XU YI JUN v. GF CAPITAL (HONG KONG) LTD

CACV 502 & 577/2019

(Heard together)

[2020] HKCA 663

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 502 OF 2019 AND 577 OF 2019

(ON APPEAL FROM HCA NO 2563 OF 2017)

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(Heard together)

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J U D G M E N T

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Hon Kwan VP:

Introduction

1.  There are two appeals before us against the judgment of B Chu J on 30 September 2019 (“the Judgment”).  The appeals are brought by the plaintiff and the defendant respectively and arose in this way.

2.  The plaintiff brought this action^[1] against the defendant, her former employer, claiming $7,800,000, being the guaranteed bonus for the year of 2016 payable to her under clause 6 of her employment contract dated 31 December 2015 (“the Employment Contract”).  She applied for summary judgment by a summons issued on 19 April 2018.

3.  By the decision of Master Suen made on 20 November 2018 (“the Decision”), the master made these two determinations (“the Determinations”) under Order 14A of the Rules of the High Court in respect of the construction of clause 6 of the Employment Contract:

(1)     the defendant can only invoke the relevant part of clause 6 to forfeit the 2016 Guaranteed Bonus in the sum of $7,800,000 (“the Bonus”) if there was a finding, before the Due Date of 31 March 2017, that the plaintiff was engaged in gross misconduct (“Determination 1”); and

(2)     in any event, such relevant part of clause 6 is rendered void by section 70 of the Employment Ordinance, Cap 57 (“EO”) and hence the defendant cannot rely on the same (“Determination 2”).

4.  Subject to the Determinations, the master ordered that the defendant be granted leave to defend the plaintiff’s claim as the defendant has an arguable defence of set-off.  He ordered the defendant to pay the plaintiff’s costs of the application for summary judgment up to 25 June 2018 (the date the defendant filed its affirmation in opposition) and that the costs incurred thereafter be in the cause.

5.  The plaintiff appealed to the judge against the Decision seeking final judgment be entered against the defendant.  The defendant appealed against the Decision seeking an order that the Determinations be set aside.

6.  By the Judgment, the judge dismissed the defendant’s appeal to set aside the Determinations.  She also dismissed the plaintiff’s appeal, agreeing with the master that the defendant has raised an arguable defence of equitable set-off and it should have unconditional leave to defend.  She ordered there be no order as to costs for both appeals.  Both parties have appealed against the Judgment to the Court of Appeal.

7.  In the appeal brought by the defendant (CACV 502/2019), the defendant seeks an order that the Determinations be set aside.

8.  In the appeal brought by the plaintiff^[2] (CACV 577/2019), the plaintiff seeks an order for final judgment in the sum of $7,800,000 as claimed with interest at 8% per annum pursuant to section 25A of the EO for late payment of wages, alternatively at the HSBC best lending rate plus 2% per annum or such other rate as the court considers fit, from the Due Date of 31 March 2017 or such other date as the court considers fit until the date of the order to be made on this appeal.  The plaintiff claims that the defendant is not entitled to make any deduction from or exercise any set-off against its liability to pay the Bonus, interest thereon and costs.

Background

9.  The relevant background matters, taken largely from the Decision and the Judgment, may be stated as follows.

10.  The defendant is a company regulated and licensed in Hong Kong by the Securities and Futures Commission to conduct regulated activities including advising on corporate finance.  By the Employment Contract, the plaintiff was employed to work as the managing director of the Structured Finance Department of the defendant in Hong Kong.  Her employment commenced on 1 March 2016 and was terminated by her voluntarily on 13 August 2017 by serving two months’ notice on 14 June 2017.

11.  The Employment Contract contained these provisions on remuneration and various bonuses:

“4. Remuneration and Bonus

Your monthly basic salary will be HK$280,000.00 payable monthly in arrears by the Company on the last business day in Hong Kong of each calendar month. You shall be entitled to an annual bonus, the amount of which, shall be at the discretion of the Board at the end of each calendar year.

5. Sign-on Bonus

You will receive a Sign-on Bonus in the amount of HK$14,040,000 payable to you in full on the payment date of your first monthly basic salary. In the event you terminate your employment voluntarily with our Company without cause within twelve months from the commencement date of your employment, you are required to repay the amount of Sign-on Bonus paid to you in full to us before your last day of employment with the Company. The sign-on bonus is not subject to any claw back under any other circumstance.

6. Guaranteed Bonus

In addition to the annual bonus and sign-on bonus referred to in clauses 4 and 5 above, we will grant you a guaranteed bonus of HK$7,800,000 (“2016 Guaranteed Bonus”) for the calendar year ending 31 December 2016. The 2016 Guaranteed Bonus is payable to you irrespective of your performance or the performance of the Group during the calendar year. Any annual bonus in excess of the 2016 Guaranteed Bonus shall be calculated and payable to you in accordance with clause 4 above. The 2016 Guaranteed Bonus will be vested in the following calendar year and payable in full on the payment date of your monthly basic salary in March 2017 (the “Due Date”). If your employment with the Company is terminated voluntarily by you without cause or you have been found guilty of any gross misconduct, in either case before the Due Date, any outstanding payments of the 2016 Guaranteed Bonus will be forfeited.” (italics supplied)

12.  The last sentence of clause 6 as italicised is the “relevant part” of that provision being the subject of the Determinations as upheld by the judge.

13.  In performance of her duties, the plaintiff sent a proposal on 20 April 2016 in respect of “Project Fiber” to the defendant’s Structured Finance Committee for review.  Project Fiber involved a loan to a Hong Kong company to fund its investment in a target company by way of purchase of a convertible bond.  In the plaintiff’s proposal, she recommended that the loan be approved.  The loan was worth $120 million.

14.  On the basis of the plaintiff’s recommendation, the Structured Finance Committee approved Project Fiber on 21 April 2016, and, on the following day, the defendant made the loan to the borrower to enable the latter to invest in the target company.

15.  On 13 October 2016, the Securities and Futures Commission ordered the target company to cease trading.  It became apparent to the defendant at that time that the borrower would default on the loan.  The defendant commenced an investigation into Project Fiber including the plaintiff’s conduct whether she had properly discharged her duties in respect of that project.

16.  The Due Date for payment of the Bonus to the plaintiff fell on 31 March 2017.  No payment was made by the defendant as its senior management decided to delay payment pending its completion of the investigation into the plaintiff’s conduct in Project Fiber or before the plaintiff had carried out the tasks to ensure a smooth restructuring of the defaulted loan.

17.  On 10 May 2017, the defendant’s Risk Management Department completed its investigation into Project Fiber and identified certain failings of the plaintiff.  A copy of the investigation report was sent to the plaintiff on 12 May 2017.  She did not respond. On 14 June 2017, she resigned by giving two months’ notice to terminate her employment. She brought proceedings in the Labour Tribunal on 29 June 2017 claiming payment of the Bonus with interest.

18.  After the proceedings were transferred to the High Court, the plaintiff filed a statement of claim on 19 January 2018, alleging breach of clause 6 of the Employment Contract for failure to pay the Bonus by the Due Date; breach of section 11E(1)^[3] or section 23^[4] of the EO for failure to pay on time the Bonus as end of year payment or as wages; and breach of section 32 of the EO for making purported counterclaims against the plaintiff as a basis of set-off and deduction against the Bonus.

19.  The defendant filed a defence on 3 April 2018 alleging that the plaintiff is not entitled to receive the Bonus by virtue of her gross misconduct which occurred before the Due Date in respect of the transaction of Project Fiber.  In its affirmation in opposition to the summons for summary judgment, a copy of an amended defence and counterclaim was exhibited.  After the Decision, the defendant obtained leave to file an amended defence and counterclaim and this was done on 11 October 2019.

20.  By the counterclaim, the defendant averred that the plaintiff was in breach of express contractual duties, implied common law duties of fidelity to act faithfully and in the best interest of the defendant and to exercise reasonable care and skill in the performance of the plaintiff’s duties, and the duty of care as an employee to exercise reasonable skill and care in her employment in relation to matters in respect of Project Fiber, and that the defendant has suffered loss and damage substantially exceeding the amount of the plaintiff’s claim.  It was pleaded in the amended defence and counterclaim that the defendant has a defence of set‑off based on the breaches as alleged and that the defendant will set off such amount awarded to it under the set-off and counterclaim against any liability found due to the plaintiff.

21.  There is no dispute that prior to the Due Date, the plaintiff had not been found guilty of any gross misconduct.  Whether the allegations against her would constitute “gross misconduct” for the purpose of clause 6 or whether the matters in the report in May 2017 would constitute findings of gross misconduct (both matters are disputed by the plaintiff) would not impact on the plaintiff’s entitlement to the Bonus if her construction of clause 6 is correct as held in Determination 1.

22.  While denying the allegations in the counterclaim, the plaintiff does acknowledge that the defendant’s claims raise a triable issue that cannot be dealt with summarily^[5].  If her entitlement to payment of the Bonus is established, what needs to be considered is whether the defendant’s unliquidated claim for damages may be set off against the Bonus. 

The issues in these appeals

23.  I will deal with the issues in these appeals in the following order:

(1)     what is the proper construction of the relevant part of clause 6;

(2)     if the relevant part of clause 6 is rendered void by virtue of section 70 of the EO;

(3)     if the defendant’s unliquidated claim for damages may be set off against the Bonus or whether the entitlement to set-off is excluded contractually and/or statutorily under section 32 of the EO; and

(4)     in light of the answer to (3), what should be the proper order on the plaintiff’s application for summary judgment.

The proper construction of the relevant part of clause 6

24.  This goes to the correctness of Determination 1.

25.  I set out again the relevant part of clause 6: “If your employment with the Company is terminated voluntarily by you without cause or you have been found guilty of any gross misconduct, in either case before the Due Date, any outstanding payments of the 2016 Guaranteed Bonus will be forfeited.”  The phrase “before the Due Date” qualifies the two cases specified.  We are not concerned with the first case of voluntary termination without cause.

26.  The plaintiff’s construction is that on the plain and natural meaning of the relevant part, in order to come within the second case to forfeit for any gross misconduct, it is necessary for there to be a finding of gross misconduct before the Due Date.  It is clear from the layout and the commas placed around the qualifying phrase “in either case before the Due Date” that this phrase refers to “[having] been found guilty of any gross misconduct”.

27.  Mr Edward Alder submitted on behalf of the plaintiff that the purpose of clause 6 was to entice the plaintiff to the defendant’s employment by offering her an attractive bonus that was (a) not performance based, (b) payable on an agreed date not subject to any (particularly indefinite) deferral, and (c) only forfeitable in very clear cut circumstances, namely, where an evidence-based finding has been made.

28.  The defendant’s construction is to the contrary. It is not necessary for there to be a finding of gross misconduct before the Due Date, so long as the gross misconduct had occurred before the Due Date.  In other words, the qualifying phrase “before the Due Date” refers to “gross misconduct” rather than “[having] been found guilty of any gross misconduct”.  The finding of gross misconduct could be made before or after the Due Date.

29.  Ms Queenie Lau, who appeared for the defendant throughout, maintained that the defendant’s construction is a possible construction, and where the contractual provision is open to two possible interpretations, the court is entitled to adopt the construction which is most consistent with business common sense, and it is not necessary to first conclude that a particular construction would produce an absurd or irrational result.

30.  She submitted that business common sense favours the defendant’s construction in that the important thing is the existence of gross misconduct rather than a finding of it, as the time when a finding is made could be arbitrary.  It would not make business sense if the plaintiff had already engaged in gross misconduct before the Due Date and yet was able to pocket the Bonus simply because no finding was made by the Due Date.  As the Bonus is not subject to any claw back, unlike the sign‑on bonus in clause 5, the relevant part of clause 6 should be construed in a manner that would disentitle the plaintiff to receive payment even if the finding was made after the Due Date for gross misconduct that had occurred before it.

31.  The master and the judge agreed with the plaintiff’s construction.  I agree with them. The natural and ordinary meaning of the relevant part is clear. There is no need to resort to the contra proferentem rule.  I do not think the language of the relevant part is capable of being construed in the manner as contended by the defendant.  Nor do I think the natural and ordinary meaning of the relevant part would flout business common sense.  To the contrary, on the defendant’s construction, there would not be any certainty as to when the finding could be made and there would be no cut-off date for the finding; the defendant could simply declare there were allegations of gross misconduct and withhold payment for an indefinite period while investigating the gross misconduct alleged to have happened prior to the Due Date^[6].

32.  On a proper construction of the relevant part, the case or event giving rise to forfeiture should happen before the Due Date.  The right to forfeit “any outstanding payments of the [Bonus]” would only be meaningful if the defendant would not pay the Bonus in full on the Due Date. This reinforces the objective intention that the event giving rise to forfeiture must crystallise before the Due Date and not after it.  It is not the objective intention to displace or defer the payment obligation or otherwise enable the defendant to seek a claw back from the plaintiff^[7]. The parties had provided for a claw back in one particular circumstance for the sign-on bonus in clause 5 but not for the Bonus in clause 6.  In the event that a finding of gross misconduct was made after the Due Date and the defendant wishes to recover recompense, it is open to the defendant to sue the plaintiff.  There is nothing unworkable or contrary to business sense with the plaintiff’s construction.

33.  Ms Lau contended that the judge has erred in comparing or linking the annual discretionary bonus in clause 4 with the Bonus in clause 6, as the two bonuses are very different; the discretionary bonus relates to performance and the quality of work, whereas the forfeiture provision in respect of the Bonus engages the concept of gross misconduct.  The judge was merely making the point that according to clause 6, if the annual discretionary bonus in 2016 should exceed the Bonus, any excess would be paid to the plaintiff in accordance with clause 4, and if the annual discretionary bonus should fall short of the amount of the Bonus, any “outstanding payments” or the shortfall should be paid on or before the Due Date^[8].  There is no error in the judge’s understanding.  As submitted by Mr Alder, in commercial terms, the Bonus simply shifted some of the plaintiff’s remuneration from the discretionary component into the fixed, ‘guaranteed’ component.

34.  I would uphold Determination 1 for all the above reasons.  This would be sufficient to dismiss the defendant’s appeal.

If the relevant part of clause 6 is rendered void by section 70

35.  In light of the conclusion on Determination 1, it is not strictly necessary to decide whether Determination 2 is correct.  What I would say about this issue is entirely obiter.

36.  Section 70 of the EO reads as follows:

“Any term of a contract of employment which purports to extinguish or reduce any right, benefit or protection conferred upon the employee by this Ordinance shall be void.”

37.  By Determination 2, it was held that irrespective of the construction put forward by the plaintiff regarding the relevant part of clause 6 or the construction put forth by the defendant, as the Bonus falls within the meaning of an end of year payment in section 11A(1)^[9], any of the conditions in clause 6 which seeks to restrict or forfeit the entitlement to the Bonus would be rendered void by section 70.  The right, benefit or protection conferred by the EO is that under section 11E(1), the end of year payment must be paid at the latest within 7 days of the due date and it is only when section 11F(1) applies that a proportion of the end of year payment as opposed to full payment can be made but not otherwise^[10].

38.  Mr Alder does not now contend that the Bonus is not an end of year payment, unlike his submission before the judge.  On appeal, he argued that the present case is not distinguishable from Rice v Baring Securities (HK) Ltd [1997] 1 HKC 76, in which the contractual entitlement to a bonus, which was held to be an end of year payment, was subject to a proviso that payment was conditional upon the employee being in employment and not being under any notice of termination at the date of payment.  The proviso was held to be void as once the bonus falls within the meaning of an end of year payment, any provision which seeks to extinguish or reduce that right will offend section 70 (at 81D).

39.  Mr Alder submitted that once the end of year payment has fallen due, under section 11E(1) it must be paid in full not later than 7 days of the due date, regardless of misconduct.  He contrasted section 11E with section 11F(1B).  The latter provides that the right to payment of a proportional part of the end of year payment is abrogated if the employment is terminated summarily under section 9.  There is no such qualification to the right conferred in section 11E(1).

40.  Ms Lau submitted that the key consideration is whether the Bonus is “payable to an employee” under section 11E(1) in a given situation.  She sought to distinguish Rice v Baring Securities (HK) Ltd. She argued that the condition sought to be interfered with in that case was the statutory right to terminate the employment by giving notice.  In present case, the condition for forfeiture seeks to ensure that there was no occurrence of gross misconduct before the plaintiff is paid the Bonus.  As there is no statutory right for an employee to engage in gross misconduct, there could be no extinction or reduction of any right, benefit or protection conferred by the EO that would offend section 70.  Her arguments were rejected by the master for the reason that the statutory right to terminate the employment by giving notice in Rice v Baring Securities (HK) Ltd would not be distinguishable from the first of the two conditions for forfeiture under clause 6 in the present case (voluntary termination of employment by the employee without cause)^[11].

41.  It is not necessary to decide whether the decisions of the courts below on this issue are correct because I have concluded that the plaintiff’s construction of clause 6 is right and the defendant cannot invoke the relevant part of clause 6 under the present circumstances.  I wish only to express my reservation on two points.  First, even if the statutory right that was interfered with in Rice v Baring Securities (HK) Ltd was not distinguishable from the first condition for forfeiture under clause 6, this does not answer the question what is the statutory right that would be interfered with under the second condition for forfeiture, which is based on a finding of gross misconduct before the Due Date.  Second, in respect of the statutory right conferred under section 11E(1), it is debatable whether it relates only to the time of payment of the end of year payment or the protection also goes to whether the end of year payment is payable.  Resolution of these questions would have to await another occasion.

If set-off against the Bonus is permissible

42.  I turn to consider the plaintiff’s appeal.

43.  There being no finding of gross misconduct before the Due Date, the defendant cannot invoke the relevant part of clause 6 and so the Bonus is due and payable to the plaintiff.  The defendant seeks to exercise an equitable set-off against its liability to pay the Bonus based on the plaintiff’s breaches for poor performance of work as alleged in the amended defence and counterclaim.  Mr Alder contended that the defendant’s unliquidated claim may not be set off in this manner because set-off is statutorily and contractually excluded.  As counsel’s arguments on appeal are focused on the statutory prohibition of set-off, I do not propose to consider contractual exclusion.

44.  The judge granted leave to appeal to the plaintiff as she accepted that the Judgment did not refer to Mr Alder’s arguments on section 32 of the EO and she was persuaded that the appeal would have reasonable prospect of success.

45.  Mr Alder relies on section 32(1) which provides as follows:

“No deductions shall be made by an employer from the wages of his employee or from any other sum due to the employee otherwise than in accordance with this Ordinance.”

46.  He drew attention to the words “any other sum due to the employee” and submitted that in light of those words, it is not necessary to determine whether the Bonus was “wages” under section 2 (which is defined to exclude any end of year payment) or an end of year payment payable under sections 11E and 11F in Part IIA.

47.  I have taken note that section 32 of the EO is in Part VI which has the heading “Deductions from Wages” and the section itself is headed “Restriction on deductions from wages”.  Also, section 32(2), which lists out the deductions that may be made by an employer in subsections (a) to (i), is governed by the opening words “The following deductions may be made by an employer from the wages of his employee”.  Notwithstanding the above references to wages, I am inclined to think that effect must be given to the words “or from any other sum due to the employee” in section 32(1) and that the wording is sufficiently wide to cover an end of year payment such as the Bonus.  Ms Lau has not argued to the contrary.

48.  What then is the effect of the protection conferred in section 32(1)?

49.  Mr Alder referred to English legislation of the 19^th century to set the historical context for the Hong Kong legislation, being the Truck Acts in 1831 and 1896, which sought to protect artificers in certain trades from the mischief of being paid wages in kind instead of cash and at the employer’s valuation.  The 1831 Act provided that the entire amount of wages shall actually be paid in currency (section 3); that in any action brought by the artificer against the employer for the recovery of any sum due as wages, the employer shall not be allowed to make “any set-off, nor to claim any reduction”, in respect of earlier ‘payments’ in kind to the artificer (section 5).  The 1896 Act extended the protection to prohibit any “deduction” from the sum contracted to be paid to the workman for bad or negligent work, unless certain requirements are met (section 2) and preserved all the prohibitions in the 1831 Act (section 8).

50.  In Williams & Ors v North’s Navigation Collieries (1889) Ltd [1906] AC 136, the House of Lords held that the Truck Act 1831 does not allow an employer when paying wages to a workman to make any deductions except those expressly sanctioned by the Act.  The obligation to pay the entire amount of wages in section 3 does not allow the employer to pay only the balance after deducting a cross-claim for which a court of summary jurisdiction had ordered the workman to pay to the employer in respect of breaches of contract to work. Reference was made to section 23 of the Act which made elaborate provision with safeguards of the cases in which debts due from the workman may be deducted from the wages due.  These provisions would be wholly unnecessary if an employer were already authorised by section 3 to deduct anything that the workman owed him and to pay merely the balance (at 140).

51.  So for many years it has been the legislative policy in England to provide protection for a certain class of employees by declining to allow set-offs against salary (Sim v Rotherham Metropolitan Council [1987] Ch 216 at 259H).  The statutory protection did not extend to all employees, and some fell outside the protection^[12].  In the State of Western Australia, where there was similar legislation, it was held that the statutory provision would strike down a contractual provision permitting the withholding of wages by the employer and the employer was not entitled to make a deduction from wages on the basis of an equitable set-off (Conti Sheffield Real Estate v Brailey (1992) 48 IR 1 at 6 to 7).

52.  Mr Alder submitted that under section 32 of the EO, the legislature in Hong Kong has extended the protection in the Truck Acts to all employees and to cover wages and any other sum due to the employee.  “Deductions” in this provision is not defined.  Ms Lau submitted that as an equitable set-off does not extinguish or reduce any claim by the employee for wages, but merely precludes the exercise of a right to claim where the connection between the claims would make this manifestly unjust, this does not fall within the “deductions” prohibited by section 32(1).

53.  I do not agree with Ms Lau.

54.  As stated by Nicholls LJ in Delaney v Staples [1991] 2 QB 47 at 57F to G, “deduction” occupies a key place in the legislative scheme (under comparable English legislation being the Wages Act 1986 which replaced the Truck Acts), so the omission to define “deduction” could not have been an oversight.  The legislature must have intended that the word should not have a “carefully circumscribed meaning” and if that is so, that word is intended to have “an extended rather than a confined area of application”.  The same reasoning should apply in interpreting the word “deductions” in section 32(1). The legislature could not have intended to remove the protection against set-off and permit the employer to deprive the employee temporarily of the right to payment of a sum due to him until the final resolution of the employer’s claim for unliquidated damages against the employee for bad or negligent work.

55.  Ms Lau further submitted that a distinction should be drawn between an equitable set-off in the context of legal proceedings and an equitable set-off deployed by the employer outside legal proceedings.  She accepted that for a deduction made by the employer not in the context of an action, whether this is permissible may be subject to section 32.  However, for an equitable set-off in the context of proceedings, this is clearly permissible and is not precluded by section 32.  In support of her contention, she relied on these speeches in Williams & Ors v North’s Navigation Collieries (1889) Ltd with particular emphasis on the parts as italicised below:

“Mr. Lush argued that this construction would be very anomalous. He urged that if the employer did not pay the wages at all and were sued, he would be entitled then to set off in the action anything due to him except such sums as fall within the prohibition of s. 5. It would be strange, said Mr. Lush, if an employer could, by breaking his contract and forcing litigation, obtain an advantage denied to him if he fulfilled his contract. No doubt this would be an anomaly, as are the Truck Acts themselves, and some other Acts which interfere in a limited degree with freedom of contract. It is necessary to distinguish between the clauses of the Act relating to set-off in an action and those relating to stoppage or deduction when the wages are paid. Possibly the Legislature thought a Court might be trusted to strike a balance in the rare cases where the dispute came into Court, but that the vast multitude of weekly or other payments which never come near a Court ought to be regulated by a simple and wholesome rule, namely, that they should be paid wholly in coin save for certain carefully specified exceptions. This is, however, a mere conjecture. It is enough to say that, assuming the Act of Parliament has so provided, the fact that the provision is anomalous does not permit us to disregard the plain meaning of the words used.” (at 140 to 141, per Lord Loreburn LC)

“Set-off in an action I understand. It is a right given by statute to a man who is sued for a sum of money to defend himself by claiming a debt due to himself from the plaintiff in satisfaction or reduction of the debt for which he is sued.  But set-off outside the Court means nothing more than a claim of deduction and retention, and the question comes to be whether the deduction of a cross debt which might be the subject of a set-off in an action is a legitimate deduction or whether the express enactment that the entire amount of the wages shall be actually paid in current coin can be so qualified.  I agree with my noble and learned friend that there can be but one answer to that question.  By s. 23 and s. 24 certain deductions are permitted to be made, or to use the language of the marginal note, “particular exceptions to the generality of the law,” are made under strictly defined conditions, and no other deductions or particular exceptions are in my opinion authorized.

… I will only add that I can see very good reasons why the Legislature should not allow a deduction to be made by the employer himself, although it might be the subject of set-off in an action where the amount where the amount and propriety of it could be impartially investigated.” (at 141 to 142, per Lord Davey)

“The whole principle upon which this legislation is based is that the workman requires protection, that if not protected he may be over-reached; and it is quite consistent with that principle to hold that in any such action brought by him to recover his wages, he may be liable to have the sum found on investigation before the legal tribunal to be due to him by his master diminished by the sum found by the same tribunal on the same occasion to be due by him to his master, and yet at the same time to prohibit the master from, as it were, substituting himself for the legal tribunal, investigating his own claim against his workman in his own office and deciding in his own favour.” (at 146, per Lord Atkinson)

56.  I agree with Mr Alder that the speeches do not provide support for the distinction Ms Lau sought to draw between an ‘in-litigation’ set-off and one that is outside litigation. It is clear from the speech of Lord Davey, who mentioned “a right given by statute”, that the law lords were talking about a legal set-off (which is a creation of statute) when they referred to a “set-off in an action”.  They were not referring to an equitable set-off at all. Further, one must not lose sight of the fact that in that case, the employer had deducted from the workmen’s wages so much of the amount they were ordered to pay by the magistrates and the employer sought to maintain the legality of the deduction in an action brought by the workmen to recover the shortfall.  If there was indeed a distinction between an equitable set-off in the context of an action and a set-off by the employer outside the court, the House of Lords would not have held that it was impermissible for the employer to make any deduction when paying wages except those expressly permitted under the Truck Act. 

57.  As for the extract from the speech of Lord Atkinson, he was clearly referring to a set-off by judgment, where cross-liabilities were netted off and extinguished to the extent of the other pursuant to a judgment, according to a long standing practice of the courts as part of their inherent jurisdiction over their own proceedings to allow cross-judgments given in the same action, or in different actions, to be set off against each other (Fearns v Anglo-Dutch Paint & Chemicals Co Ltd [2011] 1 WLR 366 at §§36 to 37).  That was also the situation in Scout Association of Hong Kong v Li Tak Wai [2018] 1 HKLRD 690, where the Court of Appeal upheld the judgment below allowing cross-liabilities adjudged to be due to be set off against each other, see in particular §33.  That the practice of set-off by judgment is permissible does not support the defendant’s contention that section 32(1) does not preclude an employer from exercising an equitable set-off in an action by raising a claim for unliquidated damages.

58.  Ms Lau cited Sim v Rotherham Metropolitan Council, Miles v Wakefield Metropolitan District Council and Derham on the Law of Set‑Off (4^th ed) at §5.65^[13] in support of her contention that an equitable set‑off for unliquidated damages is available to the employer.  But as pointed out by Mr Alder, the statutory protection under the Truck Acts did not extend to the employees in those two cases, so the dicta she relied on must be read with care as they related to whether the employer was allowed to exercise set-off in the absence of statutory protection.  As for the extract in Derham, whilst the learned author opined that on one view an equitable set-off would not contravene the statutory prohibition^[14] of an employer making a “deduction” from wages as the set-off is to “render it unconscionable for the employee to regard the employer as being liable to pay wages to the extent of the cross-claim, so as to impugn the employee’s right to claim wages”, the author also acknowledged that “this would be contrary to the evident legislative intent”.

59.  I agree with Mr Alder that the wording of section 32(1) clearly does not permit the defendant to exercise an equitable set-off by raising a claim for unliquidated damages against its liability to pay the Bonus.  The courts below were in error in holding that there is an arguable defence of equitable set-off.

The proper order on the application for summary judgment

60.  The plaintiff seeks an order for final judgment if the court should rule that an equitable set-off is prohibited by section 32(1).

61.  Ms Lau informed this court she has no submission as to this. She did not ask for a stay of the judgment to be entered against the defendant until trial of the counterclaim.  Besides, there is no or no sufficient evidence before us to support a stay even if we were minded to consider whether we should exercise the discretion to grant a stay.  I would enter final judgment in favour of the plaintiff in the sum of $7,800,000 as claimed.

62.  The period for which interest should run before judgment would be from 7 April 2017, being the last date for payment of the Bonus under section 11E(1).

63.  As for the pre-judgment rate of interest, Mr Alder sought 8% per annum pursuant to sections 25A(1) and (2) of the EO.  He pointed out that section 25A(1) covers not only wages but “any sum referred to in section 25(2)(a)” and submitted that the sum referred to in section 25(2)(a) is broad enough to cover the Bonus.  Section 25(2)(a) defined the sum as “the equivalent of the amount earned by the employee for work done over the period commencing on the expiry of his wage period next preceding the time of termination up to that time”.  The provisions in sections 25A and 25(2)(a) relate to late payment of wages and the amount equivalent to wages earned that is connected with the termination of employment.  I do not think section 25(2)(a) would cover the Bonus.

64.  The alternative pre-judgment rate of interest sought by the plaintiff is 2% above the HSBC best lending rate.  There is no evidence before us to support any suggestion that the HSBC best lending rate or the prime rate is not an appropriate starting point.  Nor is there any evidence as to the rate of interest the plaintiff might be expected to incur had she sought to borrow the amount of the judgment sum which she has been awarded.  I see no reason to order a higher rate than the usual rate of prime plus 1% in respect of pre-judgment interest in this instance (Tadjudin Sunny v Bank of America, NA, CACV 12/2015, 20 May 2016, §§170 to 184).

Conclusion and costs

65.  I would dismiss the defendant’s appeal and allow the plaintiff’s appeal, and enter final judgment against the defendant with interest as mentioned above.

66.  We have heard submissions on costs.  There is no reason to depart from the rule that costs of the appeal should follow the event.  So the defendant should pay the plaintiff’s costs in both appeals.  I decline to award costs on a higher basis.

67.  I would also order the costs below be set aside and in lieu thereof the defendant is to pay the plaintiff the costs of the application for summary judgment, the plaintiff’s appeal to the judge, the defendant’s appeal to the judge and the costs of this action, to be taxed on a party and party basis.

Hon Yuen JA:

68.  I agree.

Hon G Lam J:

69.  I agree.