CHIN KWOK CHUNG TONY v. HELLO PARTNER (INTERNATIONAL) CO LTD

DCCJ 1389/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1389 OF 2009

(transferred from High Court Action No. 2438 of 2007)

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J U D G M E N T

1.  Chin, the Plaintiff, claims against the Defendant for wrongful termination of employment contract.  The claim was filed with the Labour Tribunal in October 2007 and was transferred to the High Court in November 2007.  In March 2009, the legal action was further transferred to the District Court.

Background

2.  Zeiad Hassan M Shogair is a Saudi Arabian businessman.  Together with fellow countryman Kamal Eldin Widatalla Ahmed Elneil, Shogair planned to set up a business enterprise in the sale and export of stationery from Mainland China.  They approached Chin, who was experienced in the field.  Discussion began and proposal was presented.

3.  This led to a written “Employment Service Contract” between Chin and Shogair dated 3 June 2006 (“the Contract”).  Pursuant to the Contract, since 1 July 2006, Chin had been stationed in Guangzhou working on the establishment of the business enterprise.  He was given the title of Chief Executive Officer (“CEO”) of the company.

4.  On 17 August 2006, the Defendant (“HPI”) was incorporated in Hong Kong.  On 16 April 2007, Guangzhou Hello Partner Company Limited (廣卅市幫得首貿易有限公司) (“GZHP”) was registered as a wholly subsidiary of the HPI.  Elneil is the authorised representative of the GZHP.

5.  Two months later, the employment relationship was terminated.  Chin started to claim for his entitlements upon the termination of employment both in Guangzhou and Hong Kong.  He lodged his complaint against GZHP with the Guangzhou city labour bureau (廣卅市勞動局).  Meanwhile, through his solicitors in Hong Kong, he issued letters of demand to HPI.  In August 2007, through his lawyer in the Mainland, Chin filed his claim against GZHP with the People’s Court of Tianhe District, Guangzhou.

6.  Prior to the outcome of the proceedings in the People’s Court, Chin filed his claim for similar remedies against HPI with the Labour Tribunal in Hong Kong in October 2007 (LBTC 5010/2007).  As mentioned above, the Tribunal transferred the claim to the High Court (HCA 2438/2007).  In November 2007, the People’s Court dismissed Chin’s claim against GZHP.  That left behind the legal action against HPI in the High Court which was subsequently transferred to the District Court.

7.  The above background is not in dispute.  According to the pleadings, the major dispute lies in:

(1)                  whether HPI or GZHP was the employer of Chin;

(2)                  whether it was Chin who resigned or his employer terminating the employment; and

(3)                  if his employment was terminated by his employer, whether Chin is owed the amounts being claimed.

Whether HPI or GZHP was the employer

8.  There is no dispute that it was after negotiation between Shogair and Chin in late May 2006 that they reached the agreement of employment.  There came the Contract that evidences the agreement.

9.  The Contract contained, among others, the following provisions:

“AGREEMENT

This employment contract (hereinafter called the “Agreement”) is enter into this date between MR. SHOGAIR (Hereinafter called “The Company”) and Mr. TONY ZIE (hereinafter called “Employee”).  Whereas, the parties are enter into this agreement to set forth and confirm their respective rights and obligations with respect to the Employee’s employment by the Company.  Now, therefore, in consideration of the mutual covenants contained, the parties hereto mutually agree as follows:

1.         EMPLOYMENT; TERMS; DUTIES – The Company hereby employs the Employee as Chief Executive Officer (“CEO”).  The term of the Employee’s employment, pursuant to this Agreement, will commence on JULY 1^st 2006, and will continue until JUNE 30^TH 2009 for devote his full time and effort to the business and affairs of the Company with such duties consistent with the Employee’s position as may be assigned to him from time to time by the Board and the Chairman of the Company……”

                                                                                 [Underline added]

Novation

10.  Argument was raised that the employment agreement was a pre-incorporation contract between Shogair as the promoter and Chin.  Therefore the agreement was not binding on the company to be formed, in the absence of evidence of novation after the formation of the company.  It was also suggested that the party liable to Chin remained to be his contracting party, i.e., Shogair.

11.  Novation of contract is not a pleaded issue.  In any event, the argument was put forward without regard to the reality in the present case.  The evidence of both Chin and Shogair was that Shogair did not personally engage Chin but did so for and on behalf of the company to be set up.  Objectively Chin was employed to provide his service even prior to the setting up of the company.  Setting up the company was in fact part of his service.

12.  The wordings of the Contract reflect the intention of the parties that Chin would be the CEO of the company, when it was formed.  As such, Chin would carry out the duties assigned by the Board and the Chairman of the company, not Shogair in his personal capacity, during the 3-year term of the Contract.

13.  In the circumstances, Shogair was effectively the temporary or “holding” employer of Chin, pending the incorporation of the company.  As from incorporation, the company became the employer of Chin until the end of his contractual term of service.  The court in Law Shiu Kai v Dynasty International Hotel Group [2004] 2 HKLRD 524 at 536I-537J came to a similar conclusion after considering the reality as intended and understood by the parties in that case.

14.  The real question is whether the company employing Chin, as the “Company” referred to in the Contract, was intended and understood to refer to HPI (as Chin contends) or GZHP (as HPI contends).  Pertaining to this question is the dispute as to whether the setting up of a company in Hong Kong was already contemplated during the negotiation and at the time of the Contract.

15.  Chin’s pleaded case is that he was contracted to do preparatory work for the setting up of the company in Hong Kong and subsequently the company in Guangzhou (see para.4(b) of the Statement of Claim).  HPI denied the alleged agreement that it was the company in Hong Kong, upon its incorporation, that would employ Chin.  Likewise, HPI denied having employed Chin and alleged that it was GZHP that employed Chin as its CEO.  Subject to that, HPI actually admitted that Chin was engaged to prepare for the setting up of the company in Hong Kong before the company in Guangzhou (see paras.3(a) to (d) of the Defence).

16.  However, in court, both Chin and Shogair of HPI gave evidence that somehow differ from their respective pleaded case.

17.  Chin gave evidence that he knew nothing about how to set up a company in the Mainland.  It was Elneil, who was said to have resided in the Mainland for over 20 years, that was responsible for obtaining the business licence of the company in Guangzhou.  Chin was never instructed to set up the company or to instruct lawyer in the Mainland for such purpose.  During re-examination, he also suggested that the idea of forming the company in Guangzhou came only after the incorporation of HPI in August 2006.

18.  Shogair explained that during the negotiation and by the time when Chin was contracted, the idea was always to set up a business enterprise based in Guangzhou.  This had not been successful despite the time spent.  During a meeting towards the end of July 2006, several options were discussed.  One of them was to incorporate a company in Hong Kong and, as a foreign investor, to set up a subsidiary in Guangzhou.  This was the option adopted and hence HPI was incorporated 2 weeks to 20 days later in Hong Kong.

19.  No pleading point in this regard was not taken during the trial.  Nevertheless, the fact that the company in Hong Kong was anticipated to be set up first, even if true, is but one of the circumstances that need to be taken into consideration in determining which of the two companies to be  formed was intended to be, and in fact, the employer of Chin.  There is indeed evidence of the circumstances surrounding the agreement to employ Chin and that of the conduct of the parties thereafter.

Circumstances surrounding the agreement to employ Chin

20.  Shogair and Elneil intended to establish a stationery business in Guangzhou and eventually worldwide.  As mentioned above, Elneil had been a resident in the Mainland for over 20 years by then.  The reason why Shogair approached Chin was that Chin is experienced in the field.  Chin used to work for a company called COMIX, which is also a Mainland company in the stationery business.  Chin left COMIX in about 2003.  In 2006, Shogair approached Chin.  This led to meeting with and commissioning of Chin at a fee of about US$10,000-20,000 to prepare a feasibility study of the business enterprise and the market in the Mainland.

21.  The parties met again and eventually came to agree on the employment of Chin.  The parties met at the office of Noble Leader Company which was also a company in Guangzhou.  According to Shogair, it was Chin who suggested that this company be engaged to provide, among other things, secretarial service for the company to be set up in Guangzhou.  Ms Rickie Tang of that company prepared the Contract.  Tang, Elneil and another investor, Mr Maowia, witnessed the signing of the Contract by Shogair (as “the Company”) and Chin (as “the Employee”).

22.  I find the above background leading to the Contract to be the facts.  There is no dispute that Chin was supposed to be stationed in Guangzhou; and hence clause 2D of the Contract which provided for the monthly housing allowance payable in RMB.  The objective impression is that the conception of the business enterprise was mostly connected with Guangzhou at the time of contract.

23.  Chin referred to the other provisions of the Contract.  Clause 2A provided that his salary would be paid exclusive of local tax and payable in Hong Kong.  Clause 4 provided that the agreement should be governed by laws of Hong Kong.  He argued that these provisions were indicative of the parties’ intention and understanding that it was the company to be set up in Hong Kong that would be employing him.

24.  It was argued on Chin’s behalf that it made no sense for him to request his salary to be payable in Hong Kong, if he was employed by the company in Guangzhou.  I do not see how.  Whichever company was employing him, Chin was supposed to be stationed in Guangzhou.  According to Shogair, one reason for Chin’s such request was to facilitate his transfer of money to his family which was outside Hong Kong.  This is not inherently improbable.

25.  According to Shogair, Chin requested that the governing law of the Contract should be Hong Kong law.  This sounds credible in the case of Chin, being a Hong Kong citizen.  But if it is suggested that for the parties to agree that the employment by the company in Guangzhou to be governed by Hong Kong law would be inherently incoherent, then I do not agree.  There is no material to suggest that resolving dispute in relation to an employment between a Guangzhou company and a Hong Kong citizen in accordance with Hong Kong law would be inherently problematic.

Events subsequent to the Contract

26.  Both parties also referred to the events subsequent to the Contract.  Insofar as these are referred to for the purpose of construing the provisions of the Contract, the evidence is strictly inadmissible.  No such issue of admissibility was taken by either party.  In any event, there should be room for admitting extrinsic evidence when there is ambiguity about the identity of the contracting party of Chin.

27.  Shogair emphasized that HPI, as intended, turned out to have no business operations, save as a holding company or receiving agent of payments for GZHP.  Apart from the directors (i.e, he and Elneil who are in Guangzhou) and the company secretary, HPI has employed no staff in Hong Kong.  Its registered office in Hong Kong was actually that of the secretarial service company.

28.  Chin sought to contradict Shogair’s evidence by pointing out various activities conducted in the name of HPI.  HPI opened a company account with the bank in Hong Kong.  He would withdraw and bring money from the bank to Guangzhou for the company’s use.  But it became clear in the evidence that Chin was not the authorised signatory to deal with the money in HPI’s bank account in Hong Kong.  What Chin meant was that he had authorisation every now and then to liaise with the bank manager and to handle the money arranged to be drawn from the account.

29.  Chin also explained that he had interviewed and employed members of staff in Guangzhou.  During the process, he would make clear to the interviewees that he was deployed from Hong Kong to be in charge of the operations in Guangzhou.  However, there is no suggestion that these employees were employed by HPI.  They were clearly engaged by and for GZHP, though yet to exist legally.

30.  According to Chin, he always placed the business registration certificate of HPI on the desk during the interviews.  Shogair agreed that the business registration certificate of HPI was in fact kept in the office of GZHP.  However, I am curious how they managed to do that, if HPI was an operating business concern in Hong Kong at the same time, as Chin alleges.

31.  Trading contracts and purchase orders with vendors had been signed for and on behalf of HPI with its company chop.  Long, the secretary to the board of directors of GZHP, gave evidence and confirmed that.  Shogair did not dispute that but explained that this happened only in respect of those trading documents prior to the successful registration of GZHP.

32.  The fact was that all the preparatory work relating to GZHP was in progress since the employment of Chin commenced.  According to Shogair, other contracts has also been entered into including those for I.T. projects, product design, tenancy in respect of office and warehouse premises, stocking of merchandise as well as television commercials.  But all these had to do with the business enterprise in Guangzhou, i.e., GZHP.

33.  There is indeed no evidence to suggest that HPI was intended to have, or in fact has, business operations in the nature of those of GZHP, save as the holding company in Hong Kong.  Without such business, one wonders what sales and trading profit of HPI that parties had in mind for the purpose of calculating the commission and bonus payable to Chin under clauses 2B and 2C of the Contract, if HPI was the “Company” employing Chin as Chin alleges.

34.  It should be noted that Chin was essentially the person in charge of the above activities and operations.  In a nutshell, his evidence was that prior to the successful registration of GZHP on 14 June 2007, he had the authority to deal with the third parties in the name of HPI.  Shogair did not deny that entirely.  He also confirmed that Chin had one of the two sets of the company chop of HPI that he could use for such purpose.  However, this reflected Chin’s authority to represent HPI to deal with the third parties at the time; but did not render HPI to be his employer.

35.  It was HPI that rented Chin’s accommodation in Guangzhou.  The tenancy agreement between the landlord and HPI in December 2006 evidences that.  But this does not mean that HPI provided his accommodation.  The fact was that it was Shogair who paid Chin the housing allowance every month, as provided in the Contract, and Chin made up the balance needed to pay for the monthly rent for such rented accommodation.

36.  Contrary to the Contract, the salary of Chin was not paid in Hong Kong or by HPI.  The fact was that Shogair would pay in cash the salary in US dollars and housing allowance in RMB to Chin every month in Guangzhou.

37.  Chin argued that notwithstanding that, he was never on the payroll list of GZHP.  It transpired that his working status was not even registered in accordance with the Mainland regulations.  But there is equally no evidence of record of his employment with HPI from the revenue authority in Hong Kong.  There is no evidence that HPI ever reported the alleged employment of Chin to the authority in Hong Kong.  In court, Chin admitted that he has filed no tax return in relation to his alleged employment with HPI.

38.  After the termination of employment, Chin filed his claim against GZHP with the Guangzhou authority and the People’s Court.  According to the written judgment in November 2007, the People’s Court did not actually find whether Chin was employed (“聘雇”) by GZHP or assigned (“接受被派遣”) from Hong Kong to GZHP.  What the court there held was that in either case, Chin did not possess a working permit (“就業証”) in accordance with the relevant Mainland rules and was therefore not entitled to the protection under the law.  For this reason, the court refused to entertain the claim and hence dismissed his claim.

39.  However, the stance of Chin in the proceedings before the People’s Court is worth noting.  In his claim, Chin identified the party agreeing to employ him as the shareholder of the company to be set up in Guangzhou.  He was appointed as the CEO of that company.  His service was provided and his remuneration was received pursuant to such agreement.  Whilst it was mentioned that GZHP was a foreign investment enterprise, no reference was made to HPI at all.  The only reasonable reading of his claim there is that Chin considered himself to have been employed by GZHP.  In the proceedings before the People’s Court, Chin was represented by lawyers.  The same stance of Chin was recited in the court’s judgment.

40.  Of course, Chin had also through solicitors issued letters of demand to HPI in Hong Kong.  But as he acknowledged, HPI did not respond to them.  On the other hand, GZHP instructed lawyers and defended the proceedings in the People’s Court.  Besides contending that Chin was not protected under the law as he did not possess the working permit, GZHP did not actually deny the employment relationship.

Conclusion

41.  Considering the circumstances in totality, including those specifically discussed above, I find that the business enterprise that Shogair and his co-investors conceived was one based in Guangzhou.  Chin was employed to provide services preparing for the setting up of the company in Guangzhou and as the CEO of the company to operate the business for a term of 3 years.

42.  In the submissions on behalf of HPI, other suggestions were made such as the issue of illegality of Chin’s employment due to the lack of the working permit in the Mainland.  This is neither a pleaded issue nor a sound argument.

Termination

43.  HPI’s case is that it was Chin who voluntarily resigned on 12 June 2007.

44.  Chin did tender his resignation by email on 11 June 2007, apparently triggered by certain criticism of him by the brother of Shogair, who was also an investor in the business enterprise in Guangzhou, earlier that day.  Chin’s case is that such resignation was not accepted and his employment continued until terminated by the company.

45.  Indeed, on 12 June 2007, Shogair sent his email, with copies all parties concerned, putting on record that Chin’s resignation was not accepted.  By the same email, Shogair further assured Chin of the company’s continued support of Chin and reiterated the finality of the decision of the board in this matter.

46.  Shogair explained in court that the board merely deferred the decision on Chin’s resignation until they had confirmation after investigation of the alleged misconduct of Chin.  However, this explanation does not sit well with the contemporaneous documentary evidence.

47.  Besides his email dated 12 June 2007, Shogair actually continued to correspond with Chin regarding the business of the company afterwards.  His email to Chin dated 18 June 2007 was an example.  In fact, this email was sent while Chin was on his business trip to the USA.  Shogair also referred to such business trip in this email.

48.  In court, however, Shogair questioned whether Chin went to the fair in the USA.  He said he had received no report on such event in the USA.  He suggested that Chin went to visit his family instead; and this was therefore not a business trip.

49.  It appears to me that if Chin were minded to use the business trip as a mere excuse for his personal purpose of visit to his family, he would not have had to disclose to everyone in his email dated 5 June 2007 that he would be taking a week’s leave with his family in Canada after the fair in the USA.  Shogair’s email dated 18 June 2007 suggests that he was aware of Chin’s visit to his family during this trip to the American Continent.  Shogair even sent his regards to Chin’s family while Chin was there.

50.  On balance, I found that Chin’s resignation tendered on 11 June 2007 was unequivocally rejected.  The employment continued as a matter of fact until it was effectively terminated by the announcement and confirmation of GZHP on 26 to 27 June 2007.

51.  The announcement dated 26 June 2007 made clear that Chin was removed from his position as the CEO or as the representative in all manner of GZHP.  According to Chin, he was surprised to learn about this announcement on 27 July when he returned to work.  For all intents and purposes, this could only be termination of his employment.  Long was responsible for drafting the emails and the announcement dated 26 June 2007 at the instruction of Shogair.  Her evidence and Chin’s email dated 28 June 2007 to Shogair and all parties concerned reflect the same understanding.

The amounts claimed

52.  Whichever of the two companies was Chin’s employer, his entitlements upon the termination of his employment would have had to be considered in the light of the Contract and, pursuant to that, in accordance with the laws of Hong Kong.  For completeness, I proceed to consider the quantum of Chin’s claim.

53.  The claim consists of the following items:

(1) 6 months' wages in lieu of notice;

(2) wages in arrears;

(3) annual leave pay;

(4) end of year pay;

(5) outstanding disbursement; and

(6) housing allowance.

Wages in lieu of notice

54.  It is common ground that clause 3 of the Contract provides that the employment could be terminated by written notice of 6 months in advance.  Otherwise, compensation equivalent to 6 months’ remuneration of the employee would be payable.  Chin should be entitled to compensation including an amount equivalent to 6 months’ wages in lieu of notice.  The amount would be US$5,883.33 x 6 = US$35,299.98.

Wages in arrears

55.  There is dispute as to whether the wages for the month of June until the termination of Chin’s employment has been paid.  Various receipts were produced apparently in respect of payment of the salary to Chin since 2007.  In court, Shogair explained that he had the receipt prepared and produced it to Chin to sign upon the payment of salary and housing allowance every month.

56.  Among those produced, there is one receipt apparently for the payment of the “salary of 6 Jun” and dated 14 June 2007.  Chin admitted that he signed this particular receipt but the other details were not by his hand.  Notwithstanding that, he was adamant that he has in fact never received his salary for June 2007 as the receipt apparently suggests.

57.  Both Chin and Shogair said that wages were paid in arrears rather than in advance.  However, this practice is not really consistent if one refers to the dates of the various receipts and the payment of salary that they evidence.  Nevertheless, the receipt immediately preceding the one dated 14 June 2007 was dated 11 June 2007 and for payment of the “salary of 5 May”.  In other words, just 3 days after Chin was paid his salary for May, he allegedly got paid for June.

58.  As mentioned above, Shogair’s case is that they simply deferred their decision on Chin’s resignation on 11 June 2007 pending investigation of the alleged misconduct of Chin.  On the other hand, he added that notwithstanding that, it was Chin’s right to receive his salary.  It should be noted that the receipts on their face recorded the payment of not only the salary but also the monthly housing allowance.  The last one dated 14 June 2007 was the only exception.  There is no dispute that the housing allowance for June 2007 has never been paid.  If Chin was regarded as being entitled to his salary for June 2007, one wonders why the housing allowance for June 2007 was not paid as well.

59.  Shogair’s evidence also suggest that 3 days after the salary and housing allowance for May 2007 were paid in arrears, it was decided that the salary for June 2007 should be paid in advance.  As mentioned above, Chin had mentioned known to all parties concerned that he was departing from Hong Kong on 15 June 2007 and would return to work on 26 June 2007.  There was no real need to pay his remuneration in advance before his departure.

60.  Though Chin has the burden to prove his claim, the company has to substantiate its case that the amount has already been paid.  Apart from the receipt dated 14 June 2007, it has no other evidence of such alleged payment.  It is matter of balance of probabilities.  On balance, I accept Chin’s evidence in this respect and find that he has in fact not been paid his salary for June up to the termination of his employment.

61.  Chin claims the wages for June up to the confirmation of the termination on 28 June 2007.  The amount is US$5,883.33 x 28/30 = US$5,491.10.

Annual leave pay

62.  Clause 2E of the Contract provides that the employee was entitled to one month’s leave with salary at the appropriate time approved by the company.  Chin is entitled to payment of such amount.  The amount, as claimed, would be US$5,883.33 x 363/365 = US$5,851.09.

End of year pay

63.  Clause 2C of the Contract provides that the company should pay at the end of every year a bonus equivalent to 5% of the annual net trading profit or no less than a month’s salary payable at the end of January of each succeeding year.  This, I find, was a contractual bonus that the company would be obliged to pay.  Chin is entitled to this amount and therefore another US$5,883.33.

Disbursement

64.  Clause 2F of the Contract entitled Chin to reimbursement of out of pocket expenses incurred in the course of carrying out duties for the company.  Chin claims a total sum of RMB 22,000 representing such disbursements spent on behalf of the company in March, May and June 2007.  In support, he produced 3 claim forms filed with the company on 26 June 2007 together with copies of the relevant invoices or receipts.  The forms were filled in either by the cashier staff or the financial controller of GZHP.

65.  The amounts as per the claim forms are RMB3,851, RMB12,260 and US$645.96 respectively.  In respect of the last amount of US$645.96, the financial controller apparently made a remark on the form indicating that the equivalent amount in RMB should be 4,922.  In other words, the total amount in RMB should be 21,033.  Chin is entitled to this amount of RMB21,033.

Housing allowance

66.  Clause 2D of the Contract provides that Chin would be paid a monthly housing allowance of RMB3,000.  There is no dispute that this monthly allowance had been paid as agreed until the termination of the employment.  Chin now claims for the same in respect of the 6-month notice period.

67.  As mentioned above, Chin had to pay the rent and was reimbursed to the extent of RMB3,000 every month.  It was argued that this was disbursement in nature and therefore Chin ceased to be entitled to any housing allowance upon the termination of his employment.

68.  This argument is wrong.  From the outset, Chin was employed with a view that he would be stationed in the Mainland.  Indeed he had always been so stationed.  Contractually, the monthly housing allowance formed part of his remuneration and was not disbursement in nature.  Had his employment been terminated by 6 months’ notice, Chin would have been entitled to his remuneration, including the housing allowance, until the expiry of the notice.  Likewise, Chin’s compensation in lieu of notice would be equivalent to 6 months’ “remuneration” inclusive of housing allowance (clause 3 of the Contract).

Summary

69.  The amounts that Chin should be entitled, albeit from GZHP, are as follows:

Order

70.  The claim is dismissed.  I make a nisi order that HPI shall have the costs of this action, including any costs reserved but without prejudice to the costs orders previously made in favour of Chin.  Costs shall be taxed, if not agreed, with certificate for counsel.  In the absence of application within 14 days to vary, the costs order shall become absolute.