee in accordance with s. 7(3) as being the equivalent of the actual earnings of the employee as a piece rated employee during the month immediately preceding the wrongful determination of the contract by her.

95.  That case is clearly distinguishable as it was in respect of an employee who was paid wages on a piece rate basis unlike Chan and Kwok.  S. 7(3) can have no application to this case. 

96.  Mr Burns also relied on the observations of Yuen JA in Kao Lee & Yip v Lau Wing [2007] 3 HKLRD 365 where she said at paragraph 33

“ 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 s.6 shall be payable by the party terminating the contract to the other party’ 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., 2003) p.426 para.13-015).”

97.  In Kao Lee & Yip the court was concerned with the construction of the words “agreeing to pay” in s. 7(1).  It was held that this involved only a unilateral undertaking, offer or promise by the terminating party to pay wages in lieu of notice.  In that case the defendants were two young recently qualified solicitors employed by the firm.  Contractually they were required to give three months’ notice to terminate.  They gave three months notice but stated that they would only work for one month and pay the plaintiff two months’ wages in lieu of the remaining two months notice.  In that case the two months’ wages were readily ascertainable.  

98.  Mr Burns submitted that the proper approach to the assessment of the amount payable under s. 8A, where there is a termination otherwise than in accordance with ss.  6 and 7, is the same as the assessment of the amount payable under s. 7.  

99.  He also relied on Clark v. BET plc [1997] IRLR 348, Clark v. Nomura and Horkulak and submitted that the approach to the assessment of the amount payable under s. 7 is not materially different from the approach which was adopted by the court in the assessment of damages in those cases.  I am unable to accept this submission.

100.  It seems to me that the claims for damages in the cases relied on were not for liquidated damages but were for unliquidated damages in actions for breach of contract.  In a claim for common law damages for breach of contract damages are at large which have to be proved and which the innocent party has a duty to mitigate.

101.  As is stated in Jowitt’s Dictionary of English Law Vol 1 3rd Edn page 631

“ Unliquidated damages are damages the amount to be recovered depends on all the circumstances of the case and the conduct of the parties, and is assessed by the court or tribunal. Liquidated damages are damages recovered where the amount is fixed or ascertained.”

102.  As I have said, the plaintiff’s claims against Chan and Kwok are not for common law damages but simply for the sums claimed on the basis that each of Chan and Kwok have failed to comply with their statutory obligation to make full payment in lieu of notice as the payments made do not include any bonus.

103.  The Court of Final Appeal in Kao Lee & Yip (2008) 11 HKCFAR 576 also held that on a true construction of s. 7(1) the mechanism for termination was unilateral.  

104.  S. 7 applies both to employers and employees (per Ribeiro PJ in Kao, Lee & Yip at paragraph 32).

105.  Ribeiro PJ also said at paragraph 26

“ If termination under s.7 is unilateral then, by definition, it takes effect without the agreement of the other side. If an employer ends the contract under the section, there is no question of the employee choosing to reject any offer. The party terminating makes an unconditional promise to pay the wages in question and thereby brings the employment to an end. The promised sum becomes, by statute, due to the other party and is enforceable as a statutory debt. Additionally, contravention of s.25 wilfully and without reasonable excuse now constitutes an offence punishable by fine and imprisonment.”

106.  In the case of an employer making the payment of the sum payable under s. 7 to an employee it must be paid not later than 7 days after the day of termination (section 25(2)(b)).

107.  The Ordinance does not provide for the period of time when such a payment must be paid by the employee making the payment on termination.  In setting out the legislative history of s. 7 Ribeiro PJ pointed out at paragraph 34 that the amendment made in 1971 from “paying” to “agreeing to pay” was aimed merely at giving 7 days after termination to make the payment.

108.  In Kao Lee & Yip Ribeiro PJ also left open the question whether an employee who suffers loss beyond loss of wages (as defined in the Ordinance) by reason of a single breach involving the wrongful termination of the contract is confined by s. 8A to a remedy for lost wages or whether, on the contrary, a common law claim for unliquidated damages in respect of the additional loss is maintainable.

109.  In Lisbeth Enterprises Ltd v Mandy Luk (2009) HKCFAR 131 the court was concerned with contractual commissions to which an employee was entitled in addition to her salary both of which were payable at the end of the month.  The contractual commission was generally well over ten times her salary a month.  The holiday pay and annual leave pay which she received while in employment was calculated by reference to salary only.  Commission was not included in such calculation.  After leaving her employment, the employee sued the employer claiming additional amounts which she said she would have received by way of holiday pay and annual leave pay if contractual commission had been included in calculating the same.

110.  The Court of Final Appeal decided that holiday pay and annual leave pay formed a context which required the word “wages” be read as excluding commission save possibly for commission accruing and calculated on a daily basis in amount varying from day to day.  Subject to that possibility, no commission was to be included in the calculation of holiday and annual leave pay.

111.  It also held that the inclusion of contractual commission in the calculation of holiday pay and annual leave pay would require a workable mode of calculation.  No such mode was to be found in the Ordinance.

112.  In considering the definition of “wages” in s. 2(1) of the Ordinance Bokhary PJ said at paragraphs 16 to 18 :

“ 16. As can be seen from s.2(1), ‘wages’ do not include gratuitous or discretionary commission but, unless the context otherwise requires, includes contractual commission. Does the context of holiday pay and annual leave pay require the exclusion of contractual commission from the meaning of ‘wages’? In answering this question I begin by noting how definitions are qualified by context. Section 2(1) contains an express statement to the effect that the definitions which it provides must give way to any different meaning that the context may require. It has become common to the point of being routine for definition sections to stipulate qualifications of that nature. But such qualifications are probably no more than what would be implied anyway.

17. ‘Words’, as Lord Nicholls of Birkenhead emphasises in ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577 at p. 5 79, ‘must always be understood, or “interpreted”, in their context’. To the same effect, Lamer J (later Lamer CJC) said in Hills v A-G of Canada (1988) 48 DLR (4th) 193 at p.196 that ‘[w]ithout going so far as to say that a word has no meaning in itself, it is true that its real meaning will depend on the context in which it is used’. It is therefore a canon of statutory construction that definitions are to be read subject to anything ‘repugnant in the context, or in the sense’ (which is how Lord Selborne put it in Meux v Jacobs (1875) LR 7 HL 481 at p.493). This is a salutary approach, especially as the experience of legislative draftsmen appears to be that ‘having stipulated a meaning for a word it is extraordinarily, almost uncannily, difficult to use it only in that sense’. So says a former legislative draftsman in his book GC Thornton, Legislative Drafting (4th ed., 1996) at p.154.

18.       Next, I turn to what we described in Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144 at p.157E as ‘the law’s tendency to construe each and every provision of a statute in such a way as to accord the same a due measure of real meaning and substance’.  This necessitates looking to see whether the exclusion of all commission from the calculation of holiday pay and annual leave pay would leave the Ordinance bereft of context in which contractual commission would be treated as wages.  Having done that, I am satisfied that such exclusion would not have that consequence.  For plainly wages would still include contractual commission which has already accrued but has not yet been paid, for example, in relation to: the time for paying wages under s.23; interest on the late payment of wages under s.25A; the manner and place of payment of wages under s.26; and liability for outstanding wages under s.65.”

113.  And at paragraphs 20 and 21 he said :

“ 20. Where a statute provides that a word or phrase shall have a particular meaning save where the context otherwise requires, a context in which that meaning would create an unworkable situation can properly be regarded as a context requiring some other meaning……………………………………………………….

21.       An employee’s commission is, putting it broadly, the employee’s specified share of what the employer receives through the employee’s efforts while at work.  And the employee’s fortunes follow that of the employer inasmuch as the employee’s commission fluctuates along with what the employer so receives.  Including commission in the calculation of holiday pay or annual leave pay would in effect be giving the employee something by way of a share in nothing.  For such an exercise to be possible, there would have to be a workable mode of calculation, probably involving an element of deeming.  If any such mode of calculation is to be found in the present law, it will have to be found in the sections dealing with the rate of holiday pay and the rate of annual leave pay, namely ss.41 and 41C respectively.”

114.  He then said at paragraphs 23 and 24 :

“ 23. Plainly no mode of calculating holiday pay or annual leave pay based on commission is to be found in ss.41(1) or 41C(1). Those subsections are directed to what the employee “would” have earned. But commission involves what the employee might have earned, depending on whether the contractual requirements for entitlement to commission are satisfied. To the extent that provision is made for holiday pay and annual leave pay based on what the employee might have earned, that is done by ss.41(2) and 41C(2) which cater for piece rates and daily wages that vary from day to day. ‘Piece rates’ have nothing to do with commission. What about ‘daily wages’? Perhaps the term ‘daily wages’ applies only to wages in the sense of salary. But let us suppose for the sake of the present argument that the term extends to commission.

24.       What then would supply the requisite quality of dailiness?  Wages may not have to be paid on a daily basis before they can be regarded as ‘daily wages’.  But I do not see how wages can be so regarded unless they at least accrue and are calculated on a daily basis.  Subject therefore to the possibility that ss.41(2) and 41C(2) can be read to cover contractual commission accruing and calculated on a daily basis in amounts varying from day to day, those subsections do not cater for commission.  It follows that holiday pay and annual leave pay form a context which requires that the word ‘wages’ be read as excluding commission save possibly for commission accruing and calculated on a daily basis in amounts varying from day-to-day.”

115.  Amendments were made to the Ordinance in 2007 which included amendments to s. 7 after Lisbeth was decided. 

116.  In Lisbeth Bokhary PJ observed that an employee’s commission is his specified share of what the employer receives through the employee’s efforts while at work.  He considered that ss. 41(1) and 41(C) dealing with holiday pay and annual leave pay were directed to what the employee would have earned not what he might have earned.  As he put it at paragraph 23

“ But commission involves what the employee might have earned …………”

117.  It seems to me that apart from s. 7(3), where there was a deeming provision and a workable method of calculation provided for the amount of “wages” which would have accrued to an employee remunerated by the piece or task, there was no workable method of calculation provided in s. 7.

118.  It was only after the amendments made in 2007 that a workable method of calculation was provided.  The amendments made in 2007 introduced sub-sections (1A) to (1D) to s. 7 which introduced a workable mode of calculation.  S. 7(1A)(b)(i) provided that where the length of notice required to terminate the contract under s. 6 is a period expressed in months, as in this case, the employment may be terminated by agreeing to pay a sum calculated by multiplying the number of months required by the monthly average of the wages earned by the employee during the period of 12 months immediately before the date of notification.  Thus it is clear that with the amendments made in 2007 there was introduced a workable mode of calculation. 

119.  The plaintiff cannot rely on the amendments made in 2007.  By its primary case based on the premise that Chan and Kwok would each have earned no less bonus for the periods from 10 October 2006 to 31 March 2007 and from 1 April 2007 to 30 September 2007 it seems to me that the plaintiff is relying on the mode of calculation provided in s. 7(1A)(b)(i) of the amended Ordinance.

120.  As regards issue (1), I find that the bonuses payable under Chan’s and Kwok’s contracts of employment were not “wages” within the meaning of s. 2 of the Ordinance as the context otherwise requires that the word “wages” be read as excluding such bonuses.

121.  As to issue (3), even if such bonuses were “wages” within the meaning of s. 2 it is plain, in my view, that for the purposes of s. 7(2) the bonuses payable to Chan and Kwok during their respective periods of notice had they been employed by the plaintiff throughout their respective periods of notice would not be “wages which would have accrued” but would be wages which might have accrued to Chan and Kwok.  I so find.

122.  In view of my findings Issue (4) does not arise. 

123.  However, in case this matter goes further and it is held that I am wrong in my findings, I would briefly say that in that event the primary case of the plaintiff would, in my view, be the appropriate mode of calculation of the bonuses which would have been payable to Chan and Kwok respectively in the periods of notice and not the alternative case. A reasonable assumption can be made on the evidence that if Chan had not left the plaintiff the rest of the equity desk would have remained with the plaintiff.  That being so, in my view the sums claimed by the plaintiff’s primary case based on the premise that each of Chan and Kwok would have earned no less bonus as was earned in the same periods in the previous year should have been included in the sums tendered on behalf of Chan and Kwok in lieu of notice. 

124.  The alternative case based on the brokerage revenue generated by their new employer Nittan HK does not, in my view, provide an appropriate mode of calculation of the bonuses payable to Chan and Kwok in the periods of notice.  What Nittan HK would earn could only be ascertained after the remaining period of the notice had expired.  It would have been impossible, in my view, for each of Chan and Kwok to “agree to pay” such sums to the plaintiff as claimed in the alternative case when serving the notice under s. 7(2) in November 2006.  They left the plaintiff to work for a new employer which had different employees.  On the undisputed evidence Nittan HK did not even have an equity desk at the time Chan, Kwok and the other brokers left the plaintiff to join Nittan HK.

Conclusion

125.  The plaintiff’s claims are dismissed. 

126.  I also make an order nisi that the plaintiff should pay Chan and Kwok their costs of the action save that the costs of the claim in relation to the repayment to the plaintiff of the loyalty payments up to the time of acceptance by the plaintiff of the payments into court of the same should be costs to the plaintiff against Chan and Kwok.