ZEE YEE KA JESSICA v. GREENWOOD (ASIA) LTD AND ANOTHER

cacv 63/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 63 of 2007

(on appeal from DCCJ NO. 6578 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from a judgment dated 4 September 2006 of Deputy District Judge K W Wong dismissing the plaintiff’s claims against the defendants and entering judgment on a counterclaim against the plaintiff in the sum of $48,000 in favour of the first defendant Greenwood (Asia) Ltd (“Greenwood”).  At the conclusion of the appeal judgment was reserved which we now give.

Background

3.  The second defendant, Luk Kin Yu Peter (“Mr Luk”) was a friend of the plaintiff’s father.  In 1996, the plaintiff worked as a summer intern in an insurance company in Hong Kong at which Mr Luk was the Chief Financial Officer.  Since then, the plaintiff had kept in touch with him and it is common ground that she regarded Mr Luk as her trusted uncle whom she respected while Mr Luk treated on the plaintiff as his niece.  After graduating from college in 2000, the plaintiff joined Goldman Sachs as a financial analyst.

4.  In the summer of 2002, Mr Luk was interested in setting up joint venture English kindergartens in Shanghai.  He apprised the plaintiff of his business plan sometime in August 2002.  The plaintiff was interested in the idea and conducted considerable research into the kindergarten business.  She travelled with Mr Luk to Shanghai in January 2003 for that purpose.  When regulatory difficulties presented themselves, the focus of the joint venture turned to centres for teaching English in China.

5.  Sometime prior to 18 February 2003, Mr Luk invited the plaintiff to be part of the joint venture business (hereinafter referred to as “LG”) to be formed between an investment vehicle in the Mainland owned by Mr Luk and a Mainland company.  Mr Luk was envisaging a 90% interest in that joint venture.  The judge found that the invitation to have been made in November 2002.  The plaintiff’s case was that it was made later in January/February 2003 but nothing turned on this.  On 13 February 2003, Mr Luk acquired Greenwood as his vehicle for the joint venture in which his intended investment would be $1 million.  The proposal was that plaintiff would be the CEO of LG for a three-year term and resident in Shanghai but this was conditional on her making an investment in Greenwood to show her commitment to the joint venture.  Her investment was subsequently agreed to be $100,000 in return for which she would be issued shares that would entitle her to 24.9% of Greenwood.  The main terms of the proposed employment such as salary and housing allowance were also discussed and agreed.  The plaintiff has described the proposal as the “carrot and stick” scheme.

6.  On 18 February 2003, the plaintiff sent Mr Luk an e-mail stating that she was considering submitting her resignation “before signing a contract with you”.  There was no e-mail response from Mr Luk who was in Australia at the time.  The plaintiff tendered her resignation the very same day.

7.  The plaintiff left Goldman Sachs on 4 April 2003.  Some time thereafter but before 15 April 2003, at Mr Luk’s request, she went with him on a second trip to Shanghai.  After her return, on 25 April 2003, the plaintiff sent Mr Luk version 1 of the business plan.  On 29 April 2003, she sent Mr Luk an e-mail setting out the contract terms that she had in mind which included a start date of 15 April, compensation of $32,000 a month with a housing allowance of $6,000.

8.  Several days later, on 3 May 2003, Mr Luk sent her a draft shareholders’ agreement for her review.  This was followed by a second e-mail the same day in the following terms:

“	I forgot to mention that I have made the agreement to start from 1 June 2003.  For the period from 4/15 to 26/1, I would just give you $48,000 in cash, tax free.”

9.  Section (E) of the draft provided as follows:

“	JA’S SERVICES
	In return for purchasing [Greenwood's] shares at par, [the plaintiff] agrees to provide the following services to [Greenwood] and LG:
	(1)	For a three year period starting from the 1st of June 2003, [the plaintiff] will be CEO of LG, resident in Shanghai responsible for its day-to-day business.
	….”

The other terms included, inter alia, a salary of HK$32,000 a month, a housing allowance of RMB 6000 in Shanghai.

10.  The parties met on 5 May 2003 to discuss the draft.  At that meeting, it was agreed that her investment of $100,000 would be paid by two equal instalments so that her initial investment would be reduced to $50,000.  The plaintiff considered that the employment terms were mainly fine and suggested to Mr Luk (who was receptive to the suggestion) that the draft agreement be split into two drafts, dealing respectively with the shareholders agreement and the employment agreement.

11.  The plaintiff was given a cheque dated 20 May 2003 for $48,000 drawn on Greenwood’s account and signed by Mr Luk on Greenwood’s behalf.  Meanwhile, on 10 May 2003, Mr Luk sent the plaintiff a summary of accounts for her review in which that payment was described as “quasi-slary (sic) (4/15-5/31)”.  Under the column showing payments to the plaintiff, there was a debit entry showing her initial investment of $50,000.  This drew a response from the plaintiff on the 13 May 2003 when she sent Mr Luk a seven-month schedule to the effect that she would write a Mr Luk a cheque for that amount when “we elect shares for clarity sake”.

12.  The draft shareholders’ agreement went through several re-drafts in the course of the month of May.  Then, with the lifting of the two-week quarantine policy due to SARS, another trip to Shanghai was in the offing.  The plaintiff made it known towards the end of May that she would prefer to get the shareholders’ agreement and service contract done before making the trip.  The plaintiff sent Mr Luk a further revised draft on2 June. Mr Luk considered that the proposed amendments needed to be thrashed out at a meeting.  As he was engaged that weekend and would be preoccupied with moving house the rest of the following week, he suggested a meeting with the plaintiff the weekend after (i.e. 7 June) which would give the plaintiff time to make her visit to Shanghai and to come up with her final business plan.  The plaintiff reiterated her preference to finalise matters before her Shanghai trip.  Then came the e-mail dated 8 June 2003 from Mr Luk which the judge found terminated the joint venture between the plaintiff and Mr Luk.

The proceedings below

13.  The plaintiff’s case below was that there was an oral agreement between the plaintiff and Mr Luk whereby Mr Luk agreed to employ the plaintiff as the CEO in the joint venture for a term of two and half years commencing on 15 April 2003 at a monthly salary of $32,000, a housing allowance in Shanghai of RMB 6000 and reasonable medical and insurance coverage.  It was said that the agreement was terminated prematurely on 28 July 2003.  The plaintiff claimed, inter alia, arrears of salary from 1 June to 28 July, salary in lieu of notice and $256,000 representing the loss of income between August 2003 and March 2004 during which period the plaintiff was unemployed or such amount as might be found due pursuant to section 8A of the Employment Ordinance, Cap. 57 (“the Ordinance”).

14.  The defence was based on the nonfulfilment of a condition precedent, namely, the acquisition of Greenwood shares by the plaintiff and as that event (being a condition precedent) did not happen, she was not entitled to anything.  As noted above, the judge agreed with the defence and dismissed the plaintiff’s claim, holding that there was no employment relationship between the plaintiff and the defendants or either of them.

15.  As to the counterclaim by Greenwood and Mr Luk for repayment of the $48,000 paid to the plaintiff, it was said that the payment was made on the basis that it was an “advance” of salary to which the plaintiff would be entitled upon the parties entering into the shareholders’ agreement and the service agreement.  Because that never happened, the defendants sought the return of that sum.  The judge acceded to that submission and made an order in favour of Greenwood on the counterclaim in the sum of $48,000.

This appeal

16.  In essence, the plaintiff’s case on appeal was that the condition precedent did not preclude an employment relationship from arising, pending the finalisation and execution of the shareholders’ agreement and the service agreement.  In arguing this appeal, commendably, Mr Leo (who appeared for the plaintiff) took a realistic view of his prospects and the difficulties posed by section 5 of the Ordinance where, absent a contract evidenced in writing signed by each of the parties thereto, a contract of continuous employment would be deemed to be a contract for one month renewable from month to month.  Mr Leo based his case on there having been an employment relationship between the plaintiff and the defendants pending the conclusion and execution of the shareholders’ agreement and the service agreement which did not, in the event, materialise.  This contract was said to have commenced on 15 April and terminated on 8 June 2003.  As the plaintiff had been paid for the period up to and including 31 May 2003, Mr Leo limited the relief sought to arrears of salary up to and including 8 June 2003, one month’s notice in lieu and the setting aside of the judge’s order on the counterclaim.

17.  It is accepted that as the terms of the shareholders’ agreement could not be agreed, the plaintiff never acquired any shares in Greenwood.  Her contemplated engagement as CEO of LG therefore never materialised.  The question before this court is whether during the period from 15 April 2003 until 8 June 2003 there was an employment relationship between the plaintiff and Mr Luk and/or Greenwood.

18.  It is clear from § 7above that in April the plaintiff travelled to Shanghai with Mr Luk and thereafter worked on the joint venture by preparing a business plan and the like.  The plaintiff was pressing Mr Luk for the employment contract which she wanted signed as soon as possible.  The e-mail from Mr Luk dated 3 May 2003 set out in § 8above has to be seen against that backdrop.  Mr Luk’s expectation was that they would be in a position to conclude the drafts by 1 June 2003.  For what was envisaged would be a short period, Mr Luk was prepared to pay the plaintiff an amount calculated by reference to the monthly salary agreed pending the finalisation and execution of the shareholders’ agreement and the service agreement which both parties were then negotiating in earnest.  As the plaintiff’s trusted uncle, that he should ‘see her right’ in the circumstances can hardly be said to be surprising.  Throughout this period the plaintiff continued to work on the joint venture.  Mr Luk duly made the promised payment of $48,000 with a cheque drawn on Greenwood’s account on or about 20 May 2003.  Meanwhile the drafts went back and forth between the plaintiff and Mr Luk.  Upon receiving further re-drafts on 2 June 2003, Mr Luk scheduled a meeting with a view to resolving the outstanding issues.  It was after a discussion with the plaintiff on 7 June 2003 that he came to the conclusion that it was time “to call it quits”, thereby terminating the relationship.

19.  It cannot be gainsaid but that after she left her previous employment in early April, the plaintiff worked on the joint venture and, in general, did as she was told by Mr Luk.  She is content to accept 15 April as the start date although she thought she had commenced working a few days before.  The judge took the view that the payment was by way of an “advance salary”.  That analysis does not sit well with the facts since such an advance must presuppose that there would be monies due to the plaintiff subsequent to the advance.  But, in the present case, there was no certainty that the service contract would be signed since that was contingent on the signing of the shareholders’ agreement.  Moreover, the payment was clearly referable to the period prior to the commencement of the contemplated service contract as CEO of LG and was in return for something she was then providing to Mr Luk i.e. services relating to the joint venture.  I do not therefore consider that the payment could be regarded as a gift to the plaintiff.

20.  For my part, I consider that the particular circumstances reveal an employment relationship between the plaintiff and Mr Luk, albeit on a temporary basis, as from 15 April 2003 until it was terminated by Mr Luk on 8 June 2003.  The payment of $48,000 was for the period up to and including 31 May 2003.

21.  Mr Sadhwani drew the court’s attention to § 45 of the judgment which referred to the plaintiff’s unwillingness to make the trip to Shanghai in June until the agreements have been signed.  It was said that if she truly were an employee, she could not have refused the request to go to Shanghai.  In the context, having regard to the furious pace at which the drafts were being shunted back and forth between the parties during this period and their expectation that negotiations would be concluded by 1 June 2006 or shortly thereafter, the plaintiff’s ‘preference’ not to undertake the Shanghai trip until after the agreements were signed and sealed is not sufficient to preclude the existence of a temporary employment relationship.

Conclusion

22.  I would allow the appeal and set aside the orders below.  Against to second defendant, Mr Luk, the plaintiff is entitled to judgment in terms of a pro rata payment for the first 8 days of June 2003 based on $32,000 per month, say $8,000, and a month’s pay in lieu of notice.

23.  I would also order that the plaintiff be entitled to the costs of this appeal.  As to the costs below, although the order on the counterclaim should never have been made, it is a fact that the plaintiff’s case was run very differently below.  In those circumstances, I would propose that there would be no order as to costs below.

Hon Stone J:

24.  I agree.

Hon Rogers VP:

25.  Accordingly, there will therefore be orders in terms of paragraphs 22 and 23 above.