CHOW JIH YIM WILSON v. GLOBAL REGENCY ELECTRONICS LTD

HCLA 21/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL No. 21 of 2005

(ON APPEAL FROM LABOUR TRIBUNAL CLAIM NO. 6850/2004)

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J U D G M E N T

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1. The Defendant employer of the Claimant terminated his employment on 31st March 2003. Under his employment the Claimant was entitled to a Performance Bonus. Claim was brought by the Claimant in the Labour Tribunal to seek his Performance Bonus. The Labour Tribunal dismissed the claim and appeal is brought by the Claimant to this Court with the leave of Lam J.

2. In the Labour Tribunal, the Defendant did not contest that the Claimant was entitled under his employment contract to a Performance Bonus. Although there was no written contract, the contractual entitlement can hardly be disputed since the Claimant was paid 2 separate Performance Bonus in the past, the first in relation to the period from August to December 2000 and the second in relation to the period from January to December 2001 and there was the clear oral evidence that this was the express contractual arrangement. These Performance Bonus were paid by Global Regency International Limited (“GRI”), a predecessor employer of Claimant.

3. Due to the reorganization of GRI, his employment was transferred from January 2002 to the associate company of GRI, Global Regency Electronics (HK) Pty Limited (“GRP”) on the same terms and conditions as those with GRI.  Subsequently there was another reorganization, namely of GRP and the Claimant’s employment was transferred in May 2002 to the Defendant, Global Regency Electronics Limited (“GREL”) and again on the same terms and conditions as before.

4. The Performance Bonus enjoyed by the Claimant was generous as he was the senior executive and he was effectively running these companies during the time of his employment from August 2000 to the time when he ceased employment at the end of March 2003. The Performance Bonus that the Claimant was entitled to was agreed at the Trial to be 2/3 of 50% of the net profits of the employer company (raised in November 2001 from 2/3 of 30% of the net profits).  The dispute at the Trial and the dispute on this appeal is how that net profits is to be ascertained when the employment was terminated before the end of the accounting year of the company. This is the main issue before the Tribunal and in this Court. 

5. A secondary issue raised on appeal (if the Claimant’s contention on the first issue is rejected) is the extent the Tribunal failed to discharge its duty to properly investigate the claim and its impact on the correct assessment of the Claimant’s right.

REFERENCE DATE OF ASCERTAINMENT OF NET PROFITS

6. The main issue assumes critical importance because when the Claimant ceased employment at the end of March 2003, the Defendant Company enjoyed a large accrued profits of almost $2 Million which would thereby give to the Claimant a very substantial Performance Bonus. However by the end of the accounting year at end of June 2003 (only some 3 months later), the Company contended that there was a large loss suffered by the Company during the accounting year and that therefore no Performance Bonus was payable to the Claimant although at the Trial, the Defendant tendered some $29,644.00 as the amount payable as Performance Bonus by the Defendant to the Claimant.  That tender sum was rejected by the Claimant.

7. It is not in dispute that in respect of the past two payments of Performance Bonus, each Bonus was paid on the basis of the net profits ascertained by reference to the year-end profits and in both cases, the year-end being December (2000 and 2001). For an employee whose employment straddled the year-end, the above ascertainment of net profits obviously makes sense. But here the position is different, because the employment was terminated before the year-end (namely before the end of June 2003, which is the new accounting year-end adopted by the Defendant).  Should the net profits be ascertained for the period up to the termination of employment as contended by the Claimant or should it be ascertained (as contended by the Defendant) by reference to the year-end profits (for a period extending beyond the employment of the Claimant) and then pro-rated according to the months in the accounting year worked by the Claimant.         

8. There is no dispute between the parties before me that the situation arising in this case was not covered by the express term of the contract of employment which was merely to the effect that the Claimant be entitled to Performance Bonus equivalent to 2/3 of 50% of the Net Profits of the Company.  Nor is there any dispute before me that in respect of the termination of employment prior to accounting year-end, there is an implied term that the Claimant is entitled to Performance Bonus. The dispute is as to which of the two implied terms contended by the parties the Court should accept.

9. The virtue and merit of the implied term contended by the Claimant (net profits of company up to termination of employment, namely up to end of March 2003) is that it is simple, it is fair and it is certain.  It is simple and certain because there can be no dispute as to the date of termination of employment and the accrued profits as of that date (since this is something which should be known to the Claimant as the profits covered the period when he was in charge). It is fair because it fairly reflects the performance of the Claimant and of the Company during that period of time when the Claimant was employed and entitled to the Performance Bonus. This implied term is fair both to the Company and to the Claimant.  It is therefore both a reasonable and a necessary term (in the sense to give business efficacy).  It satisfies the usual accepted notions of an implied term.

10. The same cannot be said of the implied term contended by the Defendant (net profits of the company for the period up to accounting year-end and to be pro-rated according to the months worked during the accounting year).  This proposed implied term is complicated, open to dispute and is neither reasonable nor fair. It is unreasonable and wholly unfair because it seeks to impose the Bonus not by reference to the period when the Claimant was employed which would then fairly reflect the performance of the Claimant and of the Company during that period, but by reference to extra months (until year-end) when the Claimant was not employed and when the performance of the Company was not due to his employment. A very bad new management (after the departure of the Claimant) could radically wipe out all profits previously accrued, just as a new brilliant manager can radically increase the profits several fold. What is the logic or reason, in the above first case, to penalize the employee by taking away the accrued profits and thereby the accrued bonus.  Where is the reason or logic, in the above second case, of giving the employee a windfall of profits to which he has contributed nothing. Where is the fairness in that formulation to either the Claimant (in the first situation) or to the Company (in the second situation). It is therefore not only unfair but against the whole spirit of Performance Bonus which is employment related and not year-end related.  (Mr. Remedios’ point about equality to all employees to have their respective bonus all calculated to year-end ignores the fact that Claimant when terminated before year-end stands in a different position from other employees who continued employment until year-end). It is further objectionable because it introduces a new concept of pro-rata for the months employed which again has no logic or reasonableness or fairness behind it. There is finally another serious objection to using the year-end as basis for ascertainment of profits, because this would be after the departure of the Claimant employee when the preparation of the accounts would be outside the control and knowledge of the Claimant employee. The risk of a disgruntled employer so massaging the accounts as to diminish the accrued profits must be considerable specially when there are related company dealings and accounts. It is therefore not only complicated but dangerous to introduce such a term into the contract.  In my view, the implied term advanced by the Defendant is neither reasonable nor necessary.  It is contrary to all the accepted notions of an implied term.

11. Unfortunately, the Tribunal rejected the claim firstly on the basis that the Claimant has failed to discharge the burden of proof to establish an implied term for Performance Bonus secondly on the basis that if there was to be an implied term, the term would be that proposed by the Defendant, namely with profits to be ascertained by reference to year-end.

12. If the Tribunal had proper regard to the evidence on the contractual agreement on Performance Bonus, the past history of the payment of such Bonus, the nature of a Performance Bonus with the consequent necessity to pay such a Bonus even when the employment was terminated before year-end and the acceptance of both parties that an implied term was reasonable and necessary, the Tribunal would have come to the proper legal analysis and reach the correct conclusion that it is necessary and reasonable to imply a term. The dismissal of the claim on the ground of Claimant failing to discharge the burden of proof was clearly wrong in law.

13. Further in holding that the implied term if any should be by reference to year-end profits, the Tribunal took into account a wholly irrelevant matter, namely the necessity for year-end (beyond termination date) to take into account recorded losses attributable to the Claimant’s performance (see paragraph 11 of Reasons for Judgment).  Net profits of a company at any particular date is a fact capable of being ascertained and generally is not capable of too much dispute.  But to introduce a concept of losses due to the poor performance of Claimant (presumably which will affect the net profits) and then to couple that with a date into the future beyond the termination date (whether the next accounting year-end or some other date to enable these losses to be ascertained) is to introduce a wholly new concept, not part of the contractual term and so uncertain as to create dispute between employer and employee and to give an excuse to the employer not to pay the contractual bonus.  I cannot accept the reasons or the reasoning in Paragraph 11 of the Reasons for Judgment.  I hold that the Tribunal erred in law in finding that the implied term should be by reference to the year-end and not by reference to termination of contract.  In fact there was, with respect to the Tribunal, hardly any proper consideration given to the implied term advanced by the Claimant, neither in terms of its reasonableness nor its necessity nor it simplicity and certainty.

14. I therefore find in favour of the Appellant on the first issue and I hold that the Performance Bonus that the Claimant is entitled to is the net profits of the Company ascertained up to the date of the termination of the employment, namely 31^st March 2003. At the Trial, the figure calculated on that basis was ascertained at $578,065 (see bottom of page 151 of Bundle and paragraph 2 of the Reasons for Judgment). Judgment is therefore entered in favour of the Claimant against the Defendant in the sum of $578,065 together with interest thereon at 2% above Prime from 1st of April 2003 to Judgment date.

LACK OF INVESTIGATION BY THE TRIBUNAL

15. In the light of the above decision and Judgment entered, it is strictly speaking, not necessary for me to go into Issue 2.  But in the event that this matter may go further and that I am found to be wrong on Issue 1, I will like to say that had it been necessary for me to consider Issue 2, I would have found that the Tribunal has failed to discharge its duties in investigating properly the claim of the Claimant.

16. On the basis that the proper implied term is that contended before me by the Defendant, namely that the net profits to be ascertained should be by reference to year-end profits with Performance Bonus payable to be further pro-rated by reference to months worked, the obligation on the Tribunal is to first ascertain (having regard to the qualification of the accounts) what is the proper and true profits at the year-end. The Tribunal would have to make special inquiries as to the suspicious items of large expenses in June 2003 (bearing in mind some of them were related-company transactions see page 149) and would require not only a breakdown in detail of these items but documents in support and to take a vigorous view as to the validity of the detailed breakdown sums under each item. The Tribunal in its inquisitorial role would need to see not only the documents behind these breakdowns but also the persons who were involved in asserting them, including if necessary the auditors. The Tribunal would further have to consider how to apply the pro-rata formula (if there is found to be an accrued profits for the year-end).

17. In my view, even a cursory look down the June 2003 column of page 151 of Bundle would cause alarm bells to ring because during that one single month, something like $3.5 million liability was imposed on the company. Many expense items simply jump out of the page crying for scrutiny, such as $1,619,728.47 (for Expenses with no similar item in previous months), $312,216.00 (for Claim expenses with no similar item in previous months), $388,494.47 (for Marketing & Promotion with no similar item in previous months), $946,753.33 (for Salaries-Bonus with no similar item in previous months). 

18. Therefore if it is necessary to decide Issue 2, I would have ordered that the Tribunal (differently constituted) must assume its full statutory duty to fully investigate the claim of the Claimant and award such sum to the Claimant as he is entitled in law.

CONCLUSION

19. The conclusion I have come to is that the Claimant succeeds on Issue 1 and Issue 2 and that Judgment must be entered in favour of the Claimant in the sum of $578,065 together with interest thereon at 2% above Prime from 1st of April 2003 to today.  The Defendant Respondent must also pay the Appellant Claimant the costs of the Appeal, to be taxed if not agreed.