KWAN FRANCIS HUNG SANG v. HONG KONG EXCHANGES AND CLEARING LTD

HCA1498/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1498 OF 2010

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J U D G M E N T

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1.  This is the Defendant’s application to strike out the statement of claim and the subsequent amendments under all 3 limbs of Order 18, rule 19.

The Facts

2.  Mr Coleman SC leading Mr Dawes have succinctly summarized the facts material to the present application in their skeleton submission and I adopt the same in paragraphs 3-16 below.

3.  From May 1995, the Plaintiff (Mr Kwan) has been an employee of the Hong Kong Futures Exchange Limited which in September 1999 became a wholly owned subsidiary of the Defendant (HKEx).  In May 2000, he became the Senior Vice President and Head of HKEx’s Group Risk Management Division of Listing Regulations and Risk Management Unit.

4.  By a letter dated 20 June 2000 from HKEx, Mr Kwan was granted and he accepted a pre-listing option to subscribe for 558,989 shares in HKEx (“the Option”) subject to HKEx becoming a publicly listed company as well as approval of the Option by the Securities and Futures Commission.

5.  The Option was granted by the board of HKEx at the subscription price of HK$7.52 per share in 4 equal tranches of 25% each of the entitlement over the next 4 years (“the Share Option Scheme”).  The last share tranche entitlement matured on 6 March 2005 and could be exercised in 5 years up to and including 30 May 2010.

6.  The terms of Mr Kwan’s employment with effect from 1 April 2002 were set out in a letter from HKEx dated 18 March 2002 (“the Employment Letter”) which contained, amongst others, the following clauses:

“7. Termination

Termination of your employment will be subject to four months’ notice or four months’ payment in lieu by either party at any time. The payment in lieu will be based on the sum of the three elements of your monthly cash package. All notices of termination must be in writing.

9. Human Resources Manual

In addition to complying with the terms and conditions set out in this letter, you shall also comply with the provisions stipulated in the Human Resources Manual (as amended from time to time by HKEx) [“the Manual”], and any other rules and regulations from time to time prescribed by HKEx which, except to the extent that they are clearly inconsistent with the terms of employment stipulated in this letter, shall form part of the terms of your employment with HKEx.”

7.  There is a dispute as to whether the following implied terms existed but it will be taken in favour of the Plaintiff that they did:

(i) HKEx would not do anything likely to destroy or seriously damage the relationship or mutual trust and confidence between Mr Kwan as employee and HKEx as employer; and

(ii) HKEx shall not engage in any exercise of any right to terminate Mr Kwan’s employment with HKEx where such exercise was calculated to avoid the vesting of any Option in Mr Kwan and/or Mr Kwan’s exercise of such Option under the Share Option Scheme (“the anti-avoidance term”).

8.  A meeting was held between Mr Kwan and one Mr Conroy (the Chief Operating Officer and the then second most senior person at HKEx) on 3 March 2004 (“the Meeting”).   Mr Kwan was informed that he should resign forthwith, failing which he would be dismissed by HKEx.  Faced with the “threat”, Mr Kwan had no option but to resign immediately and he verbally informed Mr Conroy.  He also verbally informed Mr Conroy that “he reserved all his rights”.  Mr Conroy verbally accepted his resignation on behalf of HKEx.

9.  According to Mr Kwan, there was absence of any rational or valid reason for the Defendant to dismiss him.  Mr Conroy acting on behalf of HKEx had dismissed him out of personal spite with a view to avoid the vesting of any Option in him and/or his exercise of such Option under the Share Option Scheme.

10.  Mr Kwan gave formal notice of resignation on the following day (4^th March).  HKEx replied by letter on the same day accepting his resignation and advised him of the amount of monies to be paid on the termination of his employment (“the Acknowledgement Letter”).   The Acknowledgement Letter stated that employment would, as agreed, last until 31 March 2004 but that Mr Kwan’s last working day would be 5 March 2004.  It also provided that he would receive:

(i) Salary for the full month of March 2004;

(ii) 4 months’ salary in lieu of notice;

(iii) Salary in lieu of untaken annual leave pay for 27 days; and

(iv) An ex gratia payment of HK$340,000.

11.  Mr Kwan signed the Acknowledgement Letter which contained the following acknowledgement (“the Acknowledgement”):

“I accept the terms set out in this letter as the full and final settlement of all claims I may have against HKEx or any of its subsidiaries in respect of my termination of employment with HKEx effective 31 March 2004.”

12.  All of the payments under the Acknowledgement Letter had been received by Mr Kwan. Mr Kwan was also provided with a reference letter from Mr Conroy describing him in very positive terms and another letter from HKEx confirming his last position as an employee of HKEx and recording that he left HKEx “on his own accord”.

13.  I will assume in Mr Kwan’s favour that the circumstances did not allow him sufficient time to reflect or seek independent legal advice and that all of the terms of termination (except the last working day) came into existence only after the resignation letter was submitted.

14.  By 30 April 2004, Mr Kwan had only exercised 75% of the Option.  By reason of his termination, he was unable to exercise the last tranche of the Option, which matured only a year later.

15.  Further, Mr Kwan had had a salary cut by $85,000 per month in July 2003 to prevent the redundancy of another colleague.  He would not have agreed to it were he to be dismissed less than 7 months later.

16.  Over 5 years after his termination, Mr Kwan issued the claim at the Labour Tribunal, which was then transferred to the High Court.

The Plaintiff’s Case

17.  The Plaintiff’s case is that he was constructively dismissed on 3 March 2004.  The Acknowledgement was not enforceable for absence or total failure of consideration.  In any event, his express reservation of rights, including his claims in the present action, had by then been communicated to HKEx.

18.  But for the dismissal or the involuntary resignation,

(i) Mr Kwan would have remained an employee of HKEx beyond 6 March 2005 when the last tranche of the Option would become exercisable by him. 

(ii) Further or alternatively, HKEx would have followed the procedure for disciplinary action under section 9 of the Manual which would result in no finding of any cause of complaint against the him.

19.  If there had been any legitimate ground for termination of his employment, Mr Kwan claims that he had a legitimate expectation and a contractual entitlement for the procedure laid down in the Handbook to be followed, which process would have taken over 12 months to initiate and complete by HKEx, beyond 6 March 2005.

20.  But for HKEx’s breach of contract, he would have been entitled to receive further monthly salary computed at the rate before his salary cut; and to exercise the remaining tranche of the Option.  The amount at stake is in the region of $26,000,000 (based on market price of the Option Shares as at 28 February 2011 less acquisition cost plus the salary claim).

The Defence

21.  HKEx’s case is that,

(i) Mr Kwan was not dismissed and his employment was terminated by mutual agreement through his own resignation;

(ii) Alternatively, his employment was terminated by payment in lieu of notice pursuant to clause 7 of the Employment Letter and section 7(1) of the Employment Ordinance;

(iii) There was no obligation to follow the disciplinary procedure under section 9 of the Manual.

(iv) Further, the Acknowledgement Letter constituted or recorded a binding settlement agreement discharging all actual or potential claims in relation to his termination.

Principles for Striking out

22.  There is no dispute over principles.  Striking out is only done in plain and obvious cases.  Disputed facts should be taken in favour of the Plaintiff.  In so doing, I have placed full weight on the affirmations of Mr Kwan, who was the only affirmation amongst all having first-hand knowledge of what happened on 3 and 4 March 2004.  Mr Conroy had not filed an affirmation, nor did he have recollection of what had occurred when consulted by Ms Yen (Head of the Human Resources Department of HKEx) for evidence in this case. Where facts are complex or the law on an issue is developing, it would not be appropriate to strike out a claim.

Termination or Dismissal?

23.   The Court looks at substance rather than form.  If an employee was threatened that he would be dismissed unless he resigned, the Court may hold such “resignation” to be constructive dismissal.  However, if the “resignation” was motivated by other facts, such as financial benefits or a reference letter, the termination might be a voluntary resignation notwithstanding that the employee was told either to resign or be dismissed: Sheffield v. Oxford Controls[1979] ICR 396,followed in Hong Kong in Chu Hei Man, Qualia v. Dynasty World Holdings Ltd.HCLA 58/1999, unrep., 11.1.2000, Li DJ; Gloria Villaman v. Durga Devi Tillani HCLA 35/1997, unrep., 26.2.1998, Keith J.

24.  Termination of Mr Kwan’s employment had to be in writing.  Theoretically Mr Kwan could have insisted on 4 March 2004 that he had not resigned.  Nevertheless, constructive dismissal is a creation of the law to avoid the injustice/oppression to an employee caused by an employer’s strict adherence to legal formalities.  I accept the submission of Mr Maurellet, counsel for Mr Kwan, that what Mr Conroy said to Mr Kwan at the Meeting was capable of constituting constructive dismissal and that Mr Kwan had reserved all his rights there and then.  Despite a dispute over facts as to when the terms to apply on termination were communicated to Mr Kwan, I shall assume that they were so communicated only after the resignation letter was handed in and hence there was no motivation for resignation given at the Meeting.  When Mr Kwan discussed with Ms Yen as to the terms of resignation, he was merely doing his best to salvage what he could bearing in mind that he had already been dismissed: Charles Sandhu v. Jan De Rijk Transport Ltd [2007] IRLR 519.

25.  Mr Kwan’s case is that he was constructively dismissed on 3 March 2004.  I accept this date for the purpose of this application.

26.  Despite that, Mr Kwan’s letter dated 4 March 2004 clearly stated that he “would like to resign”.  The Acknowledgement Letter also stated that HKEx was “writing to acknowledge [his] letter of 4 March 2004 in respect of [his] resignation from [HKEx]”.  There was no evidence at all as to any complaint from Mr Kwan that he had been threatened or forced to resign.  HKEx offered benefits which it was not obliged to offer, namely to “extend” the employment period to 31 March 2004, and to make an ex gratia payment to him.  (I do not regard the reference letter as a form of “benefit” from HKEx because there was no evidence as to when Mr Kwan was given to know that there would be such a reference letter.)  There was no allegation that Mr Kwan was forced to accept those terms.  Nor was there evidence that Mr Kwan had asked for but was refused his rights under the last tranche of the Option, which had by then not yet matured.

27.  It is meaningless to compare the facts of this case to other cases cited to see whether the terms on termination were agreed on the day of termination or only after a number of days.  Each case turns on its own facts.

28.  Even if Mr Kwan had been constructively dismissed and reserved his rights on 3 March, there had been subsequent negotiations and compromise which he had accepted on the following day.  The circumstances showed termination by mutual agreement.  The case on constructive dismissal will fail.

Failure to Follow the Procedure for Disciplinary Action

29.  Mr Maurellet confirms that for the purpose of this application, he will not take the point that HKEx had failed to follow the procedure for disciplinary action.  I consider that a sensible approach because an employer had a right to terminate under sections 6 and 7 of the Employment Ordinance by making payment in lieu and without good reasons.  Such a statutory right could not be cut down by an implied term in the contract.  This is so even if the employer had acted for an ulterior motive: Sun Zhongguo v. BOC Group [2003] 2 HKC 239,Recorder Edward Chan SC.  Accordingly, having been “constructively dismissed” on 3 March, there was no basis to suggest that Mr Kwan could remain an employee thereafter.

30.  If an employer chooses to exercise his contractual or statutory right to terminate upon payment in lieu, he does not have to go through the disciplinary procedure stated in the contract even if the underlying reason for the dismissal was a disciplinary problem: Cheung Chi Keung v. Hospital Authority [2006] 2 HKLRD 46, Kao, Lee & Yip v. Lau Wing (2008) 11 HKCFAR 576.

Settlement Agreement

31.  An appropriately worded settlement can discharge both actual and potential claims, including even claims of which the parties could not have been aware at the time of the settlement: Foskett, Law and Practice of Compromise, 7th ed, para 2.01-2.11.

32.  The label as an Acknowledgement Letter would not prevent the letter from being a settlement agreement if in substance it was so.

33.  Any reservation of rights at the Meeting had been overtaken by events.   Mr Kwan had discussed, on his own case, the resignation arrangements with Ms Yen of HKEx on the following day.  The terms of the settlement were then finalized and signed by Mr Kwan in acknowledgement.  There was clearly a valid and binding agreement made on 4 March to settle the existing and potential disputes regarding Mr Kwan’s employment with HKEx at that time.

34.  Mr Kwan’s plea that there was lack of consideration is unsustainable.  There were benefits in the form of extension of employment period and the ex gratia payment which formed part of the settlement.  Consideration need not be adequate or be such as to be comparable to the last tranche of the Option.

35.  Mr Maurellet submits that the words “arising out of my termination” limited the settlement to matters arising out of Mr Kwan’s resignation but not the constructive dismissal.  This argument is untenable because Mr Kwan had never accepted that the termination was his.  Besides, termination is a neutral word which covers termination by either employer or employee.

36.  Mr Maurellet also submits that the phrase “all claims I may have against HKEx” (“the Phrase”) covers future claims. Existing ones including the present action would be covered if a phrase like “all claims I have or may have” was used.

37.  In Kitchen v. Lea Valley Water [1989] Vol.2 Lloyds Law Reports,at 224the settlement terms made in full satisfaction of all claims “we have or may have against [the defendant] in connection with a burst water main [at a specified address]” were held to cover not merely claims actually advanced in relation to the burst main, but other claims not advanced which might be advanced.  The fact that the parties were only negotiating in respect of specific items of physical damage could not detract from the natural meaning of the phrase.  

38.  The Kitchen case was considered in Multiplex v. Cleveland Bridge 107 ConLR 1,Jackson J.  The settlement agreement provides in Clause 2.1 that

“‘Subject to Clause 2.2, the provisions of this Agreement are in full and final settlement of all disputes between the Contractor and Sub-Contractor and all and any claims by the Sub-Contractor to the Contractor and by the Contractor to the Sub-Contractor existing on or before 15 February 2004 … Neither the Contractor or the Sub-Contractor shall be entitled or be permitted to make or pursue any claims against the other for any matter arising from any event or circumstance occurring up to and including 15 February 2004 (whether or not known to the Sub-Contractor).’

Clause 2.2 provides: ‘Clause 2.1 shall not apply to any claim that the Contractor might have for design workmanship or materials not being in accordance with the Sub-Contract.’”

39.  Jackson J was of the view that the phrase “any claim that the Contractor might have” was clearly used to denote any present or future claim.  Clause 2.2 was preserving claims, not releasing them.  The clause contained no restriction to future claims or to unknown claims.    The phrase “whether or not known to the Sub-Contractor” was a topic to which the parties expressly turned their minds. If they had intended to restrict clause 2.2 to claims which were not known at the time, they would have said so in terms.

40.  I am unable to accept Mr Maurellet’s contention that the Acknowledgement did not cover the present claim.  Mr Kwan had not made any claim at the time he signed the Acknowledgement.  This action is clearly a “future” claim within the meaning of the Phrase.

41.  Anyhow, Mr Maurellet submits that the Kitchen case and Multiplex were first instance decisions not binding on this Court.  In Multiplex, Jackson J did not construe clause 2.2 in a vacuum but together with clause 2.1 to ascertain the true intention.  Ultimately, limited assistance could be drawn on the interpretation of those clauses as it was a fact-sensitive exercise.  For present purposes, I will accept this submission and that his construction of the Acknowledgement is at least arguable. 

The Anti-Avoidance Term

42.  Mr Kwan has to show that HKEx had breached the anti-avoidance term so as to entitle him to damages.

43.  In Tadjudin Sunny v Bank of America National Association [2010] 3 HKLRD 417, the employee there advanced a similar argument in relation to a discretionary bonus referred to in his contract.  Chu J held that there was no arguable case but was overturned on appeal.  The Court of Appeal was of the view that an anti-avoidance term was a developing area of the law.  As such it was not desirable to deal with it at an interlocutory stage without going through a trial:

“55. In this respect, I note first that implied anti-avoidance terms is an area of the law which is in the process of developing as was said in Takacs v Barclays Services Jersey Ltd at para.58:

It is also clear from the many authorities that I have been referred to in the course of the hearing, only some of which I have referred to in the course of this judgment, that this is an area of the law which is in the process of developing. The vast majority of the cases have been heard during the last five to six years. It would not, in my judgment, be appropriate to determine this claim at a summary hearing, so that there is also some other compelling reason for the claim to proceed to trial.

56. This area of the law being in the process of developing, it would be far too sweeping a statement at this interlocutory stage to say, as the Judge did, that the implied terms contended for are inconsistent with our legislative policies by looking solely at the four corners of Employment Ordinance.”

(Suffiad J at page 427)

44.  The present case is distinguishable in that the Share Option Scheme simply did not form part of Mr Kwan’s contract of employment.  Clause 14 of the Share Option Scheme provides as follows:

“14.1 The Scheme shall not form part of any contract of employment between [HKEx] or any Subsidiary and any Employee and the rights and obligations of any Employee under the terms of his office or employment shall not be affected by his participation in the Scheme or any right which he may have to participate in it and the Scheme shall afford such an Employee no additional rights to compensation or damages in consequence of the termination of such office or employment for any reason.

14.2 The Scheme shall not confer on any person any legal or equitable rights (other than those constituting the Options themselves) against [HKEx] directly or indirectly or give rise to any cause of action at law or in equity against [HKEx].”

45.  In the premises, even if the anti-avoidance term existed, the Plaintiff is not entitled to claim against the Defendant for any losses arising out of his inability to subscribe for the last tranche of shares in the Option.

Conclusion

46.  Even taking all facts in favour of the Plaintiff, assuming all implied terms to be part of the employment contract, assuming that he was constructively dismissed on 3 March 2004, the Plaintiff does not have an arguable case on the merits. The claim cannot be salvaged by the current amendments (made about 7 years after the termination) or other amendments.  It is a plain and obvious case that the statement of claim should be struck out and the claim should be dismissed.

47.  I make an order nisi that costs of the action including this application be to the Defendant with certificates for 2 counsel.

48.  There shall be summary assessment of costs on the papers on 9 January 2011 at 9:30 am.  No attendance is required. The Defendant shall file and serve its statement of costs by 23 December 2011.  The Plaintiff shall file and serve his grounds in opposition by 6 January 2012.

49.  I thank counsel for their assistance.