MICHAEL REID SCOTT v. HKSAR

CACV 199 & 401/2003

CACV 199/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 199 OF 2003

(ON APPEAL FROM HCAL NO. 177 OF 2002)

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Dates of Hearing:   6 - 9 July 2004

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J U D G M E N T

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Hon Ma CJHC :

Introduction

 1. On 19 July 2002, the Public Officers Pay Adjustment Ordinance, Ordinance No. 25/2002 (this is now Cap.574) (“POPAO”) was enacted.  This Ordinance had as its object the adjustment of pay of public officers (who are remunerated in accordance with civil service pay scales or the ICAC pay scale).  Such adjustments to pay, which was to be reduced, were to take effect as from 1 October 2002.  The question for determination in this appeal is whether the reduction in pay provided for in POPAO is constitutional.  Specifically, are they contrary to Articles 100, 102 and 103 of the Basic Law?  This is the main issue in this appeal although, as I will later identify, other issues also arise going to the legality of this legislation.

2. The term “public officer” is not defined in POPAO but is defined in section 3 of the Interpretation and General Clauses Ordinance, Cap.1 as a person holding an office or emolument under the Government, whether temporary or permanent.  The term “public servant” has the same meaning.

3. The enactment of POPAO led to five sets of proceedings launched by various public officers : -

(1)    HCAL 177/2002 brought by one of the Applicants before us, Mr Bernard Lau, a police officer.

(2)    HCAL 178/2002 brought by four police officers acting both for themselves and also as representatives for four separate police associations.

(3)    HCAL 180/2002 brought by the Government Park and Playground Keepers Union and two others.

(4)    HCAL 188/2002 brought by the other Applicant before us, Mr Michael Scott, a public officer and legal officer holding the post of Senior Assistant Solicitor General in the Department of Justice.

(5)    HCAL 44/2003 brought by 13 individual civil servants who were all members of the Association of Expatriate Civil Servants of Hong Kong.

4. Following a number of directions hearings, it was eventually determined that HCAL 177/2002 and HCAL 180/2002 would first be heard by the Court of First Instance before the other proceedings.  These two proceedings involved Mr Lau and the Government Park and Playground Keepers Union.

5. The hearing of these two proceedings took place before Hartmann J over the course of four days in May 2003.  In a judgment handed down on 10 June 2003 (“the June Judgment”), the judge dismissed the applications for judicial review, holding that the provisions in POPAO reducing the pay of public officers were constitutional and legal.  It is from this judgment that Mr Lau has appealed in one of the appeals before us, namely, CACV 199/2003.

6. Following the June Judgment, the Applicants in HCAL 180/2002 (the Government Park and Playground Keepers Union) also served a Notice of Appeal but this appeal was later dismissed by consent on 22 March 2004.  The Applicants in HCAL 178/2002 (the police officers) were granted leave on 2 October 2003 to discontinue their applications for judicial review.  The Applicants in HCAL 44/2003 were similarly granted leave to discontinue on 7 October 2003.

7. This left the Applicant in HCAL 188/2002 (Mr Scott).  He continued with his application notwithstanding the June Judgment.  After a 3-day hearing in October 2003, also before Hartmann J, judgment was handed down on 7 November 2003 (“the November Judgment”) in which his application for judicial review was dismissed.  On 15 April 2004, following a 2-day hearing on costs, the judge made no order as to costs in respect of these proceedings.  The Applicant appealed the November Judgment (CACV 401/2003) and this appeal was also before us to be heard at the same time as CACV 199/2003.  The Respondent has in this appeal cross-appealed the order for costs.

8. Before us, both Mr Lau and Mr Scott have appeared on their own behalf and made submissions.  Mr Joseph Fok SC and Mr Daniel Wan appeared for the Respondent in both appeals.

The facts

9. Both Applicants are public officers within the meaning of POPAO.  Mr Lau was at the time he took his application for judicial review a Senior Inspector in the Hong Kong Police Force.  Mr Fok raised a question as to his locus standi in this appeal.  I will presently deal with this issue.  Mr Scott occupied at all material time the post of Senior Assistant Solicitor General in the Legal Policy Division of the Department of Justice.  Both Applicants are affected by the pay reduction provided for in POPAO.

10. Public officers have over the years enjoyed pay increases.  As far as we know, there have not been any downward adjustments in pay.  Following the resumption of sovereignty by the People’s Republic of China over Hong Kong on 1 July 1997, public officers have also enjoyed a number of pay increases.  For years, public officers, like the rest of Hong Kong, have benefited from the economic prosperity that Hong Kong experienced.

11. However, as the judge noted in the June Judgment, Hong Kong suffered as a result of what has been known as the Asian Economic Crisis.  In the introductory paragraph of that judgment, he said this : -

“In the latter months of 1997 a financial crisis swept through the economies of South East Asia.  That crisis, profound in its ramifications for Hong Kong, has been followed by other economic difficulties, local and global, which, to a greater or lesser degree, have left scars on the corpus of Hong Kong’s previously bourgeoning prosperity.  In the result, in economic circumstances marked by rising unemployment and by deflation rather than inflation, the Government of the Hong Kong Special Administrative Region has had to look to measures to address what it has recognised has become a 'structural problem’ facing the Territory’s public finances, one which has resulted in persistent fiscal deficits.”

12. In the 2002 Budget Speech delivered on 6 March 2002, the Financial Secretary had as one of his main themes the economic downturn in Hong Kong.  What were regarded as matters of paramount importance included keeping public finances sustainable and the implementation of effective measures to restore fiscal balance within a reasonable time.  Measures were required to address the question of public expenditure.  As the Financial Secretary said : -

“Otherwise, our fiscal policies would be out of line with the economy, and this would exacerbate the structural problem in our finances.”

13. To address these problems, the Financial Secretary said this in relation to the civil service pay : -

“67.    I have mentioned earlier that it is necessary to control the growth of government expenditure in money terms.  Personnel-related expenses account for 70% of government operating expenditure.  Given our serious fiscal position, I have assumed in the Medium Range Forecast, for financial planning purposes, that civil service pay will be cut by 4.75% and the salary-related portions of subventions to the various organisations will also be reduced by the same rate.  This assumed 4.75% pay cut has taken into account the respective cumulative pay rises for civil servants of different ranks since July 1997.

68.    Under the existing mechanism, the Government will consider, among other things, the results of the private sector pay trend survey and its own budgetary position before deciding on an annual civil service pay adjustment.  We will continue to adopt this mechanism and make a final decision after the outcome of this year’s survey is known in May.  Any decision on a civil service pay cut needs to go through the legislative process before it can be implemented.  Assuming that the pay cut takes effect from 1 October this year and that the level of reduction is 4.75%, the Government will achieve savings of about $3 billion in 2002-03 and about $6 billion in a full year.”

14. It is convenient here to describe the mechanism for pay adjustments that was in place when the adjustment brought about by POPAO was introduced (this is largely taken from the affirmation of Ms Jessie Yip, the Deputy Secretary for the Civil Service) : -

(1)    Although internal considerations are important in the determination of pay in the Civil Service (for example, the internal grading of officers into qualification groups so that pay scales can be formulated), external factors are also important.  Generally speaking, in the fixing or adjustment of civil service pay, reference is made to salaries in the public sector.  The broad principle has been to pay public officers comparable salaries to those obtainable in the private sector.  This principle has been applied since the 1960s.

(2)    In 1968, the Salaries Commission (a body established by the Government to review civil service salaries with the objective of putting civil service salaries on a comparable footing with private sector pay), said this in its “Statement of Principles and Aims of Civil Service Remuneration” : -

“The Government subscribes to the principle of fair comparison with the current remuneration of outside staffs employed on broadly comparable work taking account of differences in other conditions of service”.

(3)    Although in the 1970s, there were moves to replace the “principle of fair comparison” with another system (namely an index-linked system), the principle was reaffirmed by the Standing Commission on Civil Service Salaries and Conditions of Service (“the Standing Commission”) in 1979.  It recommended that broad comparability with the private sector should continue to be an important factor in setting civil service pay.

(4)    In rejecting the idea of an index-linked system, the Standing Commission also said this in its “First Report on Principles and Practices Governing Civil Service Pay” at paragraph 19 : -

“19.    If private sector comparability is not to provide the indicator then the only alternative which has been suggested to us is the consumer price index.  However, we do not support the concept of index linked salaries.  Firstly, from the point of view of the civil service, index linked salaries will not necessarily produce a real increase in the value of pay.  Secondly, from the point of view of the public, civil service pay must have regard to the economic circumstances of Hong Kong as a whole.  If the economy is buoyant it is right and proper that civil servants should share in the benefits.  If the economy is depressed it is equally right that civil servants should share the burden of any necessary measures to limit expenditure.”  (Emphasis added)

The second point made in this passage is important, namely, the notion that if the economy was depressed, civil servants were expected to share the burden of any measure needed to limit public expenditure.

(5)    The policy adopted by the Government has been to review civil service pay more or less annually.  Here, although the fair comparison principle is an important factor, it is not the sole factor taken into account by the Government.  The judge describes the payment mechanism in paragraphs 45 to 49 of the June Judgment : -

“45.    But that being said, the ‘fair comparison’ principle has never been the sole principle relied upon by the Executive.  Ms Yip has observed that :

‘Under the prevailing annual civil service pay adjustment mechanism, the Government decides on the size of any annual civil service pay adjustment having regard to the following factors: (i) the net pay trend indicators derived from a private sector Pay Trend Survey, (ii) the state of the economy, (iii) budgetary considerations, (iv) changes in the cost of living, (v) the pay claims of the staff sides of the central consultative councils and (vi) civil service morale.’

46.    Ms Yip has stated that :

‘It is inherent in the prevailing pay adjustment mechanism that civil service pay may be increased or decreased as some of the factors taken into consideration such as the net pay trend indicators and the cost of living are capable of upward and downward movements.  The fact that there has been no reduction until 2002 is a reflection of the generally favourable fiscal and economic environment over the years and is not an indication of any Government policy that pay should not be reduced.’

47.    The annual private sector pay trend survey report is prepared by a research unit which reports to the Commission.  Its conclusions are expressed in the form of ‘gross pay trend indicators’. The results of each year’s survey are ‘analysed and validated’ by a committee - the Pay Trend Survey Committee - which is chaired by a member of the Standing Commission and inter alia has on it representatives of four civil service consultative councils (‘the staff unions’) representing the civil service as a whole.  Once that committee has validated the survey results, those results are then, according to an established formula, mathematically modified by members of the Government administration into what are called ‘net pay trend indicators’, there being an indicator for each salary band.  ‘Net pay trend indicators’ reflect matters of pay particular to the civil service.

48.    Once the ‘net pay trend indicators’ are determined, the staff unions are invited to submit their pay claims.  In light of these claims and the matters to which reference has been made in paragraph 17 above, the Chief Executive in Council makes a final decision on pay adjustments for the year.

49.    It must be emphasised that civil service pay adjustments have not always been determined in direct correlation with the results of the relevant private sector pay trend survey.  For example, in 1982, in order not to exacerbate inflation, the civil service pay adjustment was set at a lower level than that indicated by the private sector survey.  In 1990 and 1991, the pay adjustments were again lower, the Executive resolving that there was a need to control inflation and curb public expenditure.”

15. As to what occurred in relation to the pay adjustment for 2002 that led to POPAO being enacted, again I can do no better than to refer to the June Judgment : -

“50.    On 6 May 2002, the research unit reported to the Commission that all its ‘gross pay trend indicators’ for 2001/2002 were in the negative.  Three of the four staff unions represented on the Pay Trend Survey Committee sought extra time to consider the results of the report but the chairman of the Committee found no reason to delay and the Committee met on 13 May 2002.  At that meeting, the results of the research unit were validated.

51.    The figures, when passed to Government, were modified in order to determine the necessary ‘net pay indicators’.  When calculated, they were : -4.42% for the upper salary band, -1.64% for the middle band and -1.58% for the lower band : the same percentages by which the Ordinance subsequently reduced the scales of civil service pay.

52.    On 15 May 2002, three of the staff unions submitted their pay claims.  All sought a freeze of civil service pay.  The following day the fourth staff union said that it would not submit a claim.

53.    On 22 May 2002, the Chief Executive in Council resolved that a formal offer be put to the staff unions reflecting the exact percentage decreases thrown up by the net pay trend indicators, the reductions to be given force of law by legislation.

54.    In her affirmation, Ms Yip has explained the reasoning of the Chief Executive in Council, saying it was inter alia influenced by the following matters :

(a)    The net pay trend indicators for all three salary bands showed a downward trend.

(b)    For the year ending 31 March 2002, the Composite Consumer Price Index had declined by 1.8% over the same period in 2001.  Other consumer price indices had registered similar decreases.

(c)    The Hong Kong economy had undergone a downturn.  The labour market had slackened with the unemployment rate reaching a high of 7% in the first quarter of 2002.

(d)    The Government was facing a structural fiscal deficit problem, with an estimated consolidated deficit of $65.6 billion and $45.2 billion for 2001-02 and 2002-03 respectively.

55.    In response to the formal offer of the Chief Executive in Council, two staff unions sought a pay freeze rather than a reduction; one staff union declined to make submissions; one objected to the intention to make the pay reductions the subject of legislation.

56.    On 28 May 2002, the Executive resolved that the pay reductions should be made and should, if possible, be secured by legislation.

57.    In my opinion, what must be noted - as Mr Fok, for the respondent, has emphasized - is that the Executive has sought legislation to reduce civil service pay not in order to meet a ‘target figure’ which had been unilaterally calculated as being fiscally prudent and which, in relation to the existing mechanism for adjusting pay, was entirely arbitrary but instead to reduce that pay entirely in accordance with the existing mechanism and with principles long accepted by both the Executive and the representatives of the civil service, one of those principles, indeed a founding principle, being the need for a ‘broad comparability’ between private and public sector pay.

58.    In a letter dated 11 June 2002 to various civil service staff associations, which had requested that a committee of inquiry be set up to report on the dispute as to the proposed pay reduction and its imposition by means of legislation, the Chief Secretary for Administration wrote :

‘The Chief Executive is of the opinion that it is a matter of settled public policy that in determining the size of each year’s civil service pay adjustment, the Government takes into account the following factors: the net pay trend indicators derived from an independent private sector pay trend survey, the state of the economy, budgetary considerations, changes in the cost of living, the staff sides’ pay claims and civil service morale.  Some of the considerations under the existing mechanism such as the net pay trend indicators and the cost of living are capable of upward and downward movements.  It is thus inherent in the existing mechanism that civil service pay may be increased or decreased.  The 2002 civil service pay adjustment exercise has been conducted in strict accordance with the established mechanism and the final decision on a civil service pay reduction has taken account of all the relevant factors mentioned above.’

In respect of the contemplated legislation, the Chief Secretary commented :

‘On the Chief Executive in Council's decision to give effect to the 2002 civil service pay adjustment by legislation, this is a matter of implementation of a settled policy.  The reason for this approach is that the employment contracts between the Government and the vast majority of serving civil servants do not contain an express provision authorizing the Government to reduce pay.  Legislation is therefore the only way to implement the Chief Executive in Council’s pay adjustment decision fairly and with certainty.’ [my emphasis]”

16. The following points I believe emerge from the brief description given above of the general system of civil service pay adjustments and the 2002 adjustment : -

(1)    The assessment (and if necessary, the adjustment) of public officers’ pay is an exercise that is, to a significant degree, referable to private sector pay trends.  It is also one that regards as relevant the state of Hong Kong’s economy.  Where the economy is flourishing, public officers can and do reap the benefits of this (and they have done in the past).  Where the economy takes a turn for the worse (as it did in 2002), public officers are equally expected to shoulder the burden.  The payment mechanism in place is designed so as to enable the Government to arrive at a sensible decision on what should be the appropriate payment adjustment for any given year.

(2)    The payment adjustment mechanism described above is one that may result in a situation indicating that a pay adjustment downwards is desirable, although in the past when Hong Kong’s economy has been healthy, there had only been pay increases.

(3)    The exercise carried out in 2002 was entirely in accordance with the established system.  It has not been suggested otherwise.

17. Since 1 July 1997, as stated above, public officers have enjoyed salary increments twice : - effective on 1 April 1998 and on 1 April 2000.  It is only for the year 2002 that there has been any suggestion of a pay decrease.  The reduction in pay that POPAO seeks to implement (to take effect on 1 October 2002) do not, however, result in the pay levels of public officers dipping below those as at 1 July 1997.  The relevance of this will emerge later.

POPAO

18. POPAO states its object clearly in the Preamble : -

“An Ordinance to adjust with effect on and from 1 October 2002 the pay of public officers paid in accordance with civil service pay scales or the ICAC pay scale by reducing the pay pertaining to each point on those pay scales by –

(a)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, below $15,520, 1.58%;

(b)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, $15,520 or above but does not exceed $47,590, 1.64%;

(c)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, above $47,590, 4.42%;

with effect on and from the same date to adjust the pay of certain public officers whose pay is determined in accordance with or by reference to a point on one of those pay scales or whose pay is adjusted in accordance with or by reference to adjustments to one of those pay scales by the corresponding percentages; to provide that with effect on and from the same date the amounts of the allowances payable to certain public officers that are determined in accordance with or by reference to a point on one of those pay scales or which are adjusted in accordance with or by reference to adjustments to one of those pay scales are to be determined or adjusted in accordance with or by reference to points on those scales as so adjusted; and for connected purposes.”

19. The constitutional and legal challenges directed against the Ordinance are insofar as it seeks to reduce the pay of public officers.  This is embodied in section 10 : -

“10.  Express authority for adjustments

The contracts of employment of public officers are varied so as to expressly authorize the adjustments to pay and the amounts of the allowances made by this Ordinance.”

20. What is the basis for the challenges that are made against POPAO?

The Issues

21. In the Notices of Appeal before us and the written submissions of Mr Scott in particular, the following issues were raised for our determination, although by the time actual hearing took place, it was clear that what I have described as Issue 1 below was really the only substantial issue for determination : -

(1)    POPAO was constitutionally objectionable in that Articles 100, 102 and 103 of the Basic Law were breached.  (Issue 1 : Articles 100, 102 and 103 of the Basic Law).

(2)    The Ordinance was also objectionable as breaching Article 35 of the Basic Law (Issue 2 : Article 35 of the Basic Law).

(3)    The Ordinance offended against the principle of the protection of property and the maintenance of contractual obligations contained in Articles 6, 105 and 160 of the Basic Law.  (Issue 3 : Articles 6, 105 and 160 of the Basic Law).

(3)    The Applicants were treated unequally since only public officers were targeted by POPAO.  This offended Article 25 of the Basic Law.  (Issue 4 : Equality).

(4)    The Government has breached the Labour Relations (Public Service) Convention 1978, an international labour convention expressly recognized under Article 39 of the Basic Law.  The Government has also breached Article 39 in that POPAO represented a form of indirect taxation on public officers.  (Issue 5 : Article 39 of the Basic Law).

(5)    The Applicants were entitled to enforce a legitimate expectation to the effect that their conditions of service and pay would be no less favourable after 1 July 1997 than before.  (Issue 6 : Legitimate Expectation).

22. In addition to the above issues, as I have said in paragraph 7 above, the Respondent has cross-appealed the order for costs made by the judge in HCAL 188/2002 in which no order was made.  (Issue 7 : The costs order in HCAL 188/2002).

23. I do not in this judgment intend to deal at length with Issues 2 to 6.  These were by no means the focus of the Applicants’ submissions, although they were not expressly abandoned.  In relation to them, on the whole I cannot see where the judge erred and, with respect, I agree with his reasons for rejecting them.  Many of them are upon analysis merely alternative ways of arguing the main issue (Issue 1), but some do contain independent points.  I only briefly deal with these issues, for, as I have said, I find myself in substantial agreement with the reasons for rejecting contained in the June and November Judgments.

24. The Respondent did also at the outset of this appeal raise a question as to Mr Lau’s locus standi, with which I now deal before going into the other issues.

Locus Standi

25. It was contended by Mr Fok that Mr Lau lacked locus standi in this appeal by reason of the following facts and matters : -

(1)    He has been convicted of a number of criminal charges.  On 1 June 2001, he was interdicted without pay with effect from that date due to his criminal convictions on 31 May 2001.  Subsequently, on 22 October 2001, he was convicted of a further criminal offence.

(2)    Following these convictions, the Commissioner of Police recommended to the Secretary for the Civil Service (who has powers of punishment) a punishment that, if endorsed, would result in the forfeiture of pay.

(3)    On 9 June 2003, the Secretary for the Civil Service partially accepted the Commissioner of Police’s recommendation and gave Mr Lau a reprimand and a serious reprimand for the 31 May 2001 convictions.  In respect of the 22 October 2001 conviction, he was dismissed from the Force, with the result that any outstanding pay was forfeited, together with his pension rights.

(4)    Accordingly, Mr Lau had no interest in pursuing the present appeal.

26. Mr Lau informed us that in fact he had instituted proceedings challenging the legality of his dismissal.  These proceedings have not yet been determined.  I understand that judgment is reserved in the Court of First Instance.  At one stage, the Respondent applied by a summons dated 30 July 2003 to strike out the appeal in CACV 199/2003, but this was withdrawn on 13 February 2004.

27. Given the above facts, I am of the view that Mr Lau does retain an interest in the present appeal and does have the necessary locus standi.

28. I now turn to the main issue in this appeal.

Issue 1 : Articles 100, 102 and 103 of the Basic Law

29. These Articles state as follows : -

“Article 100

Public servants serving in all Hong Kong government departments, including the police department, before the establishment of the Hong Kong Special Administrative Region, may all remain in employment and retain their seniority with pay, allowances, benefits and conditions of service no less favourable than before.

Article 102

The Government of the Hong Kong Special Administrative Region shall pay to public servants who retire or who leave the service in compliance with regulations, including those who have retired or who have left the service in compliance with regulations before the establishment of the Hong Kong Special Administrative Region, or to their dependants, all pensions, gratuities, allowances and benefits due to them on terms no less favourable than before, irrespective of their nationality or place of residence.

Article 103

The appointment and promotion of public servants shall be on the basis of their qualifications, experience and ability. Hong Kong’s previous system of recruitment, employment, assessment, discipline, training and management for the public service, including special bodies for their appointment, pay and conditions of service, shall be maintained, except for any provisions for privileged treatment of foreign nationals.”

30. Before dealing with the specific issues that arise out of these provisions, I feel there are two matters that ought to be emphasized and firmly borne in mind when construing the effect of these provisions.

31. First, the general intention of these Articles is in my view clear : - they ensured a situation in which public officers were guaranteed a smooth transfer pre- and post resumption of sovereignty .  In other words, there was to be continuity : they were to be no worse off after 1 July 1997 than before.  In The Association of Expatriate Civil Servants of Hong Kong v The Secretary for the Civil Service, unreported, HCAL 9/1998, 9 November 1998, Court of First Instance, Barnett J said this at page 12, that Article 100 of the Basic Law was intended “to ensure continuity of employment so that no public servant suffers as a consequence of the transition itself”.

32. This view of Article 100 of the Basic Law echoes the Joint Declaration.  In Annex 1 to the Joint Declaration (Elaboration by the Government of the People’s Republic of China of its Basic Policies regarding Hong Kong) it is stated in paragraph 72 : -

“After the establishment of the Hong Kong Special Administrative Region, public servants previously serving in Hong Kong in all government departments, including the police department, and members of the judiciary may all remain in employment and continue their service with pay, allowances, benefits and conditions of service no less favourable than before.  The Hong Kong Special Administrative Region Government shall pay to such persons who retire or complete their contracts, as well as to those who have retired before 1 July 1997, or to their dependants, all pensions, gratuities, allowances and benefits due to them on terms no less favourable than before, and irrespective of their nationality or place of residence.”

33. This theme of continuity is one of the hallmarks of the Basic Law, to reassure Hong Kong people that nothing would change after the resumption of sovereignty.  In HKSAR v Ma Wai Kwan, David & Others [1997] 1 HKLRD 761, Chan CJHC referred to continuity “being the key to stability” : - at page 774E.  Nazareth VP referred to the theme of the Joint Declaration and the Basic Law being overwhelmingly one of a “seamless transition” : - at 790D.  In the same case, Mortimer VP said at 800J, “The whole tenor of the Basic Law – following the Joint Declaration -  is to establish continuity”.

34. The second important matter is this.  One of the principal powers that was possessed by the Crown prior to 1 July1997 and by the Chief Executive since then, is the power to bring into effect legislation, with of course the sanction of the Legislative Council.  Prior to the resumption of sovereignty, the power in the Crown to legislate was contained in the Letters Patent.  Since 1 July 1997, the power is to be found in the Basic Law itself.  I would here refer to Articles 17, 48, 62, 66 and 73.  The power to legislate where necessary for the public good is, for obvious reasons, unrestricted (save of course where express limitations appear in the Basic Law itself and in the Hong Kong Bill of Rights).  Although this power is one that is often said to belong to the Government or the Chief Executive, this is not altogether accurate.  The power to legislate lies with the legislature as well.

35. But to what extent can contracts entered into by the Government be affected by the introduction of legislation?  This question is important in the present case because what the Government has sought to achieve by the passing of POPAO is the amendment by statute of the contracts of employment it has with public officers.  Section 10 POPAO says so in express terms.  There is no doubt that the relationship between the Government and public officers is one of contract : - see Choi Sum and others v The Attorney General [1976] HKLR 609, at 612; Lam Yuk-ming and Others v Attorney General [1980] 815, at 827.  I shall have to return to these cases later.

36. The following principles (derived from authority) are, I believe, important to bear in mind in answering the question posed in the previous paragraph (they are basic tenets of constitutional law) : -

(1)    As the Court of Appeal made clear in Lam Yuk-ming at 821, the Crown (the Hong Kong Government) “enjoys full legislative power” and at 822, “The Crown’s authority to legislate for a ceded territory is unrestricted”.  In that case, 26 dispensers in the employment of the Government had taken industrial action as a result of which they were suspended without pay pursuant to the exercise of a power under a Civil Service Regulation.  The remarks made by the Court of Appeal referred to earlier were obiter since the appeal was resolved on the basis that the contract between the Government and the dispensers contained a clause allowing the Government to vary its terms unilaterally.  However, the judge said this in paragraph 81 of the June Judgment : -

“In summary, in cases where contracts of service contain an express term empowering unilateral variation, the Court of Appeal in Lam Yuk Ming held that it was lawful for the Crown to amend those contracts by means of the legislative powers possessed by it.”

Put this way, this is perhaps slightly confusing as it may suggest that the power to legislate emanates from contractual provisions enabling variations to be made.  In my view, the power to legislate arises quite separately from any term of contract enabling unilateral variations to be made.  It arises from the prerogative powers (now contained in the Basic Law), the very point made by the Judge in paragraph 77 of the June Judgment.

(2)   In Commissioners of Crown Lands v Page [1960] 2 QB 274, the English Court of Appeal was there concerned with the question whether intervention by the government by the use of powers derived from statute affecting a contract, was permissible.  There, as the headnote to the report summarises, the Minister of Works (acting for the Crown) in the exercise of powers under some defence regulations promulgated in 1939, requisitioned certain premises which had been leased out by the Crown in 1937 for a term of 25 years.  The period of requisition lasted from 1945 to 1955.  The question was whether in those 10 years, the defendant (the transferee of the original tenant) was liable to pay rent.  The defendant claimed that the effect of the requisition had been to terminate his lease.  The evicting authority (the Minister of Works) had acquired the right of occupation as a compulsory licensee during the period of the requisition (see page 284).  The Court of Appeal held that the effect of the requisition was not to terminate the lease.  This was something that the Crown was entitled to do without terminating or even breaching the contract.  Lord Evershed MR referred to the lease having to be “treated as impliedly subject to the effect of any proper exercise in the future of the Crown’s executive authority” : - at 287.  Ormerod LJ said that he could not accept the proposition that “a covenant for quite enjoyment implied in a lease from the Crown must be taken to go so far as to imply an undertaking by the Crown to refrain from exercising statutory powers in respect of the demise premises which the Crown may properly deem necessary”.  Although the reference in this passage was to the exercise of statutory powers, it must follow that the exercise of prerogative powers is a fortiori included.  This was precisely the point made by Devlin LJ in the same case at 291 where he said : -

“When the Crown, or any other person, is entrusted, whether by virtue of the prerogative or by statute, with discretionary powers to be exercised for the public good, it does not, when making a private contract in general terms, undertake (and it may be that it could not even with the use of specific language validly undertake) to fetter itself in the use of those powers, and in the exercise of its discretion.  This principle has been accepted in a number of authorities; it is sufficient to mention Ayr Harbour Trustees v Oswald; Rederiaktiebolaget Amphitrite v The King; Board of Trade v Temperley Steam Shipping Co. Ltd. and William Cory & Sons Ltd. v City of London Corporation.”  (Emphasis added)

and at 292 :-

“When the Crown, in dealing with one of its subjects, is dealing as if it too were a private person, and is granting leases or buying and selling as ordinary persons do, it is absurd to suppose that it is making any promise about the way in which it will conduct the affairs of the nation.  No one can imagine, for example, that when the Crown makes a contract which could not be fulfilled in time of war, it is pledging itself not to declare war for so long as the contract lasts.  Even if, therefore, there was an express covenant for quiet enjoyment, or an express promise by the Crown that it would not do any act which might hinder the other party to the contract in the performance of his obligations, the covenant or promise must by necessary implication be read to exclude those measures affecting the nation as a whole which the Crown takes for the public good.”

(3)    One of the cases expressly referred to in Page was Rederiaktiebolaget Amphitrite v The King [1921] 3KB 500, where at 503, Rowlatt J said this : -

“My main reason for so thinking is that it is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises.  It cannot by contract hamper its freedom of action in matters which concern the welfare of the State.”

(4)   This passage was cited by the Court of Appeal of Guyana in Nobrega v Attorney-General of Guyana [1967] 10 WIR 187.  There, the issue was whether in circumstances where a school teacher who had been downgraded in status together with a reduced salary, the Government could lawfully do so.  The Court of Appeal held that the Government could not unilaterally alter the terms of employment.  After referring to the passage in Rederiaktiebolaget Amphitrite set out above, Cummings JA said this at 206H in relation to the unilateral reduction in pay : -

“In my view in order to justify a reduction in pay – well intended compromise thought it may be on the part of the Crown – there must be an enabling term in the contract or provision in a relevant statute; failing either of these, any variation of the contract must be mutual”.  (Emphasis added)

The case eventually went up to the Judicial Committee of the Privy Council (see [1969] 3 All ER 1604) but there decided on the basis that the school teacher had in fact been effectively dismissed.

(5)   In King v Attorney General of Barbados [1994] 1 LRC 164, a civil servant had her salary reduced by means of legislation passed as part of a Government austerity package.  She challenged the legislation on the basis that although the legislation could be passed, the Government had to pay her compensation for the drop in income.  Under the Civil Establishment Act 1948 (of Barbados), the Minister of Education had the power to determine the emoluments to be given to civil servants such as the appellant.  Under section 48 of the Constitution of Barbados, the Government had the legislative power to make laws “for the peace, order and good government of Barbados”.  In the Judicial Committee of the Privy Council, Lord Templeman said this at 201 : -

“The power conferred by s 48 of the Constitution on Parliament to make laws for the peace, order and good government of Barbados included power to make laws affecting the establishment of and emoluments attaching to offices in the public service.  That power was delegated to the minister by the 1948 Act, which remained in force after the coming into effect of the Constitution.  It was open to Parliament at any time to repeal the 1948 Act or to withdraw or supersede or exercise the powers delegated to the minister by the 1948 Act.  The 1991 Act was an effective exercise of the jurisdiction vested in Parliament to determine the emoluments attaching to offices in the public service, if Parliament considered that it was desirable to do so in the public interest.

The appellant does not deny that Parliament had jurisdiction to enact the 1991 Act but claims that the Act deprived her of property which she defined as the right to be paid not less than the emoluments attached to her office immediately before 1 October 1991.  The appellant had no such right; her only right was and is to receive such emoluments as the minister pursuant to the 1948 Act, or Parliament pursuant to its jurisdiction under the Constitution, from time to time attaches to her office.” (Emphasis added)

(6)    The above passages show in my view that a government has plenary or prerogative powers to enact legislation whenever it deems this necessary or desirable in the public interest.  It does not depend on the existence of enabling legislation, for its legislative powers derive from its prerogative.  In the case of Hong Kong, these powers are contained in those provisions of the Basic Law I have earlier identified, subject always of course to the limitations contained in that Law and in the Bill of Rights.

37. With those principles in mind, I now turn to the objections raised by the Applicants under Articles 100, 102 and 103 of the Basic Law.  Of these Articles, the most important is Article 100.  Here, apart from public officers remaining in employment and retaining their seniority, their pay, allowances, benefits and conditions of service were to be “no less favouable than before”.  The reference to “before” is of course to the position before the resumption of sovereignty on 1 July 1997.

38. In relation to Article 100, admittedly no objection can be raised on the basis that the pay of the Applicants (and that of public officers in similar positions) has, as a consequence of POPAO, been reduced to a level less favouable than before 1 July 1997.  The levels of pay of public officers, even when reduced by POPAO, are not reduced below the pay levels existing as at 1 July 1997.

39. Rather, the objection is based on the fact that the legislation, by amending their conditions of employment to allow for reductions in pay, has resulted in the conditions of service of public officers being less favourable than before 1 July 1997.  On one level, this simple argument has some initial attraction : - while there was no term of employment prior to 1 July 1997 (indeed prior to the enactment of POPAO) enabling the Government to reduce pay, POPAO now seeks to implement exactly such a reduction, albeit not on a permanent basis but only on (as Mr Fok termed it) a “one-off” one.

40. However, in my view, this argument cannot be sustained : -

(1)    In inquiring just what were the conditions of service under which public officers were serving to 1 July 1997, one must take into account the very real fact that the Government has always had the plenary or prerogative power to legislate so as to affect existing contracts.  The authorities referred to in paragraph 36 above amply demonstrate the ability of the Government to legislate (providing of course the Legislative Council allows this) in relation not just to contracts in general, but also specifically as regards the aspect of remuneration in employment contracts it has with public officers.

(2)    This was very much part of the conditions under which public officers served prior to 1 July 1997.  It would be quite astonishing if by a sidewind, this had somehow been changed after the resumption of sovereignty.  Afterall, as paragraphs 31 to 33 above demonstrate, the theme of the Basic Law (and especially of Article 100) is continuity.  The systems in place prior to 1 July 1997 were to continue in Hong Kong after that date.  Under Article 100, public officers were entitled to have conditions of service no less favourable than before but this did not mean that such conditions were to be better than before.  They were to remain the same.  Article 100 says “no less favourable than before”, not ‘better than before’.

(3)    Insofar as may be necessary, I am also of the view that even as a matter purely of contract it was an implied term of the conditions of employment between the Government and public officers that such contracts would be subject to any legislation being enacted in the public interest.  The requirements of The Moorcock (1889) 14 PD 64 and Liverpool City Council v Irwin and Another [1977] AC 239, are satisfied.  I should perhaps just add here that contracts of employment of public officers have always been a special category of employment contract in which the public interest plays a significant part.  For example, there used to be a rule that a civil servant could be dismissed at will unless this was specifically excluded by legislation : - see Lam Yuk-ming at 827, Chelliah Kodeeswaran v Attorney-General of Ceylon [1970] AC 1111, at 1118F-G.

(4)    All contracts of whatever nature, whether of employment or otherwise, have always been (and are) subject to legislative changes.  Mr Fok referred to the Sale of Goods Ordinance, Cap.26 and the Control of Exemption Clauses Ordinance, Cap.71.  I would also in the context of employment contracts refer to the Employment Ordinance, Cap.57.

41. These aspects of continuity and the Government’s power to introduce legislation (and with the approval of the Legislative Council, to pass legislation) are fundamental aspects that must be taken into account in construing Article 100 of the Basic Law (or for that matter, Articles 102 and 103).  In Ng Ka Ling & Others v Director of Immigration (1999) 2 HKCFAR 4, the Court of Final Appeal identified the proper approach in the interpretation of provisions in the Basic Law.  Emphasis was laid on the need to interpret provisions in a purposive way and to see them in context (such context including the other provisions in the Basic Law).  The courts have to avoid a “literal, technical, narrow or rigid approach”.  At 28D-I, the Chief Justice said this : -

“It is generally accepted that in the interpretation of a constitution such as the Basic Law a purposive approach is to be applied.  The adoption of a purposive approach is necessary because a constitution states general principles and expresses purposes without condescending to particularity and definition of terms.  Gaps and ambiguities are bound to arise and, in resolving them, the courts are bound to give effect to the principles and purposes declared in, and to be ascertained from, the constitution and relevant extrinsic materials.  So, in ascertaining the true meaning of the instrument, the courts must consider the purpose of the instrument and its relevant provisions as well as the language of its text in the light of the context, context being of particular importance in the interpretation of a constitutional instrument.

As to purpose, the purpose of the Basic Law is to establish the Hong Kong Special Administrative Region being an inalienable part of the People’s Republic of China under the principle of ‘one country, two systems’ with a high degree of autonomy in accordance with China’s basic policies regarding Hong Kong as set out and elaborated in the Joint Declaration.  The purpose of a particular provision may be ascertainable from its nature or other provisions of the Basic Law or relevant extrinsic materials including the Joint Declaration.

As to the language of its text, the courts must avoid a literal, technical, narrow or rigid approach.  They must consider the context.  The context of a particular provision is to be found in the Basic Law itself as well as relevant extrinsic materials including the Joint Declaration. Assistance can also be gained from any traditions and usages that may have given meaning to the language used.”

42. In my view, the approach to construction set out in the passage just referred to requires that Article 100 is not construed in the narrow way the Applicants have advanced.  The purpose of Article 100 of the Basic Law is plain : to ensure continuity from pre resumption of sovereignty to post.  It also has to be seen against all the other provisions of the Basic Law, in particular those regarding the powers of legislation in Hong Kong.

43. Out of completeness, I should just mention the fact that at no stage has the Respondent relied on any contractual right of variation enabling the Government to reduce the pay of public officers.  Although a term has now been introduced into new contracts of employment of public officers expressly allowing the Government to vary pay, this does not apply to many public officers, including the Applicants.  The old form of variation clause which does not expressly refer to the right to vary pay as such, was described by the judge in paragraph 39 of the June Judgment : -

“Ms Jessie Yip Yin Mei, a Deputy Secretary for the Civil Service, in an affirmation dated 10 February 2003, has said that ‘for decades’ two standard clauses have appeared in the memoranda.  Before the transfer of sovereignty, the first was to the effect that the public officer was subject to ‘Colonial Regulations, Government Regulations and Circulars, Departmental Instructions and to any Ordinances or Regulations’ relevant to his employment.  Since the transfer of sovereignty, this first clause has been to the effect that the officer is subject to ‘Executive Orders issued from time to time by the Chief Executive for the administration of the public service and to regulations and directions made under those orders’.  The second standard clause - both before and after the transfer of sovereignty - has been to the following effect :

‘Notwithstanding anything contained in this Memorandum or in the covering letter of offer of appointment, the Government reserves the right to alter any of the officer’s terms of appointment and/or conditions of service set out in this Memorandum or the said covering letter should Government at any time consider this to be necessary.’”

44. A general variation clause in the above form may not be sufficient to allow the Government to reduce pay unilaterally.  The objection here is that pay is so fundamental an aspect of the employment relationship that to allow a party to reduce pay based on such a general clause, may actually destroy the whole contractual relationship between the parties.  I have found useful in this context the decision of the English Court of Appeal in Wandsworth London Borough Council v D’Silva [1998] IRLR 193, at paragraph 31 and that of Mayo J in Harold William Newnham Fynn v Attorney General [1991] 1 HKLR 315, at 318F.  It is, however, unnecessary to explore further this topic given, as I have noted, the Respondent does not rely on any express contractual provision enabling it to vary pay.

45. A faint suggestion was made by Mr Scott, particularly in his written submissions, that in legislating, the Government had perhaps not acted in good faith.  Reference was made to the economic situation in Hong Kong being contributed to (or even caused by) the Government’s mismanagement of the economy.  It is not necessary either to enter into this debate.  The undisputed fact remains that POPAO was passed owing to the poor state of Hong Kong’s economy and finances, and was regarded as necessary to be passed.  Moreover, the reduction in pay brought about by the Ordinance followed the pay mechanism and procedures that had for years been in existence in relation to public officers : - see paragraphs 14 to 16 above.  This was not a situation in which the Government was enacting legislation simply to avoid liability under a contract as opposed to acting for the public good (a distinction raised by Devlin LJ in Page at 293-4).  Besides, it should be borne in mind that the passing of POPAO was not entirely the Government own doing.  This legislation, as with all legislation in Hong Kong required the prior approval of the Legislative Council.

46. I now move onto Articles 102 and 103 of the Basic Law.  The arguments here can be disposed of relatively quickly.

47. The Applicants’ objection based on Article 102 was in relation to pensions.  It was argued that if the pay adjustments under POPAO took effect, this would somehow result in the pension entitlements of public officers being less favourable than before.  The judge dealt with this issue fully in the two Judgments and rejected the Applicants’ argument.  I agree.  I emphasize the point that if POPAO survived the challenge under Article 100, any “knock-on” effects of the pay reductions mandated by the Ordinance would similarly be acceptable.  Besides, civil service pensions are based on the highest emolument that a public officer has earned during his career so that any reductions in pay would not prejudice that.

48. As for Article 103 of the Basic Law, the Applicants’ arguments here were in substance no different than those raised in relation to Article 100.  Focus was directed to the requirement in that Article to Hong Kong’s system of employment having to be maintained.  Again, I agree fully with the judge’s reasons in relation to this issue.  The system of employment in place before 1 July 1997 included the possibility of change through legislation.  This was therefore to be maintained.  The system also included the mechanism for pay adjustment which I have described in paragraphs 14 to 16 above.  This was also to be maintained.  In my view, these points, if anything, reinforce the conclusions I have reached above in relation to Article 100.

49. An argument was raised that Article 103 also mandated that the system of “pay and condition of service” was also to be maintained.  In my judgment, these words refer to the pay and conditions of service not of public officers generally but of the “special bodies” referred to in that Article.  In any event, even if the words did refer to public officers in general (such as the Applicants) then this merely repeats what has been said in Article 100.

50. For the above reasons, the Applicants’ challenge based on Articles 100, 102 and 103 fails.

Issue 2 : Article 35 of the Basic Law

51. Article 35 of the Basic Law states : -

“Article 35

Hong Kong residents shall have the right to confidential legal advice, access to the courts, choice of lawyers for timely protection of their lawful rights and interests or for representation in the courts, and to judicial remedies.

Hong Kong residents shall have the right to institute legal proceedings in the courts against the acts of the executive authorities and their personnel.”

52. The Applicants’ point was that with the enactment of POPAO, they had been deprived access to the Courts since they have become subject to a pay reduction without compensation.  Properly analyzed, this argument is no different from the more specific objections raised by them in relation to other Articles in the Basic Law.  The judge treated the objection here as an argument based on proportionality and rationality (see here R v Man Wai Keung (No.2) (1992) 2 HKPLR 164).  Again, I agree with his analysis in rejecting the objections based on this Article.

Issue 3 : Articles 6, 105 and 160 of the Basic Law

53. These Articles state as follows : -

“Article 6

The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law.

Article 105

The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property.

Such compensation shall correspond to the real value of the property concerned at the time and shall be freely convertible and paid without undue delay.

The ownership of enterprises and the investments from outside the Region shall be protected by law.

Article 160

Upon the establishment of the Hong Kong Special Administrative Region, the laws previously in force in Hong Kong shall be adopted as laws of the Region except for those which the Standing Committee of the National People’s Congress declares to be in contravention of this Law.  If any laws are later discovered to be in contravention of this Law, they shall be amended or cease to have force in accordance with the procedure as prescribed by this Law.

Documents, certificates, contracts, and rights and obligations valid under the laws previously in force in Hong Kong shall continue to be valid and be recognized and protected by the Hong Kong Special Administrative Region, provided that they do not contravene this Law.”

54. These Articles deal with the protection of property and contracts.  The objection here is based again on the fact that pay has been reduced without compensation.  Again, the arguments raise no separate issues from those arising from Articles 100, 102 and 103, which are in any event more specific in respect of the question of public officers’ pay.  I also agree with the judge’s reasons for rejecting these arguments.  In particular, I agree with him that the reduction of pay of public officers is not a deprivation of “property”.

Issue 4 : Equality

55. Article 25 states that all Hong Kong residents are equal before the law.  In order to justify a departure from this, certain tests have to be fulfilled.  Bokhary J in R v Man Wai Keung said this : -

“Clearly, there is no requirement of literal equality in the sense of unrelentingly identical treatment always.  For such rigidity would subvert rather than promote true even-handedness.  So that, in certain circumstances, a departure from literal equality would be a legitimate course and, indeed, the only legitimate course.  But the starting point is identical treatment.  And any departure therefrom must be justified.  To justify such a departure it must be shown: one, that sensible and fair-minded people would recognize a genuine need for some difference of treatment; two, that the difference embodied in the particular departure selected to meet that need is itself rational; and, three, that such departure is proportionate to such need.”

56. Again, for the reasons articulated by the judge, this objection has no merit either.  Although only public officers (with some exceptions :  see section 3 of POPAO) have been targeted, it is difficult to see how the reduction of salaries in the private sector would benefit the public purse.  Moreover, the reductions in pay provided for in POPAO followed a pay adjustment mechanism that took into account as one of its principle factors the level of pay in the private sector.

Issue 5 : Article 39 of the Basic Law

57. The arguments here, based on the 1978 Convention to which reference has been made in paragraph 21(4) above, that were raised in the Court below were barely raised on appeal.  In any event, I find myself in agreement with the judge’s analysis in the June Judgment.

58. In the November Judgment, the judge dealt with the objection based on Article 39 in the context of indirect taxation (this being allegedly the result of the pay adjustment).  The judge was, again, correct, in rejecting this argument.

Issue 6 : Legitimate Expectation

59. This was an argument that featured only in the November Judgment.  Mr Scott argued that a legitimate expectation had been created as a result of what had been said by the Chief Secretary, Sir Philip Haddon-Cave, in a letter to civil servants dated 27 September 1984 where he said :-

“Secondly, Section IV [of Annex I of the Joint Declaration] provides that future employment with the SAR Government will be on terms no less favourable than before.  That is to say, terms of employment will not be changed to the disadvantage of serving officers.”.

60. As the judge rightly pointed out, Mr Scott accepted (which was correct) that Articles 100, 102 and 103 became the constitutional embodiment of that statement.  The outcome of this issue therefore follows from the outcome of the arguments based on those Articles.

Issue 7 : The costs order in HCAL 188/2002

61. Despite the extensive arguments that have been made in relation to this ground, I intend also to dispose of it quite shortly.  It is clear from his Ruling as to Costs handed down on 15 April 2004 that the judge took into account all relevant principles and simply exercised his discretion as to costs.  The main point of contention was really over the importance he attached to the undertaking that had been sought from the Respondent by Mr Scott to the effect that he (and others in his position) be allowed to benefit from any successful challenge to POPAO even if that successful challenge were later to be removed by the Standing Committee of the National People’s Congress under Article 158 of the Basic Law.  The judge took the view that the refusal to give this undertaking was relevant to his exercise of discretion.

62. The Respondent has argued that the undertaking was not required to be given.  I agree with this but the judge was entitled to take it into account in the exercise of his discretion as to costs.  In fact, if the Respondent had been obliged to give such an undertaking but did not, there may possibly have been adverse costs implications against her.

63. It was also argued that by reason of Mr Scott’s approach at the substantive hearing of his application for judicial review before Hartmann J (where he reargued many of the same points dealt with in the June Judgment as well as some new ones), this demonstrated that even if an undertaking had been given, he would nevertheless have continued with the hearing.  Mr Scott says not.  Though not easy to determine, I have decided to give him the benefit of the doubt.

64. For my part, I might have arrived at a different conclusion on costs but that is not the test.  Hartmann J exercised his discretion and this cannot be faulted.

Conclusion

65. For the above reasons, I would dismiss both the appeal and the cross-appeal.  As far as the costs of this appeal are concerned, I would make an order nisi that there be no order as to costs.  The matters raised for determination by this Court are of considerable public importance.

Hon Rogers VP & Le Pichon JA :

The effect of this judgment

66. The conclusion to which this judgment arrives is that section 10 of the Public Officers Pay Adjustment Ordinance, Cap. 574 (“the Ordinance”) alters the conditions of service of public servants employed before 1 July 1997 to be less favourable than they were before that date.  Thus, section 10 of the Ordinance is not in accordance with Article 100 of the Basic Law.  Furthermore, the Applicants in these 2 cases are not bound under their contracts of service to accept a reduction in pay.  The importance of the decision has not been overlooked.

The Public Officers Pay Adjustment Ordinance

67. It would be convenient at this stage to mention the terms of the Ordinance.  It is dated 19 July 2002 and the material parts of its long title are as follows:

“An Ordinance to adjust with effect on and from 1 October 2002 the pay of public officers paid in accordance with civil service pay scales or the ICAC pay scale by reducing the pay pertaining to each point on those pay scales by-

(a)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, below $15520, 1.58%;

(b)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, $15520 or above but does not exceed $47590, 1.64%;

(c)    in the case of points on those scales the monthly salary pertaining to which is, on 30 September 2002, above $47590, 4.42%;”

68. Part 2 of the Ordinance relates to Civil Servants.  Section 4(1) provides that:

“4.  Adjustment of pay of civil servants

The civil service pay scales are, on 1 October 2002, adjusted by reducing the pay pertaining to each point on each of the civil service pay scales by the relevant percentage with each result, if it is not a multiple of $5, rounded up to the nearest $5.”

69. The relevant percentage is defined in section 2, but nothing turns on that as regards this case.  The pay for public officers other than civil servants is dealt with in Part 3 of the Ordinance.  Part 4 of the Ordinance deals with allowances but it is to Part 5 that attention must be focused.  Section 9 deals with future adjustments and, again, is not in point for the purposes of this case.  Section 10 is, however, equally important.  It is expressed, albeit with a split infinitive, in language that states unequivocally that the terms of employment of all public officers are altered.  It reads:

“10.  Express authority for adjustments

The contracts of employment of public officers are varied so as to expressly authorize the adjustments to pay and the amounts of the allowances made by this Ordinance.”

It is also implicit from section 10 that the terms of employment of public officers are to be found in their contracts of employment. 

The objections to the Ordinance

70. As will be referred to below, the passing of the Ordinance constituted, at the very least, a departure from established practice in the manner in which the Government handled public servants’ contracts.  Objection has been taken to it on the basis that it contravenes a number of Articles of the Basic Law.

71. The first section of the Basic Law which this section is said to contravene is Article 100, which reads:

“Public servants serving in all Hong Kong government departments, including the police department, before the establishment of the Hong Kong Special Administrative Region, may all remain in employment and retain their seniority with pay, allowances, benefits and conditions of service no less favourable than before.”

72. Article 103 of the Basic Law is likewise directed to preservation of aspects of the civil service following the transfer of sovereignty.  It reads:

“The appointment and promotion of public servants shall be on the basis of their qualifications, experience and ability.  Hong Kong’s previous system of recruitment, employment, assessment, discipline, training and management for the public service, including special bodies for their appointment, pay and conditions of service, shall be maintained, except for any provisions for privileged treatment of foreign nationals.”

Article 100 of the Basic Law

73. The starting point for consideration of the Applicants’ complaints that section 10 contravenes the provisions of the Basic Law, and, in particular, Article 100, must be a consideration of the form and effect of the contracts of employment of public servants in which they were before 1 July 1997.

The conditions of employment relating to pay – the general position

74. It is axiomatic that pay is crucial to any contract of employment.  The employer requires work.  The employee requires pay.  Contracts of employment have as their fundamental terms the work that will be performed by the employee and the pay that will be paid to the employee.  Strictly speaking, the pay would remain the same until there is an agreement binding the employer and the employee that the pay would be changed.  In the nature of things, almost inevitably, if an employer is prepared to raise pay, that would be accepted by the employee.  No doubt in many cases the agreement to raise the rate of pay would be concluded by conduct: the employer would announce the increased rate of pay and the employee would accept it.  But as with any other fundamental term an employer cannot unilaterally change the terms of the pay.  Thus if an employer were to change the pay of an employee unilaterally without the employee’s consent, express or implied (for example by conduct), that would be a breach of contract.

The conditions relating to Hong Kong public servants’ pay before 1 July 1997

The consensual nature

75. Whilst Hong Kong was a colony up until 30 June 1997, there is no dispute between the parties in these cases that questions of prerogative had long since ceased to be critical as regards the employment of public servants.  The relationship between the Government, or the Crown as it was previously referred to, and public servants has, for a long time, been regarded as a matter of contract.  As Cons J put it in Choi Sum and others v The Attorney General [1976] HKLR 609 at 612, whatever views may have been held previously, it was by then well settled that the relationship between the Crown and its servants was one of simple contract.  The same view was taken by this court in Lam Yuk-ming and others v Attorney General [1980] HKLR 815.

76. Evidence as to the terms of employment of civil servants was provided by Ms Yip Yin Mei, Jessie, a Deputy Secretary for the Civil Service, in an affirmation dated 10 February 2003.  She said that contracts of service were governed by the provisions set out in each letter of appointment and the Memorandum on Conditions of Service (MOCS) attached to that letter which the public servant would receive on appointment.  Her evidence was that there were many variations of MOCS but, for decades, most MOCS had contained two standard clauses.  The first was (in the terms relevant since 30 June 1997) that:

“The officer is subject to Executive Orders issued from time to time by the Chief Executive for the administration of the public service and to regulations and directions made under those Orders”. 

The second was:

“Notwithstanding anything contained in this Memorandum or in the covering letter of offer of appointment, the Government reserves the right to alter any of the officer’s terms of appointment and/or conditions of service set out in this Memorandum or the said covering letter should Government at any time consider this to be necessary.”

For convenience, this second clause will hereafter be referred to as “the variation clause”.  Prior to June 2000, none of the MOCS contained a clause stipulating that adjustments of pay may include a ‘pay increase, pay freeze or pay reduction’.  In June 2000 such a term was included in the standard form of MOCS which would permit a reduction of pay in accordance with the annual pay adjustment exercises.  That term was not, of course, applicable in respect of the present Applicants since they were employed well prior to 2002.

The Hong Kong Government’s system of fixing pay of public servants

77. In her affirmation, Ms Yip sets out the mechanism which the Hong Kong Government had hitherto used to adjust levels of public servants’ pay.  She states that it is the Government’s policy that pay should be reviewed and, if appropriate, adjusted annually.  The review process starts with a Pay Trend Survey carried out by the Pay Survey and Research Unit which is under the aegis of the Standing Commission on Civil Service Salaries and Conditions of Service (the “Standing Commission”).  The results of the Pay Trend Survey are submitted to the Pay Trend Survey Committee which is chaired by a member of the Standing Commission and comprises representatives from the Standing Commission, the Standing Committee on Disciplined Services Salaries and Conditions of Service, staff sides of the central consultative councils and the Government.  Once the Pay Trend Survey Committee has completed its task and validated the results of the survey, those results are submitted to the Government and there is then an adjustment of the indicators to produce what is referred to as the net pay trend indicators for each salary band.  The Government invites staff sides of the civil service to submit pay claims and then the matter is submitted to the Chief Executive in Council.  Following that a pay offer is made to the staff sides.  The final decision is taken by the Chief Executive in respect of the pay adjustment for a particular year.

78. For many decades up until 1997 the economy, whether booming or not, had been subject to inflation.  It is only in recent years that the phenomenon of deflation has existed.

79. Although the Pay Trend Survey has been adopted in the years since 1974 it has not always been followed.  Indeed there is a helpful chart set out in paragraph 36 of Ms Yip’s affirmation which demonstrates that in a significant number of years, in fact, over 40% of the time between 1975 and 2000 (inclusive), the results of the pay trend survey have not been followed when adjustments to civil service pay have been made. 

80. Whilst Ms Yip in her affirmation has produced various quotations from speeches, Reports from the Standing Commission and other sources directed to suggesting that public servants’ pay could be reduced as an alternative to being increased or left unaltered, the fact remains that prior to 1 July 1997 the contractual provisions of employment of public servants did not include provisions that salaries might be reduced.  Whilst the mechanism which has evolved in order to review public servants’ pay has now become well-established, and whilst it might give rise to the expectation that salaries would be adjusted in accordance with it, and hitherto any revision has always been upward, it is the Government’s case that the conclusions of the annual pay revision exercises did not result in any binding contractual relations with public servants.

81. Confirmation that the contracts of employment of public servants by the Hong Kong Government did not, prior to June 2000, permit unilateral reduction in pay whether by an executive decision or otherwise can be found in paragraph 58 of Ms Yip’s affirmation where it is said:

“The salary and increments clause, however, in all the MOCS preceding the June 2000 versions, does not expressly stipulate that ‘the pay scale will be subject to review in accordance with the annual adjustment exercises and such adjustment may take the form of pay increase, pay freeze or pay reduction’ as in clause 4.7 of the June 2000 version of GF 608.”

82. Indeed, notwithstanding the variation clause in pre-June 2000 MOCS, Mr Fok did not seek to argue that the Applicants’ contracts permitted any unilateral reduction in salary.

Could public servants’ pay have been reduced?

83. In relation to public servants there are a number of cases in which it has been said that the Government, or the Crown, could only reduce pay within the contract of employment if there were an express or implied term to that effect.  For example, in Choi Sum at page 612, Cons J observed:

“… it is now well settled that the relationship between the Crown and its servants is one of the simple contract.  The comments of the Privy Council in Kodeeswaran v. the Attorney-General of Ceylonhave put this beyond doubt.  But each contract is subject to the overriding power of the Crown to dismiss at will.  It is a term implied by law, unless that term is expressly excluded ….  From this general statement it follows that, unless the servant agrees, the Crown can only reduce his salary within the contract if there is an express or implied term to that effect.  That is the general law of contract.”

Then in the case of Nobrega v Attorney-General of Guyana [1967] 10 WIR 187 both Stoby, C (at page 194A-B) and Cummings JA (at page 208C) made similar observations, with Stoby C stating (at page 195B) that:

“… a right to dismiss does not include a right to reduce.  If the Crown instead of dismissing can reduce salary there is no limit to which contractual terms may be changed.”

84. In that case, the teacher’s salary had been reduced from $251 per month to $92 per month after she had failed to produce her birth and academic certificates at very short notice.  The difference between the judges was as to whether a letter purporting to ‘rescind’ the plaintiff’s appointment had the effect of only reducing her salary (the majority view) or of dismissal (the minority view).  In the course of giving his judgment Cummings JA cited a number of authorities and at page 206H said:

“In my view in order to justify a reduction in pay - well intended compromise though it may be on the part of the Crown - there must be an enabling term in the contract or provision in a relevant statute; failing either of these, any variation of the contract must be mutual.”  (emphasis added)

Although Mr Fok SC, leading counsel for the respondent, relied heavily on the italicised part of that citation, it seems clear that the reference there was to the circumstances that prevailed in Worthington v Robinson (1897) 75 LT 446, namely, that there were statutory provisions in place for the reduction in rank or discharge of any officer.  It is therefore not authority for the proposition that the Government has power to vary contracts of employment provided it is effected through legislation.  Rather, that case concerned the exercise of a power already contained in a statute which is not the present case.  It should also be mentioned that although the case went to the Privy Council, the appeal was decided on the basis that the letter constituted a dismissal and the power of variation was not addressed.   

Power to change public servants’ pay by legislation

85. In his judgments, Hartmann J relied upon the decision of this court in Lam Yuk-ming for the proposition that contracts of employment of public officers could be varied unilaterally by legislation, even in respect of such fundamental matters as pay.  Indeed this appears to have been the kernel of his decisions.  There are two matters which need to be considered in this respect.  The first is whether such legislation could have been passed and the second is what the effect of that legislation would have been.  There is a danger of running these two issues together and in the process overlooking the point that legislation can result in the frustration of a contract.  Before turning to that point it would be appropriate to consider the effect of the Lam Yuk-ming decision.

The Lam Yuk-ming decision

86. It would appear that the decision in Lam Yuk-ming had been misunderstood.  That case concerned 26 dispensers who were Crown servants in the employment of the Government of Hong Kong who, as part of an agenda to “work to rule”, had each refused to perform some part of their duties.  Civil Service Regulation 611 provided that an officer who refuses or omits to perform duties of office might be suspended from duty.  That Regulation had been introduced after the relevant persons had commenced their employment.  It had been notified to them by a circular.  What was at issue in that case was whether the Regulation formed part of the contracts of service between the Crown, in its capacity as the Government of Hong Kong, and the particular officers and whether the officers were bound by that Regulation.  In the judgment of the Court of Appeal it was noted that the Civil Service Regulations formed part of a series of Government Regulations.  The Civil Service Regulations were made by the Governor for the conduct and control of the public service.  Other Government Regulations dealt with such matters as financial business, accounting, stores, security and office procedures.

87. The Court of Appeal examined how it came about that the Civil Service Regulations had been made.  In particular it referred to the general powers under the Hong Kong Letters Patent 1917 to 1977.  These were characterised as an exercise by the Crown of its power to legislate for Hong Kong (see page 821).  There were also Colonial Regulations which were held to be subordinate legislation which bound the Governor but did not, per se, form part of the contracts of service of public officers.  Indeed, the court went on to consider the Memorandum on Conditions of Service for officers which took various forms.  Because of the terms of some of the Memoranda, the Colonial Regulations were specifically excluded from forming part of the contracts of service between the Crown and its servants.  On the other hand it was held, at page 830, that the Crown had incorporated all the Government Regulations, thus including the Civil Service Regulations, into the contracts of service of the public officers.  The ultimate question was then considered as to whether the particular Regulation, namely 611, was validly made part of the contracts of service of the officers although it only came into existence after they had commenced their employment. 

88. Three points fall to be made as a result of that.  In the first place there was no suggestion that the Government Regulations, or the Civil Service Regulations were legislation.  Although Mr Fok had initially submitted that the Government Regulations were legislation and that that had been decided in Lam Yuk-ming, he accepted that he was wrong about that when it was pointed out that at page 829 of the report, the court said this:

“… to persons unfamiliar with the niceties of legislation, in its many disguises … [the Government Regulations] are not legislative in effect.”

In the second place, the Letters Patent were held to be a form of legislation and the Colonial Regulations were held to be subordinate legislation.  These were neither in issue in the case nor were they held to be part of the terms of service of the public officers.  In the third place, there is no suggestion whatever that the Civil Service Regulations or any of the other Government Regulations, which formed part of the terms of contracts of service of public officers could be used to reduce the pay of public officers. 

89. What was at issue in that case was whether a term could be introduced into the contracts of service of public officers that if they failed to perform part of their duties they would be suspended and thus lose pay.  When properly considered, it can be seen that very far from destroying the contractual relationship between the Crown and its servants, to suspend a servant who refuses to perform one of his duties and to withhold pay from a servant who did not perform his duties would, perhaps, be no more than a natural and probable consequence.

Other decisions

90. As has been seen (see para 84 above), the Nobrega decision does not support the proposition that the Government has power to vary employment contracts through legislation. 

King v Attorney General of Barbados

91. Mention should be made of the decision of the Privy Council in King v Attorney General of Barbados [1994] 1 LRC 164.  In that case Miss King was a public servant who had been employed in 1981.  In 1991 her annual salary as a clerical officer had been $18,440.67.  By an Act passed in that year (“the 1991 Act”) the rate of emoluments payable to an officer of her grade had been reduced by 8% with the result that her salary had been reduced to $16,965.50.  The case was fought on the basis that although Parliament had had jurisdiction by virtue of the Civil Establishment Act 1948 (“the 1948 Act”) to enact the 1991 Act which had reduced the salary, the reduction in salary constituted an act of compulsorily taking an interest or right of property from Miss King.  It was held that Miss King had no such right to a minimum salary.  Her only right was to such emoluments as the minister under the 1948 Act, or as Parliament in exercise of its legislative powers, from time to time attached to her office. 

92. Interestingly, however, reference was made to the fact that the Constitution had made provision in respect of certain officers.  At page 202a Lord Templeman said:

“The Constitution has selected some officers whose emoluments may not be reduced.  By section 112 of the Constitution:

(3)    The salary and allowances payable to the holder of any office to which this section applies and his other terms of service shall not be altered to his disadvantage after his appointment, and, for the purposes of this subsection, in so far as the terms of service of any person depend upon the option of that person, the terms for which he opts shall be taken to be more advantageous to him than any other terms for which he might have opted.

(4)    This section applies to the offices of Governor-General, Judges, Director of Public Prosecutions, Auditor-General, appointed members of the Judicial and Legal Service Commission and members of the Public Service Commission and the Police Service Commission.”

93. It is perhaps of note that the provisions of section 112 of the Barbados Constitution are in some respects similar to Article 100.

94. As Mr Fok SC attached considerable significance to this decision in the context of the Government’s power to legislate, it merits closer consideration.  Section 2 of the 1948 Act featured prominently in that case.  It provided as follows:

“2(1)    The Minister may from time to time by order –

(a)    establish offices in the public service;

…

(d)   determine the emoluments to be attached to such offices;

…

  (4)    An order under subsections (1) shall be provisional only and shall be of no effect until it has been laid before Parliament and approved by a resolution of each House …

  (5)    The power conferred on the Minister by this section to make orders shall be deemed to include a power, exercisable in the like manner and subject to the like conditions, to vary or revoke any such order.”

95. The 1948 Act thus conferred on the minister a power to vary the emoluments of public officers.  That Act remained in force after Barbados became independent in 1966 when the Constitution of Barbados took effect.  Since Miss King’s office had been established under the 1948 Act, the emoluments attached to that office were subject to variation by the minister by order made under section 2, subject to affirmative resolution of Parliament.  As Miss King only commenced her employment in 1981, the emoluments to which she was entitled under her contract were thus subject to variation.

96. Under the Constitution of Barbados, its Parliament was vested with unfettered powers to enact legislation for the “peace, order and good government” of Barbados.  Although the power to determine emoluments had been delegated to the minister by the 1948 Act, as Lord Templeman remarked in the judgment of the Privy Council (at p. 201):

“It was open to Parliament at any time to repeal the 1948 Act or to withdraw or supersede or exercise the powers delegated to the minister by the 1948 Act”. 

It was in that context that the Privy Council held that the 1991 Act was an effective exercise of the legislative powers vested in Parliament.

97. Mr Fok SC argued that King v Attorney General of Barbados is authority for the proposition that prior to the change of sovereignty in 1997, the Crown had unlimited powers to reduce the emoluments of public servants by legislation so that, pre 1 July 1997, the contract of each public servant had been subject to the Crown’s exercise of its legislative powers.  So, it was said, post-handover, the Government continued to have those powers to which the contract of public servants continued to remain subject.  Section 10 of the Ordinance was no more than an exercise of those powers.  That analysis is incorrect.  Unlike the 1991 Act in the Barbados case, section 10 did not seek to rely on any pre-existing right to reduce the pay of public servants by any stated percentage: rather, it sought to vary the conditions of employment between the Government and the public servants which were contractual in nature by inserting a provision into their employment contracts that enabled pay to be adjusted.  Barbados was a case where enabling legislation was already in place: it concerned the effect of the exercise of powers conferred by such enabling legislation on contracts that post-dated it.

Commissioner of Crown Lands v Page

98. Finally, mention should also be made of the Page case which is authority for the proposition that the Government cannot bind itself not to use the legislative, prerogative, statutory or executive powers in a proper manner: see for example Devlin LJ at page 291.  But that does not mean that if the Government does exercise any of its powers whether it be legislative, prerogative or executive in respect of a contract that would not change the conditions under which the contract would be performed.

99. In the Page case, the relevance of the government not binding itself as to a future course of action arose in relation to an allegation that the government had breached a covenant for quiet enjoyment implied in a lease from the Crown.  Ormerod LJ approached the matter on the basis of what were the terms to be implied by any such covenant.  He said at page 289 that it is difficult to accept that if such a covenant were implied it would go so far as to imply an undertaking by the Crown to refrain from exercising statutory powers in respect of a demised premises which the Crown may consider to be necessary.  Lord Evershed MR at page 287 came to the same conclusion, he thought that it might be said that the terms of the demise were impliedly subject to the effect of any proper exercise of the Crown’s executive authority.  Thus both judges were looking at the terms of the lease, whether written or implied.

100. In contrast, Devlin LJ’s wider statement at page 291 is put on the basis that the government does not, when making a private contract in general terms, undertake to fetter itself in the use of its powers and in the exercise of its discretion.  He cited such cases as Ayr Harbour Trustees v Oswald (1883) 8 App Cas 623; Rederiaktiebolaget Amphitrite v The King [1921] 3 KB 500: Board of Trade v Temperley Steam Shiping Co. Ltd. (1926) 26 LlLR 76, affirmed (1927) 27 LlLR 230 and William Cory & Sons Ltd. v City of London Corporation [1951] 2 KB 476.  Furthermore, Devlin LJ went on at page 293 to quote from the judgment of Roche J in the Temperley case:

“I think and I hold that in this charterparty it is to be implied that the Crown should do nothing in connection with and in relation to and in the carrying out of the contract contained in the charterparty to prevent the shipowners from keeping the vessel seaworthy and to prevent them earning their hire.  But I am utterly unable to imply in the charterparty a term or condition that the Crown should do nothing by virtue of some general legislation or by virtue of some executive action entirely remote from the charterparty and done by persons not connected with the performance of the contract directly or indirectly to bring about the results in question.”

101. In so saying, however, Devlin LJ was well aware of the distinction between the government (in the case with which he was dealing with that meant the Crown,) not fettering itself as to a future course of conduct and as to what the consequential effect of that conduct might be on any contract.  At the foot of page 292 he said:

“During the last war the Ministries of War Transport, Food and Supply were trading on a vast scale, and were also issuing orders under their statutory powers which quite frequently frustrated their own contracts, or those made by some other government department.”

The passage then went on to explain that the government was not thereby in breach of contract, but, of course, as he had already said, the contracts might have been frustrated.  In so saying, he was echoing the words of Lord Goddard CJ in theWilliam Cory case at page 14 and Lord Asquith of Bishopstone (with whom Lord Birkett LJ agreed) at page 483 and Harman J at page 487 of the appeal report. 

The effect if there had been legislation prior to 1 July 1997 reducing public servants’ pay

Those servants employed subsequent to legislation

102. That before the resumption of sovereignty the Crown had, under Article IX of the Letters Patent 1917-1995, unlimited power to legislate is uncontroversial.  That is quite apart from the powers of the Governor in conjunction with the Legislative Council.  Had enabling legislation (of which section 2 of the 1948 Act of Barbados is an example) been enacted before the formation of the relevant contracts of service allowing adjustments to the salaries of public servants by way of pay increase, pay freeze or pay reduction, that enabling legislation would have permitted such variations in respect of public servants who were employed subject to these conditions.  It would have been similar to the situation in the Barbados and Temperley cases.  The facts of the Barbados case have already been mentioned.  (See paras 90 to 96 above.)  Briefly, the facts of the Temperley case related to a ship which had been chartered by the government during wartime.  Prior to the time it had been chartered there had been put into effect regulations which required approval under the Munitions of War Act for repairs to be carried out.  The government officer responsible for giving that approval only approved a limited amount of repairs which proved insufficient and, as a result, the ship was “inefficient” and the owners were not entitled to hire.  At page 232 of the report of the Court of Appeal decision, Romer J expressly referred to the fact that the Act had come into force before the date of the charterparty and that it was within the knowledge of the parties to that contract.  He went on to say:

“In those circumstances I am not prepared to imply an agreement on the part of the Government that they would not exercise any of the powers conferred upon the Executive by that Act, however necessary in the interests of the country as a whole it might be that those powers should be exercised, if the exercise of them in this particular case rendered the performance of the contract by the shipowners an impossibility.”

Those servants employed prior to legislation

103. If legislation had purported to alter the conditions of service of those who were public servants at the time of its enactment then the continuation of their existing contracts of service would have been doubtful to say the least.  It would have had the effect of rendering their terms of service subject to the power of the executive to vary the emoluments of public servants.  That would have been a fundamental change in their conditions of service.

104. As already noted, the judgments in the Page case as well as those in the William Cory case indicate that if legislation is passed, although in itself it may have validity, it can have serious effects on contractual relations.  In those cases the judges referred to the contracts being frustrated.

105. Whilst analogies are often not useful, it may be relevant to consider what would be the position if, after a contract had been concluded by Government for the purchase of goods but before any supply, legislation were passed which enabled Government unilaterally to alter the price which Government was to pay for the goods.  No doubt the legislation could be framed in such a way that the seller would remain contractually bound to continue to carry out the contract at the newly legislated price.  It could not however be denied that the contract had been changed, specifically that it had been changed in two very material respects.  In the first place the conditions of the contract in relation to price would have been changed and in the second place the basis for fixing that price would have been changed from consensual to dictatorial. 

106. It should be mentioned that in Choi Sum, after reviewing, inter alia, the Page case and the doctrine that the Crown cannot bind itself so as to fetter its future executive action, Cons J observed (at pages 612-613):

“… I feel that it is limited to matters that would usually be terms ‘affairs of state’.  It is easy to see how in this respect the doctrine justifies the power to dismiss at will.  Civil servants, at least senior ones, may have considerable influence over affairs of state.  It may be essential occasionally to remove at once a particular servant whose influence is having an undesirable effect.  It is difficult to see how the State interest would be protected by merely reducing his salary.”

Would the enactment of legislation prior to 1 July 1997 introducing a condition of service that gave the Government power to reduce pay have changed the conditions of service?

107. The answer to this question follows inexorably from what has already been said.  If legislation had purported to alter the conditions of service of public servants at the time of its enactment then the continuation of existing contracts of service would have been subject to a change in conditions.  Such legislation would have had the effect of rendering the terms of service subject to the power to vary the emoluments of public servants.  But that would have been a fundamental change in the conditions of service.  

108. As already noted, there was no such enabling legislation enacted before 1 July 1997 allowing adjustments to the salaries of public servants by way of pay increase, pay freeze or pay reduction.  In the absence of any such enabling legislation, it could not be said that, immediately prior to 1 July 1997, it was part of the conditions of service of public servants that their emoluments could be varied.  Any variation, whether upward or downward, had to be by agreement, whether tacit or explicit.

109. Another aspect of the point is that if the conditions of service under which public servants were employed prior to 1 July 1997 were such that legislative power could have been exercised to reduce the pay, then all that has been done by the Ordinance has been to do that which it was possible to do before 1 July 1997.  In such circumstances the introduction of section 10 of the Ordinance would be irrelevant specifically because the conditions of service of public servants would have included the possibility that pay could be reduced by legislation.  Whilst it is in no way determinative, the very fact that section 10 was introduced into the Ordinance in itself suggests a recognition on the part of Government that prior to the Ordinance the conditions of service of public servants did not include the possibility that pay could be reduced by simply passing legislation in terms of section 4 of the Ordinance.

The effect of the coming into force of Article 100 of the Basic Law

110. Article 100 of the Basic Law has already been set out above.  For the purposes of this case the purport of it is that the conditions of service of public servants should be no less favourable after 30 June 1997 then they were before.

The 2002 decision to cut pay levels

111. It would seem that, in principle, reductions in the levels of civil service pay were already part of Government policy prior to the results of any pay trend survey in 2002.  According to the Legislative Council paper LC Paper No. CB(1)2116/01-02, on 6 March 2002 the Financial Secretary announced in his 2002-03 Budget Speech that civil service pay would be cut by 4.75%.  It was not until late April 2002 that the results of the pay trend survey for 2001 to 2002 were announced.  It is then said in the paper that on 22 May 2002 the Chief Executive in Council decided on an offer of a pay reduction which was in accordance with that contained in the Ordinance.  (It is to be noted that according to the evidence filed by Ms Yip on behalf of the respondent, the Pay Trend Survey Report was only released to the Pay Trend Survey Committee on 6 May 2002.  However, nothing turns on that discrepancy.)

112. What emerges is that although as a straight forward application of general principles the variation clause in MOCS gives a power to alter the terms of appointment and/or conditions of service, the fundamental terms of a contract of employment by the Hong Kong Government with a public servant cannot be altered unilaterally.  Changing the rate of pay is to change the contract of employment in a fundamental respect.  This is well established in the cases referred to above in particular the Choi Sum and the Nobrega decisions.  The changes in previous years which have resulted from the deliberations in the Executive Council following recommendations by the Pay Trend Survey Committee have always hitherto been increases in salary.  As noted above those changes have no doubt invariably been accepted by conduct by public servants in accepting the pay offered.  In so far as there had been no increases in previous years there was no change in the terms of the contracts and hence no question arises as to whether there was any agreement as to that.

113. Quite apart from the fact that Hartmann J appears to have misunderstood the decision in Lam Yuk-ming, he also approached the matter on the basis that since section 10 of the Ordinance was a one-off provision the purpose of which was to insert a provision into the contracts of service of public officers which would sanction the reduction of pay to a level which was not below that enjoyed by the public officers prior to 1 July 1997, there was nothing objectionable in that provision.

114. That approach, however, in our view, overlooks the important point that the condition introduced into the contracts of service by section 10, namely that pay could be ‘adjusted’ which would embrace a pay reduction, was not there before.  To say that that did not make the conditions of service less favourable than they were before 1 July 1997 is to shut one’s eyes to reality for the sake of expediency.

115. In the light of the foregoing, the insertion into contracts of employment of a provision, which was not previously there, that pay might be reduced by a unilateral decision on the part of the employer, was a fundamental change in the contracts, namely in the conditions of service. 

116. Whilst the possibility of enactment of enabling legislation existed prior to the change in sovereignty, such enabling legislation was never introduced or enacted.  If it is enacted now, its purported effect is a change in the conditions of service now.  Parenthetically, we would observe that the enactment of such enabling legislation at any time after the making of the Joint Declaration in December 1984 and prior to 1 July 1997 might have raised doubts over the ‘through train’ concept contained in the Joint Declaration.

117. Prior to 1 July 1997, legislation enacted in Hong Kong was styled “enacted by the Governor of Hong Kong, with the advice and consent of the Legislative Council thereof”: see clause XXV para 1 of the Royal Instructions.  That legislative power was provided in Article VII(1) of the Letters Patent 1917-1995 which provided that the Governor was empowered by and with the advice and consent of the Legislative Council to “make laws for the peace, order, and good government” of Hong Kong.  Whilst Article VIII of the Letters Patent reserved power to the Crown, acting through one of the Secretaries of State, to disallow laws and Article X gave the Governor power to refuse his assent to a bill, the only other express limitations on the legislative power were those contained in clause XXVI of the Royal Instructions.  Those limitations prevented the Governor assenting to bills of a number of different classes none of which are of relevance in this case.

118. In contrast to the previous comparatively unfettered legislative power, Article 73 of the Basic Law provides as follows:

“The Legislative Council of the Hong Kong Special Administrative Region shall exercise the following powers and functions:

(1)    To enact, amend or repeal laws in accordance with the provisions of this Law and legal procedures;

…”

All laws that are passed must therefore accord with the Basic Law.  To that extent, the powers of the legislature to enact laws are qualified. 

119. In our view, Article 100 (which prohibits any change, inter alia, in the conditions of service which renders the terms “less favourable than before”) is infringed by the introduction, post-handover, of a term that permitted the reduction of pay otherwise than by agreement with the servant.  Since section 10 of the Ordinance brings about that effect, there is no question but that it infringes Article 100.  It follows that its enactment was beyond the powers of the legislature.

120. In argument in this court, Mr Fok SC, apart from relying on other points made in Hartmann J’s judgments, sought to argue that the wording of Article 100, by implication, meant that pay of public servants could be reduced.  It was said that the words “no less favourable than before” meant that the pay and conditions of service could be less favourable provided that they were not less favourable than before 1 July 1997.  It was said that it was inherent in the words of Article 100 that there was an ability to alter the terms of employment of contract of public servants to reduce the pay and to alter the terms of condition so long as the pay was not lower than 1 July 1997 levels.

121. Not only, in our view, is it not inherent in the wording of Article 100 that there was a power to reduce pay levels but the effect of Article 100 cannot be said to be to introduce a change in the law having the effect of altering the existing contracts of employment of public servants.  Article 100 was a constitutional safeguard that, amongst other things, the conditions of service of public servants would not be altered to their detriment.  The purpose of Article 100, and indeed Article 103, as acknowledged was to preserve the integrity of the civil service by assuring serving public officers that their positions would be safeguarded after the change of sovereignty.  Whilst there was an absolute limit of any pay reduction to levels of pay existing as at 30 June 1997, the terms of service remained the same and there was no alteration in the contractual terms of employment effected by the Basic Law.

122. For the sake of completeness we would also add that the argument was put forward that “conditions of service” as appearing in Article 100 had to be construed as relating to conditions of service other than those in relation to pay.  That, again, is a construction which would fail to give proper effect to the plain meaning of the words.  Pay is one thing and the conditions of service are another.  Taken as a whole, the words “pay, allowances, benefits and conditions of service” cannot be construed as mutually exclusive.  The conditions of service can clearly relate to such matters as pay, allowances or benefits whilst not, as indeed Section 10 does not, specifying the precise level of those items.

123. Translating that into the circumstances of this case, the Government, whether by exercising executive, legislative or even prerogative or any other power, should do nothing in connection with contracts of service of public servants which would render the conditions of service less favourable than they were before 1 July 1997.  Unfortunately, in our view, the Ordinance changes the conditions of service of public servants in a manner that is clearly less favourable than it was before.  It does not do that indirectly.  It does it specifically, purposely and directly.

Reduction of pay simpliciter

124. So far we have considered the matter on the basis of section 10 of the Ordinance and the effect of the introduction of a power to alter pay into contracts of service of the public servants.  We have done so because that is the way the legislation has been framed and because it has been the approach of Government that it was necessary to so enact the legislation.

125. What is clear, however, from the analysis which has been made above is that the contracts of service of public servants in Hong Kong were consensual and that prior to the introduction of the June 2000 MOCS there has been no power therein to reduce pay except by agreement.  Hence, pay could only be reduced and at the same time the contracts of employment remain intact if the public servants involved agreed to it.  Because of the contractual nature of the employment of public servants if pay were reduced each public servant would not be bound to accept such a reduction.  It would of course be beyond the power of Government to pay the original salary if there had been valid legislation forbidding it.  As a result therefore, if the public servant were not prepared to accept a legislated reduction and to agree to it, the contract would come to an end because it would have been frustrated.  It is no part of this judgment to analyse the consequences of a public servant’s refusal to accept such a reduction in salary.  It is sufficient if it is stated that in our view a public servant would not be in breach of contract by refusing to accept the reduction in salary.  It would be his option to accept the reduced salary or to treat the contract as at an end.  What effect that would have on such matters as pensions is something that would have to be decided on another occasion if the situation were to arise.

Article 103

126. Whilst it is not strictly necessary to consider whether Article 103 was also infringed by the enactment of the Ordinance, since it formed a significant part of the argument, it would be appropriate to do so.  Mr Fok was specifically invited by this court to address it on the question of the identity of the special bodies for appointment, pay and conditions of service which are referred to in Article 103, but he declined to do so on the basis that it might prejudice any points to be taken in a subsequent judicial review application in respect of a later Ordinance.  Whilst it is no desire of this court to prejudice any other case, the identity of such special bodies is relevant for this case.  In the absence of any argument to the contrary on behalf of the respondent, it can only be concluded that the special bodies in respect of pay and conditions of service for the public service must be a reference to, amongst other bodies the Standing Commission and the Pay Survey and Research Unit and the Pay Trend Survey Committee. 

127. Without stressing the purposive construction which must be placed upon the provisions of the Basic Law, it can hardly be said that an Article such as Article 103 which provides for the preservation of special bodies would do so except on the basis that those bodies would serve their purpose and function.  In this respect, as outlined above, if the matter had rested with the announcement in the budget speech followed by enactment of the legislation, without more, the position might well be very different.  There would have been grounds for saying that the previous two-stage process of assessing the levels of pay which resulted in a consensual change or retention of the levels of pay had been short-circuited.  Well before the special bodies for pay and conditions of service had performed their functions, it had already been decided that steps would be taken to reduce the levels of civil servants’ pay.  However, on the evidence now before this court, the initial intention expressed by the Financial Secretary that the pay levels would be reduced by 4.75% was not carried through.  Instead, the legislation enacted a reduction that was in accordance with the Pay Trend Survey.  In those circumstances it cannot be said that the work of the special bodies for pay and conditions of service had been dispensed with or ignored.  In effect, the reduction in pay followed the findings in the Pay Trend Survey, at least as much as it did in some of the previous years. 

Costs

128. In the circumstances of this case, since these appeals have been allowed, the Appellants would be entitled to their costs.  Whilst the Appellants might not have been entitled to Legal Aid, these appeals are clearly of particular public importance and merited legal assistance in the form of an amicus curiae.  Had an amicus curiae been appointed, in all probability, the Appellants’ costs would have those of the amicus.  In the circumstances we would make an order nisi that the costs be to the Appellants.

Hon Ma CJHC :

129. In the circumstances this Court, by a majority, allows the appeals and proposes to make the following orders nisi : -

(1)    That the Applicants are entitled to the following declarations that is to say :

(a)    Section 10 of the Public Officers Pay Adjustment Ordinance is unconstitutional.

(b)    The Applicants are not bound under their contracts of service to accept a reduction in pay.

(2)    The costs of these proceedings here and below be to the Applicants.