MANG JOHN CHUNG YUEN v. SUMMIT MOTORS (CHINA) LTD.

HCA 227/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 227 OF 1999

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J U D G M E N T

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INTRODUCTION

1. This is a claim arising from the plaintiff's former employment with the defendant. The plaintiff's employment as the defendant's director of business development is undisputed. Nor is it disputed that the plaintiff was employed from 1 July 1994 to 20 April 1998 (a period of about 3 years 9 months). The plaintiff was initially employed by a Astra International (HK) Limited ("Astra") until May 1995 when he became employed by the defendant. Astra and the defendant are closely related and, for the purpose of this action, it is undisputed that the plaintiff is treated as having been employed by the defendant throughout.

2. It is further undisputed that from 1994 to 1998, the plaintiff has received the following payments for his employment:-

Period	Amount Paid
1994	679,500
1995	1,047,500
1996	1,170,000
1997	1,170,000
1998	65,000
Total	4,132,000

3. The plaintiff contends that he was entitled to a payment of $1.5 million per year for the employment (pro rata for the years 1994 (1 July 1994 to 31 March 1995) and 1998 (1 April 1998 to 20 April 1998)). Thus, his entitlement for this period should be:-

Period	Amount Paid
1994	1,125,000
1995	1,500,000
1996	1,500,000
1997	1,500,000
1998	83,333
Total	5,708,333

The defendant therefore owes the plaintiff $1,576,333 ($5,708,333 - 4,132,000).

4. The defendant contends, in short, that the plaintiff was not entitled to such payment because:-

(a) the employment contract did not provide for such alleged entitlement: see para. 5, defendant's final submission;

(b) in any event, the plaintiff was not entitled to part(s) of the payment under the employment contract by reason of his non-performance of part(s) thereof.

5. Further, the defendant alleges that the plaintiff has received advanced payment from it. The amount received was $188,500 per annum (or $15,708.33 per month) payable by 12 monthly instalments and was refundable in due course or upon termination of his employment: para. 16, Amended Defence and Counterclaim. The plaintiff received altogether $434,597 from 1 January 1996 to 20 April 1998. The defendant counterclaims for that sum.

6. By way of background, the defendant was established in Hong Kong in 1995. According to its "Corporate Profile", it was owned by 3 international shareholders respectively from Indonesia, Japan and Canada. Its business was in essence (among other things) to "develop and operate a customer and service-oriented distribution network throughout China".

7. The plaintiff testified at trial and called a Mr Law Ko Ming to be his witness. Mr Law used to work as the defendant's general manager, service operation and now works for the Electrical and Mechanical Department. The defendant's witnesses were Mr Christian Tjia, its former managing director and Mr Muliadi Surya Halim, its present managing director. Mr Halim came from Indonesia to join the defendant at the beginning of May 1996 (after the plaintiff's transfer to the defendant).

8. Further, a bundle of documents was used at the trial and the parties agreed that the documents therein could be considered by the court without the formal production of the original documents.

THE PLAINTIFF'S CLAIM

9. This will be dealt with under the sub-headings below.

(1) Relevant Contractual Documents

10. 3 documents are relevant: (a) a letter headed "Confidential Memorandum" dated 10 May 1994 ("the May 94 document"), (b) a letter dated 1 July 1994 ("the July 94 document") and (c) a letter dated 1 May 1995 ("the May 95 document").

11. The relevant parts of the May 94 document are as follows:-

"SALARY AND BENEFITS

Base Salary	HK$62,000 x 13 mths	$806,000
Guaranteed Bonus:	HK$100,000	100,000
Completion Bonus:	HK$80,000/outlet	240,000
Total		1,146,000

It is agreed that part of the Director's remuneration will come in the form of subsidized shares in the company, either in the form of share options, direct share purchase and/or percentage share of income of Successful Miles Limited or any other company established with the purpose to establish automotive sales and service facilities in the PRC.

The overall understanding is that such participation would allow the Director of Business Development to realize a total remuneration package of approximately HK$1.5 million per annum.

The completion bonus applies to every service centre established in the PRC. The minimum for the first 12 months will be one outlet. Realistically, we would like to complete 3 and sign a total of 4" (emphasis supplied).

12. The July 94 document was similarly worded:-

"Your salary will be HKD906,000 per annum, payable monthly in arrears. ...

In addition, you will be entitled to a completion bonus of HKD80,000 for each service facility you develop in China. Our target for the first year is to complete three facilities and to sign a total of four.

Part of your total remuneration will come in the form of subsidized shares in the company, either in the form of share options, direct share purchase and/or percentage share of income of Successful Miles Ltd. or any other company established with the purpose to establish automotive sales and service facilities in China.

It is expected that such participation would allow you to realize a total remuneration package of approximately HKD1.5 m/n per annum" (emphasis supplied).

13. The May 95 document stipulated that:-

"Your salary will be HK$981,500 per annum, payable monthly in arrears. ...

[the provision relating to completion bonus is exactly the same as in the July 94 document]

Part of your total remuneration will come in the form of subsidized shares in the company, either in the form of share options, direct share purchase and/or percentage share of income of Summit Motor (China) Ltd. or any other company established with the purpose to establish automotive sales and service facilities in China.

It is expected that such participation would allow you to realize a total remuneration package of approximately HK$1.5 million per annum" (emphasis supplied).

(2) The Plaintiff's Entitlement under the Employment Contract

14. The first issue regarding the plaintiff's contractual entitlement relates to the construction of the employment contract and can be summarized as follows. The plaintiff argues that his employment contract provides that his annual package is $1.5 million. The package was made up of 3 components: basic salary, guaranteed bonus and completion bonus.

15. On the other hand, the defendant contends the plaintiff's employment package was composed of:-

(1) a monthly basic salary;

(2) an additional guaranteed bonus payable at year end;

(3) a completion bonus of $80,000 for each service facility completed in the mainland;

(4) a performance bonus which was tied to:-

(a) the plaintiff's performance in his employment, and

(b) Astra's/the defendant's performance.

The performance bonus was to be paid in the form of subsidized shares. Both the completion bonus and the performance bonus were "conditional" payments in the sense that they were not payable unless the "conditions" set out in (3) and (4) above were fulfilled.

According to the plaintiff, he was entitled per annum to:-

(a) $906,000 ($981,500 since May 1995) by way of basic salary and guaranteed bonus;

(b) $80,000 completion bonus for each service facility. If he completed 3 service facilities, he would be paid $240,000;

(c) the remainder (approximately $354,000 ($278,500 since May 1995) if completion bonus was payable/paid for 3 service facilities) would be paid by way of subsidized shares to make up the sum of $1.5 million.

The plaintiff testified that part of his remuneration was payable by subsidized shares because the defendant was a newly incorporated company and the arrangement would help lessen the burden on its cash flow.

16. Although some time was spent on eliciting testimony about the pre-May 94 document negotiations, it is not suggested by either party that they added anything further to what has already been stated in the 3 aforesaid documents.

17. Having considered the said documents, I reject the defendant's contention that the remuneration package was partly made up of the alleged "performance bonus". More specifically:-

(1) "performance bonus" was not mentioned in any of the 3 documents;

(2) not only that, the subsidized shares were expressly described as "part of the Director's remuneration". Only 4 matters were expressly mentioned in relation to "remuneration"; viz., basic salary, guaranteed bonus, completion bonus and "the total remuneration package of approximately HK$1.5 million per annum";

(3) further to (2) above, the 3 documents also stated that "... such participation would allow [the plaintiff] to realize a total package of approximately HK$1.5 million per annum". The word "participation" clearly refers to participation by way of shareholding or share in profits. The reference to "approximately HK$1.5 million" was a reference to the parties' anticipation that there might be fluctuation(s) in the value of the shares or the amount of profits available for sharing;

(4) the 3 documents do not expressly state that the subsidized shares or the $1.5 million would be tied to the plaintiff's performance (save as regards the completion bonus) or the defendant's performance;

(5) the alleged "tie" between the performance bonus and the plaintiff's and defendant's performance would be too uncertain. With this in mind, if there had been such an agreed item in the remuneration package, the parties would have entered into further negotiations or agreement (whether oral or written) to clarify what was the exact relationship of this "tie".

18. Leaving aside whether the employment provided for the payment of "performance bonus", the defendant also disputed the plaintiff's case that he would be entitled to $1.5 million per year irrespective of the number of service facilities in the mainland which he managed to complete. As stated earlier, the defendant contended that part of the remuneration was "conditional" payment. The $1.5 million was thus only a "target" figure. The plaintiff's testimony is that even if he was unable to complete any service facility, he would still be entitled to $1.5 million but, save for basic salary and the guaranteed bonus, it would be by way of subsidized shares.

19. Ms Cheung for the defendant put to the plaintiff that this testimony does not make sense because in effect, the plaintiff's remuneration package would be fixed at $1.5 million per annum. The plaintiff explained that the difference lies in whether he could receive cash payment instead of getting subsidized shares instead. Hence, if he was able to complete a sufficient number of service facilities, he would get paid $1.5 million per year completely in cash. If he was unable to complete any service facility, he would be paid $906,000 ($981,500 since May 1995) in cash but the rest would only be by subsidized shares. He further said that those shares would be worth less than cash because whether the company's business is profitable was uncertain.

20. Having considered the above matters, I accept the true meaning of the terms of the plaintiff's employment contract relating to remuneration to be as contended for by the plaintiff.

21. Mr Halim also testified that part of the plaintiff's remuneration consisted of what he described as discretionary bonus. I conclude that this part of his testimony should not be accepted because:-

(a) this was not mentioned in either the defendant's pleadings or witness statements, including his own;

(b) he was referring to a practice which was known to the "head office" in Indonesian (that is, the office of the Indonesian partner);

(c) he does not know whether in fact such discretionary bonus was part of the office practice of the defendant, in particular, whether it formed part of the plaintiff's employment contract;

(d) he joined the defendant in May 1996, after the plaintiff was transferred to the defendant.

22. The parties also dispute whether the amount paid to the plaintiff every month since January 1996 consisted partly of advanced payment. This will be dealt with under the heading "The Defendant's Counterclaim".

(3) Has the Plaintiff Performed the Employment Contract?

23. The issue between the parties regarding this aspect is whether the plaintiff has completed any service facility in the mainland. It is common ground that the following 6 service facilities are relevant to this: Chengdu (成都), Qingdao (青島), Hangzhou (杭州), Nanning (南寧), Xiamen (厦門)and Zhanjiang (鎮江).

24. By the time when the parties made their closing submissions, the plaintiff accepts that only the service facilities at Chengdu, Qingdao and Hangzhou were completed. In relation to the other 3 facilities, the plaintiff claims that the completion bonus was payable by way of damages because he was deprived of an opportunity to complete them when his contract was terminated. The defendant's case is that the plaintiff has not completed any service facility.

25. It is common ground that the service facilities in the mainland were to provide what are called "3-s" services: sales, repair/maintenance services and spare parts. The plaintiff's case is that 3 facilities have been completed, that they have been turned over to the defendant's operation staff and were already generating revenue by the time when he was dismissed. In this connection, the plaintiff relied on the agenda dated 20 April 1998 prepared by the defendant for its annual general meeting. The relevant parts read:-

26. The plaintiff testified that the above statements in the defendant's own document supports his case that 3 facilities had been completed by the time of his dismissal. Further, the testimony of Mr Law was that the said 3 facilities were already in operation.

27. While none of the defendant's witnesses cast doubt on the accuracy of the statements in its corporation document, Mr Tjia explained in his testimony that "Start Date" therein did not mean date of operation or completion but merely that there were some kind of activities as at that date. Further, the defendant argued that, even if the facilities were in operation, they were "temporary" facilities whereas the plaintiff was required to complete "permanent" ones.

28. I accept the plaintiff's evidence and reject that of the defendant over this aspect of the claim. In particular, Mr Tjia's testimony that "Start Date" meant only that there were some kind of activities at the time stated is unbelievable. The "Start Date" for Chengdu Summit, for example, was April 1996. The "Comment" column stated inter alia that there was stable growth of the business. The "database", according to Mr Tjia, referred to the vehicles serviced by that service facility. According to the above statements in the defendant's agenda, it is clear that the service centre there was already operating. The date April 1996 could only be referring to the date when it started to operate. This conclusion is reinforced by the "Start Date" for Zhanjiang Summit which stated "Ready to Proceed". No date was put down because it is apparent from the "Comment" column that work on the service facility there was still going on.

29. I also reject the defendant's claim that the 3 service facilities which the plaintiff said were completed were "temporary" ones which did not constitute completed service facilities within the terms of the employment contract. Mr Law testified that substantial sums needed to be invested in developing the service facilities in the mainland. He further testified that when a service facility was described as "temporary", the time period involved would be 3 to 5 years and may even be 10 years. A permanent facility referred to one which was built on a piece of land owned by the defendant and may take a long time to accomplish. His testimony was unchallenged and I accept it to be truthful and reliable.

30. I find that when the plaintiff's employment contract refers to "complete" service facilities, the parties intended the word "complete" to include the completion of the so-called "temporary" service facilities. I also conclude that the 3 service facilities which were said to be "temporary" were completed according to the terms of the employment contract.

31. The defendant relied on the plaintiff's letter dated 19 January 1998 as evidence that the 3 facilities were not completed then. The relevant part said:-

"Will stay on to see to the completion of Chengdu, Nanning and Qingdao projects beyond April if required at no additional costs ... ".

I accept the plaintiff's explanation that the above referred to the expansion work at those facilities.

(4) The Plaintiff's Claim Relating to the 3 Incomplete Facilities

32. As stated above, the plaintiff accepted in his final submissions that the service facilities at Nanning, Xiamen and Zhanjiang were not yet completed when he left the defendant's employment. He based this part of his claim on damages arising from the defendant's breach of his employment contract by depriving him of an opportunity to complete those facilities.

33. In this connection, Chitty on Contracts (1999) 28th Ed., Vol. 1, para. 13-011 and 13-012 are relevant. Para. 13-011 stated:-

"The court may be willing to imply a term that the parties shall co-operate to ensure the performance of their bargain. Thus 'where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect ... ".

Para. 13-012 reads:-

"By the same token, 'if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the arrangement can become operative.' Also where a binding contract is subject to a condition precedent, a term may be implied that a party will not do an act which, if done, would prevent fulfilment of the condition ... ".

34. This implied term should however be subject to the following express term which permitted the employment contract to be terminated by notice or payment in lieu thereof. The May 94 document did not provide for the mode for its termination. Both the July 94 document and May 95 document provided that the plaintiff's employment could be terminated by either party giving the other 3 months' prior notice or payment in lieu thereof.

35. I am satisfied, applying the above principles, that a term should be implied in relation to the plaintiff's entitlement to the completion bonus, namely, that there was an implied term on the defendant's part not to wrongfully (namely, by breaching the employment contract) deprive the plaintiff an opportunity to complete the service facilities.

36. The letter dated 14 January 1998 notifying the plaintiff of the termination of his employment contract stated:-

"Due to the rapidly deteriorating financial condition of our parent company and continuing and significant earnings deficits and lower than expected performance at Summit's PRC operations, we have decided to retrench staff at the Hong Kong head office. Unfortunately, all members will be affected. ... " (emphasis supplied).

37. It is common ground that the plaintiff was paid in full up to April 1998 and he continued to work for the defendant until 20 April 1998. His employment was therefore terminated by either more than 3 months' notice, or payment in lieu thereof. I find that the defendant has not acted in breach of the employment contract by doing so since this is a permitted mode of termination. For this reason, I do not consider that the plaintiff should be entitled to rely on the implied term that the defendant should not deprive him from completing the service facilities in order to ground this part of his claim.

38. It has been suggested by the defendant's witnesses that the plaintiff's performance was unsatisfactory. Having come to the above finding that there was no breach of the employment contract regarding this aspect, it is unnecessary to deal with this. However, I shall do so for completeness. In short, I reject the testimony that the plaintiff's performance was unsatisfactory because:-

(a) these allegations were vague, unspecific and not supported by contemporaneous documents;

(b) these allegations were not relied upon in the said letter of 14 January 1998. Instead, the reasons for the dismissal given therein were entirely unrelated to the plaintiff's performance.

39. Finally, based on the testimony of the plaintiff's witnesses and the defendant's agenda, I find that the service facilities were not completed by April 1998 because: for Nanning, it was under construction, for Xiamen, additional investment was put on hold and for Zhanjiang, there was no funding.

THE DEFENDANT'S COUNTERCLAIM

40. As stated above, the defendant alleges that the plaintiff had received advanced payment which totalled $434,597 since January 1996. It is further alleged that this was repayable in due course or upon termination of the employment contract.

41. It is undisputed that as a fact the plaintiff was paid $97,500 per month since January 1996.

42. The testimony of Mr Tjia was that in about January 1996, at the plaintiff's request, the defendant started to advance $22,000 per month to the plaintiff. It was part of this agreement that such advanced payment would be set off against the plaintiff's potential entitlement for bonuses should he be entitled to them.

43. The defendant relied on a number of documents to support its counterclaim. First, the defendant's letter dated 29 May 1996 to the plaintiff which stated:-

"Your basic salary up to December 31, 1998 will remain HK$75,500 per month ... ".

Secondly, the plaintiff's letter dated 12 August 1996:-

"... My total amount [of remuneration] has already been reduced due to deferred payment, no raise for four and a half years ... ".

Thirdly, the defendant's letter dated 19 January 1998 which stated inter alai that the plaintiff's monthly basic salary was $75,500. Reliance was also placed on the defence filed with the Labour Tribunal.

44. Mr Tjia's testimony was disputed by the plaintiff. The plaintiff testified that his monthly basic salary was increased to $97,500 from $75,500 in January 1996. The plaintiff commented in his final submissions that the defendant failed to produce any document which evidences the alleged advanced payment. Further, he relied on the following documents in support. First, when the defendant wrote to the plaintiff on 29 May 1996 (see above), the plaintiff responded on 30 May 1996:-

"1. As you informed me my basic salary was revised to HK$97,500/month from January 1996, I have made certain investment decisions myself ... ".

The defendant replied to this as follow in its letter dated 12 June 1996:-

"We agree with your point number 1".

The defendant's provident fund statement for November 1997 also supports the plaintiff's case. When the defendant made its 5% contribution to the provident fund ($4,875 per month), this was calculated on the basis of a monthly salary of $97,500. The defendant's notification to the Inland Revenue Department dated 16 December 1998 after the plaintiff left the employment shows that his salary for 1 April 1998 to 20 April 1998 (wrongly stated to be 16 April) was $65,000 (that is, a monthly total of $97,500).

45. The plaintiff's letter dated 12 August 1996 (see above) was not put to him in cross-examination. After I pointed this out to Ms Cheung, the plaintiff was recalled to be cross-examined on it. The plaintiff explained that "no raise for four and a half years" therein referred to the annual remuneration of $1.5 million whereas "deferred payment" referred to the completion bonus.

46. Further to the above,

(a) the counterclaim was not put forward in the defence filed with the Labour Tribunal before this action was transferred to the High Court;

(b) the testimony of Mr Halim, the defendant's director, was that even in the defendant's books and accounts, the monthly payment of $97,500 was entered as the plaintiff's salary;

(c) the defendant did not raise the question of setting off the alleged advanced payment against payment to the plaintiff when he left the defendant's employment Moreover, all payment up to such time was calculated based on $97,500.

47. The defendant's witness explained that the counterclaim was not included in the Labour Tribunal defence because the defendant wanted to settle the matter with the plaintiff and only took the matter seriously after this action was transferred to the High Court. However, the counterclaim was not included even in the original Defence filed herein (dated 12 March 1999).

48. I do not accept Ms Cheung's implicit suggestion that the omission was caused by the defendant's former solicitors because, firstly, there is no evidence to support this. Further, it is the defendant's case that it was all along aware of the counterclaim but it did not raise it earlier because the defendant wanted to resolve the matter amicably before the claim was transferred to the High Court. In these circumstances, the suggestion of the mere negligence of the solicitors would not be adequate to explain the omission of the counterclaim in the original Defence.

49. In view of the above matters, I accept the plaintiff's evidence and reject the defendant's evidence relating to the counterclaim. I find that the defendant has failed to establish its counterclaim which is thus dismissed.

MISCELLANEOUS

50. Various miscellaneous allegations were made by the defendant's witnesses such as there was an alleged "collateral" agreement (para. 3, Amended Defence), or the reason for not paying the plaintiff by shares (as agreed in the employment contract) was because the plaintiff rejected the proposal to hold them by a nominated company. I also do not accept these allegations to be truthful or reliable.

CONCLUSION

51. Judgment is entered in the plaintiff's favour on liability. The counterclaim is dismissed.

52. There will also be judgment in the sum of $240,000 being the plaintiff's completion bonus for completing the 3 facilities at Chengdu, Qingdao and Hangzhou. Because I do not find that the defendant has wrongfully deprived the plaintiff of his opportunity to complete the other 3 facilities, no award will be made in relation thereto.

53. As for the remaining part of the plaintiff's claim in this action, under the employment contract, the plaintiff was only entitled to be paid by way of subsidized shares (as defined therein). I should hear the parties as to whether a fixed sum should be awarded (and if so, what it should be) or whether this part of the plaintiff should be assessed (and if so, the manner for conducting such assessment).

COSTS

54. There will be a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) that the defendant is to pay the plaintiff the costs of this action to be taxed if not agreed.