Akihiro Oba and Others v. Kishimoto Sangyo Co. Ltd. and Another

CACV000211/1995

IN THE COURT OF APPEAL

1995, No. 211
(Civil)

Headnote

Contractual duties of employees and fiduciary duties of directors of companies - Breach of duties of fidelity resulting in nominal damages - Whether breach of fiduciary duties led to equitable remedies - Concept of diversion of maturing business opportunity in Canadian Aero Service v. O'Malley [1973]40 DLR (3rd) 371 is one aspect of the wider principle of equity stated in Regal (Hastings) Ltd. v. Gulliver [1967]2 AC 134.

Held (Court of Appeal) reversing the trial judge: Breach of contractual duties sounded in nominal damages only. Diversion of business opportunity requiring the intervention of equity not established on the judge's findings of fact. Appeal allowed.

IN THE COURT OF APPEAL

1995, No. 211
(Civil)

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Coram: Hon. Litton, V.-P., Godfrey and Ching, JJ.A.

Date of hearing: 19, 20, 21, 22 and 26 March 1996

Date of handing down of judgment: 12 April 1996

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J U D G M E N T

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Litton, V.-P.:

Introduction

1. This is an appeal by the defendants in an action tried by Barnett J in June, July and August 1995. By his judgment dated 6 September 1995 Barnett J gave judgment for the plaintiffs, in terms which will need close analysis later on.

2. The 1st Plaintiff (Kishimoto Japan) is a large Japanese trading corporation. The 2nd Plaintiff (Kishimoto HK) is a subsidiary of Kishimoto Japan. From 1991, when he was seconded from Japan to Hong Kong, the 1st Defendant (Mr Oba) was managing director of Kishimoto HK, for the purposes of developing the overseas trade of Kishimoto Japan. He remained at the same time a senior manager of Kishimoto Japan. His principal function was to develop Kishimoto's business in the region, and this included the emerging liquid crystal display (LCD) market. This product, known more precisely as TFT-LCD (thin film transistor - liquid crystal display) is the display component found in colour computer notebooks and products of this kind. Essentially, it is the screen on which the images are displayed. It consists of two pieces of glass with a minute gap in-between (measuring 0.3 microns) which is filled with liquid crystal. On one of the pieces of glass there is implanted a micro printed-circuit, the other piece of glass being a colour filter. When the printed circuit is energised, the liquid crystal refracts light and this forms the basis of a high resolution colour screen. Technically, this unit is known as a "cell assembly process" and it was the obtaining of contracts for the supply of equipment to mass produce these screens which provided the focus of this case.

3. In brief outline, the events leading up to this litigation is as follows:

(i) In early 1993 Oba was in discussion with the senior management of a Taiwanese company called Prime View International Limited. Mr Oba had great expertise in TFT-LCDs and was highly respected in the field. As a result of Mr Oba's efforts, Kishimoto HK, acting as a middle-man, was able to secure two contracts with Prime View for the installation of a pilot plant in Taiwan. The contracts were made in May and June 1993 and the manufacturers of the equipment were three Japanese companies known as Iinuma Gauge (headed by Mr Iinuma), Nakan (headed by Mr Odajima) and SPC. The purpose of the pilot plant was to test the viability of Prime View mass-producing TFT-LCD. The cell assembly process was one of the three processes constituting the production line which Prime View was contemplating setting up.

(ii) In mid-June 1993 Mr Oba was told by head office that Kishimoto HK was no longer to develop the Taiwan business. The business was to go to the Taiwan subsidiary. He was unable to accept this corporate ultimatum and tendered his resignation on 7 July 1993, to take effect on 30 September 1993. The resignation was, by mutual arrangement, postponed for one month and Mr Oba left Kishimoto at the end of October 1993. The judge found as a fact that Mr Oba's resignation was "prompted only by what he perceived to be lack of support and unfair treatment by top management in Kishimoto Japan" (p33 judgment).

(iii) Upon his resignation from Kishimoto HK, Mr Oba joined the 3rd Defendant (BOIS), a company which he had acquired in October. The 2nd Defendant (Mr Leung) who had been a manager of Kishimoto HK since 1991 stayed with Kishimoto HK until February 1994 when he left and joined BOIS. Both Mr Oba and Mr Leung became directors and shareholders of BOIS in November 1993. By January 1994, BOIS through Mr Oba was in contact with Prime View to discuss the possibility of BOIS supplying the equipment for the production project. At the same time, Kishimoto found that its formerly close relationship with Prime View was becoming cool, as were its relations with the Japanese manufacturers from whom the equipment for the pilot plant had been acquired: the same manufacturers Kishimoto had hoped would again supply equipment for Prime View for the mass-production project.

4. It is the plaintiffs' case (put at its simplest) that but for Mr Oba's activities Kishimoto would have got, or had a good chance of getting, a significant number of contracts for the Prime View mass-production project; Mr Oba "wooed" the team of manufacturers who had supplied equipment for the pilot plant (ING, Nakan and SPC) and "deliberately cultivated" Mr S.N. Lee the president of Prime View, with the result that Kishimoto lost the chance of getting those contracts.

The proceedings

5. After their solicitors had on 6th October 1994 warned Mr Oba of possible breaches of covenant and after a short exchange of letters, Kishimoto issued a writ against the Defendants on 12th January 1995. BOIS was, at that time, on the verge of securing a contract for the supply to Prime View of a piece of machinery manufactured by Nakan. In response to a summons seeking interlocutory injunctions, the Defendants gave undertakings not to involve themselves in the production project. It was agreed that there should be a speedy trial.

6. By their statement of claim, Kishimoto pleaded against Mr Oba: breach of his duty of fidelity as an employee; breach of his fiduciary duty as a director of Kishimoto HK and as a senior manager of Kishimoto Japan; breach of an express agreement made on 31st October 1993 not to use secret or confidential information; and breach of confidence and fiduciary duty after he left Kishimoto by using and disclosing knowledge relating to Kishimoto's dealings with Prime View.

7. Against Mr Leung, Kishimoto also pleaded breach of duty of fidelity; breach of fiduciary duty; and breach of confidence and fiduciary duty after leaving Kishimoto.

8. Against both Mr Oba and Mr Leung, Kishimoto pleaded that each induced caused or procured the other to act in breach of his duties.

9. Against BOIS, Kishimoto pleaded that it induced, caused or procured Mr Oba and Mr Leung to act in breach of their duties.

The alleged "diversion" of a "maturing business opportunity"

10. As the judge puts it: "although various individual breaches of duty have been pleaded, in combination they constitute Kishimoto's real complaint, which is that Mr Oba diverted or tried to divert to himself or BOIS what has been called a 'maturing business opportunity', that is the production project. Kishimoto also claims that Mr Oba misused confidential information. This claim is in reality part of the main complaint, but is capable of independent life if the main complaint fails".

11. I have underlined the words "or tried" in the judgment quoted above because, as I see it, there is a real difference between a case, such as Canadian Aero Service v. O'Malley (1973) 40 DLR (3rd) 371, upon which the judge heavily relied, where the defendants obtained for themselves a profitable contract by the misuse of their positions as senior officers of the plaintiff, and a case such as this where the focus of the evidence was simply upon an embryonic business project: There was no profitable contract to which the "activities" complained of could have been directed; Mr Oba was not negotiating on the plaintiffs' behalf any contract for the mass-production plant at the time he left the company; no contract as such appeared over the horizon for nearly a year.

12. As the judge rightly said:

"Diversion of a maturing business opportunity is simply one aspect of the principle, which was not in dispute, that a director owed to his company fiduciary duties, which include a duty not to profit personally from his position as director and a duty not to allow a conflict to arise between his duty as a director and his own self interest: Regal (Hastings) Ltd. v. Gulliver [1967] 2 AC 134."

13. If a director has profited from a misuse of his position as a director, in breach of his fiduciary duty, he is liable to account to the company for that profit, irrespective of whether the company has been damaged or not: see Lord Russell of Killower in Regal (Hastings) Ltd v. Gulliver at 140-141: Though the court could, in the exercise of its equitable jurisdiction, order payment to be made to the director for his work and skill in obtaining that profit: see Phipps v. Broadman [1967] 2 AC 46 at 104-E and 112D.

14. In Canadian Aero Service v. O'Malley senior officers of the plaintiff had undertaken much preparatory work for an aerial survey of Guyana, a project to be funded by the Canadian government. At a time when "it was felt the job was a certainty for Canaero" the officers resigned. Through their own company they got the contract. The amount tendered for the project, $2.3 million, was exactly the same as that in a proposal prepared by one of the defendants for Canaero. In giving judgment for the plaintiff the Supreme Court of Canada (delivered by Laskin J) said:

"Liability of O'Malley and Zarzycki for breach of fiduciary duty does not depend upon proof by Canaero that, but for their intervention, it would have obtained the Guyana contract; nor is it a condition of recovery of damages that Canaero establish what its profit would have been or what it has lost by failing to realize the corporate opportunity in question. It is entitled to compel the faithless fiduciaries to answer for their default according to their gain. Whether the damages awarded here be viewed as an accounting of profits or, what amounts to the same thing, as based on unjust enrichment, I would not interfere with the quantum. The appeal is, accordingly, allowed against all defendants ... and judgment should be entered against them for $125,000."

15. Although judgment was entered for the plaintiff in Canaero for "damages" (more accurately equitable compensation), the juridical basis for relief was that equity would not allow a fiduciary to profit from his own wrong. This is to be contrasted with the present case where Mr Oba had made no profit by the alleged diversion of business opportunity and therefore the equitable reliefs of an accounting of profits or "unjust enrichment" to which Laskin J referred in Canaero were not available.

The formal judgment

16. Barnett J gave judgment in favour of the plaintiffs on 6 September 1995. The formal order is expressed thus:

"1. Judgment be entered for the First Plaintiff against the First Defendant for damages to be assessed on the basis of 50% impairment of the First Defendant's chance of obtaining contracts for the supply of equipment for the manufacture of thin film transistor liquid crystal display ('TFT LCD') instruments in the plant to be constructed by Prime View International Limited for the mass production of such instruments.

2. Judgment be entered for the Second Plaintiff against the First Defendant and Second Defendant with damages to be assessed for breaches of their respective fiduciary duties to the Second Plaintiff.

3. Each of the Defendants be restrained whether by himself, his servants, agents or otherwise howsoever from soliciting, entering into or performing any contract with Prime View International Limited for the supply of equipment or components for or ancillary to the manufacture of thin film transistor liquid crystal display instruments for use in the plant to be constructed by Prime View International Limited for the mass production of thin film transistor liquid crystal display instruments."

17. The reason why judgment was given in terms of paragraphs 1 and 2 is because, in the second week of the trial, and after some of the plaintiffs' witnesses had given evidence and been cross-examined, there was an application to split the trial, with "liability" only to be determined by the judge, any 'inquiry as to damages' to be separately assessed at a later stage. This was objected to by counsel for the defendants, unsuccessfully.

18. Para 1 of the order contains an obvious clerical error. Where the order refers to "50% impairment of the First Defendant's chance of obtaining contracts", the judge must obviously have meant the 1st Plaintiff. Read thus, the order is still very odd. On the evidence, Prime View eventually entered into 14 contracts for equipment. The judge, however, made no findings as to how many of those contracts the 1st Plaintiff had a chance of obtaining, nor whether the chances were uniform as to them all. In fact, the 1st Plaintiff had been asked by Prime View to tender for 12 of the 14 contracts; it chose to tender for only two and got two: one for Ayumi Kogyo Co. Ltd. to supply an LC filling machine and one for Yodogawa to supply a cassette handling machine. The "lost chance" could therefore only have related to 12 contracts. How the assessment would proceed according to the judge's order is difficult to imagine.

19. Mr Thomas QC says this: On the assessment of damages, an expert can proceed on the assumption that the plaintiff would, but for the activities of the 1st Defendant, have obtained all 14 contracts. I cannot see how such an assumption can be made. Whilst the ascertainment of profits (if any) to be derived from a contract or a series of contracts is properly a matter for experts, the finding as to the chance or chances of getting any of the contracts and the percentage of such chance or chances in each case, are matters for the judge.

20. There are many cases in the books where company directors and similar fiduciaries have been made to account for profits they have made by the misuse of their positions. Industrial Development v. Cooley [1972] 1 WLR 443 was cited as an example. In Pacifica Shipping Co. Ltd. v. Andersen [1986] 2 NZLR 328 the equitable relief of injunction was ordered. Those are clear-cut cases.

21. Here Barnett J ordered, on 6 September 1995, that an injunction be granted restraining the defendants from soliciting or entering into contracts with Prime View for the supply of equipment for the manufacture of TFT-LCDs at its mass-production plant - at a time when, on the evidence, all the contracts for the cell-assembly process had long since been let. The need for the injunction is obscure. Injunction is an equitable remedy. Equity never acts in vain. The judge made no finding that the defendants had profited from any misuse of Mr Oba's position. He made no finding that Mr Oba had misused any confidential information derived from his fiduciary office (hence the Respondent's Notice to the effect that the judge ought to have so held). He made no finding that the plaintiffs had suffered substantial damage either directly or foreseeably as a result of the defendants' acts: yet he made an order for the assessment of damages which left questions of causation and proximity wholly in the air. When the result is as curious as this, it calls for the most anxious consideration by this court of the foundation of liability.

The facts

22. The evidence accepted by the judge amounted to this:

(i) Mr Oba was a senior manager with Kishimoto Japan, having been with them for 30 years: all his working life. He was vastly experienced, and was considered Kishimoto's most knowledgeable person in the LCD field.

(ii) After Mr Oba arrived in Hong Kong in 1991 he set about developing Kishimoto's overseas LCD business. With some difficulties he obtained orders for mass-production machinery from Truly Electronics Manufactory Ltd., a PRC company. For that purpose Mr Oba was able to put together a team of 3 Japanese manufacturers of equipment: Iinuma Gauge Manufacturing Co. Ltd. (ING) SPC Electronics Group (SPC) and Nakan Corporation (Nakan). ING was the "head" supplier, purchasing from Nakan and SPC and selling-on their machines, together with its own, to Kishimoto HK acting as the "middleman". This rather complicated arrangement solved the difficulties which then existed: Nakan was unable to deal direct with Mr Oba because of some prior arrangement it had with Hitachi Chemical. As a result Kishimoto HK obtained orders worth about ￥600 million, "while Mr Oba got to know the suppliers, their factories and machines and acquired a deeper knowledge of the process and the machinery involved": judgment at p10.

(iii) Mr Iinuma (head of ING) was "sufficiently impressed both by the prospect of overseas business and by Mr Oba's ability to absorb and convey the respective requirements and specifications of supplier and customer that he asked Oba to look for and develop opportunities in Taiwan through Hong Kong. In doing so Mr Iinuma was not binding ING to Kishimoto HK": judgment at p10.

(iv) At about the end of 1992, Kishimoto Japan learnt from its Taiwan subsidiary Kishisang Company that Prime View intended to set up a pilot plant, to explore the possibility of having a mass production plant for TFT-LCDs. It was agreed that Kishimoto HK through Mr Oba and in conjunction with Kishisang should contact Prime View and suppliers. According to Mr Kawada (director of the international division of Kishimoto Japan) the suppliers (ING and Nakan) regarded Mr Oba as the LCD specialist and preferred him to help them in Taiwan. It was agreed that Kishimoto HK should have a percentage of any profit.

(v) At the end of February 1993 Mr Oba visited Prime View and met Mr S.N. Lee its president. Mr Oba made a presentation of the types of machines available, particularly the equipment supplied by SPC and Nakan. Mr Lee was impressed. Mr Oba then visited the various suppliers in Japan and returned to Prime View in April 1993 with Mr Iinuma and an engineer of ING. In his written report to head office Mr Oba estimated the value of the contract for the pilot plant to be ￥140 million and said: "concerning procurement for the mass production line which will commence from 1995 they are planning to visit Japan at the beginning of June 1993 and are requesting our company ... to accompany them."

(vi) Orders for the pilot plant were placed, in May and June 1993. These comprised 15 items of equipment, of which 3 were manufactured and supplied by respectively SPC, Ayumi Kogyo Co. Ltd. and Yodogawa Kasei Kogyo, the other 12 being supplied by ING, of which 8 were manufactured by ING itself and the other 4 by other manufacturers including Nakan, the manufacturer of the PI coater. In June and July Mr Kawada met Mr S.N. Lee and Mr Lee expressed satisfaction at Kishimoto's specialist co-ordination and said they intended to go on to the mass production project.

(vii) Soon after the June order for the pilot plant was received Mr Oba received a nasty shock: He was, as the judge described it, outraged to learn that top management in Kishimoto Japan had decided to exclude Kishimoto HK from any involvement in the Prime View business: Kishimoto HK was not to receive any benefit from the pilot plant other than a small commission to cover expenses. Mr Oba gave notice to resign on 7 July, to expire on 30 September and this was later extended to the end of October 1993. As I have said, the judge found as a fact that Mr Oba's resignation was prompted only by what he perceived to be lack of support and unfair treatment by top management: Mr Oba did, however, intend to form his own company and told Mr Masuda of this intention during a trip to Japan in July to visit manufacturers and suppliers. (Mr Masuda was Mr Oba's subordinate and took over as managing director of Kishimoto HK when he left). Mr Oba also suggested that Mr Masuda should join ING and provide it with export expertise. Mr Oba also said that if Mr Masuda did this, "we would most certainly obtain contracts for (the production project)".

(viii) After his letter of resignation and before actually leaving his employment at the end of October 1993 Mr Oba made a number of visits to Japan to see manufacturers and suppliers. Of particular significance was a meeting with SPC executives on 9 September. A minute of that meeting (made by an unidentified person) was produced as Ex D7. It indicates a fairly established intention on Mr Oba's part to form a new company, to be engaged in business similar to Kishimoto's, with technical support from Iinuma Gauge and others and with staff moving over from Kishimoto HK and Taiwan to the new company. Concerning relations between Kishimoto Japan and the new company the minute notes:

"Kishimoto Sangyo is not serious about the LCD business ...".

The judge's findings concerning Ex D7 are as follows:

"Mr Oba's explanation of these minutes was that it was not a formal meeting with a formal agenda. He paid a courtesy call at which there was general conversation in which he gave a general description of the future. He had started thinking of a new company in Hong Kong, but had no firm plan and no clear picture of who would back him. He expressed a desire to be able to deal directly with SPC, a large public company. He told SPC he thought he could count on technical and financial support from ING in view of their relationship although he had not yet approached ING. He thought if he set up in business, some of the staff he worked with in Hong Kong would approach him and he felt Mr Leung might come over if he talked to him.

I simply note two aspects of this document. First, whatever form the meeting took, Mr Oba plainly had given considerable thought to his future and had some pretty clear ideas of what he was going to do. Second, the way in which Mr Oba, a managing director and senior manager, referred to his own employers and the movement of staff was wholly unacceptable."

(ix) On 22 September 1993 Mr Oba had a meeting with Mr Iinuma. This, the judge found, "crystallized Mr Oba's thinking". Within the next three weeks he had raised money from relatives, Mr Iinuma, Mr Leung (the 2nd Defendant) and a Mr Senoo (who was the president of a business which, among other things, produced machinery used for making aluminium window frames in Japan). Mr Iinuma and Mr Senoo each put up HK$700,000, Mr Leung $10,000 and Mr Oba the balance of HK$700,000.

(x) At the end of October 1993 Mr Oba left Kishimoto HK's office and went to Japan to say his farewells and tidy up his affairs. Apart from Mr Leung he told no-one in Kishimoto that he was setting up BOIS. When he paid a courtesy call on the president Mr Kishimoto he said he was going into the antique business: a story he told all his colleagues.

(xi) In mid-November 1993 Mr Oba returned to Hong Kong to set up BOIS: a shelf company he had acquired in early October. Mr Leung although a shareholder and director of BOIS from mid-November 1993, remained at Kishimoto HK until March 1994.

(xii) As regards the pilot plant, the machinery was not delivered to Prime View till November 1993. Mr Wada (assistant director of Kishimoto's international division) was put in charge after Mr Oba's resignation. He together with the manufacturers' engineers spent ten days at Prime View, from 12 to 22 December, when the machinery was set up. The performance was satisfactory and Prime View confirmed their intention to set up a mass production line.

(xiii) The pilot plant and the mass production plant were quite different in terms of equipment and scale. In December 1993 when the pilot plant was being set up at Prime View, the land for the building which eventually housed the production plant had not yet been acquired. Moreover the cell-assembly plant (with which this case is concerned) is only one of three assembly plants needed to produce TFT-LCDs. The other two processes are the making of the thin film transistors ("TFTs") themselves, and the connection of the driver circuit to the cell assembly to make the module. The embryonic stage of the proposal can be gathered from the one-page document given to Mr Wada which referred to a "first stage survey" and asked for information concerning:

"1. Equipment name, brand and model number.

2. Equipment and transfer stage size.

3. Suggested layout.

4. Estimated price for each use."

The budget was ￥12 billion, ￥8 billion being for the production line of which the cell-assembly process only formed part.

(xiv) On 16 December 1993 an article appeared in a Taiwan newspaper concerning the proposed production plant.

(xv) Mr Oba made efforts to cultivate his relationship with Mr S.N. Lee. On 22 December 1993 he sent a fax to Mr Lee telling him about BOIS, it's main lines of business (which were many); as regards LCDs the fax named seven "major equipment suppliers" including Nakan, ING and SPC as supporting BOIS. The fax ended by saying:

"We are always behind you to get success for your projects by all means. Your laboratory facilities are going to be operated, we believe, so that our Mr A Oba and Mr S Iinuma are planning to visit you to make it sure whether our services in regard to this time contract execution causes any troubles or not."

(xvi) On 10 January 1994 Mr Oba visited Prime View. He introduced BOIS and its shareholders to Mr S.N. Lee. He signed a confidentiality agreement after which Mr Lee revealed Prime View's plans: which were enormous. When Mr Oba returned to Japan, a meeting was arranged at SPC's office, attended by Mr Iinuma, Mr Odajima (of Nakan) and Mr Ichikawa of New Long, another manufacturer. He told them about Prime View's budget and schedule. Following this meeting Mr Oba wrote to Prime View to make arrangements for representatives of ING and SPC to visit Prime View. In March Mr Iinuma did visit Prime View and by this time he had decided to go with BOIS.

(xvii) Whilst Mr Oba was gearing up to get business from Prime View, Mr Kawada and Mr Wada were trying to do the same. They also attempted to cultivate their relationship with the suppliers, with little success. When Mr Kawada met Mr Iinuma in Japan in 1994, Mr Iinuma expressed anxiety as to whether Kishimoto Japan could really do Prime View business without a specialist such as Mr Oba. Mr Kawada's response could hardly have been re-assuring: He told Mr Iinuma that Mr Wada and Mr Masuda were "learning" and Kishimoto Japan would "hire a specialist to strengthen their position". A specialist was eventually hired, in August 1994.

(xviii) By about March 1994 Mr Wada realized that Kishimoto was not going to have the co-operation of the "team" which had supplied the bulk of the equipment for the pilot plant: ING, Nakan and SPC.

(xix) Prime View called for bids for the supply of equipment for the production line. There were a total of 14 contracts for the LCD cell assembly plant. Eventually Kishimoto were invited to put forward proposals for 12; they put in proposals for two and were awarded two: an LCD filling machine manufactured by Ayumi and a cassette handling machine manufactured by Yodogawa. In January 1995 Mr Oba (on BOIS' behalf) was on the verge of finalizing a contract to supply a PI coating machine manufactured by Nakan when the plaintiffs issued the writ and took out a summons for an injunction. Mr Oba then wrote to Prime View relinquishing the contract and the interim injunction proceedings were disposed of by undertakings by the defendants and an order for speedy trial.

The judge's conclusions

23. The judge's broad conclusion is as follows:

"While individual matters are susceptible of innocent explanation, taken together they require no great penetration to reveal an interest and purpose on the part of Mr Oba to place himself in pole position when it came to bidding for the production project."

24. The judge rejected Mr Oba's evidence to the effect that he had no intention of forming his own trading company until after the various meetings he had with suppliers in September 1993: Mr Oba's intention, the judge found, was formed as early as July. The judge said:

"I am, therefore, satisfied and so find that at about the time when he resigned from Kishimoto, Mr Oba conceived the idea of setting up his own trading company through which he would bid for the production project and decided to woo the team to give himself a head start in the bidding. I am also satisfied that he deliberately cultivated Mr Lee of Prime View, hoping for a sympathetic reception for his bids."

The "real issue"

25. Earlier, the judge had said that the "real issue" in the case was what was Mr Oba's true intention between June 1993 and January 1994. Having found in effect against Mr Oba on this point, it is not surprising that Barnett J gave judgment against him.

26. Mr Thomas QC, counsel for Kishimoto, concedes that the judge's focus on Mr Oba's "true intention between June 1993 and January 1994" as defining the "real issue" in the case was too narrow: A better formulation of the issue is the judge's earlier statement (p3 of his judgment) when he said:

"Although various individual breaches of duty have been pleaded, in combination they constitute Kishimoto's real complaint, which is that Mr Oba diverted or tried to divert to himself or BOIS what has been called a 'maturing business opportunity', that is the production project."

"Maturing business opportunity"

27. The problem here is that at the time when Mr Oba severed his relationship with Kishimoto, at the end of October 1993, the production project, as a business opportunity, was at best prospective. The machinery for the pilot plant had not yet been delivered to Prime View; it was not set up until December 1993; there was no certainty that even if the pilot plant proved successful, Prime View would necessarily proceed to establish the mass production plant. The site for the plant had not yet been acquired. And even if Prime View should decide to go ahead with setting up the production plant - an investment of some ￥12 billion, with the production line budgeted at ￥8 billion, of which the cell-assembly was a substantial component - there was no certainty that Prime View would necessarily have dealt with the manufacturers and suppliers through a trading company - the judge, at p37 of his judgment, noted that the trading company played a "lesser role in setting up an automatic production line". As a matter of common-sense, the added cost to Prime View of using a trading company as "middleman" would only be justified if the trading company could render a real service. And even if a trading company was going to be employed, there was no certainty that the "team" of manufacturers who had supplied the bulk of the pilot plant (ING, Nakan and SPC) would be selected for the production line: though, as a matter of common-sense, they would have an advantage over other bidders, having set up the successful pilot plant. In the end 16 vendors representing 24 machine-makers approached Prime View for contracts. There was evidence before the judge, adduced through hearsay notices, to the effect that Prime View looked at many different vendors for each of the numerous contracts and asked for proposals and costings. Kishimoto, as mentioned earlier, were also asked to put forward proposals. Dr Hu Dyi Chung, senior director of Prime View, said:

"They [Kishimoto] had as good a chance as anyone of securing business as it was never our intention to exclude any potential vendor. We were merely concerned with getting the best product, the best service and the best support at the best price".

28. Nothing before the judge contradicted this statement.

29. As regards the suppliers, Mr Iinuma was, of course, a one-third share-holder in BOIS, but there was no evidence that any other manufacturers - in particular SPC and Nakan - had any relationship with Mr Oba other than an arm's length professional one. SPC, which made the cleaning equipment, is a publicly-listed company in Japan. Odajima's evidence, apparently accepted by the judge, was to the effect that whilst he had great respect for Mr Oba, he was "not particularly impressed" by Kishimoto. Odajima was president of Nakan.

30. As regards Iinuma the judge said (p10 judgment):

"Mr Iinuma made it plain in his evidence, which I accept on this point, that he, like any other supplier or manufacturer, was always open to approaches from any customer direct or any trading company. He said more than one trading company might seek equipment from ING for the same customer. In that situation, ING will give top priority to the trading company which has already obtained an order for equipment, but would also take into account any difficulties in the customer's specifications and the ability and co-operation of the trading company."

31. This is in effect a direct refutation of any suggestion that Mr Iinuma had become the "property" of BOIS (his one-third shareholding notwithstanding). And as regards Mr Oba's own skill and ability as a marketing man, compared with Kishimoto's lack thereof after his departure, the judge accepted Mr Iinuma's evidence to this effect (p29 judgment):

"Mr Iinuma said that he was not prepared to help Kishimoto Japan in respect of the production project because Kishimoto Japan could not furnish sufficient details of specifications and layouts to enable ING sensibly to consider their request. On the other hand, ING responded to Mr Oba's contemporaneous request because Mr Oba did have sufficient information to enable ING to proceed to a meeting with Prime View. So Mr Iinuma acknowledged both Mr Oba's ability as well as the skill and work required of a trading company where a custom built production is required."

Alleged breaches by Mr Oba

32. In these circumstances, a number of broad questions arise:

(i) Has Mr Oba, on all the evidence, breached his duties of fidelity, arising by implication from his contract of employment as a senior manager of Kishimoto Japan?

(ii) Has he breached his fiduciary duties as a director of Kishimoto Hong Kong, and as a senior manager of Kishimoto Japan?

(iii) Has any damage been caused by his alleged wrongful acts?

Remedies in common law and equity

33. Breach of the duty of fidelity results in the common law remedy of damages; breach of fiduciary duties calls for remedies in equity. Although, since the Judicature Act of 1873, the streams of common law and equity have merged, there are essential differences in remedies which must be recognised.

Breach of duty of fidelity

34. The duty of fidelity arises by implication from the contract of employment. For breach of this duty damages are recoverable at common law. Where the defendant is liable for a breach of contract, the plaintiff is in general entitled to nominal damages although no actual damage is proved: see Chitty on Contracts (General Principles) 27ed. para 26-004.

35. The law in this regard is reasonably clear: An employee is bound by his implied duty of fidelity and good faith to his employer (i) not to use or disclose during his employment confidential information gained in the course of his employment and (ii) not to use or disclose either during his employment or thereafter information which is not merely confidential but can properly be regarded as trade secrets: see Faccenda Chicken Ltd. v. Fowler [1987] 1 Ch. 117.

36. The judge, correctly on the facts, made no finding against Mr Oba in regard to any use or misuse of confidential information or trade secrets. Outside of such specific instances of breach of the duty of fidelity and good faith by an employee, the matter becomes somewhat nebulous.

37. The judge's finding is as follows:

"Mr Oba was, however, in breach of his duty of fidelity and his fiduciary duty towards Kishimoto HK. Although such breaches were all pleaded in the context of Prime View, I think the following stand independently:

'(i) without telling the Plaintiffs, caused the Third Defendant to be incorporated or acquired in or about September 1993 with a view to using it as a vehicle with which to compete with the Plaintiffs; ....

(iii) lied to the Plaintiffs about his intentions, inter alia by telling Takatoshi Masuda of the Plaintiffs in or about October 1993 that he intended to work in his family's antiques business in Japan whereas, in truth, he intended to compete with the Plaintiffs in the manner aforesaid;....

(vii) in the premises, failed prior to his resignation to work full time for and in the best interests of the Plaintiffs, but instead worked for himself and/or the Third Defendant;

(viii) in the premises, acted in such a way as would have destroyed the necessary relationship of trust and confidence as between the Plaintiffs and himself as employer and employee;'

These breaches prevented Kishimoto HK from isolating Mr Oba from dealing with Prime View or the team, and from taking steps generally to ensure that he could not damage Kishimoto HK."

38. As can be seen, paras (vii) and (viii) are not independent breaches, and the matter boils down to two specific instances of breach: acquiring BOIS during the period of employment with a view to competing with the plaintiffs and lying about his future intentions. Had Mr Oba acted properly Kishimoto could have taken steps to isolate him from dealing with Prime View and "the team".

39. Assuming that these matters do amount to breaches of the duty of fidelity, can they result in more than nominal damages?

40. The situation here is rather similar to that which faced the British Columbia Court of Appeal in State Vacuum Stores v. Phillips [1954]3 DLR 621 where top executives of a company made secret plans during their employment to set up a competing company and approached salesmen of their employer to join the new company at higher commissions. No substantial damages were shown to have resulted. The British Columbia court held (by a majority) that the proper result was to give judgment for the employer with nominal damages of Can. $100.

41. In my judgment, this would be the proper result in the present case. It is no answer for the plaintiffs to say: "But we have not led any evidence as to damage because of the split trial". The plaintiffs have not pleaded that they suffered any special damage in their statement of claim: Hence they are not be entitled to lead any evidence in that regard: see Chitty on Contracts (General Principles) 27ed. para 26-002. Moreover, Barnett J did not in fact order any assessment of damages arising from the two breaches of duty: These two breaches, occurring during the employment, cannot on any view of the case have resulted in any impairment of the plaintiffs' chance of obtaining contracts for the production line: the focus of para 1 of the judge's order.

Breach of fiduciary duty

42. Breach of fiduciary duty imports wider considerations. Equitable relief for such breach is founded on the concept developed in Regal (Hastings) Ltd. v. Gulliver that a director cannot profit from his position as director without full and adequate disclosures, and a duty to avoid conflicts of interest. The facts found by the Judge can be summarised thus: Apart from acquiring BOIS, during the currency of his employment in October 1993 with a view to competing with the plaintiffs and concealing his intentions, (which also constituted breaches of the duty of fidelity and good faith as an employee), the judge also found that Mr Oba was "deliberately cultivating" Mr S.N. Lee of Prime View and "wooing" the team to "give himself a head start in the bidding". These matters occurred both during his employment and afterwards; taken in the round they constituted the "diversion of business opportunity" for which an "inquiry into damages" was ordered. "Absent Mr Oba's activities" said the judge at p38, "I see no reason why the team, of whom Mr Iinuma was plainly the leader, would not have co-operated with Kishimoto". The judge determined that Kishimoto had a chance of "getting substantial business" and the chance was impaired to the extent of 50%.

43. With respect to the judge, it seems to me that this approach is fundamentally flawed.

44. In considering breaches of fiduciary duty, for which equity gives relief in certain circumstances, the remedy is inseparable from the acts which give rise to the relief.

45. In an earlier part of his judgment (p35) the judge said that he was initially attracted to Mr Stone's argument that the production project called for a fresh initiative on the part of Mr Oba by the use of his own skill and knowledge, since the project involved a distinct series of contracts for the supply of equipment.

46. These contracts were nowhere in sight when Mr Oba left the company at the end of October 1993: all that existed at that time were the contracts for the pilot plant which, as everyone had hoped, might lead to substantial contracts for the production line later on. There were no contracts on which equitable relief could bite. Can the mere prospect of future business come within the concept of a "maturing business opportunity", as formulated in Canaero? In my judgment the answer must be No.

47. In Canaero itself, the foundation of liability was the Guyana aerial survey contract - worth Can $2.3 million - diverted to the defendants' own company. From a purely jurisdictional point of view, it may be that the Canaero concept is not confined to a situation where the "business opportunity" has matured to the stage when a specific contract can be identified, and can be stretched to cover situations where there is no specific contract in existence. An account of profits is not the only remedy in equity. The court can award "damages" for breach of fiduciary duties: Section 17 of the Supreme Court Ordinance (which in effect enacts the provisions of Lord Cairns' Act 1858 in Hong Kong) says:

"Where the Court of Appeal or the High Court has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance."

Causation and remoteness

48. But equitable damages, no less than common law damages, require evaluation by the trial judge of the fundamental issues of causation and remoteness - and, as with other forms of equitable relief, requires the exercise of a judicial discretion.

49. Plainly, on the judge's findings of fact, a principal reason why Kishimoto failed to secure contracts to supply key pieces of machinery to Prime View (except for two) was the absence of Mr Oba from Kishimoto. The suppliers and Prime View had confidence in his skill and expertise. The exploitation of such skill and expertise for his own profit cannot constitute breach of fiduciary duties to the plaintiffs, after the termination of his employment, unless it was, in the language of Canaero at p391 "in the heat of the maturation of the project". And if it were so, the profit for which Mr Oba is in equity bound to account to the plaintiffs - or the loss for which Mr Oba would be bound to compensate the plaintiffs - would be readily apparent. These would be proximate. They would need no such "inquiry" as the judge has ordered in the present case.

50. The "inquiry" as ordered by the judge - to ascertain the chance or chances of the plaintiffs getting all 14 contracts, or some of the 14 - is intrinsically an impossible exercise. How is a court to assess the effect of Mr Oba "wooing" the suppliers and "cultivating" Mr S.N. Lee? What inequitable conduct is comprised in the concept of "wooing" and "cultivating"?

51. A man is entitled to use his own accumulated knowledge skill and experience for his own profit. He is equally entitled to cultivate his own commercial relationships, with suppliers customers and anyone else, without attracting the disapproval of equity.

52. A substantial element of what happened here is surely this: Without Mr Oba, the plaintiffs lacked the necessary skill and expertise to develop the TFT-LCD business: one which was, in 1993-4, at the frontier of new technology. They did not have their own specialist until August 1994 and by that time it was too late.

53. In my judgment, what the plaintiffs signally failed to show at the trial was any causal link between the acts complained of and the loss they allegedly suffered: They avoided the issue by persuading the judge to "split" the trial.

54. If they had been able to show by evidence that, as a result of Mr Oba's "activities", they had suffered substantial damage on, say, one contract, then conceivably it might have been justifiable for the judge to order that the damages be assessed by a Master under Order 37 r1 of the Rules of the Supreme Court. The profits from that contract would be ascertainable - by the use of expert witnesses if necessary. But this is not what the judge ordered in this case.

The 2nd defendant

55. The formal order as drawn up directs that damages be assessed for breach of Mr Leung's "fiduciary duties". There was no finding that Mr Leung owed fiduciary duties.

56. The judge's finding is as follows:

"Mr Leung, as manager of Kishimoto HK, was plainly, however, in breach of his duty of fidelity. In particular, the following breaches:

'(i) planned to, and duly did, resign from the Plaintiffs in order to work with the First Defendant in using the Third Defendant as a vehicle with which to compete with the Plaintiffs and, in particular, to pursue the potential contracts on behalf of and for the benefit of themselves and/or the Third Defendant and thereby to divert them away from the Plaintiffs;

(ii) failed to reveal to the Plaintiffs his connection and relationship with the Third Defendant and/or the First Defendant;

(iii) failed to reveal to the Plaintiffs the potential threat posed to their business by the incorporation of the Third Defendant and its plan to pursue the potential contracts;

(iv) in the premises, failed prior to his resignation to work full time for and in the best interests of the Plaintiffs, but instead worked for himself and/or the First and/or Third Defendant;

(v) in the premises, acted in such a way as would have destroyed the necessary relationship of trust and confidence as between the Plaintiffs and himself as employer and employee;"

57. The judge made no finding that, in consequence of these breaches, the plaintiffs has suffered substantial damage. On the evidence none was incurred.

58. The proper order in the circumstances is to make an award of nominal damages.

The injunction

59. As indicated earlier, the events giving rise to the necessity for an injunction, by September 1995, were long spent.

Conclusion

60. I would discharge the judge's order of 6 September 1995 altogether, and likewise his order relating to costs dated 12 January 1996, and order as follows:

(i) judgment be entered for the 1st and 2nd plaintiffs against the 1st defendant in the sum of $10.00 each;

(ii) judgment be entered for the 2nd plaintiff against the 2nd defendant in the sum of $10.00;

(iii) the 1st plaintiff's claim against the 2nd defendant be dismissed.

61. We should hear counsel further on the question of costs, both in this court and below.

Godfrey, J.A. :

62. I agree with Litton, V.P. that the order made below should be set aside, and the order which he proposes substituted for it.

63. I also agree with his conclusions and with the route by which he reaches them, though subject to one reservation which does not affect the result.

64. I would not, for myself, relate the jurisdiction of the court, in cases of breach of fiduciary duty, to award equitable compensation to be paid by the wrongdoer to the wronged, to the provisions of section 17 of the Supreme Court Ordinance, as Litton, V.P. does. This legislative provision is derived, as he notes, from Lord Cairns' Act, 1858. This Act enabled the court of equity to award "damages" (something it could not previously do) where the plaintiff could make out a case for specific performance, or for an injunction, but where these discretionary remedies were inappropriate or inadequate. In such cases the Act added "damages" to the armoury of weapons of the court of equity to enable it to do complete justice. The court's jurisdiction to award compensation for a breach of fiduciary duty is independent of its jurisdiction to award specific performance or an injunction; it is, rather, akin to its jurisdiction to award compensation for a breach of trust. But, in the present case, nothing turns on the point.

Ching, J.A.:

65. Subject to the qualification in the judgment of Godfrey, J.A., I am in agreement with the judgment and the order proposed by Litton, V.P.

Representation:

Mr William Stone, Q.C. (M/S Deacons Graham & James) for 1st, 2nd and 3rd Defendants/1st, 2nd & 3rd Appellants

Mr Michael Thomas, QC and Mr Godfrey Lam (M/S Lovell White Durrant) for 1st and 2nd Plaintiffs/1st and 2nd Respondents