CHAN KAM YAU AND ANOTHER v. THE HONG KONG UNIVERSITY OF SCIENCE & TECHNOLOGY Defendant

DCCJ 4016/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4016 OF 2006

______________________

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JUDGMENT

Introduction

1. The 1^st and the 2^nd Plaintiffs (“the Plaintiffs”) were and are the employees of the Defendant.  At all material times, they were covered by a provident fund plan.  Under that plan, their retirement benefits could be worked out by simply factoring in their last salary, years of service, and a pre-set multiplier.  Some years later, the Defendant invited employees of their category to join a new plan.  The Plaintiffs complained that the new plan could not give a pre-determinable fund as it was based on the performance of the investment or wealth-conservation funds as selected by the individual employee. 

2. Of the 168 members, 166 joined the new plan, leaving the Plaintiffs the only 2 members in the old plan.  Seeing that it would not be cost-effective to continue with the old plan, the Defendant ceased contribution to the old plan, allegedly empowered to do so by the contract of employment.  The Plaintiffs argued that the Defendant had no such right.  They took out the present action essentially for reinstatement of the old plan and damages.     

The issues for this Court

3. There are no factual disputes of importance.  I have to determine the following issues:

(1)	What were the terms that constituted the contract of employment?
(2)	Was the Defendant in breach of the terms of the contract of employment?
(3)	What are the Plaintiffs’ remedies?

The Matrix of facts

4. Subject to their differences in the years of service and monthly salaries, the 1^st and the 2^nd Plaintiffs’ respective positions are essentially the same in the present action.

5. By mutual consent, the Plaintiffs’ witness statements, as well as the Defendant’s witness statement made by Lily Wei May Fong are adduced as part of their respective evidence-in-chief. 

6. There are 3 document bundles, A, B, and C, provided by the Defendant for trial.  The page numbering continues despite the change in the bundle prefix.  The Letter of Appointment of the 1^st Plaintiff, as an example, can be found at page 180 of Bundle B: “[B180]”. 

The Letter of Appointment of the 1^st Plaintiff

7. By a Letter of Appointment dated 20 September 1991 made between the 1^st Plaintiff and the Defendant [B180], the 1^st Plaintiff agreed to be appointed Workman II in the Estates Management Office of the Defendant and the Defendant agreed to provide salary and benefit to the 1^st Plaintiff. 

The Relevant Parts of the Letter of Appointment of the 1^st Plaintiff

8. Paragraph (b) [B180] stated that:

Your appointment shall be subject to this Letter of Appointment and the enclosed Memorandum on Conditions of Service for All Ancillary Staff (“the Memorandum”).

The Memorandum

9. The 1^st Plaintiff’s appointment was expressly subject to the terms contained in the Memorandum on Conditions of Service for All Ancillary Staff (“the Memorandum”) [B184 – 193]. 

The Letter of Appointment of the 2^nd Plaintiff

10. By a Letter of Appointment dated 25 November 1994 made between the 2^nd Plaintiff and the Defendant [B176 – 179], the 2^nd Plaintiff agreed to be appointed in the Attendant Student Affairs Office of the Defendant and the Defendant agreed to provide salary and benefit to the 2^nd Plaintiff. 

The Relevant Parts of the Letter of Appointment of the 2^nd Plaintiff

11. Paragraph (b) [B176] stated that:

Your appointment shall be subject to this Letter of Appointment and the Superannuation Terms of Service for Ancillary Staff (Terms of Service C) …

The Common Relevant Parts of the Letters of Appointment of the 1^st and the 2^nd Plaintiffs

12. Clause 4.(b) of Appendix C [B208] stated that:

The University shall contribute to the Scheme and pay to the Trustees for the purpose of the Scheme in respect of each Member such amount or amounts as the University considers appropriate having regard to the recommendations from time to time of the Actuary.

The Superannuation Terms

13. In early 1992, the Defendant introduced a new set of terms, the Superannuation Terms of Service for Ancillary Staff (“the Superannuation Terms”) [B180 – 247] for the ancillary staff to join.

14. By a covering letter dated 16 November 1992 [C657 – 661], the Defendant enclosed a nomination form with appendix for the 1^st Plaintiff to sign for nomination of the Superannuation Terms [C662 – 668].  It was stated in the said letter that the Superannuation Terms shall supersede the Memorandum with retroactive effect from 1 July 1992. 

15. The introduction of the Superannuation Terms preceded the 2^nd Plaintiff’s appointment.  Her Letter of Appointment was stated [B170] to be subject to the terms contained in the Superannuation Terms.

The relevant parts of the Superannuation Terms

16. Clause 19 of the Superannuation Terms stated [B201] as follows:

Subject to the provisions of the Deed of Trust …an appointee shall become a member of the Hong Kong University of Science and Technology Ancillary Superannuation Scheme from the date of his appointment on superannuation terms …, Copies of the Deed are available for inspection at the office of the Secretary to the Board of Trustees or the Personnel Office.

The Schedule of the Superannuation Terms stated [C674] that:

“Deed” means the Deed of Trust as amended from time to time …

The Deed of Trust

17. The Deed of Trust [B404 – 430; C614 – 656] (“Original Deed”) was made [B404; C616] and dated 26 November 1992 [B406; C616].  On 19 November 1992, the 1^st Plaintiff signed the form [C658] in acceptance of the Superannuation Terms.  The form stated that:

I accept the conversion of the terms of my appointment to superannuation terms with retroactive effect from 1 July 1992 on the terms and conditions set out and incorporated in the University’s letter dated 16 November 1992 to me above.  I agree fully and totally to abide by the Deed of Trust …

18. The 1^st Plaintiff agrees to be bound by the Original Deed despite its being made subsequent to his acceptance of the Superannuation Terms.    The 2^nd Plaintiff joined the Defendant after the Original Deed came into existence.

The relevant parts of the Original Deed

19. Clause 14.1 of the Original Deed stated that:

The Trustees, with the consent of the University, may by deed alter, amend, extend, modify or add to any of the trusts, powers or provisions of this Deed or the Rules provided always that no such alteration, amendment, extension, modification or addition shall be made which would:-
(a)	extend the trust hereof beyond the period specified in Clause 15;
(b)	adversely affect benefits due to a Member or his Beneficiaries or notionally accrued to a Member or his Beneficiaries in accordance with the Rules at the date of such alteration, amendment extension modification or addition unless the same is necessary to maintain Recognition Status of the Scheme;
(c)	result in payment or transfer to the University of any part of the Fund except upon dissolution of the Scheme under and in accordance with Clause 12;
(d)	cause the main purpose of the Scheme to be other than the provision of benefits upon cessation of Employment for Members and their dependents;
(e)	result in the Scheme ceasing to have Recognition Status;
and PROVIDED FURTHER that
	(1)	no person without the consent of the Member concerned shall alter to the Member’s detriment either his accrued rights under the Scheme or his vested benefits unless such alteration is consequential upon an amendment to the terms of the Scheme consented to by not less than 90% of the Members of the Scheme;
	(2)	where an alteration described in sub-paragraph (i) occurs, any vested benefit which the Member concerned is entitled to receive as at the date of such alteration under the terms of the Scheme as if the condition precedent, if any, of such entitlement had been satisfied shall, if he so elects, become payable to him; and
	(3)	for the purposes of sub-paragraphs (i) and (ii) of this clause 14, the expressions “accrued rights” and “vested benefit” shall have the meanings respectively attributed to them in the ORSO legislation.

The Deed of Variation

20. A Deed of Variation was made on 17 August 2004 [B541].  It amended the Original Deed.  As will be seen hereinafter, certain amendments are relevant to the present action.   

The relevant parts of the Deed of Variation

21. Clause 11.A. 1 [B541] stated that:

CESSATION OF CONTRIBUTIONS AND CLOSURE OF A SECTION OF THE SCHEME

The University may, upon giving not less than 90 days’ previous notice in writing to the Trustees and to the Members of the Choice Plan Members’ Fund or the DB Members’ Fund (each known as a “Section”) as the case may be, cease to contribute to one Section of the Scheme in which event upon the expiry of such notice the contributions of the University shall cease in respect of Members in the relevant Section.  Scheme Service in respect of the relevant Members shall also cease to accrue and the Section shall be continued as a closed section of the benefit of the Members in that Section at the date of closure and no new members shall be admitted to the Section provided that the University may at anytime while that Section is being continued as a closed section in accordance with this provision recommence making contributions to that Section in accordance with this Deed whereupon the contributions of the University shall restart in respect of Members in the Section, Scheme Service shall start again to accrue and further Members may be admitted.

22. Clause 11A. 2 [B541] stated that:

The University may by not less than 30 days’ previous notice in writing to the Trustees at any time close a Section of the Scheme as regards the admission of new Members and from the expiry of such notice no new Member shall be admitted to that Section.  The contributions of the University in respect of that Section shall continue.

Events leading to the present action

23. Out of the 168 members, only the Plaintiffs remained in the DB Plan. The Defendant made a lot of contacts with the Plaintiffs with a view to persuading them to switch to the Choice Plan.  Repeated extensions had been given to the Plaintiffs.  The Plaintiffs maintained their refusal because they wanted to have a pre-determinable provident fund.

24. In October 2005, the Plaintiffs complained to the Mandatory Provident Fund Authority (“MPFA”) about the Defendant’s decision to cease contribution to the DB Plan.  The MPFA found that the Defendant was not in breach of any statutory requirements.   

25. On 1 July 2006, the Defendant ceased the contribution to the DB Plan but kept it as a closed section [A4 para. 10].  

26. On 7 July 2006, the Plaintiffs filed a claim for reinstatement of the DB Plan in the Labour Tribunal.  

27. On 1 August 2006, the Labour Tribunal transferred the claim to the District Court. 

The Defendant’s Stance

28. Wei May Fong Lily’s witness statement [A39 – 45] stated that as 98.8% of the members had switched to the Choice Plan, it would not be cost-effective to keep in place the DB Plan for only 2 members.  As a publicly-funded institution, the Defendant has the responsibility to monitor its finance and to ensure that its fund is used effectively [A42 para. 11].  Exh. D1 shows that the performance of various funds in the Choice Plan has so far been promising.  Exh. D2 estimates that the administration of the DB Plan for only 2 members will cost $134,710 per year. 

29. The Defendant is still open to accepting the Plaintiffs in the Choice Plan as though they had joined with respective effect from 1 July 2006. 

Closing submissions

30. I have considered all submissions put forward by the parties. 

This Court’s findings

What were the terms that constituted the contract of employment?

31. The 1^st Plaintiff was bound by the Letter of Employment [B180], which incorporated the Memorandum [B184 – 220].  The Memorandum was subsequently superseded by the Superannuation Terms by the 1^st Plaintiff’s consent.  The Superannuation Terms was stated to be subject to the Deed of Trust, among others. 

32. Defence counsel submits [in para. 47 – 54 of Closing Submissions] as to whether the terms of the Original Deed were apt to be incorporated into the contract of employment.  Hobhouse J in Alexander v Standard Telephones and Cables Ltd (No. 2) [1991] IRLR 286, at 292 – 293 stated as follows:

The principles to be applied can therefore be summarized.  The relevant contract is that between the individual employee and his employer; it is the contractual intention of those two parties which must be ascertained.  In so far as that intention is to be found in a written document, that document must be construed on ordinary contractual principles…  The fact that another document is not itself contractual does not prevent it from being incorporated into the contract if that intention is shown as between the employer and the individual employee.  Where a document is expressly incorporated by general words it is still necessary to consider, in conjunction with the words of incorporation, whether any particular part of that document is apt to be a term of the contract; if it is inapt, the correct construction of the contract may be that it is not a term of the contract.

(my emphasis)

33. The Plaintiffs argue [in para. 10, 24 of Closing Submissions] that the Original Deed was incapable of creating any direct relationship between the Plaintiffs and the Defendant.  I think it is clear that the Original Deed defined the rights and obligations between the trustees and the Defendant.  Although it did not deal with the contractual position between the Plaintiffs and the Defendant, I think there are good reasons for its incorporation.  Firstly, in so far as it related to how the provident fund would be managed, the Plaintiffs would become beneficiaries under the trust.  Secondly, the Plaintiffs and the Defendant expressly intended for its incorporation. 

34. The Deed of Trust included any deed of trust as amended from time to time.  This would include the Deed of Variation.  I am satisfied that the Deed of Variation constituted part of the contract of employment. 

Was the Defendant in breach of the terms of the contract of employment?

35. Clause 11.A.1 of the Deed of Variation gave the Defendant a unilateral power of variation in the cessation of contribution to the DB Plan and the adoption of the Choice Plan. 

36. Defence counsel submits that the principle governing this power was explained by Lord Woolf MR in Wandsworth London Borough Council v D’Silva as follows:

The general position is that contracts of employment can only be varied by agreement.  However, in the employment field an employer or for that matter an employee can reserve the ability to change a particular aspect of the contract unilaterally by notifying the other part as part of the contract that this is the situation.  However, clear language is required to reserve to one party an unusual power of this sort.

37. I think the language of Clause 11.A. was clear enough.  I have already rejected the Plaintiffs’ argument (3) (that the variation was unenforceable as it was contrary to the restriction on variation contained in Clause 14.1(d) of the Original Deed) hereinabove. 

38. Defence counsel accepts that the Defendant must show that the exercise of the power was not exercised irrationally or perversely, although it may be exercised unreasonably.  He refers to the judgment of Deputy Judge Woolley in Wood v Jardine Fleming Holdings Ltd [2001] 2 HKC 735 at 742 where he applied the following observations by Burton J. in Clark v Nomura International plc [2000] IRLR 766, at 774:

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 capriousness would be a good example) ie that no reasonable employer would have exercised his discretion in this way.

39. At 775, Burton J. regarded it a “contractual obligation” not to assess the bonus (the subject-matter of the unilateral power of variation) irrationally or perversely.

40. This notion of a “contractual obligation” was in effect translated into an “implied term” so that the Court can give remedies for its breach in Staunton and Nash v Paragon Finance plc [2002] 1 W.L.R. 685, at 697. Dyson LJ regarded that, in the money-lending contract before the Court, the discretion on the part of the money-lender to set the interest rate could not be construed as unfettered.  He held that:

There were terms to be implied in both agreements that the rates of interest would not be set dishonestly, for an improper purpose, capriciously or arbitrarily. I have no doubt that such an implied term is necessary in order to give effect to the reasonable expectations of the parties. I am equally in no doubt that such an implied term is one of which it could be said that "it goes without saying". If asked at the time of the making of the agreements whether it accepted that the discretion to fix rates of interest could be exercised dishonestly, for an improper purpose, capriciously or arbitrarily, I have no doubt that the claimant would have said "of course not".

41. I think it is on the basis of an implied term that the Defendant had a contractual duty not to exercise the unilateral discretion irrationally or perversely (of which caprice or capriousness would be a good example) in that no reasonable employer would have exercised his discretion in this way.

42. The Choice Plan is not without merits.  It is up to the member to decide what mixture of investment and wealth-conservation he is looking for.  It had been clearly stated in the information booklet, as common sense would have warranted, that high-risk funds would bring high return or loss whereas low-risk funds would bring low return or loss.  Its performance so far has been promising in most of the funds.  I cannot say that it was an irrational or perverse decision on the part of the Defendant to switch to the Choice Plan. 

43. The cessation of contribution to the DB Plan was part and parcel of the switch.  It is not worthwhile to keep the DB Plan going just for 2 members in view of the high administration cost.  The Defendant had to cease contribution to the DB Plan.  I cannot say that it was an irrational or perverse decision on the part of the Defendant to do so.       

44. I do not find the Defendant in breach of the contract of employment.     

What are the Plaintiffs’ remedies?

45. The Plaintiffs argue [in paras. 7 – 8 of Closing Submissions] that in any event, they are entitled to be protected under s. 32A of the Employment Ordinance (Cap. 57).  It states, among others :

(1)	An employee may be granted remedies against his employer under this Part –
		…
	(b)	where he is employed under a continuous contract and the employer, without his consent and, in the absence of an express term in his contract of employment which so permits, varies the terms of his contract of employment because the employer intends to extinguish or reduce any right, benefit or protection conferred or to be conferred upon the employee by this Ordinance

46. Section 32A(3) states that:

For the purposes of subsection (1)(b), the variation of the terms of the contract of employment by the employer as referred to in that subsection shall, unless a valid reason is shown for that variation within the meaning of section 32K, be taken to be variation of the terms of the contract of employment by the employer by reason that the employer intends to extinguish or reduce any right, benefit or protection conferred or to be conferred upon the employee by this Ordinance.

47. Section 32K states, among others:

For the purposes of this Part, it shall be a valid reason for the employer to show that … the variation of the terms of the contract of employment with the employee was by the reason of –
	…
(c)	… genuine operational requirements of the business of the employer …

48. I think it abundantly clear that there was an express term in the contract of employment which permitted the variation, namely the cessation of contribution to the DB Plan and the adoption of the Choice Plan.  The Plaintiffs are not entitled to be protected by s. 32A.

49. If I am wrong (so that the Plaintiffs are entitled to be protected), it will fall upon the Defendant to show a “valid reason”.  The Defendant’s case is that the variation was due to “genuine operational requirements”.  Of the 168 members, 166 or 98% of them expressed the willingness, and later actually switched, to the Choice Plan.  Only the Plaintiffs elected to remain in the DB Plan.  Exh. D2 estimates that the administration of the DB Plan for only 2 people would cost $134,710 per year.  This is plainly not cost-effective.  This suffices as a valid reason for the variation.

The Plaintiffs’ Other Arguments

50. Apart from those I have already referred to hereinbefore, the Plaintiffs have raised other arguments in their Closing Submissions.  Some of them wholly or partly repeat those arguments.  I shall try my best to identify and deal with them hereinbelow without repetition. 

Argument (1): There were two separate contracts of employment

51. In the 1^st Plaintiff’s case, the letter of appointment incorporated the Memorandum, which was subsequently superseded by the Superannuation Terms.  In the 2^nd Plaintiff’s case, the letter of appointment incorporated the Superannuation Terms.  The Plaintiffs argue [in paras. 5 – 7 of Closing Submissions] in that Clause 4.(b) of Appendix C of the Letter of Appointment [B208] required the Defendant to contribute to the Scheme which, the Plaintiffs say, remained to be the DB Plan.  I think it is clear that the Superannuation Terms never stood alone as an independent contract.  It was expressly subject to the Original Deed.  This argument has no merits.

Argument (2): The Plaintiffs were only bound by the Original Deed but not its subsequent variations

52. It was expressly stated in the Superannuation Terms that it was subject to the Original Deed.  The Original Deed was defined to include the any deed as amended from time to time.  The Deed of Variation that came into existence constituted part of the contract of employment.  This argument has no merits. 

Argument (3): The addition of Clause 11.A.1 of the Deed of Variation was unenforceable

53. The relevant parts of Clause 14.1 and (d) stated:

The Trustees, with the consent of the University, may by deed alter, amend, extend, modify or add any of the trusts, powers or provisions of this Deed or the Rules provided always that no such alteration, amendment, extension, modification or addition shall be made which would :-
	…
(d)	cause the main purpose of the Scheme to be other than the provision of benefits upon cessation of Employment for Members and their dependents  …

54. The DB Plan was to be replaced by the Choice Plan.  The Choice Plan remained to be a provident fund.  This argument has no merits.  

Argument (4): The Superannuation Terms could not be changed      

55. The Plaintiffs argue [in paras. 9, 17, 30 of Closing Submissions] that Clause 19 [B201] would not permit any change to the DB Plan.  This is wrong because it was expressly stated to be subject to the Original Deed, among others.  The Original Deed was defined to include any deed as amended from time to time [B206].  

Argument (5): The Defendant had to require the Trustee’s consent in changing the Superannuation Terms

56. The Plaintiffs argue [in paras. 12, 28, 31b of Closing Submissions] that the Trustee’s consent had to be obtained if the Defendant wanted to amend the Original Deed.  I understand the Plaintiffs had never raised the objection in their pleadings or elsewhere that the subsequent amendments to the Original Deed, including the Deed of Variation, were made without the Trustee’s consent.  Even if this objection is raised, it is clear that the subsequent amendments were made with the consent and compliance of full formalities by the body of Trustee [B529 – 530].  

Argument (6): The Occupational Retirement Schemes Ordinance (Cap. 426)

57. The Plaintiffs argue [in para. 33 of Closing Submissions] that this Ordinance provided for the formation of a provident fund scheme by a contract of employment.  Therefore the scheme can only be amended by the contract of employment.  I think the contract of employment must include the Original Deed and the Deed of Variation.   

The conclusion

58. The Plaintiffs wholly fail in the present action.  There is no apparent reason why costs should not follow event.  Subject to any costs order already made, I make an order nisi for the Defendant to have all costs reserved, if any, and costs of the present action, with certificate for counsel.  This costs order shall become absolute 14 days from today. 

59. I thank defence counsel for his comprehensive opening and closing submissions.