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滴水不漏：合约弥偿为最佳保障

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给《香港律师》的信

2021年九月

在「仲裁庭判令附带法庭程序费用的权力」（《香港律师》，2021年6月）一文中，作者认为，由于在附带法庭诉讼中申请临时措施所招致的费用（「附带法庭程序的费用」）不能构成「仲裁程序的费用」，仲裁庭因此不能判给申请方相关费用。

被忽视的法例

我等谨认为，《再谈在仲裁中追讨附带法庭程序的费用》（《香港律师》，2021年4月）阐述的分析尚未被充分理解，而《仲裁条例》第74(3)条亦再次被忽略。

简而言之，《仲裁条例》第74(3)条明确规定，「凡任何一方要求作出命令或指示(包括临时措施)，则仲裁庭亦可就该请求……命令一方支付费用」。（作者后加的强调）该条文看来已授权仲裁庭就《仲裁条例》第74(1)条衍生的一般仲裁程序费用以外的费用颁令。

仲裁程序的费用

尽管许多有关其他司法管辖区的文章都曾探讨「仲裁程序的费用」这概念，但这些讨论与《仲裁条例》第74(3)条的诠释并不相关。《仲裁条例》第74(3)条乃是一条由香港立法会议员创造的独特条文，外国法规并无任何同等的条文。

无论如何，前文作者所引用的文献亦指出了某些仲裁庭可以在仲裁中判给「附带法庭程序的费用」的情况。

1.《国际仲裁实务指引》(International Arbitration Practice Guideline)（2006年）中提及，若本地法院无法处理临时措施的费用，或法院已将其提交予仲裁庭决定，则临时措施的费用可能在仲裁中予以追讨。

2. 同样地，Micha Bühler（2018年）接受了只要没有重复判给费用且相关法律程序没有违反仲裁协议，「附带法庭程序的费用」也许可以作为仲裁费用予以追讨。

3. Jeffrey Waincymer教授（2012年）进一步指出，「如果这是胜方用以支持仲裁的附带行为，例如于法院取得临时措施的费用」，该「附带法庭程序的费用」则有可能被视为仲裁费用。

原则上，除非另有明确规定，否则仲裁庭判给「附带法庭程序的费用」的管辖权不应取决于某些事件而定。因此，依我们愚见，这些文献均倾向支持而不是否定仲裁庭确实对判给「附带法庭程序的费用」拥有管辖权的观点。较好的说法应是仲裁庭虽有判给讼费的管辖权，但基于显而易见及不必重复的公共政策原因，这种管辖权只应在极罕见的情况下使用。

务实及可行的商业解决方案

虽然要求外国司法管辖区特别容许仲裁庭判给「附带法庭程序的费用」这主张可能值得推崇，但若这主张与外国司法管辖区预设的讼费原则相反，则并不现实。无论如何，要改变每个外国司法管辖区的常规亦是不切实际的。

依我们愚见，一个简单而可行的解决方案，亦与上述Waincymer（2012年）的学术文献相符，是在仲裁协议中加入讼费弥偿条款，订明「附带法庭程序的费用」可作为损害赔偿予以追讨。

鸣谢

作者感谢梁泳泽律师（高李严律师行合伙人）的研究指导和梁冠衡先生（高李严律师行暑期实习生）的研究投入。任何错误、遗漏和失误都是作者自己的责任。

有关英国税务的简单摘要

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1.    英国与香港的税制的分别

香港

  • 收入来源地域征税 – 即只有源自香港的利润才须在香港征税，而源自其他地方的利润则不须在香港缴付利得税。

英国

  • 全球征税 – 即在全球所赚取的收入和收益，包括得自海外的利润，都予以征税。
 入息稅物业
收入稅		公司利得稅股息稅資产
增值稅		土地稅物业
印花稅		遗产稅
香港2% – 17%净租金收入的15%16.5%
(正常税率)
8.25%
(不超过$2,000,000
的应评税利润)		沒有沒有差饷: 5%
地租: 3%		$100 – 15%2005年7月15日後取消遗产税
英国  20% – 45%物业所得租金收入连同个人
入息计算税款		19%
(正常税率)		7.5% – 38.1%
(视乎税级)		10% – 28%
(視乎稅級和資產類別)		市政稅:
£1,070.22 – £3,210.66
(2020/21年度)		0% – 12%最高稅率为40%
2.    英国税制的简介

A.    全球征税制度 – 英国居民 (Resident) vs 非英国居借居民 (Non-domiciled Resident)

英国居民

  • 如你是英国居民，便要为源自英国及海外的收入缴税。
  • 一般而言，只要你在每税收年度（4月6日至来年4月5日）于英国逗留多于183日，就自动定义为税务居民（Tax-Resident）。

非英国居借居民 (Non-domiciled Resident)

  • 如你居住在英国，但并非英国居籍居民，那么只有源于英国的收入和收益要缴税，而对于海外收入，你可选择申请以汇款制计税 (Remittance Basis) ，即只把汇入英国的海外收入和收益计税。
  • 居籍 (domicile) 是个普通法概念，意旨你视为永久居所的国家或地区。要确定居籍有可能涉及复杂的法律事实，考虑因素包括为你的出生地、于英国逗留的时间长短、是否有意于英国永久定居等等。
  • 值得注意的是如你在20年内有15年都是英国税务居民（即使居籍并非英国），你将在第16年起自动被视为具有英国居籍的人（Deemed Domicile），并需要为源自英国及海外的收入缴税。

B.    香港与英国签订的双边税务条约 (Double Taxation Agreement)

  • 香港与英国有签订双边税务条约，订明双方的征税权，亦定明不同被动收入的税率宽免，以防止双重征税。
3.    移民前的税务计画

A.    建立 “干净资本” (Clean Capital)

  • 首次成为英国税务居民以前所产生的海外收入或收益一般称为 “干净资本”。即使该资金被汇入英国，都不会被征税。
  • 在成为英国税务居民之前，应该将 “干净资本” 进行分离。否则如果该资金和成为税务居民后产生的资金混合，原本的“干净资本”亦有机会被征税。
  • 以达至 “干净资本” 分离，你可开设不同银行账户，以单独管理 “干净资本”、利息帐户和资本收益帐户等。

B.    妥善安排每年居英日子

  • 如上所述，如你在20年内有15年每年留英日子多于183天，便会被视为英国居籍 (domicile)，这会影响你可否申请以汇款制计税及遗产税缴纳多寡。

C.    作好资产承继安排

  • 如你打算保留香港作为你的居籍 (domicile)，建议应订立香港遗嘱以涵盖香港资产。

D.    设立信托

  • 海外信托的设立能有效地达至税务递延甚至减免。海外信托的海外收入和收益一般无需缴英国所得和利得税。
  • 至于英国遗产税，英国非居籍居民设立的海外信托的海外资产无需缴税。只要信托设立人在设立信托时是英国非居籍居民，即使之后信托设立人获得居籍，信托名下的海外资产亦无需缴英国遗产税。

联络我们:

Anna Chan 陳韵祺律师 | 合伙人
anna.chan@oln-law.com

Victor Ng  吳光懋律师 | 合伙人
victor.ng@oln-law.com

免责声明：本文仅供参考。本文中的任何内容均不得解释为对任何人提供的英国或香港法律意见或任何与此有关的法律意见。高李严律师事务所对任何人因本文所所载的任何内容而行所造成的任何损失和/或损害不承担任何责任。

Dissipation of Assets by Debtor – How Lumley v Gye Tort Can Assist Creditor

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The notorious “dissipation” cases

One of the common questions a desperate creditor would ask is whether he/she can go after the ultimate owner/the controller of the debtor company instead of the debtor itself. In most circumstances, the answer is No because:-

  1. Under the “privity of contract”, only the contracting party can be sued for breach of contract. Where there is a written contract, a party is in general bound by its terms after signing. A party is not allowed to claim that there are contracting parties other than those stated in the contract, especially when the application of The Contracts (Rights of Third Parties) Ordinance has been expressly excluded.
  2. A company is accepted in law as a separate “legal personality” which is able to act on its own, and is also able to be sued and become liable on its own. In the case of a limited liability company, a shareholder’s liability is limited to the extent of his investment in the company.
  3. Only in very exceptional circumstances (such as fraud) that the court would “lift the corporate veil”. But even in the case of fraud, the UK Supreme Court once pointed out in VTB Capital plc v. Nutritek International Corp [2013] UKSC 5 that it is wrong to treat the persons behind as contracting parties to hold them contractually liable.  

In view of the above cardinal principles, a cunning owner/controller may nominate a limited liability entity as the borrower/contracting party thus shielding oneself from personal liability. Such owners/controllers may also willfully drain the company’s financials or in more radical cases, they may even try to siphon off assets from the company to their related parties. In the latter scenario, as it is not uncommon for such controllers to have lent money to the company by way of shareholders’ loans, such controllers may even actively pursue the winding-up of the company with the ultimate goal to appoint a liquidator over whom they may exert influence.

Creditors’ options in such an unfortunate circumstance are limited. The creditor may try to obtain a Mareva injunction against the debtor company, which is, however, preventive in nature and would have no use if dissipation has already occurred. In such a situation, what has been consistently underexplored, if not overlooked, is the tort as recognised in Lumley v. Gye [1853] EWHC QB J73, or what is modernly called the tort of procuring a breach of contract. As will be seen below, this tort has been recently reinvigorated (in particular in the cases of Marex Financial Limited v. Carlos Sevilleja Garcia [2017] EWHC 918 (Comm) and Palmer Birch v. Lloyd [2018] EWHC 2316 (TCC)) to cover shareholders/ directors (and even ultimate beneficial owners and shadow directors) of a company who, through dissipation, have emptied the pocket of the company to deprive it of the means to make payments to its contractual counterpart. This may sound a bit ironic because while commercial lawyers have always tried to use the device of contract to avoid the need to establish a “duty of care” should a dispute later arise, it is tort law which comes to the rescue when no effective means is to be found in enforcing a contract. On the other hand, as will be analysed below, it cannot be overstated that a contract nonetheless plays a significant role here because the tort relies on the existence of a contract and a breach thereof (which in turn depends on the existence, breadth, legality and enforceability of a contractual clause). Viewed in this light, the existence of the Lumley v. Gye tort actually highlights the importance of the drafting technique of a commercial lawyer.

The Elements of the Lumley v. Gye Tort 

The basic elements of the Lumley v. Gye tort are that:

  1. There at least has to be a contract.
  2. There at least has to be a breach of the contract.
  3. There has to be an element of participation (which has to be more than mere prevention) on the part of the shareholder/director/controller in causing the breach of the contract.
  4. The shareholder/director/controller must also have intended to procure the breach of the contract through its participation. Impliedly, they must also have known of the existence of the contract.
  5. The plaintiff has to have suffered a loss.

Having regard to the elements of the tort, it is then not difficult to understand why such a tort can be a useful weapon in a dissipation case against the controllers of the company where a breach of contract has already occurred. By definition, such controllers are in control of the company so that it is usually hard for them to insulate themselves from the dissipation. On the other hand, being close to the affairs of the company, they cannot really deny their knowledge of the contract. As for the fifth element, the non-payment under the contract is the loss suffered.

It can be immediately observed that while the Lumley v. Gye tort seems to have “sidestepped” the doctrine of separate legal personalities, it does not deny and is actually premised on the recognition of the separate legal personalities of a company and its controllers (so that they can be properly regarded as third parties). Therefore, there is no established policy reason to exclude a claim against the controllers once the elements of the tort are satisfied. The debtor in Palmer Birch tried to argue that the whole claim was an impermissible attempt to pierce the corporate veil but such argument failed.

As can be shown in the Supreme Court case of Sevilleja v. Marex Financial Ltd [2020] UKSC 31, a claim based on the Lumley v. Gye tort is allowed even when the company is in the process of being wound up. The no reflective loss rule is no bar to such a claim. A general creditor may therefore be in a more advantageous position since he/she could have a direct claim against the controllers circumventing the problems of ranking lower than secured creditors or ranking pari passu with claims of other general creditors. 

Is there a tort of knowingly inducing or procuring the wrongful violation of a judgment debt?

Under the doctrine of merger, upon obtaining a judgment, the contractual debt has “merged” into the judgment and the claimant can no longer rely on the original contractual debt. The question then is, whether the creditor can still rely on the Lumley v. Gye tort where the non-payment is in respect of a judgment debt deriving from a contractual debt? This is the scenario encountered by the English Court in Marex Financial, where at first instance Knowles J decided in an interlocutory application hearing that there exists a tort of knowingly inducing or procuring the wrongful violation of a judgment debt, thereby extending the application of the Lumley v. Gye tort to cover such a judgment debt. Though this case was subsequently appealed to the Supreme Court on other points, ruling on this point remains undisturbed.

The decision of Marex Financial however leaves another problem unaddressed. Given that the original Lumley v Gye tort only recognizes contractual interests as a specific asset class worthy of its protection, it remains to be seen whether the tort of knowingly inducing or procuring the wrongful violation of a judgment debt can be extended to judgment debts based on other causes of action (e.g. a monetary judgment obtained solely based on a tortious claim).

Even if the tort of knowingly inducing or procuring the wrongful violation of a judgment debt is kept within its current bounds, it still represents an outlier in the common law world because a cause of action is generally considered as completed upon the grant of the judgment so that the failure of the debtor to satisfy a judgment debt would not give rise to another cause of action, and the creditor is left with traditional enforcement actions and winding-up proceedings. By this special tort, the creditor can now launch a new claim against the shareholder/director/controller of the debtor company where the judgment debt (which has to be derived from a contractual debt) remains unsatisfied.

Comparison to other economic torts

The Lumley v Gye tort also has the following advantages when compared with other economic torts:

  1. No fraud needs to be proved as in the case of tort of deceit. It has to be borne in mind that fraud is a serious allegation and it is hard to prove fraud in a commercial context.
  2. No unlawfulness needs to be proved as in the cases of unlawful means conspiracy and unlawful interference.
  3. Unlike conspiracy, only one wrongdoer (other than the contract breaker) is enough in the Lumley v. Gye tort.

The Lumley v. Gye tort also seems to be exceptionally useful against shadow directors who are acting outside of the constitution of the company. Ironically, this may deprive them of the defence of “acting bona fide within the scope of his authority” conferred on by the company whereas such a defence is generally available to a de jure director. It is therefore not a coincidence that the main defendant in both the cases of Marex Financial and Palmer Birch is a shadow director.

On the other hand, in dissipation cases, what the claimant requires is some initial evidence that there has been dissipation of assets from the company. Such financial information is not normally available to outsiders and as the claimant cannot fish for evidence, he may have to obtain such evidence through other legal routes. Such routes may include contractual clauses which allow access to financial information (which are commonly included in commercial agreements), as well as disclosure orders ancillary to a Mareva injunction. 

Conclusion

Both the cases of Marex Financial and Palmer Birch have not been considered by the Hong Kong courts in the context of a Lumley v. Gye tort. It therefore remains to be seen whether the two cases will be followed by the Hong Kong courts, especially when the flexible use of the Lumley v. Gye tort has the effect of sidestepping many of the long-lasting common law principles as described above. However, as an experienced litigator can tell, there is often no better way to apply pressure on the other side than to sue the natural persons behind, and for this reason alone the possibility of launching a claim based on the Lumley v. Gye tort is worth exploring. 

Our firm has extensive experience in debt recovery action in HK. If you have any question regarding the topic discussed above, please contact our partner Anna Chan at anna.chan@oln-law.com or Martin Tse at martin.tse@oln-law.com for further assistance.

August 2021

Top 7 Contracts for Startup Survival in Hong Kong

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We are frequently asked by our startup clients whether or not written contracts are strictly necessary, particularly during the early stages when their business may not be much more than a great idea about a product or a service. We are aware that founders frequently jump into building their businesses without any written contracts but doing so can prove to be a costly mistake. 

Why bother with contracts at all?

Written contracts set out the rights and obligations of each party, thereby reducing uncertainties and helping to minimise the risk of disputes getting out of hand. Accordingly, embarking on a business arrangement without a signed written contract means that all of your rights and obligations are left uncertain, leaving your business in a weak position overall. 

Regarding the kinds of business arrangements that startups and founders will find themselves in, there are few absolute rules but one is that you should use a written contract whenever you intend to enter into dealings with third parties (paid/unpaid workers, vendors, customers or investors) or with other founders. Employees are a special category because employment laws in Hong Kong actually require employers to provide written employment agreements. 

So, what contracts does a startup really need and why? 

The following is our Top Seven list of all contracts that founders are likely to need during the early phases of setting up and growing their businesses:

1.    Employment contract

You will need at least one sturdy, reusable employment contract for your startup to be in compliance with Hong Kong employment laws but will also need to address confidentiality, non-solicitation, non-competition as well as several other key issues. If you intend to hire interns or other unpaid workers, you will also need a variation of an employment contract for them. For anyone who will be working for the business as a legitimate independent contractor you may also need a services agreement. You will also find that as a startup, these agreements and the business itself will probably need to incorporate a share incentive scheme of some sort to incentivise performance.

2.    Co-Founders agreement/Collaboration Agreement/Founders’ Agreement

The function of this contract is to address the contributions of the respective founders, their entitlement to shares in the business (vested over what time period) as well as set out clear contingencies in case any of the founders withdraw. These are often put into place before the business has been incorporated so frequently, founders will ask to include simple administrative rules that will govern the founders’ conduct until a formal shareholders’ agreement is put in place which then replaces the Co-Founders Agreement. 

3.    IP assignment contract

This is the next most important contract on the list partly because it often is put in place before the business has been incorporated and before any employment contracts are needed. However, the main reason is that the technology developed by the founders is, more often than not, the lynchpin of the business but until the underlying IP has been legally assigned to the business, it consists of little more than ideas in the founders’ heads. Without that crucial step of assigning the IP, no investor will invest in the business for the simple reason that the business doesn’t own its IP. The founders own it. And unless that IP is assigned to the business, what will prevent the founders from leaving the business in 5 months to set up another business? 

4.    Non-disclosure agreement (NDA)

Everyone has heard of NDAs (aka confidentiality agreements) which primarily function as a means of protecting the business from unauthorised disclosure or use of confidential information. The general rule of thumb is that, as a business, you should not allow any individual or organisation to have access to any valuable confidential information until after they have signed a properly prepared NDA. 

5.    Investment agreement/Subscription agreement

This contract, often signed together with the shareholders’ agreement, governs the relationships between the company, the founders and new investors and can take many forms depending on the investors’ intended contribution. In Hong Kong, the investment will usually center around a subscription of either preference or ordinary shares in exchange for an agreed amount of cash (i.e.: an equity investment). Occasionally, investors will offer cash in exchange for a convertible note or other debt instrument. Regardless of how the investment is structured, at a bare minimum, the underlying contract must address details such as the amount, timing and conditions for the investment, and conditions that must be met before the investors can recover their investment. Regardless of who prepares the original agreement, the company and founders need to careful about the scope of representation and warranties as well as potential indemnity/liability provisions that investors will typically insist on inserting to protect their own interests. 

6.    Website terms of use (aka terms and conditions)

Although not often thought of as a contract, these function the same way contracts do by stipulating the rights and obligations of website users and including protections geared to the business. Businesses that use their website for conducting e-commerce will also need to include legal terms of sale to govern functions such as payments, delivery and returns. Unlike the other contracts in this Top Seven list, terms of use are normally entered into as digital contracts instead of being signed in the traditional way. 

7.    Shareholders’ agreement

These are used to govern the relationship among shareholders once the business has been incorporated and, like the Investment Agreement, are usually quite detailed. Because they are so detailed and therefore costly to prepare, founders will normally wait until they start fundraising before paying to have a shareholders’ agreement prepared. The reason for that is because each investor will assert specific demands to protect their investment and these will need to be reflected in both the shareholders’ agreement and the Investment Agreement. Each new set of demands will entail changes being made to both agreements. 

How can OLN help?

With the above list in mind, we hope you can appreciate why it is foolhardy to operate a startup without written contracts. So, how do you avoid that?

Although contracts are freely available online, the quality and suitability of these vary tremendously. Without substantial prior experience dealing with contracts, you will not know which ones to use and what changes need to be made. To avoid making a costly mistake, in most instances, you should seek advice from a lawyer before negotiating, preparing or signing any significant contract. 

If you only require a few contracts at a time and some occasional legal advice, the most cost-effective option available in Hong Kong is to subscribe to OLN Online. OLN Online offers a huge library of contract templates for Hong Kong startups (including all of the ones listed above), as well as the basic advice you will need to get started, and is available through two subscription plans. 

If you need more hands-on assistance with your contracts, we recommend that you contact one of us at OLN. We have decades of experience advising founders and investors about emerging businesses and can provide all of the advice you will need for your contracts and other arrangements. 

If you have any questions regarding your contract needs or other legal issues, feel free to contact Cermain Cheung (cermain.cheung@oln-law.com) for advice.

August 2021

The Risks of Breaking a Hong Kong Employment Contract Before It Commences

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Prelude

It is not at all surprising in Hong Kong for job applicants to back out of the already accepted job offer and accept a better job offer with a more competitive remuneration package. In practice, usually the innocent employer would save themselves the hassle of chasing after the defaulting recruits and simply find a substitute from the job market, especially for those junior or middle-level positions. However, this may not always be the case and the recent judgment handed down by the Court of Appeal in the Hong Kong case Law Ting Pong Secondary School v Chen Wai Wah [2021] HKCA 873 demonstrated clearly that not honouring a signed employment contract may come with a price even before commencement of the employment. 

Overview of the case facts

The case of Law Ting Pong Secondary School started off at the Hong Kong Labour Tribunal and was argued all the way up to the Court of Appeal. 

In gist, this case concerned a teacher who was offered employment by a local secondary school. On 17 July 2017, this teacher was given (a) an Offer of Appointment; (b) the Conditions of Service for Teachers; and (c) a Letter of Acceptance in respect of his then potential employment with the school. The teacher signed and returned the Conditions of Service and the Letter of Acceptance to the school on the same day. The Letter of Acceptance stated that:- 

“I accept the appointment offered in your letter dated 17th July 2017 in accordance with the attached Conditions of Service for Teachers in Law Ting Pong Secondary School.

I also understand that once I accept this contract, the conditions of the new contract will come to [sic] immediate effect e.g. I need to give three months’ notice to terminate my employment with the school.

I confirm that I have read and understood all the above conditions and hereby agree to abide by them.”

The Conditions of Service stated that the period of employment would be “from 1st September 2017 to 31st August 2018”. Under the Conditions of Service, the teacher was required to give the school three months’ notice in writing, or payment in lieu of notice, or a combination of both in order to terminate the employment contract “in order to terminate my [i.e. his] employment with the school” [Emphasis Added] (the “Termination Provisions”). In August 2017 the teacher backed out of the contract. The school then claimed against the teacher for payment in lieu of notice pursuant to the Termination Provisions. 

The school succeeded at the Labour Tribunal and was awarded damages in the sum of HK$139,593 (equivalent to 3 months’ payment in lieu of notice). 

The teacher subsequently appealed against such decision and the same was overturned by the Court of First Instance. The Court of First Instance held that the Letter of Acceptance did not form part of the specified terms offered by the school to the teacher, as, inter alia, the Conditions of Service did not make any reference to the Letter of Acceptance. Accordingly, the employment should be read as only starting on 1 September 2017 in accordance with the terms of the Conditions of Service, and hence the teacher was not liable to make any payment in lieu as his employment had not commenced at the time when he back out of the employment contract.

Thereafter, the school further appealed against the decision of the Court of First Instance and the Court of Appeal restored the decision of the Labour Tribunal. The judgment of the Court of Appeal can be summarised as follows:-

  1. The Offer of Appointment, the Letter of Acceptance and the Conditions of Service were given to the teacher together when the school’s offer of employment was made, thus the terms of all the three documents were accepted as a “package deal”. Accordingly, it must be plain and reasonably understood by the teacher, that the school was offering (and only ready to offer) employment on the basis set out in all the three documents. It follows that the Letter of Acceptance formed part of the contract between the school and the teacher, thus should be taken into consideration for adjudication of the matter. 
  2. A reasonable person shall take the Letter of Acceptance to mean that the terms of the employment contract would come into immediate effect such that the teacher would have to give 3 months’ notice to terminate the same. This shall be obvious as the notice requirement under the Termination Provision was specifically used as an example of the terms of the employment contract taking immediate effect.
  3. Further, the fact that the period of employment would start from 1 September 2017 only meant that the teacher’s performance of teaching duties was to commence on a future date. In general, a valid contract had legal effects, for example, as to repudiatory or anticipatory breach, and was enforceable immediately when it was made, irrespective of the time of performance. Hence, although performance of teaching duties would commence on a future date (i.e. 1 September 2017), as from 17 July 2017 (i.e. the date of signing the contract) both parties were both legally bound to perform their obligations under the contract.
  4. In response to the defendant teacher’s argument that the amount required to terminate the employment contract under the Termination Provision was wholly disproportionate to the monetary loss that the school might suffer and any legitimate interests of the school (thus is a penalty clause and unenforceable), the Court ruled that a clause could only be a penalty if it operated upon a breach of contract (i.e. a liquidated damages clause). The payment of a sum in lieu of notice under the Termination Provisions was a contractually agreed method of lawful termination of the employment contract; it was not in the nature of damages for breach of contract. It was therefore a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance, thus not a penalty clause.
  5. The Court further completed the analysis by commenting that the Termination Provisions would still be enforceable even if the same was a liquidated damages clause. On this issue, the Court of Appeal clarified the test to determine whether a clause was a penalty clause was, whether the relevant clause was out of all proportion to the innocent party’s legitimate interest in enforcing the contract; and that the innocent party could have a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation. In applying the test, the Court shall first identify the legitimate interest of the innocent party that is being protected by the clause, then move on to assess whether the clause is out of all proportion to such legitimate interest by considering the circumstances in which the contract was made. 
  6. Accordingly, the teacher was ordered to, inter alia, pay to the school HK$139,593, being payment in lieu of 3 months’ notice.
Takeaways

The case of Law Ting Pong Secondary School suggests that once the employment contract is signed, the agreed notice under its termination provision has to be observed, even before the commencement of the employment.

However, it is arguable that Law Ting Pong Secondary School turns on its specific facts that the employer school has made it explicit on the Letter of Acceptance that the conditions of the employment contract came to immediate effect upon execution and the notice requirement under the Termination Provision was specifically used as an example for illustrating the same. 

Further, it is also not certain as to what the Court’s decision would be if any probation period is provided for in respect of the relevant employment. It seems the Court did not pay any regard to Section 6(3A) of the Employment Ordinance (Cap.57) when reaching its decision in Law Ting Pong Secondary School, which provides that:-

“Where in any contract of employment, whether in writing or oral, it has been expressly agreed that the employment is on probation and the contract makes provision for the length of notice required for its termination such contract may be terminated —
(a) notwithstanding the length of notice provided for in the contract, by either party at any time during the first month of such employment without notice or payment in lieu;

(b) by either party at any time after the first month of such employment by giving to the other party notice of the agreed period, but not less than 7 days.”

In light of the Court of Appeal’s decisions in Law Ting Pong Secondary School, it seems the legal position in such scenario could possibly be, albeit awkward, (a) the employee will be required to give notice equals to such length as stated in the employment contract if he chooses to back out of the contract; and (b) no notice is required if he chooses to terminate his employment in the first month of his probation by operation of Section 6(3A) of the Employment Ordinance (which kicks in following the commencement of the employment).

How can OLN help?

As can be seen, it would be advisable for employers to clearly and expressly document in its employment contract the notice period and/or the termination mechanism if the employee fails to show up on the commencement date of employment as agreed. The degree of clarity required in this regard can be very demanding. 

We have practical experience in helping employers with the drafting and review of employment-related documentation to ensure the same complies with the employment law regime in Hong Kong and latest development on the same, so as to protect employers’ interest.
 
On the other hand, we also assist, from time to time, employees on the review of employment-related documentation and advise employees on any potential legal consequences arising from their employment contracts.

If you have any question regarding the topic discussed or other employment issues, please contact our Partner Mr. Victor Ng at victor.ng@oln-law.com or our associate Ms. Barbara Kwong at barbara.kwong@oln-law.com for further assistance.

July 2021

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.