GHAZI FAIDI v. QANTEX CAPITAL MARKETS LTD AND OTHERS

HCA 272/2018
HCA 486/2018

[2022] HKCFI 1632

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 272 OF 2018

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ACTION NO. 486 OF 2018

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(Consolidated by Order of Master Queenie Lau dated 2 October 2018)

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D E C I S I O N

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I.  INTRODUCTION

1.  This is an employment dispute.  The plaintiff was an employee of the 1^st Defendant (“the Company”), a licensed financial institution engaged in the business of stock brokerage. While under the employment of the Company, the Plaintiff held the title of “Co-Head, Nikkei Options Desk” between 2011 to 2014, and was given the dual titles of “Desk Head of Nikkei Options” and “Co-Head of Asian Broking” thereafter.

2.  The 2^nd and 3^rd Defendants (“D2” and “D3”)  are brothers and are together the majority shareholders, directors and responsible officers of the Company.

3.  The two actions relate to the alleged entitlements of the Plaintiff under the second employment contract dated 3 April 2014 (“the Employment Agreement”)  that the Plaintiff as employee has entered into with the Company as the employer. In the Employment Agreement, D2 and D3 signed as guarantors in relation to the terms set out in Schedule 2 thereof.

4.  The Plaintiff has lodged a claim in the Labour Tribunal against the Company on 9 November 2017. The matter was transferred to the High Court and became HCA 468/2018, which was then consolidated with HCA 272/2018 commenced by the Plaintiff against all three Defendants. The Plaintiff claims for the payment of liquidated damages of US$1,000,000 less the part-payment of US$250,000 made pursuant to the Schedule 2 of the Employment Agreement, and payment of his share of the legal costs in the outstanding sum of HK$296,515 incurred in relation to a share purchase transaction that fell through.

5.  By a Consolidated Defence and Counterclaim dated 12 February 2019, the Defendants deny the Plaintiff’s claims. The Company counterclaims for the return of legal fees and the sum of US$250,000 paid to the Plaintiff by mistake, and 3 months’ wages in lieu of notice under clause 15.1 of the Employment Agreement.

6.  By summons dated 16 July 2020, the Plaintiff applies to have 3 preliminary questions of law or construction to be finally determined without a full trial of the action, pursuant to RHC Order 14A.  The three questions and the Plaintiff’s proposed answers are set out below –

The First Question

Whether, on the proper construction of the Deed of Termination dated 4 December 2015, clauses 2 and 5 thereof have the effect of superseding the Plaintiff’s rights and claims under clause 7.1 and Schedule 2 of the Employment Contract dated 3 April 2014.

The Plaintiff proposes that the answer should be “no”.

The Second Question

Whether the notice the Plaintiff served on the D1 on 10 February 2017 (“Notice”)  was a valid notice under clause 2 (d)  of Schedule 2 of the Employment Agreement.

The Plaintiff proposes that the answer should be “yes”.

The Third Question

Whether the Notice was a valid notice under clause 2 (e)(iii)  of Schedule 2 of the Employment Agreement.

The Plaintiff proposes that the answer should be “yes”.

7.  On the bases of the proposed answers to the three questions, the Plaintiff applies for judgment to be entered in favour of the Plaintiff for the balance of the sum due under clause 2 of Schedule 2 and for interest.

8.  The Plaintiff’s application is supported by his own affirmation. The Defendants rely on an affirmation made by D3 in resisting the application.

II.  BACKGROUND FACTS

9.  The facts set out below are undisputed.[1]

10.  By an employment agreement dated 13 July 2011, the Plaintiff commenced employment with Qantex for a fixed term of 3 years (“the Initial Employment Agreement”).

11.  Shortly before the Initial Employment Agreement expired, the Plaintiff entered into a new employment agreement (“the Employment Agreement”), dated 3 April 2014, for an initial term of 39 months, to be continued indefinitely upon the expiry of the initial term until terminated[2]. The Employment Agreement contains terms that provide the Plaintiff with incentive in the form of a sign-on bonus (“the Sign-On Bonus”)  for agreeing to continue his employment with the Company under clause 7.1 -

“…. You will receive a one off (sic)  payment for re-signing your employment contract. The details of this payment are outlined in Schedule 2. You agree to repay to the Company on a pro-rata basis any payment made under Schedule 2 if you resign or are summarily dismissed within 39 months of the Commencement Date.” (Emphasis added)

12.  Schedule 2 of the Employment Agreement (“Schedule 2”)  contains the following “details of … payment” referred to in clause 7.1 in the form of two options at the election of the Plaintiff -

“You will be entitled to receive a one off (sic)  payment for the re-signing of your employment contract. The payment will be at your choice of the following alternatives.

1)  A cash payment of US$750,000

2)  The Company agrees to:

a. Procure the transfer of 1,231,000 ordinary shares (the “Shares”)(representing a total of 5% of the company’s outstanding ordinary shares)  to you from existing shareholders within. [days] of the execution of this Employment Contract (the Transfer”);

b. Pay any stamp duty that may be payable in connection with the transfer referred to in clause (2)(a)  of this Schedule 2;

c. Procure on your behalf a Deed of Adherence to any existing shareholders’ agreement to which any other shareholders are a party at the time of the Transfer;

d. Between 3 October 2014 (being for the avoidance of doubt, a day 6 calendar months after the signing of this Employment Contract), up to and including the end of the Term (as defined in clause 2.1 of the Employment Contract), within 3 months of receiving written notice of exercise under this clause, transfer to you the sum of. US$ 0.8124/share in consideration for the transfer to the Company (or its agent, nominee or assig)  of the Shares (in any amount of shares that you elect, provided the maximum amount payable for the total of the Shares does not exceed US$1,000,000);

e. If any relevant transaction occurs by which the shareholders of the Company (including yourself, whether by way of tag-along or drag-along rights acquired as a result of signing the shareholders’ agreement pursuant to clause 2(c)  of this Schedule 2)  agrees (sic) to surrender, transfer, or otherwise beneficially assign their interests in the shares of the Company to a third-party (the Third-Party Buyout), you agree that:

i.  To the extent the right specified in clause 2 d)  of this Schedule 2 remains unexercised at the date of completion of Third-Party Buyout, such rights in clause 2(d)  will expire and be replaced by the rights set out in clause 2(c)(iii)  below; and

ii.  any up-front cash payment for the Third-Party Buyout will be set off against any remedy sought under clause 2(f)  of this Schedule 2.

And the Company further agrees that:

iii.  At any point during the period between the completion of the Third-Party Buyout, and the end of the Term (as specified in clause 2.1 of the Employment Contract), you may elect to forgo any future earn-out rights which you may acquire as part of the Third-Party Buyout in return for a cash payment equal to the formula in sub paragraph (1)  below, which the Company agrees to make or procure within 3 months of being so notified;

1.  CASH PAYMENT = US$ 1,000,000 less any consideration received as part of the Third -Party Buyout less any payment received pursuant to clause 2(d)  above less any earnout commission already received;

2.  For the avoidance of doubt, and in the event of any dispute, it is the parties’ express intention that the formula in the preceding paragraph preserves a right by you to receive a total sign-on bonus of US$1,000,000 within the term, but to properly account for any consideration (whether upfront payments or earn out commissions)  that may be received as a result of any Third-Party Buyout.

AND Simon Gray and Matthew Gray, being a party only to this Schedule 2, jointly and severally agreed to procure the making of such cash payment referred to clause 2(e)(iii)  above and further jointly and severally personally guarantee such payment should the Company fail to make such payment within 14 days. If it's OK in the diary, it's okay.

(Emphases added)

13.  In July 2014, D2 and D3 entered into an agreement in relation to the transfer of the Company’s shares to the Plaintiff pursuant to clause 2  (a), (b)  and (c)  of Schedule 2 (“Shareholders Agreement”). On 17 October 2014, D3 transferred 5% of the shares in the Company (“the Shares”)  to the Plaintiff.

14.  On 24 December 2014, the Plaintiff, D2 and D3 entered into a share purchase agreement (“SPA”)[3] with CBD Investment (Cayman)  Corporation (“CBD”). Under the SPA, CBD agreed to purchase, and the Plaintiff, D2 and D3 agreed to sell 85%[4] of the shares of the Company to CBD (“the CBD Transaction”).

15.  Clause 4.1 (c)  of the SPA provides that it is a condition precedent for the CBD Transaction that the Shareholders Agreement has been terminated on terms satisfactory to CBD acting reasonably (“SPA Condition Precedent”).

16.  On 4 December 2015, the Plaintiff, D2 and D3 entered into a Deed of Termination (“Deed of Termination”)[5], under which the Shareholders Agreement would be terminated.  Clauses 2 and 5 of the Deed of Termination provide as follows –

“2. PREVIOUS AGREEMENTS

With effect from the date of the Deed, all previous agreements between the Parties relating to their interests, rights, and obligation in respect of the Company, including the Shareholders Agreement, shall be terminated and will have no further effect.

5. ENTIRE AGREEMENT

This deed constitutes the whole agreement between the parties relating to the subject matter herein (no party having relied on any representations made by any other Party which is not a term of this Deed)  and no future variation of any term of the Deed shall be effective unless made in writing and signed by each of the Parties.”

17.  The parties to this consolidated action and CBD entered into a Supplemental Agreement dated 4 December 2015 (“the Supplemental Agreement”),[6] pursuant to which certain clauses of the SPA including on the timing for the payment of the ”Initial Cash Consideration” were amended from  payment “on Completion” to “payable as soon as practicable after Completion, but… no later than [30] March 2016[7]”.

18.  On 28 January 2016, the Plaintiff transferred the Shares to CBD, as did D3 his shares in the Company, whereupon CBD became the majority shareholder of the Company.

19.  CBD failed to pay the consideration under the SPA and the Supplemental Agreement whether by the extended payment deadline or at all. This led to the execution of an unwind deed dated 20 February 2017 (“the Unwind Deed”)  between D2, D3 and CBD. The Plaintiff did not sign the Unwind Deed.

20.  On 10 February 2017, the Plaintiff served a notice on the Company (“the Notice”),[8] with copies sent to D2 and D3 as guarantors, stating as follows-

“I refer to my contract of employment with [the Company] dated 3 April 2014. I am writing to notify you [i.e. the Company] under Clause 2(d)  and 2(e)(iii)  of Schedule 2 [of the Employment Agreement] of my decision to elect to receive a cash payment calculated in accordance with sub-clause 1. Based on that formula, the payment is USD1,000,000 (US Dollar one million). I look forward to receiving payment within three (3)  months of the date of this notification in accordance with Schedule 2”.(Emphasis added)

21.  On 7 July 2017, the Company made a payment of US$250,000 in two separate tranches to the Plaintiff. Despite the Plaintiff’s demands, the Defendants have not paid the Plaintiff the balance of the Sign-On Bonus in the amount of US$750,000.

22.  On 2 July 2017, the initial 39-month term of the Employment Contract was completed.[9] On 3 October 2017, the Plaintiff’s employment came to an end.[10]

III.  APPLICABLE LEGAL PRINCIPLES

Preliminary Question

23.  The applicable legal principles are not in dispute. In Rockwin Enterprises Ltd v Shui Yee Ltd[11] Recorder Ma SC (as he then was)  has laid down a three-step approach for considering an application for determining a preliminary question, as follows -

(1)  Is the relevant question one of law or of the construction of a document?

(2)  If so is that question one that should be determined under the O.14A procedure?

(3)  If the answer to (2)  above is yes, what is the determination of that question and what orders should the Court make as a consequence of determining that question?

24.  Step (2)  above requires the Court to be satisfied of the following [12]–

(1)  That the question of law or construction is one that is suitable for determination without a trial. In other words, the Court has all the necessary facts and matters before it in order to determine the question of law or construction;

(2)  That if so suitable and should it be determined by the Court, that it will finally determine (subject to a possible appeal)  the entire cause or matter or any issue or claim therein; and

(3)  Even if the above two conditions are fulfilled, that the Court in its discretion is satisfied that the question is one that ought to be determined under O.14A.

25.  In the same judgment, Recorder Ma SC accepted as correct the principles stated by the English Court of Appeal in Korso Finance Establishment Anstalt v John Wedge[13], where the court overturned the decision of the court below in refusing to entertain the application for a preliminary question to be determined unless the determination of the question would finally determine the entire matter, and allowed the appeal on the basis that the wording of O.14A did not require that the determination of the relevant question should finally determine the action. The English Court of Appeal considered that the question of construction before it was well capable of constituting an issue in the cause or matter.

26.  Of the factors set out in the preceding paragraph, the matters that may be relevant in the exercise of discretion under sub-paragraph (2)  would include whether the determination of the question might facilitate settlement or result in saving of time or costs[14].

27.  It is well-established that the O.14A procedure is inappropriate for determining a question where the related “issues of facts are interwoven with legal issues to be determined”.  Questions of law or construction of documents cannot be dealt with on assumed or hypothetical facts.  Where it is necessary for the court to hear evidence to resolve a factual dispute in order to come to a determination on the question of law or construction it would not normally be suitable to invoke O.14A: Shell Hong Kong Ltd v Yeung Wai Man & Kiu Yip Co Ltd.[15]

28.  However, even where determining the question will finally determine the issue or the entire cause, it does not follow that the court should automatically be req uired to embark on the determination of a question under O.14A[16]. The court retains a residual discretion not to embark on a determination of a question under O.14A even if the first two requirements set out in §22 above are satisfied: Rockwin at §21.  In exercising this residual discretion, the court must be well aware of the risk of making a determination where it is not seized of all the necessary facts and matters, and weigh in any likelihood that there will be a trial: Cable & Wireless HKT Int’l Ltd v New World Development Ltd[17].

29.  Words of caution have been sounded against deciding questions of legal principles without knowing the full facts.  The court should not place itself in a precarious position in the event that the basis on which it made its determination may turn out to be inconsistent with facts subsequently found.  It should not by making a determination bind its hands in its future fact finding: China Ping An Insurance (HK)  Co Ltd v Tsang Fung Yin Josephine.[18]

Construction of Contract

30.  On the principles of construction of documents, this court will follow the well-established principles set out in Jumbo King Ltd v Faithful Properties Ltd[19] -

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless, and they may have said things which, if taken literally, means something different from what they obviously intended.”

31.  The Court must bear in mind the overall importance of context when construing contractual documents: Fully Profit (Asia)  Ltd v Secretary for Justice[20].

32.  The construction of a term of contract is to be carried out by identifying the meaning of the relevant words, in light of the natural and ordinary meaning of those words, the overall purpose of the contract, any other provisions of the contract, the facts known or assumed by the parties at the time, and common sense, but ignoring the subjective evidence of the party’s intentions. It is not for the Court to go behind the terms of a finalised document or speculate on why the parties should have agreed to a particular wording, or to relieve a party of the consequences of agreeing to terms containing clear wording.: Maeda KKKK v Bauer Hong Kong Ltd [21]. 

33.  If one would conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other: Maeda KKK v Bauer Hong Kong Ltd.[22]

34.  Reliance placed on commercial sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. A court should be very slow to reject the natural meaning of a provision as correct, simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. Commercial common sense is not to be invoked retrospectively. Maeda KKK v Bauer Hong Kong Ltd.[23]

35.  In striking a balance between the indications given by the language and the implications of competing constructions, the Court must consider the quality of drafting of the clause (the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention), and it must be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest Maeda KKK v Bauer Hong Kong Ltd.[24]

36.  As a general rule, the intention of the parties is to be ascertained from the words used in the deed.  It is with only limited exceptions that extrinsic evidence may be given to show the real intention of the parties. On occasions, this rule may lead to the actual intention of the parties being defeated, but the rule is applied to ensure certainty in legal affairs: AIB Group (UK)  Ltd v Martin.[25]

 IV.  DISCUSSION

a.   The First Question

37.  Applying Step (1)  of the test in Rockwin, the First Question is clearly one of law and/or construction of contract. It requests an answer on whether the Defendant’s pleaded position on the construction of clauses 2 and 5 of the Deed of Termination[26] is correct. 

38.  The Plaintiff’s position in his Reply and Defence to Counterclaim is that clauses 2 and 5 only affect the Plaintiff’s rights as a shareholder of the Company, and leave untouched the Plaintiff’s rights to the Sign-On Bonus under Schedule 2 of the Employment Agreement.

39.  In cannot be disputed that the Deed of Termination was executed to satisfy the SPA Condition Precedent[27] as set out in the SPA. As seen from the undisputed facts and the documents executed, its obvious purpose is to terminate the Plaintiff’s rights as a shareholder under the Shareholder Agreement to the satisfaction of the purchaser in the Third-Party Buyout, CBD, so that the share purchase transaction can proceed.

40.  The wording of clause 2 in focus is whether the termination of “all previous agreements between the parties relating to their interests, rights and obligations in respect of the Company, including the Shareholder Agreement” includes termination of selected provisions of the Employment Agreement, namely, clause 7.1 and Schedule 2.

41.  Mr Alder submits that although the Deed of Termination does not refer to the Employment Agreement, it does not mean that it could not terminate some of its provisions, including the provisions in Schedule 2 clause 2. He invites the court to construe clause 2 of the Deed of Termination widely as terminating “all previous agreements between the parties”, including but not limited to the Shareholders Agreement, but also “such parts of the Employment Agreement that relates to the employee’s interest in the Company’s shares”, in particular its Schedule 2.

42.  Mr Alder relies on Liquidators of China Medical Technologies Inc v Tsang Tak Yung Samson[28] to support reading a wide meaning into the words “relating to”. I do not find the decision has any application at all, as the issue for determination in that case was on statutory interpretation, not construction of contract.  The dicta on the scope of the meaning of the phrase used in the context of legislation is of no assistance to this court here.

43.  Schedule 2 of the Employment Agreement contains elaborate terms of the Company’s agreement to a “one-off payment”[29] as the Sign-On Bonus in two alternatives. The Company promised to either pay the Plaintiff US$750,000 in cash, or at his election “procure the transfer of” 5% of its shareholding to him, which shareholding could be transferred back to the Company at a fixed price on notice given by the Plaintiff between the expiry of 6 months from the start of the term of employment till its end (3 October 2014 to 2 February 2017)[30]: Schedule 2 clauses 1 and 2.  The performance of the Company’s obligations in Schedule 2 to honour the payment of the Sign-On Bonus in the event of a Third-Party Buyout (clause 2 (e)(iii))  are guaranteed by D2 and D3 personally.

44.  The Deed of Termination devotes a section to “Background”, from which the purpose of executing the deed is made clear. It refers to the Shareholders Agreement under (A), the SPA under (B), the Supplemental Agreement under (C), and specifically clause 4.1(c)  of the SPA, namely, the SPA Condition Precedent under (D). Under (E)  of the same section, it states –

“The Parties now wish to terminate the Shareholders’ Agreement on the terms appearing in this Deed.”

45.  The construction of a contract involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve: Jumbo King. Bearing in mind the factual context and the purpose for which the Deed of Termination was brought into existence, I do not accept that clause 2 would have the effect of, selectively and without specific reference, terminating or superseding unspecified rights of the Plaintiff as an employee contained in any other document without even referring to it.  

46.  If the Defendant’s suggested interpretation were to be given its full effect, the obligations of the Plaintiff as an employee of the Company under the Employment Agreement would likewise have to be regarded as an “agreement relating to the … obligations in respect of the Company”, and would have been “superseded” by the Deed of Termination.  This is a consequence Mr Alder himself would accept as the parties’ intention. However, his selective approach of reading it as terminating whatever agreement that “relates to” “interests, rights … in respect of the Company” does not find support in the correct approach to construction set out above. I should bear in mind the fact that despite a list of the relevant background documents having been set out, the parties to the Deed of Termination chose to make no reference to the Employment Agreement, less still the Plaintiff’s guaranteed right to the Sign-On Bonus under Schedule 2 clause 2 (d)  and (e)  which it purports to terminate or supersede.  

47.  In fact, under Schedule 7 paragraph (g)  of the SPA, which is expressly referred to in paragraph (B)  of the “Background” section of the Deed of Termination, the Company is prohibited from “[making] any change to the terms and conditions of employment of any … of its …Senior Employees (including remuneration, bonuses, pension entitlements and other benefits)” before Completion and without the written consent of CBD. This provision would certainly apply to the terms of employment of the Plaintiff under the Employment Agreement, and would have precluded the Company from making any significant change to the terms governing the Sign-On Bonus payable to the Plaintiff.  The presence of this provision in the SPA makes it unlikely for the Termination Agreement to have the effect contended for by the Defendants. It makes it inherently unlikely that that the parties to the Termination Agreement had intended any deletion of prior existing rights of the employee may have the effect of significantly modifying the rights of the Plaintiff even if by agreement, and risking non-compliance of the SPA. This part of the factual matrix further refutes the argument put forward by the Defendants on construction.

48.  It is clear from the provisions for the Sign-On Bonus that the possible Third-Party Buyout envisaged by the parties at the time of entering into the Employment Agreement was a process that would take a period of time to complete. The parties’ intention for the rights and obligations of the parties as provided for under Schedule 2 clause 2 to survive and continue to subsist throughout this period is clearly spelt out in clause 2 (e)  (i)  and (iii)  of Schedule 2.  This view is fortified by Schedule 7 of the SPA, as referred to above, which makes it an obligation on the part of the Company to maintain without any substantial change the terms of employment including bonus entitlement of senior employees such as the Plaintiff. This is obviously in order to ensure stability of the operation pending completion of the purchase. The above is inconsistent with the proposition that somehow by executing the Deed of Undertaking, the parties had intended to terminate some unspecified rights of the Plaintiff in the Deed of Termination.

49.  Step (2)  of the test in Rockwin requires the court to be satisfied that the question is suitable for determination without a trial, in that it has all the necessary facts and matters before it in order to determine the question of law or construction. Counsel for the Defendants Mr Alder submits that the First Question raises issues of fact that require determination, and therefore does not qualify for summary determination under the O.14A procedure. The reference to issues of fact is to those raised by the Plaintiff in his pleadings[31]. On the other hand, counsel for the Plaintiff has indicated he only intends to rely on pleaded facts that are not in dispute[32], and does not need to and will not rely on any facts in dispute in support of this application[33].

50.  On the question of construction, the position of Mr Alder in oral submission was that the terms of the Deed of Termination was clear and the Defendants do not find it necessary to rely on any evidence: it was the Plaintiff who relied other facts which are disputed in the Defence. I agree that the true nature of the First Question is one of construction of the agreement itself, which can be determined simply by referring to the terms of the Deed of Termination and with reference to the undisputed factual matrix as the Plaintiff now proposes. I do not accept Mr Alder’s argument that the Plaintiff is precluded from not relying on any pleaded facts that are in dispute for the purpose of determination of the First Question. Given the Plaintiff is only relying on facts which are not in dispute for the purpose of the First Question, I do not find any evidence given by D3 on the commercial benefits perceived by the Plaintiff of the evolving terms of the share purchase transaction with CBD to be of any assistance.  I am prepared to accept that on this question of construction, the court has all the fact necessary facts before it to make the determination.

51.  One of the factors to be considered in Step (2)  of the Rockwin test is whether the determination of the preliminary question might facilitate settlement or result in the saving of time and costs: see paragraph 26 above.

52.  Apart from this principal claim of the Plaintiff, the only other monetary claim of HK$296,515 involves legal costs in relation to the share purchase transaction with CBD that are not yet reimbursed to the Plaintiff. On the other hand, the Company counterclaims for the return of the payment by mistake of (i)  legal fees relating to the CBD transaction, and (ii)  US$250,000 which the Plaintiff agrees to account for in his claim from the sum of US$1,000,000. On top of that, the Company disputes the Plaintiff’s allegation of constructive dismissal based on the wrongful non-payment of the balance of the US$1,000,000. The Company denies constructive dismissal and counterclaims for 3 months’ salary in lieu of notice in the sum of HK$375,001.  Out of the three items in the Defendants’ counterclaim, the lion share also goes to the claim for the return of US$250,000 made by “mistake”, which the Plaintiff will account for if it succeeds in its principal claim for the payment of US$1,000,000.

53.  Plaintiff’s counsel Mr Jason Lee contends that the determination of the First Question without a trial will likely result in a saving of time and costs for the parties. This is on the basis that the Plaintiffs’ main claim being US$1,000,000 minus part-payment of US$250,000[34], the First Question will dispose of a “significant part of the dispute” as well as the Counterclaim for the return of the same part-payment of US$250,000 made by alleged mistake[35]. The Plaintiff perceives that the determination of this question in the negative “may well facilitate and result in the settlement of the entire proceedings”[36], and would enable the Court to enter partial judgment on the said claim and counterclaim.

54.  It is submitted on behalf of the defence that the determination of the issue will not obviate a trial, and the court should be careful not to tie its hands in the event that the facts to be decided after a trial may drive a different conclusion. The Defendants rely on the decision of Stone J in Cable & Wireless[37], which distinguishes the decision of the English Court of Appeal in Korso[38]. The learned judge pointed out that the case before him is a far cry from the case before the English Court of Appeal, where the court took the opportunity to construe a document the effect of which would almost certainly be dispositive of what was probably perceived as an unmeritorious action.

55.  As will be apparent from the judgment of Stone J in Cable & Wireless, the case before him was a claim worth HK$280 million in value in delivery fees said to have been paid by mistake by one telecom company to another. It gave rise to questions on the construction of two Determinations made by the Telecommunication Authority pursuant to statutory powers. The background in which the telecommunication market was opened up to free competition in the mid 1990’s, and the technical aspects of how fees were to be determined in the context of cross-territory connection were complex. The lengthy questions originally framed in the summons were abandoned, with two shortened questions re-formulated in a revised summons which referred to two paragraphs of the pleadings. In the end, only one was proceeded with, but was still regarded to have been “mounted too broadly” even in its revised form[39]. The learned judge placed “heavily in the balance the overwhelming probability that there will be a trial of this action”, and considered the possibility of settlement as a result of the determination of the reframed question unlikely. The decision made on the facts before him was plainly correct and was upheld by the Court of Appeal[40].

56.  The First Question is a crisp question of construction of clauses 2 and 5 of the Deed of Termination, set against factual matrix that is not in dispute.  It is a far cry from the question proposed for determination before Stone J in Cable & Wireless.  Evidence on the commercial sense should not be invoked to undervalue the importance of the language of the provision which is to be construed: Maeda.

57.  That said, the First Question relates to the principal claim, which, if successful, would substantially reduce the scope of the parties in dispute, leaving only a much smaller claim and relatively minor counterclaims of an aggregate value within the jurisdiction of the District Court, and hardly any commercial reason to expend substantial legal costs and time in continuing expensive litigation.  However, the court must not lose sight of other hurdles that the Plaintiff will have to cross in order to succeed in his principal claim.  This relates to the Second and Third Questions, which will be dealt with below.  It is only if those two questions, or either of them, is also disposed of in favour of the Plaintiff, that I would see the force in the Plaintiff’s argument that the determination of the questions would dispose of the lion’s share of the causes in dispute, and would likely lead to settlement of the rest and saving in costs.

58.  The fact that the matter may still go to trial because there exists any other defence that would require a trial to determine should indeed go into the weighing scale in the court’s exercise of discretion on whether to determine the question.  The court must have regard to the facts pertinent to the particular case under consideration.  

59.  It would therefore be appropriate to discuss the exercise of my discretion after considering all the three questions.

b.   The Second Question and the Third Question

60.  These two questions relate to the validity of the Notice served pursuant to the clause 2 of Schedule 2.  Clauses 2 (d)  and 2(e)(iii)  of Schedule 2 define alternative but mutually exclusive circumstances in which the service of a notice will trigger payment obligation on the part of the Company and obligations under the guarantee provided by D2 and D3. 

61.  A clause 2(d)  notice may be given within the designated period, i.e., between 6 months after commencement to the end of the 39-month term of the Employment Agreement, for up to the full amount of the Shares to be transferred back for a proportionate payment of up to US$1,000,000.  

62.  This right may be exercised at any time during the relevant period, but will be modified by clause 2(e)  where Third-Party Buyout occurs and the shareholders had enter into an agreement to “surrender, transfer or otherwise beneficially assign” the shares to the third-party buyer. “Third-Party Buyout” is defined as –

“If any relevant transaction occurs by which the shareholders of the Company (including yourself whether by way of tag-along or drag- along rights acquired as a result of signing the shareholders’ agreement pursuant to clause 2(c)  of this Schedule 2)  agrees (sic) to surrender, transfer, or otherwise beneficially assign their interests in the shares of the company to a third party (“the Third Party Buyout”)…”

63.  Clause 2(e)  applies where there is a Third-Party Buyout, and the shareholders including the Plaintiff had entered into an agreement to transfer their respective shares in the Company to the third-party buyer.  In such circumstances, as sub-paragraph (i)  stipulates –

“…to the extent the rights specified in clause 2(d)  of this Schedule 2 remains unexercised at the date of completion of the Third-Party Buyout, such rights in clause 2(d)  will expire and be replaced by the rights set out in clause 2(e)(iii).”

(Emphasis added)

64.  In other words, the right to payment of the Sign-On Bonus upon transfer of the Shares under clause 2(d)  expires in so far as it is not exercised by the date of the completion of the Third-Party Buyout, and is replaced by the right under clause 2(e)(iii)  “during the period between the completion of the Third-Party Buyout and the end of the Term”.

65.  The mutually exclusive nature of the two provisions is recognised in §22 of the Amended Statement of Claim, where the Plaintiff pleads that the Notice was served upon the Company by the Plaintiff “electing to receive in accordance with clause 2(d)  or, alternatively, 2 (e)(iii)(1)  of Schedule 2” (emphasis added), and the Plaintiff is therefore entitled to payment from the Company of US$1,000,000 by 10 May 2017.  However, this is at variance with the language of the Notice, which claims to “notify [the Company] under clause 2(d)  and (e)(iii)  of Schedule 2 of my decision to receive [the Sign-On Bonus]”.

66.  Although the Plaintiff’s proposed answers to both questions are “yes”, even if the two questions were appropriate to be determined summarily in an O.14A procedure, the court would not be able to answer both of them in the positive. Putting the Plaintiff’s case at its highest, only one of the two provisions in the circumstances would give the Plaintiff the right to payment by the Notice.    

67.  In §22 of the Consolidated Defence and Counterclaim, the Defendants deny that “the Notice was a valid notice under either clause 2(d)  or clause 2(e)(iii)  and/or the Plaintiff is entitled to receive any payment from the Defendant under Schedule 2”.

68.  These Second and Third Questions address the defence raised in §22 of the Consolidated Defence and Counterclaim against the principal claim of the Plaintiff, and are directly relevant to the basis of the Defendants’ principal counterclaim for the return of the US$250,000 paid by mistake.  

69.  The undisputed facts relied on by the Plaintiff as relevant to the two questions are that the Shares were transferred to CBD ahead of payment for the purchase price by CBD, but payment was never made. It is not disputed the Plaintiff did not enter into the SPA as a shareholder by exercising any tag-along right, nor was any drag-along right exercised by other shareholders against him. It is common ground that the Plaintiff did not execute the Unwind Deed.

70.  However, Plaintiff did not make clear whether the rights exercised under the Notice was exercised before the completion date of the Third-Party Buyout, in which case clause 2 (d)  applies, or whether it was a right exercised after the completion date, in which case only clause 2 (e)  (iii)  could apply. Neither the two questions nor the submissions advanced by the Plaintiff before the court were expressed to be on the alternative basis[41]. On the other hand, §22 of the Statement of Claim states that the two provisions are relied on in the alternative, which does not accord with the expression in the Notice itself. 

71.  The Defendants’ contentions include those grounds stated under the First Question above, i.e. that the Schedule 2 rights to receive the Sign-On Bonus was terminated and superseded by the Termination Agreement. By submitting that clause 2(e)(iii)  does not apply because no tag-along/drag-along rights were relied on by any of the parties, the Defendants impliedly contend that no “Third-Party Buyout” as defined in clause 2(e)  had taken place, and therefore only the rights under clause 2(d)  under the Second Question is left to be considered. 

72.  The Defendants’ submissions on clause 2(d)  are –

(1)  Schedule 2 clause 2(d)  only applies where the Plaintiff remains in a position to return the Shares to the Defendants, but at the time of the Notice the Plaintiff was no longer the legal owner of the Shares;  

(2)  In the CBD Transaction, the Plaintiff was not exercising tag-along rights, nor was he forced to enter into the CBD Transaction by way of drag-along rights, which is what Schedule 2 clause 2 (e)  is limited to;

(3)  therefore it is not open to the Plaintiff to rely on Schedule 2 clause 2(d)  or (e)(iii)  to serve the Notice.

73.  The Plaintiff submits that the two questions are questions of law or of construction, and maintains the position that they can be decided on the basis of the agreed facts set out above, as there are “no real disputes between the parties as to the material facts underlying Question 2”, only disagreement as to the legal effects and consequences. [42]

74.  The Affirmation of D3 states that the Defendants were advised that the two questions are neither of law nor of construction, but questions of fact to be determined by the court[43]. Mr Alder for the Defendants takes a slightly different position, and submits that these are questions of construction intertwined with issues of fact which are in dispute, and therefore not suitable for determination under the O.14A procedure[44]. The Affirmation of D3 at §§32 and 33 refers back to §§22(3)  and 22(4)  of the Consolidated Defence and Counterclaim. D3 also puts forward matters pertaining to the commercial negotiations of an alleged cash top-up and the related motives of the Plaintiff’s entering into the SPA and subsequent amendment agreements[45], which are not pleaded in the defence. The evidence put forward in D3’s affirmation[46] contains allegations of facts and evidence of subjective intention pertaining to the commercial sense of the terms of Sign-On Bonus in Schedule 2, and alleged changing mentality of the parties including the Plaintiff, as negotiations progressed and the SPA was amended once and again. In the light of the principles set out in paragraph 32 above and in Hellman Holder v Webster[47],  and in the absence of pleading of any of those facts,[48] the court is unable to take such evidence into account in the construction exercise.

75.  In considering whether the court has all the facts necessary to determine the First Question, the court finds that there is no evidence available from the undisputed facts on whether the Notice was served before or after the relevant “date of completion of the Third-Party Buyout” as defined under clause 2 (e). If the Notice was only served after the date of completion, there would have been no question that the Second Question should be answered in the negative, even without considering the other arguments advanced by the Defendants.

76.  It is common ground that as a result of at least the first of the two amendment agreements[49] (dated 4 December 2015 and dubbed “the Supplemental Agreement" by the Defendant[50]), which the Defendants agreed was signed, full payment for the consideration under the SPA was postponed until after completion. Whereas clause 3.2 of the SPA[51] provides for payment of the “Initial Cash Consideration” to the sellers “on completion”, the Supplemental Agreement provided for payment to be “as soon as practicable after completion”, requiring CBD only to have paid $1 before the date of completion[52].  A copy of the second amendment agreement dated August 2016 but bearing only the signature of the Plaintiff and his witness (a document not admitted by the Defendants in pleadings to have been executed[53])  shows payment of the Initial Cash Consideration further postponed to a date “after Completion on a date agreed in writing” [54].

77.  However, the fact that payment was postponed till after completion still does not resolve the question of whether “completion” did take place and if so whether before or after the date of the Notice.  “Completion” within the meaning of the SPA (clause 6)[55] does not mean only the transfer of the Company’s shares by the sellers to CBD, but involves a series of obligations to be complied with by the sellers pursuant to Part A Schedule 4 of the SPA[56], unless waived by the purchaser in the absence of full compliance. The Second Question can only be determined in the positive (subject to other defences)  if “completion” within the meaning of clause 6 of the SPA has not taken place and therefore the right under clause 2(d)  not replaced under clause 2(e)(i). However, there is no assertion, evidence or admission to that effect. In the circumstances, the court simply lacks the necessary factual basis to enable it to determine the Second Question. Step (2)  of the Rockwin test is not satisfied.

78.  In view of my conclusion on the Second Question, there is no need to deal with the rest of the defence arguments on the same question, but I shall refer to them for the sake of completeness. The conclusion of the court on the issues discussed below is subject to my conclusion in the Second Question set out in the preceding paragraph.

79.  The Defendants take the position that at the date of the Notice, the Plaintiff has already “sold” the Shares to CBD.  That said, it is common ground that CBD never paid the consideration for the transfer of the Shares. It follows that there is no basis whatsoever for CBD to retain the legal title to the Shares transferred. CBD has therefore been holding the shares on constructive trust for the transferor and is obliged to return them to the Plaintiff.  The beneficial title to the Shares remains with the Plaintiff.

80.  On a plain reading of clause 2(d)  of Schedule 2, there is nothing in the words “in consideration for the transfer to the Company … of the Shares” to suggest that the legal title of the Shares must, as a “condition”[57] of the agreement,  also be in the hands of the Plaintiff at the time of the Notice, even if he only has the beneficial title and would be legally entitled to call for the transfer back of the Shares. Given the Plaintiff remains beneficially entitled to the shares, the Notice issued by the Plaintiff pursuant to clause 2 (d)  is not made invalid simply because he has yet to have procured the legitimate return of the Shares to him from CBD. Whether the Plaintiff will manage to provide the consideration for the payment of US$1,000,000 under clause 2 (d), i.e. by securing the legal title of the shares for transfer to the Company, is a separate matter.

81.  I turn now to the Third Question, which requests the Court to determine whether the Notice was validly issued based on clause 2(e)(iii)  of Schedule 2 to the Employment Agreement.

82.  As discussed above, whether clause 2(e)  has any application likewise depends on whether “completion” of the Third-Party Buyout within the meaning of clause 6 of the SPA had or had not taken place at the time of the Notice.  Again, for the lack of assertion, evidence and admission that “completion” within the meaning of clause 6 of the SPA has already taken place, the Court is unable to determine this question for the same reason that it is unable to determine the Second Question.

83.  In deference to counsel’s arguments, I shall deal with the main submissions advanced under the Third Question, apart from those advanced by Mr Alder generally under the First and Second Questions which I have already dealt with above, namely, that there are relevant background issues raised in pleadings and in D3’s the affirmation that are in dispute and ought to be investigated at trial.

84.  Mr Alder for the Defendants submits that the Plaintiff is only entitled to rely on clause 2 (e)(iii)  to issue a notice to claim for the payment of US$1,000,000 if he joins the CBD Transaction by exercising his tag-along right or by other shareholders exercising their drag-along rights against him, but that was not the case. He had entered into the CBD Transaction on his own accord outside of those terms. Mr Alder relies on the words “if any transaction occurs by which the shareholders of the Company (including yourself whether by way of drag-along or tag-along rights…)  agrees to surrender, transfer … their interest in the shares of the Company to …  the Third-Party Buyout” as defining the limited circumstances in which the right to serve a notice is available to the Plaintiff.

85.  The parties’ disagreement is on how the above words in parenthesis, which are grammatically imperfect, should be read, and the legal effect thereof.  Mr Alder submits that the reference to “whether by way of drag-along or tag-along rights” limits the Plaintiff’s rights and disentitles him to the right under clause 2 (e)(iii)  if the Plaintiff has joined the Third-Party Buyout on any other basis. Mr Chan on the other hand submits that there is nothing in the clause that suggests that the Plaintiff has to have entered into the SPA by reason of exercising tag-along rights or by other shareholders having exercised on him drag-along rights before he was entitled to the give notice under the clause.

86.  In my view, clause 2 (e)  does not impose the restriction that the Defendants postulate it does. When properly construed, the word “whether” cannot be read as “but only if” in its context. When the clause is read as a whole, it refers to a Third-Party Buyout occurring by agreement (“if any relevant transaction occurs by which the shareholders of the Company ( …)  agrees (sic)  to surrender”), but, for the avoidance of doubt, includes the situation where the plaintiff as a shareholder exercises the tag-along right and therefore “agrees” to sell alongside other shareholders, as when he does not “agree” to the share purchase but is dragged into the SPA by other shareholders exercising drag-along rights under the Shareholders Agreement[58]. If it were intended to exclude the Plaintiff as a shareholder from “agreeing” to a Third-Party Buyout other than by exercising tag-along rights or having been dragged along, the exclusion would have been made clear.

87.  In construing the clause, I bear in mind the principles set out in the Court of Appeal’s judgment in Maeda Corporation v Bauer[59]. I prefer the construction set out in the preceding paragraph which is consistent with business common sense and to reject the construction advanced by the Defendants.

88.  I find support for the above view in Schedule 2 clause 2 (e)(iii)(2), where the “express intention that the formula in the preceding paragraph preserves a right by [the Plaintiff] to receive a total sign-on bonus of US$1,000,000 within the Term, …” is stated “for the avoidance of doubt and in the event of any dispute”.

89.  The Defendants also submit that the Notice was defective as it did not contain any election by the Plaintiff to forgo future earn-out rights.  I do not think there is anything unclear in the Notice as one given pursuant to clause 2 (e)(iii), which clause was specifically referred to. There are two options: one is to retain the future earn-out rights as a shareholder within the Third-party Buyout, or elect to forgo the future earn-out rights and receive the cash payment (calculated in accordance with sub-clause 1)  in return. The clause itself does not contain any stipulation that the election has to specify the forgoing of earn-out rights. Notice is only needed if the Plaintiff makes an election for the second option. The words “it is my decision to elect to receive a cash payment calculated in accordance with sub-clause 1” contained in the Notice make it abundantly clear that the Plaintiff elects to forgo the future earn-out rights.  

c.  Overall Exercise of the Court’s Discretion

90.  I find that the court’s discretion should be exercised not on any of the question by itself, but by taking into account all three questions to be disposed of in this application under the Order 14A procedure. 

91.  In view of my conclusion that I do not have all the necessary facts and matters before me in order to determine the question of construction on the Second and Third Questions, I would exercise my residual discretion in favour of not determining the First Question either.

92.  The inability of the Court to dispose of these two further questions even after the disposal of the First Question means that the 1^st Defendant’s liability to pay the Plaintiff the Sign-On Bonus will still have to be investigated at trial. The determination of the First Question alone would be unlikely to have any effect contended for by the Plaintiff.

V.  CONCLUSION & DISPOSITION

93.  I dismiss the application.

94.  Costs of this application should follow the event.  I make an order for the costs of the O.14A application to be paid to the Defendants by the Plaintiff, to be taxed if not agreed.

95.  I would also thank counsel for both parties for their able assistance.