Court Of First Instance Confirms 'Modern' Judicial Approach To Penalty Clauses In A Hong Kong Employment Case

Published date10 August 2022
Subject MatterEmployment and HR, Contract of Employment, Employee Benefits & Compensation
Law FirmMayer Brown
AuthorMr Hong Tran

In Ng Yan Kit Alfred and Another v. Ever Honest Industries Ltd and Another [2022] HKCFI 1834, the Court of First Instance (CFI) confirmed that the approach to considering penalty clauses in Law Ting Pong Secondary School v Chen Wai Wah [2021] HKCA 873 should be followed in Hong Kong.

Background

The employee was a vice president and director of the defendant companies.

Clause 6 of the Employee's 2016 Letter of Employment ("Subject Clause") provided:

"The Group cannot dismiss you within three years upon the commencement of this employment agreement. If the Group dismisses you within three years after this employment agreement commences, you will be paid two whole years' salary as compensation. If this employment is terminated by you within three years, one month's written notice or one month's salary in lieu of notice is required, and after resignation, you will not be allowed to work in an organisation that is in the same or relevant industry or the compensation of two whole years' salary will not be granted."

The employee was dismissed on 1 April 2016, with three months' payment in lieu of notice, annual leave payment and end of year bonus. The employee subsequently brought a claim in the Labour Tribunal (LT) for 24 months' salary under the Subject Clause.

Original LT Decision

The LT considered, among other things, whether the Subject Clause was a penalty or a liquidated damages clause, and held that "...since there is no evidence to show that the parties have attempted to make a genuine pre-estimate of the loss in case of a breach of the New Agreement, the Subject Clause is a liquidated damages clause and not a penalty."*

(*Note: on this point, the Hon Mr. Justice David Lok at the CFI said: "The Presiding Officer has made a serious error here. I think what she meant is that, as there is no evidence suggesting that the parties have attempted to make a genuine pre-estimate of the loss in the case of a breach, the Subject Clause is a penalty clause. That should have been the logical conclusion from her finding.")

In so deciding, the LT had considered that payment of three months' salary in lieu of notice was adequate compensation, since the employee was found to have suffered from cancer after he was terminated, so he could not have worked in any event due to treatment.

The employee appealed to the CFI.

CFI Appeal Decision

The CFI criticised the LT's reasoning on the penalty issue as being too simplistic, since it had only relied on the fact that there was...

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