SUPREME CHINA SECURITIES LTD v. NG WING YIP AND OTHERS

HCA 70/2022

[2024] HKCFI 1196

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 70 OF 2022

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DECISION

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INTRODUCTION

1.  On 16 February 2023, master made a decision on the plaintiff’s summons dated 9 September 2022.  He granted summary judgment (1) against the 2^nd defendant for the sum of $2,068,088.35 together with interest, and (2) against the 3^rd and 4^th defendants for the sum of $1,355,876.42 together with interest.  He dismissed the application against the 1^st defendant for summary judgment or, alternatively, interim payment.

2.  This is the plaintiff’s appeal against the master’s decision dismissing its application.  This decision concerns the plaintiff and the 1^st defendant only. There is no appeal taken out by the 2^nd, 3^rd and 4^th defendants. 

3.  The plaintiff is a securities broker licensed by the Securities and Futures Commission.  It provides securities brokerage and margin financing services.

4.  Between 7 June 2021 and 28 February 2022 (that is, shortly after the commencement of the present action), the 1^st defendant was a “responsible officer” of the plaintiff for the purpose of the Securities and Futures Ordinance, Cap 571.  At around the same time, between 6 July 2021 and 28 February 2022, he was an account executive of the plaintiff.

5.  The 2^nd and 3^rd defendants were clients of the plaintiff.  They each opened a margin securities account with the plaintiff under the terms of a Client Master Agreement.  Under those terms, each was required to maintain adequate collateral in the account and provide additional collateral as and when required by the plaintiff. 

6.  The 3^rd defendant is a Hong Kong incorporated company.  The 4^th defendant is its sole director and shareholder. The 4^th defendant signed a letter of guarantee guaranteeing the plaintiff the prompt payment of all sums of money due and payable by the 3^rd defendant.

7.  In this action, the plaintiff’s claims against the 2^nd, 3^rd and 4^th defendants arise out of the 2^nd and 3^rd defendants’ failure to deposit funds into their respective margin accounts up to the required maintenance margins.

8.  Separately, the plaintiff’s claim against the 1^st defendant arises out of a contract signed by them dated 6 July 2021 and referred to in the pleadings as “the Letter of Appointment”.  The plaintiff relies on clauses 3(a) and (b) and 4.  Its case is that under clauses 3(a) and (b), the 1^st defendant guarantees to it sums due to it by the 2^nd and 3^rd defendants.  Alternatively, it says that under clause 4, the 1^st defendant gives it an indemnity for all losses and damages suffered by it as a result of the two defendants’ default.  Hence, the plaintiff claims from the 1^st defendant a total sum of $3,423,964.77 (ie $2,068,088.35 + $1,355,876.42), together with interest.

FACTUAL BACKGROUND

9.  The following chronology of events is not in dispute.

10.  The plaintiff and the 1^st defendant entered into a written agreement dated 7 June 2021.  It was entitled “Employment Contract”.  The 1^st defendant was appointed as a responsible officer of the plaintiff.  He was entitled to a monthly salary of $45,000, together with other employee benefits, such as annual leave, sick leave and discretionary bonus. 

11.  About one month later, the parties entered into the Letter of Appointment.  The 1^st defendant was appointed as an account executive.  He was to act as the plaintiff’s “trading agent for the procurement of clients and trading orders in respect of securities”.  He would receive commission, which would include income generated from the transactions of the clients for the month.  The plaintiff would retain 40% of the consideration of each transaction (subject to a minimum of $40), and the 1^st defendant would receive the remaining balance as commission.

12.  While the Employment Contract explicitly stated that the relationship between the parties was one of employment, the Letter of Appointment contained the following express provision stating that the 1^st defendant was an independent contractor and not an employee:

“6. Independent Contractor status of appointment

You [ie the 1^st defendant] understand, agree and signify your independent contractor status as a self-employed person under this letter of appointment and that there is no employment relationship whatsoever between the Company [ie the plaintiff] and you.”

13.  It is not in dispute that the relationship between the plaintiff and the 1^st defendant was governed by the above two contracts.  What is being disputed is precisely what relationship (or relationships) was created under the two contracts.

14.  On 4 October 2021, upon the 1^st defendant’s referral, the 2^nd defendant applied to open a margin securities account with the plaintiff.  The account was opened on the following day.  In the process, he signed a number of what appear to be standard and pre-printed documents of the plaintiff, including a “Client Information Form”, which incorporated the terms of the Client Master Agreement.  The signing was witnessed by the 1^st defendant.  He also signed a declaration as licensed representative.  The application was accepted by a Mr Kwan Hung Kay.  In addition, there was a “Risk Profiling Questionnaire” which was also signed by the 1^st defendant.  His signature appeared above the pre-printed text “Signature of Staff/R.M./A.E.”.  Lastly, there was a “Anti-money Laundering & Anti-terrorist Financing Questionnaire”.  The 1^st defendant filled in one part of the form and signed as responsible officer.

15.  A short while later, on 20 October 2021, also upon the 1^st defendant’s referral, the 3^rd defendant applied to open a margin securities account, with the 4^th defendant acting as its guarantor.  The account was opened on the following day.  To open the account, standard form documents, similar to those signed by the 2^nd defendant, were prepared and signed in a similar manner.

16.  As of 10 January 2022, the accounts of both the 2^nd and 3^rd defendants stood in debit below the required maintenance margin.  The shortfall amounts were $2,083,808.01 and $1,359,635.52, respectively.

17.  On the same day, the plaintiff issued a demand to the 2^nd and 3^rd defendants requesting them to deposit funds into their accounts by 4pm on 11 January 2022.

18.  Both the 2^nd and 3^rd defendants failed to do so.

19.  Shortly afterwards, on 18 January 2022, the plaintiff commenced the present action against the 1^st to 4^th defendants to recover the outstanding sums.  Before the issue of the writ, no demand letter was sent to the 1^st defendant.

20.  Pleadings were then filed.  On the same day when the 1^st defendant filed his defence, he issued a notice of contribution and indemnity against the 2^nd to 4^th defendants seeking an indemnity and/or contribution from them in the event that he is held liable to the plaintiff.  On 3 May 2022, master gave directions on the notice.  Among other things, it was directed that the question of liability of the 2^nd to 4^th defendants should be tried at the same time at the trial of the main action.

THE PLAINTIFF’S CLAIMS

21.  I now set out the plaintiff’s claims as pleaded.

The claims against the 2^nd, 3^rd and 4^th defendants

22.  The plaintiff claims against the 2^nd and 3^rd defendants for breach of clauses 2.3 and 2.4 of the Client Master Agreement as they failed to top up their respective accounts by 11 January 2022.  The plaintiff claims against the 4^th defendant as guarantor of the 3^rd defendant.

23.  In this appeal, the 1^st defendant does not take any issue with the liability of the 2^nd to 4^th defendants (save for the 4^th defence detailed below).  It is therefore unnecessary to set out the above contractual clauses here.  However, on quantum, the 1^st defendant takes issue with the interest rate charged by the plaintiff.

24.  The operative clause is clause 3.4.  It read:

“The Client agrees to pay interest on all overdue balances (including interest arising after a judgment debt is obtained against client) at such rates and on such other terms at the Broker’s absolute discretion as the Broker has notified the client from time to time.”

25.  According to the plaintiff’s calculations, interest was charged on the outstanding sums at 9% per annum initially, and then at 16% per annum from 1 March 2022 onwards.

26.  Notice of the increase in the interest rate was given to the 2^nd and 3^rd defendants on 28 February 2022.

The claims against the 1^st defendant

27.  As pleaded, the plaintiff’s claims against the 1^st defendant have two parts. 

28.  First, it relies on the guarantee given in clauses 3(a) and (b) and the indemnity given in clause 4 of the Letter of Appointment.

29.  I reproduce the clauses below:

“3. Guarantee

(a) You hereby irrevocably and unconditionally guarantee to the Company the due and punctual performance by all the clients introduced by you or your agents (“Your clients”) of all their obligations under or pursuant to the Client’s Agreement, and other related documents (collectively referred to as “Client Agreements”), and the due payment and discharge of any sums of monies (whether by way of principal, interest or otherwise) due and payable by Your clients to the Company;

(b) You hereby irrevocably and unconditionally undertake as primary obligor and not merely as surety that, if your Clients fail to pay any sums whatsoever due and payable under or pursuant to the Client Agreements or otherwise, you shall pay to the Company such sums on demand by the Company;

…

4. Indemnity

You shall indemnify the Company against all damages, liabilities, action proceedings, judgments, costs (including costs on a solicitor-and-client basis), claims, demands and other losses of whatever nature that may be suffered or incurred by the Company in connection with or arising from transactions in securities dealt by or through you in the name of the Company, whether or not the same may have been caused by or may relate to any fraud, deceit, neglect, misconduct, breach of contract or default on the part of you or Your Clients.”

30.  Secondly, the plaintiff alleges that the 1^st defendant was in breach of an implied term of the Employment Contract and/or the Letter of Appointment.

31.  This part of the case is based on a board resolution passed on 30 June 2021.  It was resolved that the plaintiff’s business priority was to collect outstanding loans from clients and the business principle was not to extend any further margin financing to existing or new clients.  The plaintiff contends that it was an implied term of the Employment Contract and/or the Letter of Appointment that the 1^st defendant should act in accordance with any board resolution or internal policies of the plaintiff, and that he was in breach of the implied term as he caused the plaintiff to provide margin financing services to the 2^nd and 3^rd defendants.  As a result, the plaintiff has suffered loss and it claims damages from the 1^st defendant.

THE DEFENCES

32.  To resist the summary judgment application, the 1^st defendant filed a short affirmation, which is seven pages long. Significantly, he made a number of factual allegations concerning his work arrangement with the plaintiff.  He relied on them to say that he was an employee under the Employment Contract and the Letter of Appointment.  These factual allegations are not themselves controversial.  For the purpose of this appeal, I shall treat them as true when determining the true nature of their relationship.

33.  Mr Jeff Yau, counsel for the 1^st defendant, puts forward nine defences in his submissions.  I would make the initial observation that they primarily revolve around legal arguments, eg the legal effect of a particular contractual clause, as opposed to factual disputes.

LEGAL PRINCIPLES

34.  An appeal from a master to a judge under Order 58, rule 1 of the Rules of the High Court is by way of re-hearing.  I should treat the summons as though it came before me for the first time: see Hong Kong Civil Procedure 2024 at 58/1/2.

35.  The principles concerning a summary judgment application are well-known.  Given the nature of the defences, I only need to reiterate the following proposition which is trite.  If the plaintiff’s application is properly constituted, he is prima facie entitled to judgment unless the defendant shows cause to the contrary.  The burden is on the defendant to show a real or bona fide defence or some other reason for a trial: see Hong Kong Civil Procedure 2024 at 14/4/1 and 14/4/2.

DISCUSSION

36.  In this appeal, my task is to examine each of the defences and decide whether any of them raises any triable issue such that the action should proceed to trial.

1^st defence – the action falls within the exclusive jurisdiction of the Labour Tribunal

37.  Under the first defence, the 1^st defendant contends that he and the plaintiff were in an employment relationship under the Letter of Appointment and the Employment Contract.  Furthermore, his role as an account executive under the former agreement shows features of an employee.  In either scenario, there is a triable issue that the plaintiff’s claims against him under the Letter of Appointment fall within the exclusive jurisdiction of the Labour Tribunal: see section 7(1) and (2) and para 1(a) of the Schedule of the Labour Tribunal Ordinance, Cap 25.  The present action not being commenced in that forum, the Court of First Instance has no jurisdiction to hear the case.  Mr Yau submits that the issue of employment cannot be resolved on affidavits and hence judgment should not be entered summarily.

38.  He submits that the Letter of Appointment and the Employment Contract are inextricably linked in that the 1^st defendant’s role as an account executive was in practice inseparable from his role as a responsible officer, and both agreements are integral of such relationship.  Hence, there existed one overall relationship between the parties and that was an employment relationship.

1^st defence – legal principles

39.  The legal principles governing whether a work relationship should be classified as an employment relationship or some other type of relationship, eg independent contractor, are authoritatively laid down by the Court of Final Appeal in Poon Chau Nam v Yim Siu Cheung (2007) 10 HKCFAR 156. 

40.  The case itself concerns a claim under the Employees’ Compensation Ordinance, Cap 282.  However, the guidance is of general application and should apply when the issue falls to be decided for other purposes: see, eg, paras 10 and 13.

41.  The proper approach is to examine all the features of the relationship against the background of a range of well-recognised indicia with a view to deciding whether, as a matter of overall impression, the relationship is one of employment, bearing in mind the purpose for which the question is asked.  The indicia include, among other things, any sharing of profit or risk of loss, the degree of control exercised by the alleged employer, the provision of equipment and the parties’ own views of their relationship.  The exercise involves a nuanced and not a mechanical approach: see paras 18 to 20.

42.  In this exercise, the modern emphasis is on the economic or commercial aspects of the relationship as evinced by all the relevant indicia.  The court’s task is to properly appreciate whether as a matter of economic or commercial reality, there exists an employer-employee relationship.  This is to be contrasted with the traditional approach which placed a lot of weight on whether the alleged employer exercised control over the manner in which the worker was to carry out his work.  Control should now be treated as one of the indicia to be taken into account: see paras 11 and 13. 

43.  In recognition of this modern emphasis, the issue is sometimes framed as follows – whether the worker performs the services as a person in business on his own account.  If so, he is an independent contractor.  If not, he is an employee.  See Poon Chau Nam at para 17; 李偉基(Lee Wai Kei Wicky) v 寰宇家庭有限公司(World Family Ltd) HCLA 35/2015, 3 October 2017 at para 16; Yuanta Securities (Hong Kong) Co Ltd v Ng Yin Lam [2021] HKCFI 435 at paras 78 and 82 (first sentence).

44.  As regards the indicium of control, it must now be recognised that the existence of control in itself does not equate employment because one party’s reservation of a right to control the manner of working could be overridden by economic or commercial realities which point to the other party being engaged as an independent contractor: see Poon Chau Nam at para 16; cited and applied in 李偉基at para 25. 

45.  The case of 李偉基 is itself a good illustration of this point.  The claimant there was engaged by the defendant company as an education consultant.  The defendant company was in the business of selling English education materials licensed by Disney.  The claimant’s job was to promote the sale of these materials: see para 4. 

46.  The Labour Tribunal found as a fact that the defendant company exercised control over various aspects of the claimant’s work.  For instance, he had to observe internal directions and guidelines when promoting the materials and he had to buy all name cards and uniforms from the defendant company.  The presiding officer held, however, that such control was imposed for good commercial reasons, eg, to maintain the image of the defendant company and its brand and that such control was not necessarily control exercised by an employer over an employee.  In the end, it was held that the claimant was not an employee.  Lok J affirmed the decision and the reasoning on the issue of control: see paras 23 and 24.

47.  The takeaway here is that in the modern commercial context, a worker would often be subject to some form of control when carrying out his work.  It should be appreciated that in some of these cases, such control is imposed because it is necessary to give effect to the commercial arrangement between the parties.  It is not imposed because the parties are in an employer-employee relationship.  Where that is the case, the existence of control should not be readily taken as a manifestation of an employment relationship. 

48.  For instance, it would be surprising if the claimant in 李偉基 would be free to market the Disney education materials in whatever way he wished.  There were bound to be controls over how he could market the products in order to maintain the image of Disney.  As such, they were not the kind of controls which an employer would ordinarily impose on a worker because the worker was an employee.

1^st defence – the proper approach

49.  The issue of whether a work relationship should be classified as an employment relationship must be evaluated with reference to the specific facts of each case.

50.  Mr Thomas Wong, appearing for the plaintiff, places heavy reliance on the case of Yuanta when arguing that the 1^st defendant was not an employee under the Letter of Appointment.  That case also concerns a claim by a securities brokerage firm against a consultant in respect of default made by the latter’s clients.  The firm sued on a guarantee given by the consultant which was similarly worded as the guarantee in the present case.  In the context of deciding whether an implied term existed, it was held that the consultant was not an employee of the firm: see paras 50(3), 82 and 83.

51.  I accept that the facts in Yuanta are very similar to the present case.  However, they are not identical.  In my view, instead of focusing on a comparison between the facts of the two cases, I should tackle the issue by following the general approach laid down in Poon Chau Nam.

52.  In his submissions, Mr Wong in fact goes further and makes the observation that the court has recognised in a long line of cases that account executives in brokerage firms, particularly those who introduce clients and earn commissions from the client’s investments, are independent contractors and not employees.  He cites Yuanta and Kei Siu Hung v CAF Securities Co Ltd HCLA 39/2008, 27 November 2008 in support. 

53.  To this submission, I would say two things. First, a review of the authorities cited by both sides does not show that there is “a long line of cases” as suggested by Mr Wong.  Second, to the contrary, it was observed in Kei Siu Hung that there was no evidence of any industry practice or custom that account executives in the brokerage field would be regarded as employees or self-employed persons.  In that case, there was no dispute between the parties that in the industry, accounts executives were engaged either as employees or self-employed representatives: para 8.

54.  Having gone through the legal principles above, I would start my discussion by rejecting outright Mr Yau’s suggestion that the issue of employment should not be decided now but should be left to trial.

55.  What is unusual about this defence is that if it succeeds, it does not give rise to any substantive rights and obligations between the parties.  None of the other eight defences formulated by Mr Yau turns on whether the 1^st defendant was an employee or not.  In other cases where the issue is raised, it is invariably because the worker would be entitled to certain statutory or other benefits conferred by the status of an employee instead of an independent contractor, eg, compensation under the Employees’ Compensation Ordinance as in Poon Chau Nam.  And that is why it is worth the efforts to argue for an employment relationship.

56.  But that is not the case here.  Even if the 1^st defendant succeeds in this defence, the impact is purely procedural.  It only goes to determine which court the plaintiff should have gone to in the first instance to make the claims.  It is true that if the Letter of Appointment created an employment relationship, the plaintiff ought to have commenced the action in the Labour Tribunal and the Court of First Instance has no jurisdiction to hear the present action.  Nevertheless the substantive causes of action remain the same, regardless of the forum in which the case is heard.  An employee status would not confer any substantive rights on the 1^st defendant.  The defence only goes to the jurisdiction of a particular court and no more.  (This leaves one to wonder the actual utility of the defence.  Even if it is upheld, there is nothing to stop the plaintiff from starting all over again in the Labour Tribunal, there currently being no applicable time bar.  Nevertheless, since the defence is raised, I shall have to deal with it.)

57.  In a case like this one, the issue of employment should be resolved at the earliest opportunity and should not be deferred to trial.

58.  In my view, the issue is capable of being resolved at this interlocutory stage, without receiving any live evidence for the purpose.  As will be seen below, the material facts relied on by the plaintiff can be gleaned from the documentation signed by the parties at the time.  The documents are not controversial.  Equally, the material facts relied on by the 1^st defendant are not controversial either.  They are not rebutted by the plaintiff’s reply affirmation.  In any event, as remarked above, I shall treat his factual allegations as true in this appeal.

59.  In his seven-page affirmation, the 1^st defendant made a number of factual allegations concerning the issue of employment.  Just as in Yuanta, one does not expect him to hold back any material fact or circumstance in his opposing affirmation.  In any event, the evidence presently available already covers the most material aspects of the relationship and one cannot realistically expect more to come out if the case proceeds to trial: see para 80.  After all, the work relationship was a short one (lasting just over eight months) and on its face was not a complicated one.

60.  For the above reasons, the approach which I would adopt is that I would consider the material indicia of employment as revealed by the presently available evidence and come to a definitive conclusion on the question of whether the 1^st defendant was an employee under the Letter of Appointment.

1^st defence – the indicia of employment

61.  I am of the view that while the Employment Contract and the Letter of Appointment were in force, there existed a parallel set of relationships and that under the former agreement, the 1^st defendant was an employee whereas under the latter, he was not an employee but an independent contractor.  Therefore, I reject the defence and hold that the Court of First Instance has jurisdiction to hear the present action.

62.  Before going through the list of indicia, it is worth highlighting a special feature in this case – that is the existence of the two separate agreements appointing the 1^st defendant to work in two different roles during the same period with the plaintiff.

63.  Mr Yau emphasises that both agreements are “inextricably linked” and are “integral” of the overall relationship.  This submission is open to dispute on the evidence.  In any event, the starting point is that there is no established rule to the effect that there could only be one relationship between an alleged employer and a worker at any one time.  In principle, the circumstances may be such that different relationships existed in respect of the different works done.  I am of the view that the present case is one such case.  I set out the indicia below which I consider to be material.

64.  The first indicium is the remuneration structure.

65.  Under the Letter of Appointment, no base (or fixed) salary would be paid.  The 1^st defendant instead would receive commissions, the amount of which is purely based on a percentage of the income generated by his clients’ transactions (see para 11 above).  In other words, if his clients executed no transaction in a month, he would not receive any remuneration as account executive for that month.  In fact, in the three months from October to December 2021, he received commissions of about $5,000, $6,000 and $16,000 respectively.

66.  This is to be contrasted with his role as responsible officer under the Employment Contract, under which he received a fixed monthly salary of $45,000.  This sum would be paid regardless of how many clients he introduced to the plaintiff or how many transactions his clients executed in the month.

67.  This indicium points against an employment relationship.

68.  The second indicium is the allocation of rewards and risks.  This is closely related to the first indicium.

69.  Mr Wong submits that the 1^st defendant assumed significant financial rewards and risks for his work as account executive.  This is because he had prospects of profit by way of commission, and significant risk of loss when his clients defaults since he had given a guarantee and indemnity under the Letter of Appointment.  He further submits that the contractual provisions reflect an agreed allocation of risk between the parties.

70.  I accept the submission in general except that it may not be apt to say that the 1^st defendant would earn “significant” financial rewards as account executive.  It is not borne out by the evidence.  In fact, he was receiving only thousands of dollars of commission a month, which by any standard cannot be described as “significant”. 

71.  On its face, this allocation of rewards and risks is capable of producing very one-sided results, just as in the present case. While his commissions were in the range of thousands of dollars, the 1^st defendant has assumed a risk of loss of an arguably disproportionate scale by his giving a guarantee and indemnity which has no upper limit.  As a matter of fact, the plaintiff is now trying to hold him liable for over $3.4 million.  In this regard, I note that similar guarantees and indemnities given in the securities brokerage industry have on previous occasions been upheld as enforceable on the facts: see Yuanta (challenge based on implied term) and Hao Tian International Securities Ltd v Ng Shui Cheong [2020] HKCFI 1590 (challenge based on unconscionable bargain and undue influence).  In this case, however, no issue is taken by the 1^st defendant on this point.

72.  Coming back to the indicium, the material point here is that the agreed allocation of risks points strongly towards an independent contractor arrangement.  This is very much consistent with the 1^st defendant working on his own account, bearing the inherent economic risks: see, eg, 李偉基 at para 16.

73.  Again, this arrangement is to be contrasted with the fixed salary structure under the Employment Contract.  There, the 1^st defendant did not appear to assume any monetary risk arising out of the plaintiff’s business.

74.  This indicium points strongly against an employment relationship.

75.  The third indicium is the express intention of the parties.

76.  The Letter of Appointment expressly provided that the 1^st defendant was a self-employed person and disavowed any employment relationship.  I have quoted the relevant clause in para 12 above.  The Letter of Appointment also contained other provisions expressly recognising the 1^st defendant’s status as a self-employed person.  For example, in clause 7, he was required to open an MPF account “under self-employed person class”.  This stands in stark contrast with the express terms of the Employment Contract.

77.  It is of course trite that the court is not bound by the label used by the parties to describe their relationship.  However, unlike in some other cases, the present label does not appear to be a label crudely or indiscriminately used.  It is evident that it was a conscious act to separate and differentiate the two roles taken up by the 1^st defendant. Two different documents were signed.  The two roles were by design distinct from each other, in terms of the work nature, the remuneration structure and many other aspects.  The “labels” used by the parties were unambiguously stated in the documents.  They should be given weight by the court.

78.  Furthermore, in this case, the two documents were signed not at the same time, but about one month apart.  It would appear that each of the agreements could operate independently of each other.  This undermines Mr Yau’s submission that the two agreements are “inextricably linked”.

79.  This indicium points against an employment relationship.

80.  The fourth indicium is the nature of work.

81.  As account executive, the 1^st defendant was responsible for building his own portfolio of clients.  The plaintiff did not assign any clients to him.  After the opening of accounts, he would continue looking after his own clients.

82.  This feature is similar to the facts in Yuanta. The following observation made in respect of the defendant in that case applies equally here:

“In my opinion, as a matter of economic reality, Ms Ng was carrying on a business on her own, using the platform provided to her by Yuanta.”

83.  This indicium points in favour of an independent contractor arrangement.

84.  The fifth indicium is the manner in which the 1^st defendant carried out his work.

85.  Mr Yau highlights that in the account opening documentation, the 1^st defendant signed in his capacity as the plaintiff’s “staff” or as “responsible officer”, which the plaintiff had apparently accepted.  See para 14 above.  All these, Mr Yau submits, show that the Employment Contract and the Letter of Appointment are both integral of the relationship and they point to an overall employment relationship between the parties.

86.  The submission is not entirely understood.  It is an objective fact that the 1^st defendant held two roles with the plaintiff. Insofar as Mr Yau is saying that on certain occasions, eg in the account opening process, the 1^st defendant acted in both capacities at the same time, that may be correct.  But I do not think that this observation can meaningfully point to there being an overall relationship of employment, instead of there being parallel relationships under the two agreements.

87.  This indicium is a neutral one on the issue.

88.  The sixth indicium is the control exercised by the plaintiff over the 1^st defendant in the course of his work as account executive.

89.  Mr Yau submits that the plaintiff provided all the “tools” for the 1^st defendant to do his job, including the account opening forms and the system and support for the execution of the securities transactions.  He was required to use the plaintiff’s account opening forms with no exception.  He reported to Mr Kwan, the plaintiff’s director, as his supervisor in respect of both his roles as responsible officer and account executive.  The plaintiff retained a discretion to decide whether to accept a client introduced by him or not.  Mr Kwan had to approve the accounts referred by him by signing on the Client Information Form.  All these, Mr Yau contends, point to there being an employment relationship.

90.  In my view, such control ought to be looked at against the context.  The plaintiff is a licensed securities broker and must comply with the prevailing securities laws and regulations.  It is totally legitimate for the 1^st defendant to be subject to the plaintiff’s supervision in his work and that clients referred by him must be vetted by the plaintiff in accordance with its internal procedure.  Hence, as a matter of commercial reality, these controls were necessary for the plaintiff to properly carry on its licensed activity.  They were a necessary aspect of the working arrangement, regardless of whether the 1^st defendant was an employee or an independent contract.  As a matter of analysis, in my view, the imposition of such controls is not a manifestation of an employment relationship.

91.  This indicium is neutral on the issue.

92.  The seventh indicium relates to how the plaintiff represented to the outside world the role of the 1^st defendant.

93.  Mr Yau submits that the plaintiff represented to the outside world that the 1^st defendant was its representative or agent.  It did so by providing him with a direct telephone line for clients to contact him.  In the plaintiff’s communication with the clients, he was referred to as “本公司之客戶經理”. An employee is more likely to be an agent than an independent contractor.

94.  I consider that this indicium is, again, a neutral one.  This is because the above acts of the plaintiff were simply means to enable the 1^st defendant to deal with the clients and to enable them to trade on the plaintiff’s platform.

95.  As emphasised in Poon Chau Nam, when it comes to classifying whether a worker is an employee or an independent contractor, the court does not undertake a mechanical exercise of running through items on a checklist.  Apart from examining the details, it should stand back from the details and form an overall impression of the situation: para 18. 

96.  Having gone through in detail what I consider to be the material indicia, the overall impression which I have formed is as follows. 

97.  The commercial reality is that the 1^st defendant was appointed to take up two distinct roles with the plaintiff.  There was clear differentiation of the two roles, as reflected in the express terms of two separate governing agreements. 

98.  It is not in dispute that he was an employee under the Employment Contract.  As for his position under the Letter of Appointment, I consider that the first indicium of the remuneration structure and the second indicium of the allocation of rewards and risks carry significant weight.  They strongly point to the economic reality that as account executive, the 1^st defendant was really carrying on a business on his own account.

99.  Hence, I conclude that the 1^st defendant was not an employee under the Letter of Appointment.  For that reason, the Court of First Instance has jurisdiction to hear the claims.  The defence based on jurisdiction should be rejected.

2^nd defence – clause 3 of the Letter of Appointment is unenforceable as there is no contract of surety and is uncertain

100.  The second defence has two planks. 

101.  First, it is contended that the Letter of Appointment purports to guarantee the plaintiff against liabilities of an indefinite number of unknown persons and for there to be a valid suretyship, there must be a contractual relationship between the principal debtor and the surety such that the latter may exercise his rights against the former.  There is no such contract here between the 1^st defendant and the other defendants.

102.  Mr Yau relies on the following passages in Chan Ki v David Sassoon & Co Ltd [1908] 3 HKLR 40 at 48:

“… there must be a contractual relationship between the person guaranteed and his surety, in order to enable the surety to exercise his rights against the person guaranteed …

… And if there is no contract between them, there cannot be a relationship of principal and surety, because a surety ceases to be a surety if he cannot sue the principal debtor.”

103.  I reject this argument.  Mr Wong submits, and I agree, that there is no requirement that a contractual relationship must exist between the principal debtor and the surety in order for the guarantee to be valid.  The passages in Chan Ki are plainly taken out of context.  They concern when a surety may exercise his rights against the principal debtor, which is not what the present claims are about.  They are not concerned with whether the creditor can sue the surety, which is what the present claims are about.

104.  The second plank of the defence is that clause 3 is uncertain as it has not stated the identity of the principal debtor, which is a highly material term.  It is therefore arguable that clause 3 fails for uncertainty.  Mr Yau relies on Whiting v Diver Plumbing & Heating Ltd [1992] 1 NZLR 560 at 563 (line 45) and Crawford v Financial Services Institutions Ltd [2003] 1 WLR 2147 at paras 26 to 28.

105.  In the present case, while the exact names of the clients are not spelt out in the clause, the description of whose obligations are being guaranteed is put in clear terms: “all the clients introduced by you or your agents”.  There is no uncertainty about this description. 

106.  Mr Yau’s reliance on Whiting and Crawford is misplaced.  In Whiting, the guarantee was on a printed form with gaps for details to be filled in but the space where the name of the debtor was supposed to be filled in was not filled in.  Hence, on the face of the document alone, the debtor could not be identified: see 562 (lines 25-45).  Crawford similarly concerned the situation where the guarantee was executed in blank with the name of the debtor not inserted.  These two authorities present totally different facts from the present case and are not relevant.  This defence has no merit.

3^rd defence – clause 3(b) is inapplicable for lack of demand

107.  The 1^st defendant contends that clause 3(b) is inapplicable because the plaintiff made no demand against him before the commencement of the present action.  A demand is a crucial constituent of a claim in guarantee.  Mr Yau relies on Esso Petroleum Co Ltd v Alstonbridge Properties Ltd [1975] 3 All ER 358 at 367C-D.

108.  Mr Wong disagrees and argues that where a surety has covenanted to pay as a primary obligor, he will be liable under the guarantee regardless of whether a demand is made before the issue of a writ, even where the contract provides for payment “on demand”.  He relies on MS Fashions Ltd v Bank of Credit and Commerce International SA (in liquidation) [1993] Ch 425 at 436D-F and Levin v Tannenbaum [2013] EWHC 4457 (Ch) at para 29.  He also refers me to two decisions in Hong Kong which cited MS Fashions.  They are Secretary for Justice v The Hong Kong and Yaumati Ferry Co Ltd HCA 15329/1999, 22 December 2006 at para 378, and Bank of India v Gimajasa Ltd [2021] HKCFI 354 at paras 44 and 47.

109.  It is not necessary for me to resolve the disagreement.  This defence concerns only clause 3(b).  As will be seen below, none of the defences put forward by the 1^st defendant are arguable as far as clauses 3(a) and 4 are concerned.  Hence, even if the 1^st defendant’s argument on clause 3(b) prevails, he would still not be able to resist summary judgment.

4^th defence – the contracts between the plaintiff and the 2^nd and 3^rd defendants were unauthorised and hence the latter’s liabilities are unenforceable

110.  Under this defence, the 1^st defendant argues that the contract entered into between the plaintiff and the 2^nd and 3^rd defendants were unauthorised in light of the board resolution passed on 30 June 2021 (see para 31 above).  The plaintiff therefore could not have given the consideration which it purported to give: Fairland Overseas Development Co Ltd v Secretary for Justice [2007] 4 HKLRD 949 at para 90.  Any liabilities which the 2^nd and 3^rd defendants might have assumed in respect of the margin accounts are hence unenforceable.  It follows that the 1^st defendant cannot be held liable for them.

111.  I reject the defence.  Again, the reliance on Fairland is misplaced. Para 90 of the decision read:

“The effect of an ultra vires contract is that the Government “had not given and could not give the consideration which they had purported to give” …”

112.  The case was concerned with an ultra vires situation.  By contrast, it cannot be said in the present case that the margin financing agreements which the plaintiff entered with its clients were ultra vires.  Fairland does not apply.  By seeking to enforce the agreements against the 2^nd and 3^rd defendants, the plaintiff has ratified them even assuming that there was originally a lack of authority as alleged.

5^th defence – the plaintiff is estopped from relying on clauses 3 and 4

113.  This defence was abandoned by Mr Yau in the course of his oral submissions.

6^th defence – causation

114.  Mr Yau argues that given that a guarantor’s liability sounds in damages, it must be subject to the requirement of causation.  Here, the transactions with the 2^nd and 3^rd defendants were approved by the plaintiff.  It is therefore arguable that the 1^st defendant did not cause such loss.

115.  This argument is without merit.  As a matter of construction, on a plain reading of the contractual provisions, there is no requirement that the loss was caused by the 1^st defendant.  Furthermore, the 1^st defendant has so far not put forward any factual matrix which would suggest that the contractual provisions should be so construed.

7^th defence – final judgment should not be entered because the claims under clauses 3 and 4 are inseparable from the claim based on breach of implied term

116.  Under this defence, Mr Yau argues that the claims under clauses 3 and 4 are inseparable from the claim for breach of implied term.  Procedurally, they should be dealt with together.  Hence no summary judgment should be entered in respect of the former at this stage.

117.  Mr Wong has confirmed that if summary judgment is granted under clauses 3 and 4, the plaintiff will have recovered all its losses arising from the default of the 2^nd and 3^rd defendants.  There will be no need to pursue the claim based on breach of implied term.  The entire action will be effectively disposed of.

118.  On this basis, this defence does not assist the 1^st defendant.

8^th defence – final judgment should not be entered before the 1^st defendant’s claims against the 2^nd to 4^th defendants are determined

119.  Under this defence, it is submitted that final judgment should not be entered against the 1^st defendant before his claims against the 2^nd to 4^th defendants for quia timet reliefs are determined, as there are overlapping issues between the two sets of claims.  Procedurally, they ought to be resolved at the same time.  The plaintiff’s summons is in fact inherently inconsistent with the master’s order that the two sets of claims be tried together.

120.  I reject the defence.  It has no merit.  As none of the defences raised by the 1^st defendant are valid, there is no reason why summary judgment should not be granted now.  Procedurally, the 1^st defendant may now proceed with his notice of contribution and/or indemnity against the other defendants, if he so wishes.  Nothing is to be gained by deferring judgment as suggested by the 1^st defendant.

9^th defence – it is arguable that the plaintiff cannot arbitrarily adjust the interest rate from 9% to 16%

121.  This defence concerns interest only. 

122.  On 28 February 2022, the plaintiff unilaterally increased the interest rate from 9% to 16%.  Relying on United Overseas Bank Ltd v Gracewood International Ltd [2021] HKCFI 2950 at paras 54 to 58, the 1^st defendant argues that it was an arbitrary exercise of the contractual discretion on the part of the plaintiff as the increase was substantial and it has not provided any explanation for such increase.  The plaintiff should not be allowed to do so.

123.  The plaintiff’s primary position is that the 1^st defendant should not be allowed to raise the defence now.  This is because it has not previously been mentioned at all, whether in his defence or in his opposing affirmation.  Because of that, the plaintiff did not have the opportunity to explain its reasons for increasing the interest rate in its affirmations. 

124.  On the face of it, the increase was substantial, involving an almost 80% increase.  In the notice to the 2^nd and 3^rd defendants, there was no explanation for such increase.  Furthermore, the timing was that the increase took effect just shortly after the default occurred.  In the absence of any explanation, there is room for arguing that the increase was arbitrary.

125.  Having said that, however, I have to agree with Mr Wong’s submission that procedurally it is prejudicial to the plaintiff if the court is to allow the 1^st defendant to rely on this defence.  In an application for summary judgment, the burden is squarely on the defendant to raise triable issues and he should condescend upon particulars.  And, generally speaking, he should do so in his opposing affidavit. 

126.  Here, whether the exercise of the discretion to increase the interest rate was arbitrary or justified is clearly a fact-sensitive question.  It was incumbent on the 1^st defendant to raise it as a defence in his opposing affirmation with particulars so that the plaintiff would have a chance to respond.  Because of the 1^st defendant’s omission, the plaintiff has been deprived of such an opportunity.  To hold the point against the plaintiff now would be prejudicial as such a ruling would affect its substantive rights, without it having had a chance to provide evidence to rebut the point.  For these reasons, I reject this defence.

CONCLUSION

127.  None of the defences put forward by the 1^st defendant raise any triable issue or show that the action should proceed to trial.  Summary judgment should be entered, based on clauses 3(a) and 4 of the Letter of Appointment.  I allow the plaintiff’s appeal and set aside the master’s order.

128.  I order that judgment be entered against the 1^st defendant in the sum of $3,423,964.77, with interest accruing at the rate of 9% per annum from 19 January 2022 and then at the rate of 16% per annum from 1 March 2022 until payment in full.

129.  I make an order nisi that the 1^st defendant do pay the plaintiff’s costs of the summons, including the hearing before the master, and this appeal, including all reserved costs, such costs to be taxed if not agreed, with certificate for one counsel.  (I should record here that Mr Wong accepted at the hearing that the plaintiff was not entitled to ask for costs of the action in this appeal as such costs were not sought in the summons.)