News & Events

Deacon's Litigation & Dispute Resolution Newsletter - February 2013

By: Joseph Kwan, Richard Hudson, Cathy Wu, Robert Clark, Karen Dicks

Submitted by Firm:
Deacons
Firm Contacts:
Cynthia Chung
Article Type:
Legal Update
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No Lawyer? No Privilege!

by Richard Hudson (richard.hudson@deacons.com.hk) and Cathy Wu (cathy.wu@deacons.com.hk)

The scope of Legal Professional Privilege ("LPP"), the doctrine that protects from disclosure, communications between clients and lawyers, made for the purpose of seeking and giving legal advice, has been considered and, in some cases refined, in a number of decisions in Hong Kong and other common law jurisdictions over the last decade. The latest such decision comes from the English Supreme Court in R v Special Commissioner of Income Tax [2013] UKSC 1, and concerned an attempt to widen the scope of LPP to include advice sought from and given by non legal professionals, namely tax accountants.

Prudential Plc was requested by the Special Commissioner of Income Tax ("HMRC") to provide various documents in relation to a marketed tax avoidance scheme. Prudential asserted that some of the documents related to tax advice given by its accountants and argued that such documents did not need to be disclosed, as they were protected by a category of LPP, legal advice privilege ("LAP"). Prudential challenged the HMRC's request for these documents by way of judicial review proceedings, but the English High Court and, on appeal, the Court of Appeal, both held that LAP is restricted to advice sought from or given by members of the legal profession and not accountants.

Prudential appealed to the Supreme Court and advanced its case by arguing, amongst other points, that LAP should be based on the function of the communication (i.e. a request for or provision of legal advice) rather than the status of the advisor, and that given that LAP was a common law right created by judges which should be applied and, if necessary, extended so as to accord with the principles underlying and justifying the right, LAP should attach to accountant-client communications concerning legal advice.

The Supreme Court dismissed Prudential's appeal in a 5:2 majority decision. The Court noted that it was universally believed that LAP only applied to communications in connection with advice given by members of the legal profession, and ought not to be extended to communications in connection with advice given by other professionals, even where that advice was legal advice that the professional was qualified to give.

The Court acknowledged that Prudential's argument was a strong one in terms of logic: LAP was conferred for the benefit of clients, and served to protect the client and not the legal profession, and it was hard to see why the scope of LAP should be restricted to communications with legal advisers who happened to be lawyers. The Court nevertheless concluded that, as a matter of policy, LAP at common law should be restricted to communications between a qualified lawyer and his or her client and could not be claimed over communications between a tax accountant and his or her client, for the following reasons:-

  1. The consequence of extending LAP to legal advice provided by professionals other than lawyers was hard to assess;
  2. The extension would lead to uncertainty in the application of the existing privilege rule, which is clear and well-understood, and would be an extension beyond what had for a long time been understood to be the limits of LAP;
  3. Extending LAP is a question of policy to be considered by the legislature, not the judiciary;
  4. Parliament had in fact extended LAP on three occasions to certain other professions, including patent attorneys and trademark agents, but had not chosen to extend LAP to accountants giving tax advice. This suggested that it was inappropriate for the Court to extend the law relating to LAP.
  5. Where a common law rule was valid in the modern world, but had an aspect or limitation that appeared to be outmoded, it was by no means always right for the courts to modify the aspect or remove the limitation.

Whilst this judgment is not binding on the Hong Kong courts, and it remains to be seen whether a similar challenge to the scope of LPP will be mounted here, it does re-state the current position under Hong Kong law. Clients need to be cautious of the fact that any legal advice which they may obtain from professionals other than qualified lawyers will not be protected by LAP.

Employers Beware When Exercising Pilon Clause!

by Robert Clark (robert.clark@deacons.com.hk)

In Geys v Société Générale [2012] UKSC 63, UK's Supreme Court held that employers, when exercising their rights under a Payment in Lieu of Notice Clause ("PILON Clause") must give clear and unambiguous notice to the employee that they are doing so. Simply making the payment will not suffice. It further held that the contractual principle that a party's repudiation terminates a contract only if and when the other party accepts the repudiation, applies equally to employment contracts as it does to other types of contract, so that in the event of a wrongful summary termination of an employee's employment, the contract continues to exist unless and until the employee accepts the employer's breach (or is deemed to have accepted the breach) or the employer subsequently lawfully terminates the contract.

Background

Geys had been employed by Société Générale as a managing director of its European Fixed Income Sales, Financial Institutions Division. His employment contract provided that his employment could be terminated on the expiry of three months' written notice by him to Société Générale or by Société Générale to him. It also provided that if Société Générale were to terminate his employment in circumstances other than those specified in the contract (which did not apply here), then Société Générale would pay him a Termination Payment within 28 days of termination. There were further clauses in the employment contract, the effect of which were that if Gey's employment was terminated after 31 December 2006 but before 1 January 2008, he would be paid X amount and if such termination was after 31 December 2007 but before 1 January 2009, he would be paid Y amount. The difference between X and Y was substantial.

On 29 November 2007, Société Générale purported to terminate Gey's employment, by handing him a letter, stating that they had decided to terminate his employment with immediate effect and would arrange for him to be provided with the appropriate termination documentation. He was escorted from the building and did not return.

On 18 December 2007, Société Générale sought to exercise a PILON Clause in the Staff Handbook (which formed part of Gey's employment contract) by paying Geys three months' salary into his bank account. They did not, however, notify Geys that they had done this until they wrote to him on 4 January 2008. Société Générale argued that Gey's contract had been terminated on either 18 December 2007 (the date on which they had paid three months' salary into his bank account), or, alternatively on 29 November 2007 (when they had handed him a letter stating that they had decided to terminate his employment).

The date when Gey's employment was terminated would have a significant bearing on the amount of termination payment he would be entitled to under his employment contract.

In relation to a termination date of 18 December 2007, Société Générale argued that the payment into Gey's bank account of three months' pay on that day was sufficient to exercise the PILON Clause and there was no need to also notify him that the Clause had been exercised. In relation to a termination date of 29 November 2007, Société Générale argued that where an employee's contract is terminated wrongfully, it is not open to the employee to elect whether to accept the employer's repudiatory breach (and thereby bring the contract to an end) or to affirm the contract and keep it in existence, rather, the contract comes to an end on the date of the wrongful termination.

Geys argued that his contract was terminated on 6 January 2008, the deemed date of receipt according to the Staff Handbook of Société Générale's letter of 4 January 2008.

The issues before the Supreme Court and its ruling in relation to each are as follows:

Does the repudiation of an employment contract by the employer, which takes the form of an express and immediate dismissal, automatically terminate the contract (the "automatic theory") or does the normal contractual rule apply, namely that the repudiation only terminates the contract if and when the other party elects to accept the repudiation (the "elective theory")?

The elective theory is to be preferred to the automatic theory because, depending on the terms of the contract, sometimes it matters whether the contract is terminated forthwith, or instead, survives until some further terminating event. The date of termination fixes the end of some contractual obligations and, sometimes, the beginning of others. An increase in salary may depend on the survival of the contract to a particular date. The amount of a pension may be calculated with reference to the final salary paid throughout a completed year of service. An entitlement to holiday pay may similarly depend on the contract's survival to a particular date. In some cases, an award of damages will compensate the employee for such loss, but it will often fail to do so.

The overall effect of the automatic theory was to reward the wrongful repudiator of the contract with a date of termination which he has chosen, no doubt as being, in light of the contract terms, the most favorable to him and, correspondingly, most detrimental to the other, innocent party to it. Under the automatic theory, the decision as to whether the contract is at an end is made beyond the control of the innocent party, whereas under the elective theory, it is for the innocent party to judge whether it is in his interests to keep the contract alive.

The contractual principle that the innocent party can elect whether to accept the breach or affirm the contract applies equally to employment contracts as it does to other types of contracts. Accordingly, if an employment contract is wrongfully terminated, the employment contract continues until the employee accepts the employer's breach (or is deemed to have accepted it) or the employer subsequently lawfully terminates the contract. In the present case, Geys did not accept the breach and his employment therefore continued until it was lawfully terminated by Société Générale when he received notice of the exercise of the PILON clause, on 6 January 2008.

When was Gey's employment contract terminated?

It was an obviously necessary incident of the employment relationship that a party is notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised and how and when it is intended to operate. Both employer and employee need to know where they stand. They both need to know the exact date upon which the employee ceases to be an employee. In a lucrative contract, such as this one, a good deal of money may depend on it. But even without that, there may be rights such as life and permanent health insurance which depend upon continuing to be in employment. It is necessary, therefore, that the employee not only receive his payment in lieu of notice, but that he receive notification from the employer in clear and unambiguous terms, that such payment has been made and that it is made in exercise of the contractual right to terminate the employment with immediate effect. He should not be required to check his bank account regularly in order to discover whether he is still employed. If he does learn of a payment, he should not be left to guess what it is for and what he is meant to do.

Such clear and unambiguous notification was not given in this case. It was not until 6 January 2008, when Geys must be deemed to have received Société Générale's letter of 4 January 2008, that the contractual right to terminate under the PILON method provided for in the Staff Handbook was validly exercised and his employment with Société Générale came to an end.

Was there any conflict between the provision for termination on three months' notice in the employment contract and the provision in the Staff Handbook, which gave Société Générale the right to terminate the employment at any time with immediate effect by making a payment in lieu of notice?

No. The employment contract set out a way of terminating the contract, but did not say that it was the only way. It used the word "can", which suggested that it was a course of action that Société Générale might take if it wanted to. But Société Générale reserved the right, in the Handbook, to use the PILON method. That provision in the Handbook could be read as qualifying the provision set out in the contract.

Hong Kong's Privity of Contract Law Under Review

by Karen Dicks (karen.dicks@deacons.com.hk)

In October 2012, the Department of Justice released a draft Contracts (Rights of Third Parties) Bill 2013 ("the Bill"), for consultation. If the Bill is passed, a third party will, in certain circumstances, be able to enforce the terms of a contact that he is not a party to. The changes could have a significant impact, particularly on insurance and construction contracts (under which benefits are often conferred on third parties), although the Bill does allow the contracting parties to exclude its statutory provisions from their contract.

In the likely event of the Bill being passed, industries, particularly the insurance and construction industries, will need to carefully review their contracts and expressly exclude the statutory provisions, where they wish to do so.

Hong Kong's current law - The Doctrine of Privity of Contract

Under the doctrine of privity of contract ("the Doctrine"):-

  1. a person cannot acquire and enforce rights under a contract to which he is not a party; and
  2. a person who is not a party to a contract cannot be made liable under it.

Criticisms of the Doctrine of Privity of Contract

The second aspect of the rule (at ii above) is generally regarded as sensible, but the first aspect (at i above) has been criticized, as frustrating contracting parties' intentions to benefit third parties. For example, A and B enter into a contract under which A agrees to pay a sum of money to C, with both parties fully intending that C should take the benefit of A's promise. If A defaults, C cannot sue A under the existing law because of the Doctrine.

Various other jurisdictions, including England, Canada (New Brunswick), Australia (Western Australia, Northern Territory and Queensland), New Zealand and Singapore have reformed the Doctrine by legislation.

Contracts (Rights of Third Parties) Bill 2013

After considering recommendations of the Law Reform Commission of Hong Kong Sub-Committee ("LRC Sub-Committee), the Department of Justice prepared the Bill, with a view to implementing the recommendations in full. The LRC Sub-Committee recommended that the Doctrine should be reformed (but not completely abolished) and that a clear and straightforward legislative scheme should be enacted whereby, subject to the manifest intentions of the parties to a contract, the parties could confer legally enforceable rights or benefits on a third party under that contract.

The Department of Justice has sought the views of professional bodies, business communities and other interested parties on the Bill and a summary of the main provisions (which could be changed after the public consultation) are as follows.

Scope of Application

The Bill excludes contracts entered into before the Ordinance comes into effect and also the following two categories of contracts:-

  1. Contracts where third parties already have enforceable rights under existing rules reflecting international conventions. This includes bills of exchange, promissory notes and other negotiable instruments, contracts for the carriage of goods by sea and air, and contracts on a letter of credit.
  2. Contracts where there are policy reasons for a third party not having the right to enforce a contract. This includes a memorandum and articles of a company having effect as a contract under seal under section 23 of the Companies Ordinance (where it is intended that the contract should not confer rights on third parties) and contracts of employment, as against an employee. The latter envisages, for example, a situation where an employer and employee enter into a contract and the employee is seconded to work for a third party. It could be unfair to the employee if the third party could sue on the contract.

In its comments on the Bill, the Hong Kong Bar Association has suggested that Deeds of Mutual Covenants, governing the use of multi-storeyed buildings, should also be excluded, since the obligations contained in them are a unique feature of Hong Kong's conveyancing system, with their own special rules on enforcement by third parties, evolved through case law and underpinned by statute.

Which Third Parties have a right to enforce a contractual Term?

The Bill provides that a third party who is expressly identified in the contract by name, as a member of a class or as answering a particular description, may enforce a term of the contract, if :

  1. the contract expressly provides that he may do so; or
  2. the term purports to confer a benefit on him, unless on a proper construction of the contract, the parties did not intend the term to be enforceable by the third party.

The Bill provides that rights may be conferred on a third party who was not in existence when the contract was entered into. It also provides that a third party's right to enforce a contractual term is to be subject to other relevant terms of the contract.

What remedy is available to the third party?

The Bill provides that a third party is entitled to any remedy that would have been available to him in any action for breach of contract, had he been a party to the contract.

Can the contracting parties rescind or vary the contract?

To achieve a balance between the contracting parties' freedom to alter the contract terms and the interests of the third party who may suffer as a result, the Bill provides a cut off point after which the contracting parties cannot vary or rescind the contract, without the third party's consent. The cut off point occurs :

  1. once the third party has communicated to the promisor (by words or conduct) his assent to the term conferring benefit on him, or
  2. the third party has relied on the term and the promisor
    1. is aware of that reliance; or
    2. could reasonably be expected to have foreseen that the third party would rely on it.

The above is subject to any express term in the contract allowing the contract to be rescinded or varied by a party or parties without the third party's consent and the third party is aware of that express term or reasonable steps have been taken to bring it to his attention.

The Bill provides that the Court may dispense with a third party's consent to rescind or vary the contract if it thinks it just and practicable to do so and the other party (ies) agrees to this.

Defences available to a Promisor

The Bill provides for the defences, set-offs and counterclaims available to the Promisor where the third party brings proceedings for the enforcement of a contract term.

The Promisee's Right

The Bill contains a provision making it clear that a third party's right to enforce a term in the contract, does not affect the right of the Promisee to enforce any term of the contract.

Protection of Promisor from Double Liability

The Bill provides that if a Promisor has performed his obligations to the third party, the Promisor is discharged, to the extent of that performance, from the same obligations owed by the Promisor to the Promisee. It also provides that if the Promisee has recovered from the Promisor a sum in respect of the third party's loss or the Promisee's expense in making good to the third party the Promisor's default, in any subsequent proceedings brought by the third party, the court must reduce any award to the third party to an appropriate extent to take account of that sum.

Arbitration and Exclusive Jurisdiction Clauses

Parties to a contract may include in it an arbitration clause agreeing to refer any dispute arising from the contract to arbitration and/or a jurisdiction clause specifying the jurisdiction for any action in relation to the contract. The question is whether such claims would also be binding on the third party. The Bill provides that if a third party has the right under the Ordinance to enforce a contractual term and the contract contains an arbitration clause or an exclusive jurisdiction clause, then the third party is to be bound by that clause, as regards any dispute between the third party and the Promisor, relating to the enforcement of the term by the third party, unless on a proper construction of the contract, the third party is not intended to be so bound. The Law Society, in its comments on the Bill, has suggested that the same should also apply to any mediation clause in the contract.

Assignment of Third Party Right

The Bill allows the third party to assign to another person his rights to enforce a term under the contract, unless there is a clause in the contract prohibiting this or, on a proper construction of the contract, those rights were not intended to be assignable.

The Way Forward

As stated above, the Department of Justice sought comments by 31 December 2012 and is now in the process of considering such. We shall monitor the progress of the Bill and report on such in our subsequent newsletters.

Arrangement Signed for Mutual Recognition and Enforcement of Arbitral Awards between Hong Kong and Macau

by Karen Dicks (karen.dicks@deacons.com.hk)

On 7 January 2013, the Governments of Hong Kong and Macau signed "The Arrangement Concerning Reciprocal Recognition and Enforcement of Arbitral Awards Between the Hong Kong Special Administrative Region and the Macau Special Administrative Region" ("the Arrangement") to provide mutual recognition and enforcement of arbitral awards in both places.

Under the Arrangement, the Hong Kong courts shall recognise and enforce arbitral awards made in Macau pursuant to Macau's arbitration laws and the Macau courts shall recognise and enforce arbitral awards made in Hong Kong pursuant to Hong Kong's Arbitration Ordinance.

Where a party fails to comply with an arbitral award, whether made in Hong Kong or Macau, the other party may apply to the relevant court in the place where the party against whom the application is filed is domiciled, or the place in which the property of the said party is situated, for recognition and enforcement of the award.

In Hong Kong, the Court of First Instance has jurisdiction to entertain an application for recognition and enforcement of awards. In Macau, the Court of First Instance has jurisdiction to entertain applications for recognition, while the Court of Second Instance has jurisdiction to enforce the arbitral awards.

The Arrangement was made in accordance with the provisions in the Basic Law of Hong Kong and Macau. The content of the Arrangement is made in accordance with the spirit of the New York Convention and is broadly similar to the existing arrangements on the same issue between Hong Kong and Mainland China and between Macau and Mainland China.

The Arrangement will no doubt lead to greater legal co-operation between Hong Kong and Macau and further enhance Hong Kong's reputation as an international arbitration venue.