POON SIU KUEN AND OTHERS v. PINE CORPORTION LTD

Go to Part I

HCLA 71/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 71 OF 2001

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO. 106, 2427 and 3270 /2001)

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J U D G M E N T : PART II

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1. I shall discuss the law concerning mutuality of obligation for a contract of service in this Part. Although, subject to one point referred to below, counsel for both parties had no quarrel with my analysis of the law in Hong Kong in Wong Man Kwan v Chun Shing Holdings Ltd [2003] 3 HKLRD 403, there are points referred to in the cases cited by the Presiding Officer in her reasons for judgment which I have not adequately dealt with previously. Since I am holding that the Presiding Officer erred in law in her approach, I should explain why. The Presiding Officer placed much reliance on two English authorities: Montgomery v Johnson Underwood Ltd [2001] IRLR 269 and Stevedoring and Haulage Service Ltd v Fuller [2001] EWCA Civ 651 (the latter came to the attention of the Presiding Officer after she gave her oral decision). I referred to the latter case but not the former in Wong Man Kwan. I shall come back to these cases later.

2. In order to have a focused discussion, it will be useful for me to set out two specific issues that, in my view, requires some clarification,

(a) what is the meaning of "mutuality of obligation";

(b) what are the implications that concept under the Employment Ordinance.

3. Professor Freedland in his book The Contract of Employment (1976) at p.19-21 had pinpointed two sets of obligations in the context of a continuing contract of employment, and I quote from p.20,

"In the case of the contract of employment, the exchange is of service against remuneration; but there is more to the contract than this simple exchange, because the employee undertakes an obligation to make himself available to render service, while the employer undertakes to enable the employee to earn his remuneration. Each of these promises, however, is conditional upon the readiness and willingness of the other to perform his counter-promise. Hence the contract has a two-tiered structure. At the first level there is an exchange of work and remuneration. At the second level there is an exchange of mutual obligations for future performance. The second level --- the promises to employ and be employed --- provides the arrangement with its stability and with its continuity as a contract." (my emphasis)

4. Professor Freedland took the view that the second level, no matter how short the duration was, forms an integral part of any employment relationship and therefore must exist in any contract of employment properly so called.

5. In my judgment, it is important to bear in mind the distinction between these two sets of obligations in considering the question of mutuality of obligation. Three questions are involved when one enquires about the relationship between a worker and the person who engaged him: (1) whether there is any contract between them; (2) if yes, whether the contract is a contract of service; (3) if yes, whether the contract is a continuing contract. In each of these questions, the relevance of these two sets of obligations, as analyzed below, are not the same.

6. There are cases and textbook authorities referring to the mutuality of obligation as necessary to establish a contractual relationship of whatever nature. But it is quite clear that in the context of contract arising from each specific engagement the court was referring to mutuality on the first level and not mutuality on Professor Freedland's second level.

7. It is significant to note that in the modern cases where this requirement of mutuality was referred to, the following passage in the judgment of MacKenna J in Ready Mixed Concrete v Minister of Pensions and National Insurance [1968] 2 QB 497 at p.515 was always cited,

"A contract of service exists if these three conditions are fulfilled: (i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master; (ii) he agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master; (iii) the other provisions of the contract are consistent with its being a contract of service."

On the first element, it was further elaborated,

"There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill."

The first element was subsequently regarded by judges as establishing the requisite mutual obligations, see Stephenson LJ in Nethermere (St Neots) Ltd v Gardner [1984] ICR 612 at p.623 and Stephenson LJ's analysis was subsequently adopted by Sir Christopher Slade in Clark v Oxfordshire Health Authority [1998] IRLR 125 and Lord Irvine LC in Carmichael v National Power [1999] 1 WLR 2042. See also Buckley J in Montgomery v Johnson Underwood [2001] IRLR 269.

8. I think element (i) in MacKenna J's formulation can be satisfied by mutual obligations on the first level. Many modern English cases addressed the question of mutuality by reference to the time when the worker was not actually working and focused on the lack of mutuality during such gaps. In such context, when the worker did not provide any service in exchange for remuneration, it is not surprising that mutuality on the second level needed to be explored. As I have already mentioned in Wong Man Kwan, they do not rule out the existence of contract of service during each specific engagement. In Stephenson v Delphi Diesel Systems [2003] ICR 471, Elias J said in Paras.11 to 14,

"11. The significance of mutuality is that it determines whether there is a contract in existence at all. The significance of control is that it determines whether, if there is a contract in place, it can properly be classified as a contract of service, rather than some other kind of contract.

12. The issue of whether there is a contract at all arises most frequently in situations where a person works for an employer, but only on a casual basis from time to time. It is often necessary then to show that the contract continues to exist in the gaps between the periods of employment. Cases frequently have had to decide whether there is an over-arching contract or what is sometimes called an "umbrella contract" which remains in existence even when the individual concerned is not working. It is in that context in particular that courts have emphasised the need to demonstrate some mutuality of obligation between the parties but, as I have indicated, all that is being done is to say that there must be something from which a contract can properly be inferred. Without some mutuality, amounting to what is sometimes called the "irreducible minimum of obligation", no contract exists.

13. The question of mutuality of obligation, however, poses no difficulties during the period when the individual is actually working. For the period of such employment a contract must, in our view, clearly exist. For that duration the individual clearly undertakes to work and the employer in turn undertakes to pay for the work done. This is so, even if the contract is terminable on either side at will. Unless and until the power to terminate is exercised, these mutual obligations (to work on the one had and to be paid on the other) will continue to exist and will provide the fundamental mutual obligations.

14. The issue whether the employed person is required to accept work if offered, or whether the employer is obliged to offer work as available is irrelevant to the question whether a contract exists at all during the period when the work is actually being performed. The only question then is whether there is sufficient control to give rise to a conclusion that the contractual relationship which does exist is one of a contract of service or not."

9. So understood, although these cases referred to mutuality of obligations on the second level as being essential for any contract of service, they are consistent with Elias J's analysis on how mutuality can be satisfied during each specific engagement. A recent example of similar understanding by judges in the English Court of Appeal can be found in Brook Street Bureau v Dacas [2004] EWCA Civ 217 at Paras.53 and 86 to 88 (per Mummery LJ and Munby J respectively).

10. I now examine the cases mentioned by the Presiding Officer. O' Kelly v Trusthouse Forte [1983] ICR 728 is a case where the question of mutuality had been considered in the context of specific engagement. There were doubts whether the Industrial Tribunal had dealt with each engagement as separate contracts. Ackner LJ thought the Industrial Tribunal did not deal with it (see p.755F) whilst Fox LJ and Donaldson MR took the opposite view (see p.760E to G and p.764A to B). The majority considered that the Industrial Tribunal did not made any error of law in dealing with that issue. The Industrial Tribunal's approach on mutuality of obligation can be found at p.44 E to F,

"We are, of course, aware that lack of mutuality of obligation is not, in itself, a decisive factor and that outworkers can, in appropriate circumstances, be employees working under contract of employment, even though there is no obligation to provide work or perform it... Nevertheless, this was a factor on which we placed very considerable weight in making our assessment."

The tribunal was obviously considering mutuality on the second level, see factors (o) and (p) enumerated by them at p.743H.

11. Ackner LJ had these to say regarding mutuality in the context of possible employment arising from each specific engagement, at p.755H,

"When [the appeal tribunal] came to the factors which in relation to the overall contract were treated as being inconsistent with a contract of employment, the lack of mutuality factor (o) and (p) did not apply to the individual contracts, since once a "regular" had turned up for the function then it was accepted there was a contractual obligation to allow the work to be done."

12. Fox LJ considered the question of employment arising out of specific engagements only after he accepted that the tribunal's decision on lack of mutuality on the second level could not be disturbed on appeal. It is important to note what was said at p.760C,

"There remains the question whether there was a series of individual contracts of employment of the 'regular' casuals."

Hence, the lack of mutuality on the second level, in His Lordship's view, did not rule out contracts of employment arising from a series of individual contracts. His Lordship later resolved the issue by reference to the tribunal's finding that the applicants were in business on their own account.

13. The Master of the Rolls held the same view. At p.764B, His Lordship said,

"Furthermore, in the light of the industrial tribunal's finding of lack of mutuality in relation to the umbrella contract the only point of considering "service v services" was in relation to the individual contracts."

14. There are passages in the judgment of Stephenson LJ in Nethermere (St Neots) Ltd v Gardner which, reading on a broad-brush, may suggest that mutuality on the second level is essential for all contracts of services. However, it is necessary to read that judgment in context. In that case, the worker did not advance any argument based on employment under a series of separate contracts (see p.626B) and the court was able to decide the case in favour of the worker on the basis of global contract.

15. I explained in Para.22 of my judgment in Wong Man Kwan why Clark v Oxfordshire Health Authority [1998] IRLR 125 and Stevedoring and Haulage Service Ltd v Fuller [2001] EWCA Civ 651 were not authorities in respect of mutuality for contracts of employment arising from each specific engagement. In fact they could be regarded as authorities supporting at least implicitly the view that the lack of mutuality on the second level could not negate the existence of contract of service on each specific engagement. Otherwise, the finding of lack of mutuality would dispose of this argument as well.

16. Carmichael v National Power [1999] 1 WLR 2042 falls under the same category, see p.20444. At p.2045G, Lord Irvine said,

"In substance the tribunal held that the documents did no more than provide a framework for a series of successive ad hoc contracts of service or for services which the parties might subsequently make; and that when they were not working as guides they were not in any contractual relationship with the CEBG."

It follows that notwithstanding the absence of mutuality on the second level, Lord Irvine could not rule out the possibility of a contract of service arising from each specific engagement.

17. McLeod v Hellyer Brothers [1987] IRLR 232, another case cited by the Presiding Officer, was again decided by reference to the existence or non-existence of global contract. Because of the way in which the case had been conducted below, the Court of Appeal refused leave to the worker to argue by reference to fixed term employment arising from the specific engagement (see p.248-250).

18. In contrast, McMeechan v Secretary of State for Employment [1997] IRLR 353 was a case decided by reference to employment arising from specific engagement. The Presiding Officer did not refer to this case in her judgment. Waite LJ said these with regard to mutuality on the second level,

"The conditions ... excluding mutuality of obligation are irrelevant in this context. That is not to say that in the different context of a general engagement they would be without effect. They might there turn out to be of crucial --- even decisive --- importance. In the circumstances of a specific engagement, however, there is nothing on which they can operate. When it comes to considering the terms of an individual, self-contained, engagement, the fact that the parties are not obliged in future to offer --- or to accept --- another engagement with the same, or a different, client must be neither here nor there." (my emphasis)

19. I do not read the judgment of Waite LJ as saying that there is no need to have mutuality of obligations on the first level in order to establish a contract of services in respect of each specific engagement. His Lordship was only saying that there is no need to have mutuality on the second level.

20. In Wong Man Kwan, I was also referring to mutuality on the second level when I held that its absence was not fatal to a case built on contract of service arising from each specific engagement (see Paragraph 10 my judgment).

21. Cheng Yuen v The Royal Hong Kong Golf Club [1997] HKLRD 1132 is a case of tripartite arrangement. The parties involved were the caddie, the individual golfer and the club. The essence of the majority decision in the Privy Council was that as between the caddie and the club, there was no employment relationship as the caddie was only given a licence by the club to offer his service as a caddie on the club premises. The majority held that the actual engagement of the service of the caddie was by each individual golfer. In other words, even if there were any employment relationship, it would be an employment by the individual golfer, not the club. This is apparent from the following dictum in the judgment of Lord Slynn,

"Mr Cheng was not an employee of the Club whether on a continuing basis or by separate contracts, like a casual worker, each time he actually worked." (p.1138E)

"There is no reason why there should not be a separate contract of employment each time Mr Cheng agreed to act as caddie for a particular golfer and whether that was a contract of service of for the provision of services it is not necessary to decide." (p.1139A)

22. Properly understood, Cheng Yuen is not an authority for the proposition that the absence of mutuality on the second level necessarily defeats a claim based on a contract of service arising from a specific engagement. To the contrary, Lord Slynn's reference, in the first dicta cited above, to the position of a casual worker when he was working as example of employee employed under separate contracts suggested otherwise.

23. In Wong Man Kwan, I have already referred to the judgment of Lord Hoffmann in Cheng Yuen. For reasons given in my previous judgment and in the present case, I respectfully agree with His Lordship's analysis.

24. In Hong Kong, the status of a casual labourer who was engaged on a day-to-day basis were considered in many cases in the context of employee's compensation. As far as I am aware, it had never been suggested in those cases that the absence of mutuality on the second level is fatal to their claim as employee. An early example is the case of Wong Man-Luen v Hong Kong Wah Tung Stevedore Co. [1971] HKLR 390.

25. More recently, the Privy Council adverted to the position of casual worker as employee in the context of a claim by a worker for compensation in respect of an accident at work occurred at a construction site in Lee Ting Sang v Chung Chi-keung [1990] 2 AC 374 at p.388D to E.

26. The definition for "employee" under Section 2 of the Employees' Compensation Ordinance Cap.282 refers to person who has entered into or works under a contract of service. Proviso (b) of the section clearly envisages that casual workers, other than those specifically excepted, come within that definition (see Lee Ting Sang v Chung Chi-keung [1990] 2 AC 374 at p.381E to F). The underlying assumption is that the absence of mutuality on the second level would not rule out the existence of a contract of service.

27. In Montgomery v Johnson Underwood Ltd [2001] IRLR 269, Buckley J criticized the tribunal in following McMeechan. His Lordship took the view that mutuality of obligation was still an irreducible minimum for a contract of service even in the context of a specific engagement. It is, according to Buckley J, not a mere factor to be considered. From the following dictum, it is however quite plain to me that the learned judge was referring to mutuality on the first level (i.e. work in exchange for remuneration) instead of mutuality on the second level (i.e. promise to engage in the future and promise to work in the future).

"It could be that [the Tribunal] considered that mutuality of obligation was satisfied by Mrs Montgomery's acceptance of the offer to work for O&K against JU's promise to pay for work done, but they do not say so."

"For my part, I would accept that an offer of work by an agency, even at another's workplace, accepted by the individual for remuneration to be paid by the agency, could satisfy the requirement of mutual obligation."

28. My reading of Waite LJ's judgment in McMeechan is that His Lordship's observations cited in Paragraph 18 above did not exclude the requirement of mutuality on the first level for a specific engagement to give rise to a contract of service.

29. Montgomery v Johnson Underwood Ltd is a case of employment agency involving tripartite arrangement amongst the worker, the agency and the end-user. The difficulty in that sort of situation is "the differential distribution between the agency and the end-user of rights and obligations that would normally all be vested in the employer", viz. the obligation to remunerate and the right to control are located in different parties (per Munby J in Brook Street Bureau v Dacas [2004] EWCA Civ 217 at Para. 83, see also Paras. 9 to 11 and 50 in the judgment of Mummery LJ). Since we are not dealing with such a situation, I need not dwell further on the topic. However, it is noteworthy that mutuality of obligation was held to be satisfied in these cases by reference to mutuality on the first level (see Brook Street Bureau v Dacas Paras.37 and 53).

30. As pointed out by Sedley LJ in Brook Street Bureau v Dacas, the legal status of a worker has ramifications over and above the rights such a worker, see Paras. 72 to 73 of that judgment. If the negligence of one of these claimants in the present case caused damages to a third party, it is almost unimaginable that such third party would accept that the Defendant would not be vicariously liable by claiming that the claimant was an independent contractor.

31. Hence, I do not think mutuality of obligations on Professor Freedland's second level is vital for an affirmative answer to questions (1) and (2) in Paragraph 5 above. Subject to statutory modification, it is however important for the determination of question (3) if one needs to resort to the concept of global contract.

32. Counsel for the defendants contended that even though mutuality on the second level is not essential for establishing a contract of service arising from each specific engagement, he submitted it is a relevant factor. He recognized that Lord Hoffmann's dicta in Cheng Yuen suggested otherwise. Waite LJ in McMeechan and Elias J in Stephenson v Delphi Diesel Systems [2003] ICR 471 also thought this to be irrelevant. Ackner LJ held the same view in O' Kelly v Trusthouse Forte. Fox LJ and Sir John Donaldson MR did not expressly address the point. On the other hand, the tribunal in that case thought this was relevant although it was not clear whether this was confined to its decision that there was no overall contract.

33. The weight of the authorities is against the submission of Mr Chan. As a matter of principle, given that we are confined to the question whether the casual worker in the course of working under each specific engagement is under a contract of service or contract for service, it is difficult to see the relevance of the presence or absence of mutuality of obligation regarding the future when this specific engagement has been completed. As Waite LJ put it, there is nothing on which this element could operate on if one focuses on each specific engagement. I therefore reject Mr Chan's contention.

34. On the question of continuing contract of service, as explained in Wong Man Kwan, the position is primarily governed by Schedule 1 in the Employment Ordinance. Although the provisions in the Schedule, to some extent, modelled on the English legislation, they are not identical. As far as Hong Kong is concerned, only when a claimant cannot satisfy the statutory requirement of working 18 hours each week for a continuing period of 4 weeks as per Paragraphs 2 and 3(1) of the Schedule, he will need to resort to the concept of global contract under Paragraph 3(2)(b) of the Schedule (assuming he could not rely on the other limbs under Paragraphs 3(2) or 4). In that event, mutuality on the second level is crucial. In other words, for those who could satisfy the requirement of Schedule 1 without resorting to the concept of global contract, mutuality on the second level is not essential.

35. Further, for worker who has been in continuous employment over 24 months (see Section 31B), the statutory concept of lay-off under Section 31E(1) could be relied upon. Section 31E (2) provides that the continuity of a contract of employment would not be broken by any lay-off as a result of which no severance payment has been made.

36. It should be noted that the mere fact that a worker is working under a continuous contract of employment only satisfies one of the requirements for some statutory rights under the Employment Ordinance. The Claimants in the present case claimed statutory holiday pays, annual leave pay, wages in lieu of notice, severance payment or alternatively long service payment.

37. For reasons I gave in Wong Man Kwan, there is no valid claim for wages in lieu of notice if there is no global contract.

38. As regards severance payment, there has to be at least 24 months' continuous employment before the relevant date. In addition, there has to be either dismissal by reason of redundancy or lay-off (Section 31B). Dismissal bears a special meaning under Section 31D. In the context of casual worker, a relevant question is whether he could be regarded as being engaged under a fixed term contract (Section 31D(1)(b)). As mentioned above, lay-off can also be relied upon.

39. As regards long service payment, there has to be at least 5 years' continuous employment and other criteria under Section 31R has to be satisfied.

40. As regards holiday pay, Section 40 requires 3 months' continuous employment prior to the relevant holiday.

41. As regards annual leave, Section 41AA requires at least 12 months' continuous employment.

42. Hence, under the scheme of the ordinance, even if a worker is deemed to be in continuous employment by reason of his working for more than 18 hours for 4 consecutive weeks for the same employer, he would not be qualified for these rights unless he has continued to work in that manner for a fairly long period.

Appearances of Unrepresented Claimants:

1st day of Hearing (25.5.2004)

2nd day of Hearing (27.5.2004)

3rd day of Hearing (28.5.2004)

HCLA 71/2001 - 7th Claimant (present)