PRATT, JON VAUGHAN MERRICK v. BARCLAYS CAPITAL ASIA LTD

CACV 123/2017

[2018] HKCA 132

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 123 OF 2017

(ON APPEAL FROM HCA NO 1295 OF 2016)

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J U D G M E N T

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Hon G Lam J (giving the judgment of the Court):

Introduction

1.  This is an appeal from the decision of L Chan J on 4 May 2017 to strike out parts of the plaintiff’s amended statement of claim upon the defendant’s application.

2.  The defendant is a company incorporated in Hong Kong, an Authorised Institution registered with the Hong Kong Monetary Authority as well as a Licensed Corporation registered with the Securities and Futures Commission of Hong Kong.  It is a wholly owned subsidiary of Barclays Bank plc (“Barclays plc”), a bank with its headquarters in the United Kingdom whose shares are traded in the London Stock Exchange.

3.  The plaintiff was employed as a Managing Director in the defendant’s Investment Bank Division from 2010 until 21 April 2016.  By a letter dated 21 January 2016 he was given 3 months’ notice of termination, for reason of redundancy, as well as garden leave with immediate effect until termination.  The plaintiff lodged a claim against the defendant in the Labour Tribunal, which has since been transferred to the Court of First Instance.  The claim with which the strike out application was principally concerned was that relating to a discretionary incentive awards scheme.

The employment contract

4.  The contract of employment was, so far as relevant, contained in the offer letter dated 30 August 2010.  There were the following provisions in it about the incentive awards scheme (“the incentive award clause”):

“The firm [ie the defendant] operates a discretionary incentive awards scheme for employees, the nature, value and delivery of which (if any incentive awards are indeed made) are entirely at the firm’s discretion. Such incentive awards may include a cash payment to be made via payroll (subject to statutory withholdings), equity-based awards, or such other form of awards as the firm deems appropriate.

The making of any discretionary incentive awards will depend upon individual, team and firm performance and your adherence with the firm’s values, policies (including but not limited to those for risk and compliance) and employee standards.

Employees who are in employment and not working out a period of notice on the 31^st October will be considered for participation in the discretionary incentive awards scheme for the Performance Year (1^st January to 31^st December). Actual delivery of any incentive award is subject to you being in Eligible Employment (as defined in the section dealing with Remuneration and Benefits: General) on the delivery date. Normally any awards would be made in the first quarter of the year following the Performance Year. Furthermore, any disciplinary process may at the firm’s discretion result in the reduction (in part or in full) or delay in delivery of any or all of such incentive awards.

The firm reserves the right to decline to make discretionary incentive awards at its absolute discretion or change the timing and/or nature of its discretionary incentive awards scheme at any time.”

5.  The contract was governed by Hong Kong law and the parties submitted to the exclusive jurisdiction of the Hong Kong courts.

The incentive awards scheme

6.  What happened in fact is that Barclays plc had set up 2 plans, which were called the Barclays Group Share Value Plan (“SVP”) and the Barclays Group Cash Value Plan (“CVP”) and managed centrally by 2 committees called the Barclays Group Share Schemes Committee (“SVP Committee”) and the Barclays Group Cash Plans Committee (“CVP Committee”) respectively (both of which were in fact the remuneration committee for the time being of the board of directors of Barclays plc), to grant awards of shares in Barclays plc and cash to employees of members of the Barclays group.

7.  As described in the judgment below, for the performance years of 2011, 2012, 2013 and 2014, incentive awards (“Awards”) were granted to the plaintiff.  The defendant decided that the plaintiff was “eligible” to receive an Award, but it is common ground that the Awards were granted by Barclays plc under the 2 Plans, and that the decision to grant the Awards to the plaintiff (including what was to be awarded) was made by the SVP and CVP Committees. 

8.  The Awards were granted in 3 forms: a deferred conditional right to receive shares of Barclays plc under the SVP, and a deferred conditional right to receive cash and a “service credit” both under the CVP.  The value of the Awards was substantial and, we are told, exceeded the fixed-sum compensation of the plaintiff under the contract of employment.  There is no dispute about the Awards granted in respect of the performance year 2011 as all the benefits therein had vested in the plaintiff.  The issue here concerns the unvested parts of the Awards for the performance years of 2012, 2013 and 2014.

9.  For each of those years, the plaintiff was notified he was granted Awards by 3 letters all issued in March of the following year, relating to the 3 forms of Awards respectively.  For the performance year of 2012, the letter relating to shares was issued by the SVP Committee; the letters relating to cash and service credit were issued by the CVP Committee. For the performance years of 2013 and 2014, all 6 letters were issued by one “Long Term Plans Team”.

10.  The letters in different years are not identically worded but are to similar effect.  The letters state, inter alia:

(1)   The Award is in the form of a conditional right to receive shares or cash, as the case may be.

(2)   It is granted under the SVP or CVP (as appropriate).

(3)   The Award will vest, and the plaintiff will become entitled to the shares or cash, on the vesting dates specified, subject to conditions which include the rules of the SVP (“SVP Rules”) or the rules of the CVP (“CVP Rules”) (as appropriate).

(4)   The SVP Committee or the CVP Committee may suspend the Award where, inter alia, the plaintiff is under investigation for a regulatory or disciplinary matter.

(5)   Participation in the SVP or CVP (as the case may be) does not affect (or enhance) the plaintiff’s rights and obligations under the terms of employment with Barclays.  The terms of the Plan are separate from and do not form part of the contract of employment.

11.  Both the SVP Rules and CVP Rules contain provisions that any dispute arising out of or in connection with the plan shall be referred to arbitration under the London Court of International Arbitration Rules and that the plan shall be construed, administered and governed in all respects under the law of England and Wales.

The vesting of the Awards

12.  As the judge explained, the mode of vesting of the shares and cash Awards was as follows.  For the performance year of “Year x”, the Awards would be made and notified to the employee in around March of “Year x+1”. The entitlement to the relevant shares and cash would vest in the plaintiff in 3 equal tranches in March of the following 3 years ie “Year x+2”, “Year x+3” and “Year x+4”.  The service credit Award was also a cash award, amounting to 10% of the total value of the deferred cash Award, but would vest only on the same date as the third tranche of the deferred cash and share Awards.

13.  No Award was granted to the plaintiff for the performance year of 2015. Further, after the termination of employment on 21 April 2016, the plaintiff was told that the SVP and CVP Committees had suspended the unvested benefits under the Awards granted in previous years, including the tranches that were due to vest in March 2016, because he was “involved in an investigation”.

14.  The unvested benefits are therefore (i) the third tranche of the shares and cash Awards and the service credit Award for the performance year of 2012; (ii) the second and third tranches of the shares and cash Awards and the service credit Award for the performance year of 2013; and (iii) all 3 tranches of the shares and cash Awards and the service credit Award for the performance year of 2014.

The relevant claim of the plaintiff

15.  By the action the plaintiff made 2 main claims.  The first, which has been called the “Deferred Compensation Claim”, is a claim in relation to the unvested portions of the 2012, 2013 and 2014 Awards with the exception of the service credit in the 2013 and 2014 Awards.[1] Together they amount to 214,898 shares of Barclays plc and HK$6,446,612.  The claim as pleaded in the amended statement of claim may for present purposes be broadly summarised as follows:

(1)   The defendant was under a contractual obligation:

(a)   to operate a discretionary incentive awards scheme (“Operation Obligation”);[2]

(b)   not without reasonable and proper cause to conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between it and the plaintiff as employer and employee (“Term of Trust and Respect”);[3]

(c)   not to administer, or permit to be administered, such incentive awards scheme in respect of the plaintiff in an irrational, perverse or arbitrary manner or otherwise than bona fide and in good faith (“Bona Fide Incentive Awards Scheme Term”);[4]

(d)   in the event the plaintiff’s employment is terminated other than summarily, to pay or vest (or cause to be paid or vested), as appropriate, on or around the last day of the plaintiff’s employment any unpaid or unvested portion of an incentive award granted to the plaintiff during his employment (“Termination Payment/Vesting Term”);

(e)   not to exercise its right to terminate the plaintiff’s employment by giving 3 months’ notice in order to avoid the plaintiff’s being eligible for an incentive award under the Scheme, or to avoid paying a cash or service award or vesting a shares award already made thereunder (“Anti-avoidance Term”).[5]

(2)   Further, (as pleaded in §7A) the defendant was obliged not to rely on its breach of the Operation Obligation to avoid complying with its obligations under the Term of Trust and Respect in general and the Bona Fide Incentive Awards Scheme Term, the Termination Payment/Vesting Term and Anti-avoidance Term in particular.

(3)   The defendant acted in breach of contract to designate or treat the plaintiff as a person “subject to investigation” or “involved in an investigation”.[6]

(4)   The defendant’s refusal or failure to pay or vest or procure the payment or vesting of the outstanding portions of the 2012, 2013 and 2014 Awards due to vest in March 2016 was a breach of contract by the defendant.[7]

(5)   The defendant’s refusal or failure to confirm that it will pay or vest or procure the payment or vesting of further outstanding portions due to vest in March 2017 and 2018 was a threatened breach of contract by the defendant.[8]

(6)   The refusal or failure to pay or vest or procure the payment or vesting of the outstanding portions of the 2012, 2013 and 2014 Awards on or about the last day of the plaintiff’s employment was a breach of contract by the defendant.[9]

(7)   The plaintiff is entitled to damages or specific performance of the defendant’s obligation to pay or vest or procure the payment or vesting of the outstanding portions.[10]

16.  The second claim, which has been called the “Wrongful Termination Claim”, complains that the termination of the plaintiff’s employment was unfair and avers that had his employment not been wrongfully terminated, an Award for the 2015 Performance Year would have been made to him in amounts no less than those awarded for 2014.  He therefore claims, inter alia, damages for loss of the Award for 2015 and (as pleaded in §89(2)) loss of the service credits awarded to him under his 2013 and 2014 Awards.

17.  In connection with the “Wrongful Termination Claim”, the plaintiff also pleaded as follows in the amended statement of claim:

“89A. If and insofar as it may be necessary to do, the Plaintiff relies on the Operation Obligation and contractual obligation pleaded in paragraph 7A hereof in support of the aforesaid claim.”

The strike-out application

18.  The defendant applied to strike out those parts of the amended statement of claim in which the Deferred Compensation Claim is pleaded (as summarised in §15 above), essentially on two grounds, as explained in the supporting affidavit. 

(1)   First, it is said that the Awards were awarded and administered by Barclays plc, and not the defendant, under the SVP or CVP Rules.  The decision to suspend the outstanding portions of the plaintiff’s Awards was made by Barclays plc, not the defendant.  The plaintiff has sued the wrong party.

(2)   The claim mounted by the action is an “impermissible sidestepping” of the London arbitration clause and the English governing law clause in the SVP and CVP Rules.

19.  In addition, the defendant applied to strike out §7A and §89A of the amended statement of claim (see §15(2) and §17 above) on the ground that the defendant was not obliged to ensure that the incentive awards scheme must consist in rights governed by schemes operated under the defendant itself as opposed to Barclays plc or other entities.

20.  Finally, the defendant applied to strike out §§13 to 16 of the amended statement of claim, which pleaded the plaintiff’s role in strengthening certain weaknesses identified by a compliance audit of the defendant’s Debt Capital Market business and in identifying conduct deficiencies in the defendant’s Korean Debt Capital Markets team, the weaknesses identified and the measures taken to address them between around 2010 and 2014.  The defendant contended that these paragraphs were irrelevant and scandalous.

The judgment below

21.  The judge struck out the Deferred Compensation Claim in its entirety. His reasoning may be summarised as follows.  As a matter of construction of the contract of employment, the defendant could procure to be granted to the plaintiff the Awards which were granted and administered by Barclays plc to the exclusion of the defendant.  Once the 2012, 2013 and 2014 Awards were granted (as they were in March 2013, 2014 and 2015 respectively), the defendant had fulfilled its obligations under the contract of employment.  It had no further obligations in relation to the vesting and realisation of the Awards.

22.  The judge accepted the analogy advanced by the defendant’s counsel of an annuity policy purchased by the defendant from a third party insurer for the benefit of an employee.  Once the defendant has delivered the annuity policy to the employee, it drops out of the picture.  If there should be any dispute about the enjoyment of the annuity, it would only be a matter between the employee and the insurer, not involving the defendant.  The judge gave further analogies of the defendant giving the plaintiff shares in a listed company or a club membership as an Award.  Any dispute with the company or the club would have nothing to do with the defendant.  In short, the judge accepted the defendant’s “wrong party” argument.

23.  The judge also struck out §7A and §89A apparently in the belief that they were part only of the Deferred Compensation Claim.  He did not give any separate reasons for removing these two paragraphs insofar as they were relied upon for the Wrongful Termination Claim.

24.  The judge struck out §89(2) in the belief that it formed part of the Deferred Compensation Claim, even though it was not encompassed within the defendant’s application.

25.  The judge also struck out §§13-16, on the ground that they were irrelevant to the Wrongful Termination Claim.  Since he struck out the Deferred Compensation Claim, he did not consider the relevance of those paragraphs to this claim.

This appeal

26.  The plaintiff appeals against the striking out of all these parts of the amended statement of claim.  The defendant accepts that §89(2) should not have been struck out because it was in fact part of the Wrongful Termination Claim, but seeks to uphold the judge’s decision in all other respects.

27.  The principles governing applications to strike out pleadings are not in dispute.  As set out by the judge[11], it is only in plain and obvious cases that the court should exercise its power to strike out, the court should not decide difficult points of law in striking out applications, and the claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out: Hong Kong Civil Procedure 2018, vol 1, §18/19/4; Ha Francesca v Tsai Kut Kan (No 1) [1982] 1 HKC 382 CA at 392G-H.  Where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made: Yue Xiu Finance Co Ltd & Anor v Dermot Agnew & Ors [1996] 1 HKLR 137 at 141D-E.  It is inappropriate to strike out a claim involving an area of law which is in the process of developing: Tadjudin Sunny v Bank of America, National Association [2010] 3 HKLRD 417 at §§7 and 56.

Deferred Compensation Claim

28.  The judge saw the issue as a single question of whether, on the proper construction of the incentive award clause, the defendant could procure an Award for the plaintiff that would be administered by a third party to the exclusion of the defendant.[12] He struck out the claim because he took the view that “D has satisfied its obligations in the Scheme by procuring to P the Awards in the SVP and CVP”.[13]

29.  We prefer to approach the matter by asking whether it is plainly and obviously unsustainable, in the light of the contract and the facts pleaded and other incontrovertible facts, to say that the refusal or failure to vest the unvested portions of the Awards in 2016 and thereafter constituted or resulted in a breach by the defendant of the contract of employment including in particular the incentive award clause and the terms referred to in §15(1) above which were not the subject of the strike out application.

30.  The defendant does not dispute, at least for present purposes, that under the contract of employment, it had an obligation to operate an incentive awards scheme for its employees, “the nature, value and delivery of which … are entirely at [the defendant’s] discretion”.  There is no dispute that under the SVP Rules and CVP Rules, however, it was the SVP or CVP Committee that decided, in its absolute discretion, to grant an eligible employee an Award.  It is also common ground that the Awards were actually granted by Barclays plc pursuant to the decisions of the relevant committees.

31.  The judge stated:

“It is clear and obvious that the Awards were procured by D pursuant to the Scheme. They were procured by D exercising its discretion under the Scheme. Otherwise, there was no reason whatsoever for Barclays PLC to have granted them to P.”[14]

32.  The judge further considered it clear that the contractual obligation of the defendant could be and was exhaustively discharged by the defendant thus procuring to the plaintiff Awards granted and administered by Barclays plc to the defendant’s exclusion.[15]

33.  We are, with respect, unable to agree the matter is so clear. The affidavit evidence is that for the performance years of 2012, 2013 and 2014, the defendant “decided that the Plaintiff was eligible to receive a discretionary incentive award”.  We have seen no evidence of any recommendation by the defendant that the plaintiff should be granted an Award or as to the form of the Awards or their amount.  Even if the defendant did make such a recommendation, it seems to be common ground that the 2 committees had a discretion, unfettered thereby, whether or not to make an Award (the relevant Rules say “in its absolute discretion”).  There is no suggestion that the committees were bound to accept the defendant’s recommendation, or that in practice they invariably did so, or even that in the present case they had fully accepted the defendant’s recommendation.  In consequence, the concept that the defendant “procured” the grant of the Awards, advocated by the defendant’s counsel and adopted by the judge, seems no more than a shorthand for saying that the defendant made a recommendation as to the plaintiff’s eligibility generally. 

34.  Even after the Awards were granted, they were on the SVP and CVP Rules still liable to be suspended or reduced (to nil if appropriate) in the discretion of the Committees under various circumstances.  They include circumstances relating to the employment.  For example, under clause 3.6 of the SVP Rules, if an Award recipient is “involved in an investigation”, the SVP Committee may “following consultation with the Employer” suspend any unvested portion of the Award.  In contrast, the examples of annuity policy, listed shares and club membership which confer fixed rights against independent third parties are, in our view, far removed from the facts here and provide little assistance.

35.  Mr Man SC, who appeared for the defendant, accepted in argument that the contractual responsibility of the defendant potentially extended beyond making a recommendation.  Thus it was accepted that, for example, if the defendant made a recommendation in favour of an employee but it was capriciously rejected by the SVP and CVP Committees who decided not to grant any Award, then the employee would have a cause of action against the defendant.  This brings into question whether it is incontestably clear that the grant of an Award exhaustively discharges the defendant’s obligation so that there could be no recourse against it if, for example, the SVP and CVP Committees subsequently capriciously suspended the Award.

36.  A possible and, in our view, not obviously untenable interpretation of the facts, which remain to be fully investigated, is that while the defendant did not itself operate an incentive awards scheme, it had put in place an arrangement by which another person (ie Barclays plc) performed for it, as far as it is concerned, the relevant obligations of the contract of employment including the incentive award clause and the implied terms pleaded by the plaintiff.  On this argument, whether or not it was permissible for the defendant in this way to delegate, as it were, or to “cede”[16] the performance of those contractual obligations (and the plaintiff said it was not), they remained its obligations and it would be liable to the plaintiff if the performance by the third party fell foul of the requirements of the contract: see eg Chitty on Contracts (32^nd ed), vol 1, §19-082. 

37.  Arguably, on this interpretation, the defendant did not “drop out of the picture”[17] after making a recommendation.  It remained contractually accountable to the plaintiff for the operation of the scheme albeit it was, from the point of view of the Barclays group, being operated by Barclays plc.  It may be (and we need put it no higher) that, as between the plaintiff and Barclays plc, a new legal relationship was created in parallel in that once the Awards were accepted, the plaintiff became bound by the terms of the SVP Rules and CVP Rules including the arbitration clause and governing law clause, but this relationship does not necessarily replace the contractual relationship between the plaintiff and the defendant.

38.  All these are of course just possible arguments and we express no view on their merits, but we do not think the matter is so plain that the court can strike out the Deferred Compensation Claim on the materials available.

Paragraphs 7A and 89A

39.  In view of our conclusion above on the Deferred Compensation Claim, §7A of the amended statement of claim will be reinstated. 

40.  As to §89A, the short answer is that since §89A was struck out by the judge only because he (mistakenly) thought it was part of the Deferred Compensation Claim, and as there is no respondent’s notice to uphold the ruling for any other reason, §89A should be reinstated.

Paragraphs 13-16

41.  The plaintiff relied on §§13-16 and other matters in support of the plea in §27 of the amended statement of claim that he:

“was rightly regarded by the Defendant to be a trustworthy, capable, high performing and valuable employee with an unblemished record of regulatory compliance”.

42.  §27 was in turn relied upon in §81 which pleaded that the defendant had no or no proper grounds to designate or treat the plaintiff as a person “subject to investigation” or “involved in an investigation”.  It was also relied upon in §55 which disputed that the plaintiff’s employment was terminated for redundancy.

43.  We note further that §§13-16 concern, inter alia, the plaintiff’s review of the conduct of one Mr Choi and that the subsequent investigation of the plaintiff involved, inter alia, an allegation of potential weaknesses in the plaintiff’s supervision of Mr Choi.[18] Although the conduct in question is different, we do not think it is plain and obvious at this stage that these averments are irrelevant.  The court is not concerned with the strength of the averments at this stage.  In our view these paragraphs should not be struck out.

Conclusion and disposition

44.  For these reasons the appeal is allowed.  The order for striking out is set aside and to be replaced by an order that the defendant’s summons be dismissed with costs here and below.