Employment Law — High Court stays claims pending arbitration in employment dispute over discretionary bonus and deferred shares
This case highlights the importance of arbitration agreements placed by the Courts in Hong Kong and how it may affect the prosecution of claims that would normally fall within the exclusive jurisdiction of the Labour Tribunal.
Mak v LA
|Reference:||HCA 1967/2020;  HKCFI 285|
|Court:||Court of First Instance|
|Before:||Hon K Yeung J Hon Mimmie Chan J in Chambers|
|Appearance:||Earl Deng, instructed by Hugill & Ip, acted for the successful Defendant.|
|Date of Decision:||24 January 2022|
The Plaintiff commenced proceedings in the Labour Tribunal and the High Court against the Defendant, his former employer concerning his annual discretionary bonus which consisted of cash and shares (the latter of which would vest subject to a separate Share scheme). The Plaintiff sought the court’s order for the Defendant to redeem and vest the deferred shares.
The Defendant’s employer successfully stayed the entire proceedings pending arbitration notwithstanding that only the Shares scheme was covered by the arbitration agreement. This case highlights the importance of arbitration agreements placed by the Courts in Hong Kong and how it may affect the prosecution of claims that would normally fall within the exclusive jurisdiction of the Labour Tribunal.
The Plaintiff (“the Employee”) was employed by the Defendant (“LA”) as its CEO, CFO and Head of Compliance.
The Employee is contractually entitled to an annual discretionary bonus which comprised (1) a cash bonus, and (2) awards of shares (“Deferred Shares”) under LA’s Staff Profit Sharing Scheme (“Scheme”).
The Deferred Shares are subject to a vesting period of 3 years. For instance, in relation to the shares awarded for 2016, one-third would vest on 31 December 2017, one-third on 31 December 2018, and one-third on 31 December 2019. The relevant agreement provides that, upon termination of employment, the unvested shares would continue to vest in accordance with the vesting timetable.
The Employee claims (inter alia) that LA was in breach of contract when, upon termination of his employment, LA failed to vest the unvested Deferred Shares to the Employee.
The Employee was awarded discretionary bonuses for the years 2016, 2017 and 2018. LA issued letters which confirmed the total bonuses awarded for each year and the terms of the Scheme (“Bonus Award Letters”).
In the letters which confirmed the 2017 and 2018 bonuses, it is stated that “any dispute arising out of or in connection with this agreement” would be referred to arbitration in Hong Kong, by reference to a sole arbitrator to be appointed by LA from the HKIAC list of approved arbitrators. No such clause existed in the letter for the 2016 bonus.
The Employee only countersigned the letters for the 2016 and 2017 bonuses. He claims that, not having signed the letter for the 2018 bonus, he never agreed to its terms including the arbitration agreement.
Labour Tribunal Proceedings
The Employee commenced proceedings against LA in the Labour Tribunal (“the Tribunal”). He seeks a mandatory order for LA to redeem and pay the realized amount of the vested and unvested Deferred Shares, and the sum of US$429,139.58 as the discretionary bonus for 2019.
In its Defence, LA contended that (inter alia) any disputes related to the Scheme should be submitted to arbitration and that the Tribunal lacks exclusive jurisdiction to hear the Employee’s claims.
Proceedings at the Court of First Instance
By consent, the Employee’s action was later transferred to the Court of First Instance (“CFI”).
After the Employee filed the Statement of Claim in the CFI proceedings, LA issued a Summons for the stay of proceedings under section 20(1) of the Arbitration Ordinance, Cap. 609 (“AO”) on the ground that the parties’ arbitration agreement excludes the Court’s jurisdiction.
A day later, LA filed its Defence which stated that it has no intention to submit to the Court’s jurisdiction, and that the Defence was filed without prejudice to its challenge to the Court’s jurisdiction nor its application to stay the action pending arbitration.
Under s.20 AO:
“A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed”.
The authorities are also beyond dispute, that the party applying for the stay only has to establish a good prima facie case that the parties were bound by an arbitration clause.
The Court’s Analysis
Issue: Whether an arbitration agreement exists
The Court held that LA has established a prima facie case that a valid arbitration agreement exists in relation to the terms of the Employee’s participation in the Scheme. Further, it rejected the Employee’s argument that, because the arbitration clause provides for the reference to be made to a sole arbitrator, that by itself renders the arbitration agreement unconscionable and unenforceable:
“The manner of reference and appointment of arbitrator was freely agreed to by the parties, at the time when the arbitration agreement was made. In this case, they agreed to a sole arbitrator to be appointed by LA. An arbitrator is under a statutory duty to act independently, fairly and impartially, and to treat the parties with equality, irrespective of the identity of the party appointing the arbitrator. If the arbitrator fails in such duty, it is open to the Employee to pursue all remedies available to him, including setting aside the award.” (Judgment para. 43)
Moreover, the learned Judge found that the fact that the Employee did not countersign one of the Bonus Award Letters does not negate the prima facie existence of a valid arbitration agreement. This is supported by s.19(2) AO which provides that an arbitration agreement has to be in writing, and can be in a document, whether or not signed by the parties. The Court is also satisfied that the dispute relating to the Deferred Shares falls within the ambit of the arbitration agreement.
Issue: Whether Deferred Shares claims fall within Labour Tribunal’s exclusive jurisdiction
Under Paragraph 1 in the Schedule to the Labour Tribunal Ordinance, Cap. 25, the Tribunal’s exclusive jurisdiction encompasses “a claim for a sum of money, whether liquidated or unliquidated, which arises from the breach of a term … of a contract of employment”.
In the Court’s view, the Employee’s claims in respect of the Deferred Shares do not fall within the Tribunal’s exclusive jurisdiction since the Employee seeks not purely a sum of money, but rather a mandatory order for LA’s redemption of the vested and unvested Deferred Shares.
Accepting the submissions of Mr Earl Deng, Counsel for LA, the Court held that there can be no hardship to the Employee to refer the parties to arbitration in accordance with their agreement. If the Employee has a strong claim, arbitration will not weaken his case. Thus, there is no sufficient reason for the Court to hold otherwise.
Issue: Whether residual claims should be stayed
The residual claims in these proceedings, after referring the Deferred Shares claims to arbitration, are the Employee’s claim to the 2019 discretionary bonus of US$429,139.58, and alternatively on quantum meruit basis.
This claim is not made under the Scheme and is governed by the employment contract which provides for the jurisdiction of the Hong Kong Court. LA applied for these claims to be stayed under the Court’s inherent jurisdiction on case management grounds.
The law’s position is that, where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue proceedings in the absence of very good reasons to the contrary, and that a management stay should only be granted in rare and compelling circumstances (China Shanshui Cement Group Ltd v Tianrui (International) Holding Co Ltd  HKCFI 3043).
At the end of the day, it is a question of what serves the ends of justice between the parties to the litigation and the administration of justice generally (Linfield v Taoho Design Architects Ltd & Ors  2 HKC 204). A stay must not cause injustice to the plaintiff.
In the present case, the Court concluded that the ends of justice would be served by a stay of the residual claims, pending arbitration of the Deferred Shares claim:
“… I bear in mind that the Employee had first made his claims in the Labour Tribunal, obviously with the interests of minimizing costs and simplifying procedures in mind. These interests may be better served by arbitration rather than by litigation in the Court which would inevitably involve procedural, interlocutory and legal skirmishes. … Time and costs may be saved, to achieve an early resolution. The parties may even consent to submitting the residual claim of the 2019 Bonus to the same arbitral tribunal for determination, which would avoid the risk of inconsistent findings by the Court and the tribunal on questions of conduct and performance.” (para. 66 Judgment)
Based on the above reasons, the Court granted LA’s application for stay and awarded costs to LA on an indemnity basis. As the Arbitration Court has repeatedly emphasized, arbitration agreements are to be observed and will be upheld by the Court, and parties who challenge or breach such agreements do so at their own peril of being ordered to pay costs on an indemnity basis.
• Arbitration agreements are valid even if unsigned. The Court will examine all the facts to decide whether the agreement is prima facie existent.
• An arbitration clause is not rendered unconscionable just because it provides for the appointment of a sole arbitrator by the employer or one party.
• Saving time, minimizing costs and simplifying procedures can be highly relevant factors deciding whether there are “very good reasons” to stay residual claims.
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This article was first published on 9 March 2022.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photograph which appears in this article is included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related.