HO MING PUI ANDY v. MIDLAND REALTY (STRATEGIC) LTD

HCA 1699/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1699 OF 2012

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REASONS FOR DECISION

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1.  This was an appeal by Midland Realty (Strategic) Ltd (“the defendant”) from a decision of Master M Wong made on 5 November 2015 whereby the Master granted Ho Ming Pui Andy (“the plaintiff”) leave to amend its reply. The appeal relates to a narrow point in that the defendant objects to only one sentence of §4 of the amended reply (“the opposed amendment”). At the conclusion of the hearing the appeal was allowed. Accordingly, there is to be an order in terms of paragraphs 1 and 2 of the notice of appeal and an order that the costs of the appeal and below be assessed summarily on paper. My reasons for allowing the appeal appear below.

Background facts

2.  The plaintiff was a former director of the defendant that is part of the Midland group.  The holding company is listed on the Stock Exchange of Hong Kong.  The plaintiff was employed under the terms of a service agreement dated 17 July 2006 (“the agreement”) and served as director responsible for the sale and purchase, leasing and/or investment of land, properties and/or other assets in areas designated by the defendant from time to time for the period from 1 July 2006 until he was terminated on 15 February 2012.

3.  The plaintiff brought proceedings against the defendant in June 2012 in the Labour Tribunal which proceedings were transferred to the High Court in August 2012.  The plaintiff claims that the defendant has underpaid him the sum of $21,595,638.43 (subject to discovery) for the period from 1 January 2007 to the end of February 2012.

4.  Under the agreement the plaintiff’s remuneration comprised a basic monthly salary and a commission calculated in accordance with clause 2.1(b) of the agreement.

5.  The relevant provisions in the agreement relating to remuneration for present purposes are the following:

“2.1 (b) Commission: the commission shall be calculated in accordance with the commission letter issued by the Finance Department and the terms and conditions stated therein. The Employer may at any time exercise its absolute discretion to decide in writing any change of the formula and ranking calculation method. The commission shall be calculated in accordance with the actual amount received by the Employer in relation to the Employee’s transactions of the sale and purchase and the lease of the property after deducting the Employer’s expenses, claims, credit card handling fees, allowance, discount, loss and other similar items incurred in carrying on the sale and purchase and the lease of the property in the Designated Areas or market directly controlled and managed by the Employee. The Employer shall in accordance with the terms and conditions and the formula and ranking calculation stated in the commission letter by the Finance Department calculate …

2.3 The Employee, without prior permission, shall not be allowed to inspect the Employer’s internal accounting books and records, but if there is dispute on the matter relating to the Employee’s entitlement to the amount of the commission, the Employee may request the Employer to produce a certificate to be duly signed by the Employer’s internal accountant for his inspection.  The said certificate shall state the actual amount of commission received by the Employer and the amount of commission payable by the Employer to the Employee.  Besides, the said certificate shall be treated as a final evidence of the aforesaid amount payable and is binding on the parties to this Service Agreement.”

6.  §4(3) of the defence simply set out clauses 2.1 (b) and 2.3 of the agreement which was in Chinese with an English translation provided by the defendant.  The defendant’s translation differed from the plaintiff’s version set out in the statement of claim.  That issue has been resolved by the certified translation now available.  In the plaintiff’s reply he admitted only those clauses that were set out in Chinese in §4(3) of the defence.

7.  The amendment to §4 of the reply read as follows:

“The English translation of clause 2.3 of the Employment Contract in paragraph 4(3)(ii)(b) is denied. The Plaintiff avers that term ‘證明文件’ should be translated as ‘supporting documents’ and not ‘certificate’. The Plaintiff further avers that a certificate issued by the Defendant is not a Certificate within the meaning of clause 2.3 of the Employment Contract unless such Certificate was issued pursuant to the request of the Plaintiff. Further or in the alternative, the Plaintiff avers that clause 2.3 of the Employment Contract amounts to an ouster of jurisdiction of the court and is therefore void as contrary to public policy. Further or in the alternative, clause 2.1 and/or 2.3 of the Employment Contract are subject to the implied term that in determining the amount of Commission payable to the Plaintiff as indicated on the ‘Certificate’ and/or ‘Supporting Documents’, the Defendant is under a duty to be in good faith and to use reasonable care to determine the amount of Commission payable.” (emphasis added)

8.  It will be seen that the second, third, fourth and fifth sentences of the plaintiff’s amendment to paragraph 4 of his reply make independent and separate points.  The opposed amendment is to the sentence appearing in italics above.

9.  It is relevant to mention that prior to the application to amend the reply, there had been earlier interlocutory proceedings.

10.  On 18 June 2013, the defendant issued a certificate signed by its accountant (“the 2013 certificate”) stating that for the period between 1 January 2007 and 29 February 2012 the amount actually received by the defendant arising from sale and lease transactions in relation to which commission was payable to the plaintiff and the amount of commission payable on that basis should be $30,992,129.56.  According to the defendant’s records, the plaintiff had been paid $34,378,020 and so the defendant considered that no further commission was payable.

11.  In those circumstances, in July 2013 the defendant took out a summons for the determination of four questions of law under Order 14A including the question whether a certificate under clause 2.3 of the agreement is conclusive and binding on the parties as to the plaintiff’s entitlement to commission.  The master dismissed the defendant’s summons on the sole ground that the 2013 certificate was not a certificate within the meaning of clause 2.3 of the agreement because the defendant did not produce the certificate upon the request of the plaintiff.

12.  On appeal, Chow J dismissed the appeal for the exact same reason as the Master although he accepted that, as a matter of principle, that (1) a conclusive evidence clause in a contract should be given legal effect according to its terms citing Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 and similar cases; (2) clause 2.3 of the agreement has the effect that a certificate produced by the defendant which falls within the clause shall be final and conclusive as regards the amount of commission payable by the defendant to the plaintiff; and (3) the judge did not accept the remaining submissions of the plaintiff, including the submission that clause 2.3 is void on the basis that it amounts to an ouster of the court’s jurisdiction: see §§19, 22 and 25 of the judgment of Chow J dated 6 August 2014.

13.  By summons dated 7 July 2015, the plaintiff applied to amend his reply.  His amendment to §4 is set out in §7 above.  The master allowed the amendment on 5 November 2015 from which order the defendant now appeals.

14.  The basis of the defendant’s appeal is that clause 2.3 is not objectionable and cannot be struck down on the ground that it ousts the jurisdiction of the court and therefore void as contrary to public policy.  It was submitted that the opposed amendment should not have been allowed.

The applicable legal principles

15.  Insofar as the court’s power to allow amendments to pleadings is concerned, it is common ground that post‑CJR the court has a discretion under Order 20 rule 8 (1A) to allow or order an amendment to a pleading conditional upon its being satisfied that the amendment is necessary either for disposing fairly of the cause or matter, or for saving costs.

16.  In the circumstances of this case, the only question that arises is whether the proposed amendment is necessary for disposing fairly of the cause or matter.

17.  On the issue of the validity and efficacy of conclusive evidence clauses in the commercial context, the leading case of Dobbs (supra) establishes that a conclusive evidence clause in a contract is valid and does not oust the jurisdiction of the court.  Mr Hon (counsel for the plaintiff) did not seek to challenge that principle.  He apparently accepts the correctness of Dobbs and the line of cases stemming from that decision.

18.  Nevertheless, it is relevant to look more closely at the courts’ approach to conclusive evidence clauses and the rationale for upholding their validity.

19.  Dobbs concerned the validity of a clause in a guarantee that provided that a certificate signed by the bank’s manager should be conclusive evidence of indebtedness at a particular date.  The High Court of Australia had no difficulty in rejecting the guarantor’s contention that the clause was invalid because it was an attempt to oust the jurisdiction of the court on an issue essential to the guarantor’s liability and to substitute for the opinion of the Court that determination or opinion of a bank officer.  The majority of the Court explained (at 651 and 652) that:

“It is not easy to see how the amount can be certified unless the certifier forms some conclusion as to what items ought to be taken into account, and such a conclusion goes to the existence of the indebtedness. Perhaps such a clause should not be interpreted as covering all grounds which go to the validity of a debt; for instance, illegality … the manifest object of the clause was to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness. …

Parties may contract with the intention of affecting their legal relations, but yet make the acquisition of rights under the contract dependent upon the arbitrament or discretionary judgment of an ascertained or ascertainable person. …”

Then (at 654) they went on to state that:

“It is therefore a mistake to suppose that the policy of the law exemplified in the rule against ousting the jurisdiction of the Court prevents parties giving a contractual conclusiveness to a third person’s certificate of some matter upon which their rights and obligations may depend.”

20.  In a separate judgment, after referring to the arbitration awards and conclusive evidence clauses in various mercantile contracts, Starke J stated (at 657) that:

“In none of these cases is the jurisdiction of the Court ousted: all that has been done or attempted is to provide for the ascertainment of rights or facts by the parties or by some agreed person or tribunal, and to leave the enforcement of the parties’ rights, so ascertained or flowing from the facts so found, to the determination of the Courts of law … it is an evidentiary stipulation for use before those Courts.”

21.  The English courts have upheld the validity of conclusive evidence clauses in various mercantile contracts as appears from the many authorities cited by Starke J (at 656).  Subsequent to Dobbs it has been applied by the Court of Appeal in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyd’s Rep 437 and other cases.

22.  As noted in Standard Chartered Bank v Neocorp International Ltd [2005] 2 SLR(R) 345 (at §17) such clauses were originally devised and inserted in commercial documents to obviate cumbersome and painstaking enquiries to prove outstandings on running accounts and are now used pervasively in all manner of documentation by all manner of businesses in common law jurisdictions.

23.  North Shore Ventures Ltd v Anstead Holdings Inc and others [2012] Ch 31 is the most recent English decision on the subject and offers an example of a certificate being “manifestly incorrect”.  In that case the guarantors had undertaken to guarantee the actual indebtedness of borrower under a loan agreement that was subsequently varied that reduced the rate of interest.  The certificate issued did not reflect the subsequent variation.  That gave rise to an obvious mismatch between the relevant agreement and the certificate.  Since the certificate contained a manifest error the guarantors were not precluded from demonstrating that the amount of indebtedness was of a lesser amount.

24.  The Court of Appeal in North Shore had every opportunity but chose not to depart from Dobbs despite certain concerns expressed by Sir Andrew Morritt C.  So the law (now long settled) is that manifest error or fraud aside, conclusive evidence clauses are binding.  That is because they represent a contractual bargain between the parties who should be held to their bargain.

25.  Mr Wong SC, counsel for the defendant, submitted that three matters emerge from the authorities:

(1) The cases have consistently upheld the validity and purpose of conclusive evidence clauses in different commercial contexts.

(2) The argument of ousting the court’s jurisdiction was specifically raised and considered in Dobbs, Bache and North Shore but has been rejected.

(3) If the clause were sufficiently clear, a certification may be conclusive even where it concerns or goes to the existence of liability.

Mr Hon did not demur from those conclusions.

Whether clause 2.3 is objectionable

26.  The issue between the parties comes to this: whether clause 2.3 is objectionable because it has the quality of ousting the court’s jurisdiction.  If it were not objectionable on that basis, it would follow that the opposed amendment cannot be shown to be necessary for fairly disposing of the cause or matter and leave to amend should not be given.

27.  The context in which this question arises is relevant.

28.  In §6 of his statement of claim the plaintiff claimed that the defendant is indebted to him in the sum of approximately $21.595 million. He provided a detailed breakdown in the pleading of specific amounts in relation to specific periods.  An item of expense that the defendant had deducted from the gross income/receipts when calculating the plaintiff’s commission entitlement was in respect of “central costs”.  The plaintiff considers that such central costs should not have been deducted in calculating his commission entitlement.

29.  The amounts claimed in fact represent the additional commission the plaintiff stood to receive but for the allegedly wrongful deduction.  One arrives at those amounts by applying the relevant or applicable commission rate (which was 5.5% pre-July 2009 and 4% post-June 2009) to the central costs deducted for the corresponding period.

30.  It appears to be common ground between the parties from evidence filed in other interlocutory applications (not before this court) that the Midland group provides centralised services or functions for the group such as advertising, accountancy and human resources etc.  The costs incurred for those services or functions constitute “central costs” that are allocated among the various Designated Areas or districts.

31.  The court was informed that the plaintiff has been provided with this information and he knows exactly what central costs have been allocated to the area(s) for which he was responsible.  As earlier explained, the various amounts that he claims are calculated by reference to those central costs.

32.  Hitherto, it had been the plaintiff’s case that no part of such central costs should be deducted from the gross receipts or commission received by the defendant when calculating his commission entitlement.  However, at the hearing, the plaintiff appeared to have changed his stance in as much as he now appears to accept that “some” of the central costs are deductible. His objection, seemingly, is to expenses incurred not by the defendant directly but centrally for services provided to the defendant for its business.

33.  The plaintiff’s current position appears to be that he is acknowledging (if not conceding) that he may not be entitled to the entire amount of $21 million plus claimed.  However that can only be known after discovery of information concerning details of such central costs.  But, as I understand it, his application for discovery has been refused.

34.  Be that as it may, what is the nature and effect of clause 2.3?  It is a provision that cannot be looked at in isolation.  That is because clause2.3 forms only a part of the provisions for remuneration.  The plaintiff’s entitlement depends on the provisions contained in clause 2 with particular reference to clauses 2.1(b) and 2.3 of the agreement.  They need to be read and construed in their entirely in order to ascertain the contractual intent concerning remuneration at the time the parties entered into the agreement.

35.  It is clear from clause 2.1(b) that the defendant had the power to decide, inter alia, the rate of commission.  The parties also conferred on the defendant an absolute discretion to decide in writing “any change of formula and ranking calculation method”.

36.  Then for the purposes of calculating the plaintiff’s commission:

(1) the gross receipts or actual amount received by the defendant attributable to the property transactions for which the plaintiff was responsible had first to be ascertained;

(2) deductions would have to be made from that figure, such deductions to reflect the defendant’s expenses incurred in carrying on the sale and purchase and the lease of the properties in the Designated Areas or market managed by the plaintiff; and

(3) the defendant is then required to calculate the commission due to the plaintiff in accordance with the terms and conditions and the formula and ranking calculation stated.

37.  The next stage begins with first sentence of clause 2.3.  Inarguably, that is a clear agreement between the parties that the plaintiff “shall not be allowed to inspect the [defendant’s] internal accounting books and records”.  Given the nature of the defendant’s business, such a provision is nothing out of the ordinary since its financial information is clearly commercially sensitive.

38.  The clause then provided for what was to happen in the event of any dispute.  It envisaged that the dispute would be “settled” in the sense of being put an end to by means of a certificate issued by the defendant’s internal accountant.  That certificate was to state the actual amount of commission received by the defendant and the amount of commission payable to the plaintiff which certificate was to be treated as “final evidence” of the amount payable and is binding on the parties.

39.  Clause 2.3 was obviously intended to provide the mechanism for settling any issue or dispute arising between the parties concerning the amount of the plaintiff’s commission entitlement.  In nature, character, substance and effect, it is indistinguishable from a conclusive evidence clause.

40.  Mr Hon’s approach to clause 2.1(b) is to construe it as an independent or stand‑alone provision.  It was said that because certain terms of the “formula” were not defined, that raised matters of construction that are matters of law for determination by the courts.  The “formula” was the plaintiff’s shorthand reference to the sentence in the middle of clause 2.1(b) that set out deductible items.  He submitted that clause 2.3 had the effect of rendering nugatory or taking away all the plaintiff’s “rights” under clause 2.1(b), thereby ousting the court’s jurisdiction to determine questions of law (arising from the true construction of clause 2.1(b)) and hence void as contrary to public policy.

41.  It was disingenuous for the plaintiff on the one hand to “accept” and not challenge the validity and efficacy of conclusive evidence clauses and the authorities cited in support and then, by some sleight of hand, resuscitate the objection based on the ousting of the court’s jurisdiction, an objection the courts have repeatedly rejected.

42.  As regards the plaintiff’s suggestion that the first sentence of clause 2.3 was operative only during the period of employment of the plaintiff, it is entirely without foundation or merit.  Nothing in the agreement warrants such a reading that, in my view, borders on the perverse.  Further, the plaintiff was also unable to articulate what in the factual matrix affected the ability of clause 2.3 to take effect as a conclusive evidence clause.

43.  Mr Hon did not cite a single authority in his oral submissions, not even Ungoed‑Thomas’ dictum in In re Davstone Estates Ltd’s Leases Manprop Ltd v O’Dell and others [1969] 2 Ch 378 referred to in his written skeleton.  Davstone was a decision that was based on counsel’s concession and the special terms of the leases in question.  Not only was that case not cited to the court in cases subsequent to Dobbs that applied the Dobbs principle, Knox J doubted its reliability in Nikko Hotels (UK) Ltd v MEPC PLC [1991] 2 EGLR 103 at 109A–C.

44.  Rather, the plaintiff sought to derive assistance from certain passages in the written skeleton of the defendant’s counsel in the discovery proceedings mentioned earlier but in the absence of all underlying material.  That, of course, is wholly inappropriate.

45.  For the reasons stated above, I am not persuaded that clause 2.3 does not have the effect of a conclusive evidence clause.  The objection based on ouster of the court’s jurisdiction plainly is unsustainable as a matter of law. In those circumstances the opposed amendment cannot be necessary for disposing fairly of this action.