HONG KONG: ARBITRATION FAVOURED OVER LABOUR TRIBUNAL IN EMPLOYEE BONUS DISPUTE

In a recent Hong Kong Court of First Instance decision MAK v LA [2022] HKCFI 285, the Court was presented with a dispute arising from a bonus letter silent on dispute resolution mechanism, and with conflicting dispute resolution clauses in related contractual instruments, including the employment contract. The Court ultimately concluded that the arbitration agreement extended to the bonus letter. The case provides a timely reminder on the importance of express, clear and consistent dispute resolution provisions where employment terms are contained in multiple agreements. The Court also clarified the relationship between the Labour Tribunal's jurisdiction and that of the arbitral tribunal.

Background

The plaintiff (Employee) was employed as the CEO, CFO and Head of Compliance of the defendant, LA. After LA terminated his employment, the Employee claimed for payment of various bonuses alleging the employer had breached implied terms of the employment. Specifically, the Employee asserted that he was entitled to the vesting and redemption of share units granted under a staff profit-sharing scheme (Scheme) from 2016 to 2018 (Vesting and Redemption Claim), and discretionary performance bonus for 2019 (Unpaid Bonus Claim).

The Employee initially brought the dispute before the Labour Tribunal. LA challenged whether the Labour Tribunal had jurisdiction over the dispute, and claimed that the Vesting and Redemption Claim should be submitted to arbitration. The Labour Tribunal ordered that the proceedings be transferred to the Court of First Instance (Court), following which LA sought to stay the Employee’s claims in the Labour Tribunal, pending arbitration.

Conflicting dispute resolution clauses

The employment terms between LA and the Employee contained conflicting dispute resolution clauses, namely:

• the letter of employment provided for the exclusive jurisdiction of the Hong Kong courts and tribunals over any dispute arising out of the employment;
• the letter for the 2016 bonus awarded under the Scheme (2016 Bonus Letter) did not have a clause on dispute resolution; and
• the letters for the 2017 and 2018 bonus awarded under the Scheme, which had since the 2016 Bonus Letter been restructured, set out the revamped terms and conditions of the Scheme, and stated that "any disputes arising out of or in connection with this agreement" were to be referred to a sole arbitrator appointed by LA from the Hong Kong International Arbitration Centre's list of approved arbitrators (respectively, 2017 Bonus Letter and 2018 Bonus Letter). The 2017 Bonus Letter was signed by the Employee, but the 2018 Bonus Letter was not.

Applying arbitration agreement to multiple agreements

Hong Kong Courts have long established a pro-arbitration approach and if an action is brought in a matter which is the subject of an arbitration agreement, and if a party so requests, the Court shall refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed (Section 20 of the Arbitration Ordinance (Cap. 609) (AO)).

In determining the appropriate forum for the Vesting and Redemption Claim, the Court first considered the terms of the 2017 Bonus Letter, which were framed broadly to govern the Employee's participation in the Scheme. The Court found that the 2017 Bonus Letter, which was signed by the Employee and which contained an arbitration clause, had a prima facie arbitration agreement concerning the Employee's participation in the Scheme.

The Employee argued that the arbitration agreement was unconscionable and unenforceable due to factors including LA's asymmetrical power to nominate the sole arbitrator. The court rejected the argument and reasoned that it is bound by the AO to refer the parties to arbitration once the prima facie existence of the arbitration agreement is established. An arbitrator, even though nominated by LA, is under a statutory duty to act impartially. The Court found no basis to support the allegation that the arbitration agreement was "null, void, inoperative or incapable of being performed".

The Court then considered whether the arbitration agreement in the 2017 Bonus Letter may be extended to the 2016 Bonus Letter and 2018 Bonus Letter. All three Bonus Letters dealt with the same subject matter - the Employee's entitlement to share units under the Scheme. The Court found that the arbitration clause in the 2017 Bonus Letter was wide enough to extend to the disputes under the 2016 Bonus Letter and 2018 Bonus Letter, by:

• finding that the dispute over the Vesting and Redemption Claim had the closest connection with the terms and conditions of the Employee's participation in the Scheme (which was specifically set out in the relevant bonus letters), rather than the letter of employment. The relevant bonus letters were agreed by the parties after the letter of employment, which indicated their intention to arbitrate disputes in relation to the Scheme, rather than litigate them pursuant to the letter of employment.
• making the observation that terms and conditions set out in the 2017 Bonus Letter extend to the 2016 Bonus Letter and 2018 Bonus Letter, in the absence of any agreement providing for the contrary;
• applying a presumption in favour of arbitration; and
• adopting the "extend Fiona Trust principle", so that a jurisdiction agreement contained in one contract is extended to a claim under another contract. This is based on the presumption that commercial parties are likely to have intended to have the disputes arising from their relationship determined by a tribunal which they have chosen.

Even though the 2018 Bonus Letter was not countersigned by the Employee, the Court held that this did not alter the existence of an arbitration agreement in writing. In any event, the Court found that the arbitration agreement in the 2017 Bonus Letter extended to the 2018 Bonus Letter.

The jurisdiction of the Labour Tribunal

Another issue that the Court had to decide was whether the Vesting and Redemption Claim fell within the exclusive jurisdiction of the Labour Tribunal. Under section 20(2) of AO, the Court "may" refer to arbitration, on request, a dispute falling within the jurisdiction of the Labour Tribunal, provided that:

• there is no "sufficient reason" why the parties should not be referred to arbitration in accordance with the arbitration agreement; and
• the party requesting arbitration was "ready and willing … to do all things necessary for the proper conduct of the arbitration …".

If a claim falls within the Labour Tribunal's exclusive jurisdiction, there may be a sufficient reason to not refer to arbitration. The Labour Tribunal has broad jurisdiction including exclusive jurisdiction over monetary claims arising from the breach of a term of an employment contract. In this case, as the substance of the Vesting and Redemption Claim related to the share units under the Scheme, the Court considered this to be more than a simple claim for a sum of money. Therefore, the Vesting and Redemption Claim was not within the exclusive jurisdiction of the Labour Tribunal. As LA had also been ready and willing to proceed to arbitration, there was no reason not to refer the claims to arbitration.

While the Court appreciated the Employee may seek to bring a claim in the Labour Tribunal to minimise costs and take advantage of the simplified procedure, the Court considered that these interests may be served in arbitration. Therefore, it held that LA had demonstrated the existence of an arbitration agreement and that the Vesting and Redemption Claim fell within the ambit of the arbitration agreement thus it was bound to refer the parties to arbitration. In keeping with the usual practice of the Hong Kong courts where an arbitration agreement is challenged unsuccessfully, the Employee was ordered to pay costs of the application to LA on an indemnity basis.

Whether a stay of residual claims in Court proceedings should be granted

In respect of the Unpaid Bonus Claim, it did not fall under any of the Bonus Letters and was governed by the letter of employment (which provided for the exclusive jurisdiction of the Hong Kong courts). As such, the claim was not referred to arbitration. However, the Court found that the claim overlapped with the Vesting and Redemption Claim and therefore it was appropriate to stay the Unpaid Bonus Claim pending the determination of the Vesting and Redemption Claim. To avoid the risk of inconsistent findings by the Court and the arbitrator on the overlapping questions, the Court suggested the parties agree to submit the Unpaid Bonus Claim to arbitration.

Key takeaways

The decision is a helpful reminder of the following:

• Employers should have express and consistent dispute resolution provisions in employment terms, especially when those terms are contained across a suite of documents.
• Increasingly, employers are referring incentive disputes to arbitration because it is confidential and permits greater procedural flexibility and, often, efficiency. It may be more appropriate for disputes relating to more complex incentive schemes to be heard in a forum other than the Labour Tribunal, whose purpose is to provide a quick, informal and inexpensive way of settling simple disputes between employees and employers.
• If arbitration is agreed as the dispute resolution forum for certain employment-related disputes, such a choice should be respected and complied with. Departure from the agreement may lead to cost sanctions from the Court.

For more information, please contact Tess Lumsdaine, Senior Consultant, Peter Chen, Senior Associate, Ellie Cheung, Associate, or your usual Herbert Smith Freehills contact.