CHAN KAN IP PHILIP v. KONE ELEVATORS INTERNATIONAL (CHINA) LTD.

HCA 19518/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 19518 OF 1999

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J U D G M E N T

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1. This is a claim for damages to compensate the loss of earnings and other emoluments suffered by the plaintiff arising out of the defendant's wrongful termination of his contract of employment.

Background

2. The defendant is one of a number of inter-related companies in a group of companies which I shall refer to as the KONE Group. It was founded in Finland 1910 and now carries on its business of manufacturing and installing escalators and elevators worldwide, including in Hong Kong and on the Mainland of China. The plaintiff came to be employed by a member of the group called Kone Elevator (HK) Limited (KEL) by letter of employment dated 9 September 1991 under the title Field Operation Manager. That employment persisted until 1 January 1998 when, by agreement made between KEL, the plaintiff and the newly incorporated defendant, the plaintiff was transferred to the defendant and thereby became an employee of the defendant. I reproduce below the pertinent clauses of the agreement, in which KEL is referred to as the 1st company, the defendant as the 2nd company and the plaintiff as the employee:

"WHEREAS

1. By an Employment Letter dated the 9 day of September, 1991 made between the 1st Company and the employee, the Company employed the Employee upon and subject to the terms and conditions therein set out.

2. The 1st and 2nd Company are companies within KONE Group of Companies.

3. Due to administrative reasons, the 1st Company at the request of the 2nd Company shall transfer the Employee to the 2nd Company upon the subject terms and conditions set out hereunder.

NOW THIS AGREEMENT WITHNESSETH AND IT IS HEREBY AGREED AND DECLARED as follows: -

1. The 1st Company shall transfer the Employee to the 2nd Company with effective from January 1, 1998 ("the Transfer Date"). Upon such transfer, all right benefits interests and liabilities of the Employee with the 1st Company accrued from 11 September 1991 (on which the Employee was confirmed to join the 1st Company) up to but exclusive of the Transfer Date will be transferred to the 2nd Company accordingly.

2. In consideration of such transfer, the 2nd Company will be solely liable for all such rights benefits interests and liabilities of the Employee with the 1st Company as mentioned in clause 1 above.

3. In satisfaction that the Employee's rights benefits interests and liabilities have been sufficiently protected under the above transfer arrangement, the Employee hereby waives all possible claims whatsoever against the 1st Company arising out from such transfer.

4. With effective from the Transfer Date, the Employee becomes the employee of the 2nd Company subject to the following terms and conditions.

a) Term of employment

The employment commences on the Transfer Date and continues thereafter subject to termination as provided below.

......

f) Termination of employment

The employment can be terminated by either party giving to the other not less than one month's written notice in advance or one month's salary in lieu. However, the 2nd Company shall always have the right to dismiss the Employee without compensation in the event that the Employee is found guilty of any dishonesty, gross default or misconduct by the 2nd Company.

......

o) Transfer to other companies

The 2nd Company may transfer the Employee to any companies within the KONE Group PROVIDED ALWAYS that all rights benefits interest and liabilities of the Employee with the 2nd Company accrued as at the actual date of such transfer be transferred to the new company accordingly and subject to the terms and conditions of the new agreement between the Employee and the new company."

3. In August 1998 another agreement was entered into. This time the parties were the defendant, the plaintiff and another member of the KONE Group, called Kone Elevators Co. Limited (KEC). The agreement was entitled Foreign Service Agreement (FSA) and the parties referred to as follows, namely: KEC as the Host Company, the defendant as the Home Company and the plaintiff as the Employee. The term "Employer" was defined as meaning either the Home Company or the Host Company.

4. The preamble I repeat verbatim:

"WHEREAS,

a) the Employee is currently employed by the Home Company.

b) The Home Company will assign the Employee to the Host Company for a period set forth hereinafter, during which the Employee will perform duties for the Host Company as well as for the Home Company.

c) The Home Company will continue the Employee's employment after the foreign service period has expired on the terms and conditions set forth hereinafter.

and likewise a clause headed The Assignment:

"Subject to the terms and conditions of this Agreement, the Employee shall, during the term of this Agreement (hereinafter referred to as the "Foreign Service"), serve as Quality & Training Manger, resident in PRC, or in such other position or location as the Employer and the Employee may agree. The Employee shall perform such services as may be assigned to her (sic) by the Employer from time to time and shall temporarily serve in other positions and locations as may be assigned by the Employer."

5. The term was fixed to run from 1 September 1998 to 31 August 2000.

6. There follows a clause setting out what was to be required of the plaintiff, in which reference is frequently made to the Employer. His salary, costs of relocating and other emoluments were then detailed, to be paid by KONE, though KONE is not separately defined. The Host Company was committed to pay for or reimburse the cost of housing and related expenditure. The Home Company was required to pay a one-off settling in grant. The Home Company's existing medical plan was to cover the plaintiff and his family; the Home Company was to contribute to his pension scheme. His salary was reviewable according to Home Company practice.

7. Clause 20 dealt with those events which would give rise to termination of the FSA, as follows:

"20. TERM AND TERMINATION

20.1 This Agreement shall terminate without notice at the end of the Foreign Service period.

20.2 This Agreement may be terminated by the Home Company with three (3) months' written notice upon the occurrence of one of the following events:

(i) failure to comply with the general obligations set forth in Article 4.1.-6. of this Agreement;

(ii) unsatisfactory performance of the Employee of his duties under this Agreement;

(iii) any other imputable act of the Employee justifying termination under the laws of the Host Country or the Home Country.

20.3 In the event the Employee has been medically unfit to work for a continuous period of two (2) months and she (sic) is expected to remain so for a further month, the Home Company may terminate this Foreign Service Agreement with one (1)month's notice to the Employee.

20.4 The Home Company is entitled to terminate this Agreement with six (6) month's written notice in the event the Employee's skills, knowledge and expertise are, in the opinion of the Employer, due to business and/or organizational needs required in the Home Company.

20.5 The Employee may terminate this Agreement with three (3) months' written notice to the Employer for grave reasons beyond his control.

20.6 This Agreement may be terminated without notice at the occurrence of one of the following events:

(i) any gross misconduct of this Agreement;

(ii) war, civil disorder or other similar actions taken in the Host Country (PRC) which in the opinion of the Home Company render the situation too dangerous for the Employee;

(iii) any other imputable act of the Employer or the Employee justifying immediate termination under the laws of the Host Country or the Home Country (Hong Kong).

20.7 In the events set forth in items (i) and (ii) of Article 20.6 set forth hereinabove, in the parties shall be entitled to terminate also the Home Company employment respectively."

Clause 21.3 stated: -

"21.3 Upon termination of this Agreement due to reasons other than

(i) breach of contract by the Employee; or

(ii) termination of the Agreement by the Employee for other than grave reasons beyond the control of the Employee,

the Host Company / the Home Company shall reimburse the Employee for reasonable relocation costs incurred by him in connection with such immediate repatriation."

Clause 24.1 stated: -

"This Agreement contains the entire agreement between the parties in relation to the subject matter hereof and this Agreement supersedes the existing dormant home employment agreement."

8. In terms of the FSA, the plaintiff relocated to Shanghai and began to undertake his duties there from 1 September 1998. By a memorandum headed, in the name of KEC, Job Description, dated and signed on 5 May 1999, the plaintiff's duties were specifically defined. It spelt out, inter alia, that he was the designated Service Quality and Training Manager, reporting to the Human Resources Director. That is a position held in KEC by Sara Chik Wai Chi (Miss Chik).

9. In or about May 1999, there was a falling out. The plaintiff was given notice of termination of his employment as a result of misconduct, the contract to expire on 31 August 1999. His salary to that date, annual leave, bonus and pension was calculated and a document on 'KONE Elevators' letterhead headed 'Statement of Final Account' was prepared and signed. Two cheques were handed to the plaintiff. He acknowledged receipt. I reproduce the document, as close as possible to the original:

Your pension benefit will be paid by means of cheque by the
insurance company after one month of your resignation month.

I, the payee, agree the captioned sum of HK$ 102,118.39 as
final payment on termination of my service. 49,254.39

I, the payee, understand agree that I have the responsibility to reimburse
KONE Elevators Co.Ltd. for such expenses not so entitled but incurred
by me, such as the medical insurance fee, upon the request
from KONE Elevators Co.Ltd

I acknowledge the receipt of cheque of the sum HK$49254.35.
and HK$324,232.55 for the annual leave plus bonus and pension (final scheme x service x factor) "

10. By letter of 3 September 1999, under the same letterhead Miss Chik wrote to the plaintiff as follows:

"KONE Elevators

September 03, 1999

Chan Kap Ip, Philip

Dear Philip,

You have received your final salary, allowance, pro-rata bonus and retirement benefits etc. in Hong Kong Office for your final payment up to August 31, 1999 which is your last working day with KONE as agreed.

There is an outstanding amount of RMB 41,255.42  41,545.02 being the traveling expenses claims to be reimbursed to you calculated as follows:

Please kindly sign and return this letter to me to signify your confirmation that the above mentioned amount is to be credited into you're savings account No. 22970002938*0 with 中國建設銀行上海市徐滙支行天朗橋路辦理處as the full and final payment.

11. The plaintiff signed and returned the document as shown on the reproduction.

12. Notwithstanding that that settlement of the final accounting had apparently been undertaken by agreement the plaintiff was in fact not satisfied; claiming wrongful termination of his contract with the defendant he filed a claim for losses suffered in the Labour Tribunal in November 1999. The adjudicating Presiding Officer held the claim was in excess of his jurisdiction and the plaintiff was left with pursuing his claim by a writ in the High Court. His writ was filed in December 1999.

The Proceedings

13. The plaintiff claims that under the FSA he was employed by the defendant for two years to expire on 31 August 2000; that without good reason or adequate notice his employment was terminated as from 31 August 1999; that the termination was wrongful. He claimed loss as follows:

"PARTICULARS OF LOSS; DAMAGES
			HK$
a.	Loss of earnings from 1-9-1999 to 31-3-2000 HK$52,864.00 x 12 months	=	$634,368.00
b.	Mobility Allowance HK$9,000.00 x 12 months	=	$108,000.00
c.	Double pay HK$52,864.00	=	$ 52,864.00
d.	Bonus & other benefit		to be assessed
e.	Fringe Benefit		to be assessed
f.	Undertaking of reimbursement of tuition fee (course of Doctor for Engineering)	=	$ 65,000.00
g.	Extra 1,000 private hours' fee per year for research work undertaken thereon 1,000 hours x HK$351.50	=	$351,500.00
			------------
	Total:		$1,211,732.00 "
			============

14. In its defence the defendant denies liability. Under the FSA the plaintiff was employed by KEC, answerable to Miss Chik, the Human Resource Director and employee of KEC. The plaintiff during the course of that employment was guilty of misconduct; specifically, a false claim to recover expenses incurred. His employment was terminated as a result; not by the defendant, but by his employer, KEC. If, which is denied, the plaintiff was employed by the defendant, the termination of the plaintiff's employment was not wrongful.

15. In his reply the plaintiff reiterated he was employed by the defendant. He denied misconduct and in particular submitting a false claim. He reiterated that he was wrongfully terminated. He claimed he was coerced into signing acceptance of the amounts paid to him in settlement of his salary, emoluments and pension.

The Issues

1) Was the defendant the plaintiff's employer? If so,

2) was the plaintiff's employment wrongfully terminated? If so,

3) has the quantum of loss been established?

16. To deal with these issues, I come next to consider the evidence adduced.

The Evidence - Findings of Fact - Resolution of the Issues

17. The plaintiff was called as was Miss Chik. Also for the defendant I heard from an employee of KEC and resident in China, a man called Bob Zang (Mr Zang). I also heard from one Raymond Chan Ping Keung (Mr Chan). Based in Hong Kong, he is the Regional Human Resources Director of KEL. There were also filed and served two witness statements by Lun Kei Wah (Mr Lun), Human Resources Manager of KEL, and William Wong Wing Lam (Mr Wong) a former Managing Director of the defendant. Mr Lun was prior to the trial called away and Mr Wong has since left the KONE Group. I was invited to take their evidence into account subject to weight.

Who Employed the Plaintiff?

18. The plaintiff said it was the defendant up to the FSA and thereafter in terms of the FSA it was a shared responsibility. He referred to the agreements of 1 January 1998 and the FSA, drawing a distinction between the two; in the former his transfer was unequivocal - see clauses 1 to 4. The FSA stated no such assignment. Whilst the preamble was equivocal, the agreement itself quite clearly recorded that the Employer made reference to KEC and the defendant.

19. Miss Chik stated that the plaintiff was answerable to her in his job description and she was employed only by KEC. She did accept that the FSA indicated his employment was dual rather than exclusive, then said rather confusingly that she regarded him as employed only by KEC. Mr Chan said from his perspective the plaintiff became an employee of KEC as from 1 September 1998. He said 'As of that date, he was not required nor to my knowledge requested to perform any duties for the defendant and did not in fact perform any duties for the defendant'. And Mr Wong said:

"Prior to the Plaintiff's transfer to Kone Elevators Co. Ltd ("KEC") in August 1998, the Plaintiff was employed for a time by the Defendant and reported directly to me. After his transfer to KEC, he no longer reported to me, and did not perform any duties for me."

20. My finding is that the plaintiff's employment with the defendant was not terminated by the FSA, in the manner that it was by the earlier agreement when he was assigned from KEL. It may well be that in practical terms he worked for KEC and was answerable to KEC's director Miss Chik. After all, it would not have been sensible to have it otherwise, given that he was based in Shanghai for the duration. It may well be that during that time he undertook no duty for the defendant. But the terms of the FSA cannot be gainsaid; it stated specifically that the term Employer, meaning of course the plaintiff's employer, referred either to the defendant or KEC. And this was not a device, for tax or other reasons. The agreement required the plaintiff to 'perform such services as may be assigned to him by the Employer from time to time and shall temporarily serve in other positions and locations as may be assigned by the Employer.' In plain words this vested control in KEC and/or the defendant. Further, I cannot and do not ignore that the defendant and KEC are part and parcel of the KONE Group with common objectives and policies. Some of the officers played a dual role; for instance, Mr Wong was both Managing Director of the defendant and a director of KEC. I have noted that all seem to use the same letterhead, which serves to project a common interest, a single entity.

21. I am satisfied the answer to the first question is 'Yes, the defendant was the plaintiff's employer.'

Was the Termination of the Plaintiff's Employment Wrongful?

22. It is the plaintiff's case that there was no misconduct on his part which could have justified the FSA being terminated ahead of its due date. Clause 20.2 (requiring 3 months' notice) did not apply because the termination was not carried out by the Home Company (the defendant). Clause 20.4 (requiring 6 months' notice) did not apply either because he was not required to return to his former duties. And Clause 20.6 did not apply because none of the stated grounds, and in particular 'gross misconduct of this agreement' had been established.

23. It is the defendant's case that there was gross misconduct, justifying dismissal without notice under 20.6(i). In fact, 3 months' notice was given, but this to assist the plaintiff in relocating his family rather than to comply with a contratual obligation.

24. The events leading up to the termination are, at least as to background, not disputed.

25. In April 1999 a quality assurance audit was scheduled to be conducted over a number of KEC's offices on the Mainland. One Kevin Tse (Mr Tse) of the Hong Kong Quality Assurance Agency was assigned to carry out the audit. The plaintiff and Mr Zang were assigned to accompany him. The trip was to last several days. Miss Chik approved a pre-excursion estimate of expenses of RMB $9,000 and Mr Zang, put in charge of the purse, was paid this in cash.

26. Following the trip and by virtue of following usual procedures a claim form was submitted to Miss Chik to recover a total of about RMB$11,000.

27. It is Miss Chik's account that she noticed there were three separate invoices from three separate restaurants for the one meal. She called in Mr Zang and sought an explanation. He said that he did not accompany the plaintiff and Mr Tse on all their excursions. This was one such occasion. The plaintiff simply gave him the invoices and told him to claim against them. He did as he was told, without question. She returned the claim and invoices to Mr Zang telling him to submit a proper claim. I refer now to Miss Chik's statement as to what happened next: -

"29. I then called the Plaintiff into my office and told him what Mr Zang had told me. He did not attempt to deny that he had instructed Mr Zang to claim for the expenses in the way admitted by Mr Zang. He attempted to justify it by saying that in order to get the HKQAA certification, it was necessary to entertain the auditor as much as possible. The Plaintiff also told me that because the unified tax invoices could not be obtained for every expenses incurred, he had to do something to make up for the sums that could not otherwise be claimed. He said that he was doing this for the benefit of the company.

30. I then told the Plaintiff that his explanation was not acceptable. I said to him that he had behaved dishonestly and unethically and that his misconduct was particularly serious and disgraceful because he was in a position of authority with respect to his local colleagues. By doing what he did, I told the Plaintiff that he was setting a bad example for his colleagues and subordinates; he was sending out the wrong message to the effect that it was acceptable to cheat in order to obtain favourable treatment in securing business or special concessions. As I told the Plaintiff, which he knew all along, such a practice was never part of the company's policy. Having heard what I said, the Plaintiff simply kept silent. At the end of this meeting, I told the Plaintiff that I had rejected Mr Zang's claim and instructed him to submit genuine claims for the audit trip. The Plaintiff then left my room.

31. After the meeting, Mr Zang re-submitted the expense claim without the false items and I approved it.

32. Immediately after the meeting with the Plaintiff, I reported the incident to the Managing Director of KEC, Mr Matti Hyytiainen. We decided that in light of his past poor performance and the particular incident of making false claims to the company, the Plaintiff's employment with KEC should be terminated."

28. Mr Zang's account confirmed as it related to him Miss Chik's account. He prepared a fresh claim deleting the offending invoices and Miss Chik then passed it.

29. The plaintiff's account was materially different. Taken to Miss Chik's evidence that she confronted him about the false claims he said, repeatedly, ' I don't remember.' But he denied any wrongdoing. He said that may of the individual claims were to recover expenditure incurred at various night clubs and karaoke bars which included not only meals but tips paid to hostesses. He said this was a necessary and usual feature of entertaining on the Mainland. Moreover though on occasion he looked for restaurants which did not incorporate these extras, he could find none. He said Mr Chik's concern was not directed at any falsification of invoices but at what she told him was the improper tactic of entertaining the auditor in that way. He said that the part he played in the audit excursion was an innocent one, undertaken in good faith and with KONE's best interests his sole motive. Certainly it did not warrant his being sacked, after eight years of service. The real reason for his departure was that he was the victim of office politics. A former colleague of Miss Chik's, a man called Hon, had been made redundant from another member company of the KONE Group. For the purpose of keeping him on Miss Chik fabricated the incriminating account she had put forward so that Hon could be employed in his place. And that is what happened.

30. Miss Chik in turn denied that her concern was the impropriety of the plaintiff's actions rather than the falsification, and his dishonesty. And she dismissed as untrue that her real motive was to assist Hon. Although he was hired to take the plaintiff's place this was not part of a nefarious plan; KEC needed a replacement and he fitted the bill.

31. Taken to the various letters that passed from employer to employee and acknowledged by the plaintiff as employee, the plaintiff was asked in cross-examination to explain why, if he found the termination to be wrongful, he made no protest and by signature acknowledged he was being paid his full entitlement. He responded that because of financial constraints he had no option. Mr Lun of KEL had told him what KONE had calculated was his entitlement. He was also told that if he did not sign to acknowledge his pension would be withheld in full. He said that he could not afford to wait; he needed the money having lost out in the market crash of 1997.

32. Mr Lun (in his witness statement) said otherwise:

"I did not at any time during the meeting (or at any other time) represent to the Plaintiff that if he declined to sign and acknowledge receipt of the cheques or the statement of final payment that the Defendant or KEC would decline to pay the Plaintiff the entire pension. In fact, the 2 cheques representing the payment of the pension and final payment for annual leave and bonus had already been prepared and were ready for collection by the Plaintiff at the meeting."

33. I am satisfied that the plaintiff was responsible for attempting to cheat the system in orchestrating false claims for expenses not properly payable. I do so by accepting as the truth Miss Chik's account, corroborated by Mr Zang, and rejecting the plaintiff's as being implausible, and his stated reasons for his sacking as fanciful.

34. In considering whether the conduct was gross misconduct warranting summary dismissal I pay heed that the plaintiff held a managerial post, and that the act complained of was one of material dishonesty and breach of trust. I find it was such that his employers were entitled to lose confidence in his integrity and no longer be required to retain his services. It justified termination without notice under clause 20.6 (i) of the FSA by one or other of his employers. My finding is fortified by his accepting, without demur or protest, the accuracy and completeness of the accounting which led to his being handed and receiving his final pay cheques.

35. The answer to the second question is 'No, the plaintiff's employment was not wrongfully terminated.'

The Quantum of Loss

36. I do not need to answer the third question now that I had found against the plaintiff on liability. But there are several matters to raise by way of footnote.

37. First, he would not have succeeded in recovering the tuition fees for his doctorate. There is a policy in KONE under which an employee may apply for the cost of a course of study. In this case there is no evidence that the plaintiff had applied for and had had approved reimbursement of his tuition fees. Even if this had happened the policy of KONE is clearly spelt out; reimbursement follows successful completion of the course; i.e graduation. The plaintiff had only completed the first year; he was still several years away from his degree. Secondly, it was an exercise in extraordinary optimism to seek reimbursement of study time notionally charged out at an hourly rate. There is not a thread of evidence to justify that claim, which was deemed to fail in any event. Thirdly, the plaintiff said in evidence that following his departure from KONE he was employed immediately, by a competitor group, for at least a year, at a salary package which was worth more than the one he had left. Bearing in mind his claim was for actual loss, in these circumstances he would have been hard pressed to justify claiming the wages and other emoluments he stated he had missed out on because of the defendant's breach. Conceivably he may have been entitled to wages in lieu of notice, but that was not pleaded, nor argued; in any event it is now academic.

The Outcome

38. The plaintiff's claim fails and is dismissed. Costs, nisi at first instance, are to the defendant, taxed if not agreed.