International Tutors Ltd v. Ad Excellentiam Ltd and Others

DCCJ 2715/2015

[2018] HKDC 1155

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2715 OF 2015

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ASSESSMENT OF DAMAGES

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Background

1.This is an assessment of damages of the counterclaim of the 1^st and 2^nd plaintiffs by counterclaim, Ad Excellentiam Limited ("the AEL”) and David John Pratt ("Pratt") against the International Tutors Limited (“the 1^st defendant”), James Terence Ffitzroy ("the 2^nd defendant"), Leung Lok Hang Janice ("the 3^rd defendant") and the International Tutors Hong Kong Limited ("the 4^th defendant”). Interlocutory judgment was entered against the said defendants on 1 November 2016.

2.The 1^st defendant was formed by the 2^nd defendant and another cofounder in 2011 to carry out tuition and academic business. The 1^st defendant commenced this action against the AEL, Pratt and some other parties in June 2015.  The 1^st defendant’s allegations against AEL and Pratt are that Pratt was engaged by the 1^st defendant as its technical officer in 2011 and re-engaged as the chief technical officer in 2015.  Shortly after the re-engagement, Pratt illegally downloaded a complete copy of all private and confidential emails of the 1^st defendant.  Pratt was one of the directors of AEL.  As part of his management of AEL, Pratt used the stolen data to poach the 1^st defendant's clients and had further caused AEL to mimic the webpage design and business operation of the 1^st defendant, causing damage and financial loss to the 1^st defendant.

3.In September 2015, the AEL and Pratt filed their Defence and Counterclaim denying the 1^st defendant's allegations.  AEL and Pratt counterclaimed against the 1^st defendant mainly on the basis that the documents prepared by ITL in or relating to these proceedings amount “defamation libel and malicious falsehood”.  They also alleged that the 1^st defendant’s manner of communications with the co-defendants in the main action put stress and disharmony on all co-defendants in the main action which eventually led to AEL’s cessation of business.

4.The 1^st defendant subsequently filed its Reply and Defence to Counterclaim pleading that the counterclaim of AEL and Pratt was vexatious and ought to be struck out.

5.In the hearing of the case management summons on 3 May 2016, the 1^st defendant was absent.  The 1^st defendant’s action against AEL and Pratt was therefore dismissed pursuant to Order 25, rule 1(5) of the Rules of the District Court, Cap 336H (“RDC”).

6.In the hearing of another case management summons on 24 May 2016, upon the application of AEL and Pratt and in the 1^st defendant’s absent, the Registrar granted leave for AEL and Pratt to file and serve their Amended Counterclaim.  The same was filed on 30 May 2016, the allegations and matters pleaded therein are summarised below.

7.First, it is alleged that the defendants made untrue defamatory remarks and accusations in the writ of summons issued in this action, in the statements made to the police and filed in other tribunals, and in the statements of truth signed in court documents.  These amounted to defamation, libel and malicious falsehood.

8.Secondly, it is alleged that before issuance of the writ in this action, the 1^st defendant sent a letter to AEL demanding payment of $500,000 within 4 days in settlement of a variety of claims.  However, before expiration of the 4-day period, the 1^st defendant issued the writ in this action.  It is said that this action was instituted not for the purpose it claimed but to try to influence the proceedings and impending trial in another court[1], and to cause the plaintiffs continued harm in time, energy, emotion and a loss of business and revenue.  This amounted to vexatious litigation and abuse of process.

9.Thirdly, the 1^st defendant issued the writ as a façade because before issuance of the writ, it had transferred their business to the 4^th defendant in an attempt to avoid any liability that may be incurred in this action.  This together with the making of false statements in various court documents and the statements of truth thereof amounted to contempt of court.  

10.Fourthly, despite the actual relationship between 1^st defendant and the 4^th defendant (the 4^th defendant being the transferee of the 1^st defendant’s assets and business), all defendants in their Reply made false statements that the present counterclaim had no connection with the 4^th defendant, that the 4^th defendant was not carrying on essentially the same business as the 1^st defendant, and that the 1^st defendant had ceased trading on or about August 2015.  These statements were made by the defendants knowing that they were untrue with an intent to deceive the plaintiffs.

11.The plaintiffs alleged that there was justifiable reliance by them on the said untrue statements and various types of injuries were done to them as a result. All these amounted to fraud.  For the details of the injuries pleaded, see paragraph 37 of the Amended Counterclaim.

12.Based on the above, the plaintiffs claim damages, aggravated damages and exemplary damages against all defendants jointly and severally for defamation, libel, malicious falsehood, vexatious litigation and fraud.  The plaintiffs further claim that the vexatious litigation and abuse of proceedings by the defendants devastated the business of AEL.  AEL was therefore forced to cease operation, terminate the tenancy agreement with the landlord prematurely with consequential rental liability.  Rental liability and loss of profits are thusly claimed by the plaintiffs against the defendants.  For the details of the claim, see paragraphs 57 to 74 of the Amended Counterclaim.

13.On 30 August 2016, the Registrar ordered that unless the 1^st, 2^nd, 3^rd and 4^th defendants filed and serve their defence to the counterclaim filed by AEL and Pratt (ie the 1^st and 2^nd plaintiffs) by 25 October 2016, interlocutory judgment be entered in favour of the 1^st and 2^nd plaintiffs for damages to be assessed with costs to be taxed if not agreed.

14.Upon the defendants’ default of the said unless order, the Registrar entered judgment in favour of the 1^st and 2^nd plaintiffs against the defendants on 1 November 2016 for damages to be assessed. This is how this assessment of damages comes before me.

Defamation, Libel and Malicious Falsehood

15.I shall mention at the outset the law recognises that there are certain situations in which it is for the public benefit that a person should be able to speak or write freely and that this should override or qualify the protection normally given to reputation by the law of defamation.

16.The Court of Final Appeal in Chang Wa Shan v Esther Chan Pui Kwan & Ors [2018] HKCFA 29 at para. 38 refers to the forceful statement by Brennan CJ, Dawson, Toohey and Gaudron JJ in Mann v O’Neill (1997) 191 CLR 204 at 213 that:-

“… absolute privilege attaches to statements made in the course of judicial proceedings because it is an indispensable attribute of the judicial process…. were civil liability to attach or be capable of attaching, it would impede inquiry as to the truth and justice of the matter and jeopardise the ‘safe administration of justice’.”

17.In Lincoln v Daniels [1962] 1 QB 237, Devlin LJ at pp.257-258 considered the scope of judicial privilege and said:-

“…The absolute privilege which covers proceedings in or before a court of justice can be divided into three categories. The first category covers all matters that are done coram judice. This extends to everything that is said in the course of proceedings by judges, parties, counsel and witnesses, and includes the contents of documents put in as evidence. The second covers everything that is done from the inception of the proceedings onwards and extends to all pleadings and other documents brought into existence for the purpose of the proceedings and starting with the writ or other document which institutes the proceedings. The third category is the most difficult of the three to define. It is based on the authority of Watson v M’Ewan, in which the House of Lords held that the privilege attaching to evidence which a witness gave coram judice extended ….”

18.In the joint judgment of Brennan CJ, Dawson, Toohey and Gaudron JJ in Mann v O’Neill, they said:-

“It is well settled that absolute privilege attaches to all statements made in the course of judicial proceedings, whether made by parties, witnesses, legal representatives, members of the jury or by the judge. It extends to oral statements and to statements in originating process, in pleadings or in other documents produced in evidence or filed in the proceedings. It is said that it extends to any document published on an ‘occasion properly incidental [to judicial proceedings], and necessary for [them]’.”

19.Turning to the facts of the present case, the documents which allegedly contain defamatory statements are court documents (including the writ of summons, pleadings and statements filed in other court and tribunals etc), a pre-action letter and police statements.  These documents were obviously prepared in the course of, for the purpose of or incidental to judicial proceedings and should be covered by judicial privilege.  As for the pre-action letter in particular, whether any defamatory statements were published is doubtful because the letter was issued by the 1^st defendant to AEL (ie the 1^st plaintiff) instead of any other third party.  Regarding the police statements, they were made during criminal investigations and are protected by privilege for promotion of public interest: see Gatley on Libel and Slender, 12 ed. at p.477, para.13.12.    

20.The above observations on liability are briefly mentioned for the sake of completeness. For the purpose of the present assessment of damages, even on the assumption that the allegedly defamatory materials are not covered by privilege, I could not see any damage of reputation having been done to the plaintiffs as a result of the defamatory statements contained in the said documents.

21.The allegedly defamatory statements were made in the context of legal proceedings or criminal investigations. Any reasonable man should know that the truthfulness of the defamatory allegations against the plaintiffs has yet to be proved, tested and determined at trial.  Such being the case, the plaintiffs should not be put to extra costs and expenses to vindicate the plaintiffs’ reputation, if any, on top of the costs to be incurred by the plaintiffs to defend against those defamatory allegations in this action.

22.I see of no evidence of the plaintiffs having suffered any actual loss such as loss of business or profits, loss of earnings, customers etc as a result of the alleged defamation. The loss of revenue and rental liability are not the losses resulting from the alleged defamation but are the consequences of the abuse of process by the defendants which will be dealt with separately below.

23.The subjective effect of the defamatory remarks on the plaintiffs, if any, is minimal. In paragraph 54 of the Amended Counterclaim, it was said that the pre-action letter with defamatory remarks was of no consequence except only causing harm to the trust and cohesive spirit within AEL. In paragraph 63 of the Amended Counterclaim, it was described that the defamatory statements had the effect of a nuclear bomb going off in destroying the moral and spirit of AEL although those statements, as reasonably perceived by knowledgeable officers of AEL and impartial readers, were no more than simple text which could be easily dealt with.

24.By reason of the above analysis, I would not allow any award under this head.

Contempt

25.The plaintiffs are not seeking any relief under the notion of contempt in the Amended Counterclaim.  In any event, no leave for application for an order of committal under Order 52 of RDC has been obtained nor leave for bringing contempt proceedings by reason of a false statement in a document verified by a statement of truth has been obtained by the plaintiffs under Order 41A, rule 9 of RDC.

26.I, therefore, would not allow any award under this head.

Deceit (Fraud)

27.The tort of deceit is committed when a person makes a false statement, knowing it to be untrue or being reckless as to whether it is true or not, with the intent that the claimant will rely on it: see Clerk & Lindsell on Torts, 22^nd ed. at p.1297 at para. 18-01, then in so far as the latter does so and suffers loss, the defendant is liable.  

28.Deceit is not actionable per se: damage, in other words, is of the gist of the action: see Clerk & Lindsell on Torts, 22^nd ed at p.1319 at para. 18-39.  The plaintiff is entitled to such damages as will put him in the position he would have been in if he had not relied on the defendant’s statement.  If he has entered into some transaction as a result of the deceit, he is therefore entitled to recover his immediate losses, plus any further damage suffered as a consequence.  If he has entered into some transaction as a result of the deceit, he is therefore entitled to recover his immediate loss, plus any further damage suffered as a consequence.  It may, of course, be that the victim of a deceit has suffered no loss at all as a result of it: in that case, as might be expected, he recovers nothing.

29.Turning to the facts of the present case, the fraudulent or deceitful acts complained of are mainly the defendants’ false statements that the counterclaim has no connection with the 4^th defendant, that the 4^th defendant was not carrying on essentially the same business as the 1^st defendant, and that the 1^st defendant had ceased trading on or about August 2015.

30.Apparently, the plaintiffs did not believe in these statements nor did they place reliance on these statements otherwise the plaintiffs would not have hotly disputed the truthfulness of these statements and gathered evidence to counter the same.  

31.This observation on liability is briefly mentioned for the sake of completeness. For the purpose of the present assessment of damages, even on the assumption that there was justifiable reliance of the false statements on the part of the plaintiffs (which I do not agree), I am not satisfied that the plaintiff has suffered any loss or damage as a consequence.

32.When one studies closely the various injuries pleaded by the plaintiffs in paragraph 37 of the Amended Counterclaim, it is clear that none of them constitutes the damage caused by deceit or fraud in the strict legal sense.  The pleaded injuries are the alleged injury occasioned by other causes (eg contempt of court, abuse of process, defamation and malicious falsehood etc) rather than by the alleged fraud/deceit.  The causative link is missing.

33.As for the alleged harm to the plaintiffs in event the 1^st defendant successfully avoids its liability in the action by transferring its business to a non-party (ie the 4^th defendant), such harm could not possibly happen because the plaintiffs have already made the 4^th defendant a party to the proceedings by suing it as the 4^th defendant to counterclaim and has further obtained interlocutory judgment against the 4^th defendant.  

34.I therefore would not allow any award under this head.

Vexatious Litigation / Abuse of Process

35.The Court of Appeal in Speed Seal Products Ltd v Paddingto [1985] 1 WLR 1327 decided that Grainger v Hill (1838) 4 Bing NC 212 132 ER 769 provided “a basis for an arguable case” that there had been an actionable abuse of the process of the Court.  The plaintiff must, however, establish that the defendant used in the legal process for a predominant purpose “outside the ambit of the legal claim which the court is asked to adjudicate”.  In assessment of damages, the court may compensate the plaintiff for foreseeable economic losses suffered by him as a consequence of civil proceedings: see Clerk & Lindsell, 22^nd ed at p.1210 at para. 16-72.

36.Turning to the facts of the present case, it is pleaded in the Amended Counterclaim that the 1^st defendant issued a pre-action letter to AEL demanding payment of $500,000 within 4 days for a variety of claims which are libellous and untrue and, without waiting for expiration of that 4-day period or waiting for the plaintiffs’ reply, the 1^st defendant commenced the present proceedings.  

37.It is further pleaded that the defendant used the present action not as “method of justice” but as a method of intimidation to try to influence another set of legal proceedings to gain a favourable settlement with other parties in the Labour Tribunal proceedings (ie LBTC 339/2015) wherein the 1^st defendant was sued by Pratt for arrears of wages. 

38.The plaintiffs claim that the defendants’ vexatious litigation caused harm to the trust and cohesive spirit within AEL.  One of the directors of AEL, Samuel Buchanan, was unable to cope with the fear and vulnerability to such vexatious litigation. He became emotionally detached from the business and secretly resigned and left for the USA without notice to AEL. Samuel Buchanan possesses academic qualifications from Harvard and a MBA degree at Cornell.  He was the essential “headliner” of AEL’s business. With his departure, AEL was unable to find a suitable replacement to carry on the business. As the necessary return targets could not be met, AEL had no option but to vacate its offices and ceased business at the end of August 2015, opening itself to a breach of the rental agreement between AEL and the landlord.

39.The plaintiffs claim a sum of $189,574 being the rental liability owed to the landlord.  Having considered all evidence from the plaintiffs which has not been countered by the defendants to counterclaim, I accept that the said sum of $189,574 is part of the foreseeable economic loss suffered by AEL as a consequence of the civil proceedings.  I would allow the same in favour of AEL (ie the 1^st plaintiff).

40.The plaintiffs also claim that if they had carried on the business as they did in the initial operation of AEL from April to August 2015, they could have easily met their business return target as per the projected return during the first two years of operation. Based on a spread sheet of projected return prepared by the plaintiffs (see page 236 of Bundle B2), the plaintiffs claim that the loss of profits for the remaining 7-month in the first year of operation is $94,979 and the loss of profits for the second year of operation is over one million. 

41.Having considered all evidence from the plaintiffs which has not been countered by the defendants to counterclaim, I accept that the said sum of $94,979 was the reasonable loss suffered by AEL as a consequence of the abuse of process and would allow the same in favour of AEL (ie 1^st plaintiff).

42.However, the projected profits for the second year in the sum of over one million will not be allowed. The said projected return is about 10 times of the first year return which appears to be an overly optimistic figure arrived by subjective expectation rather than objective business analysis.  This coupled with the plaintiff’s duty to mitigate loss, I would only allow $94,979 under this head.

43.It should be noted that the award for rental liability in the sum of $189,574 and the award for loss of profits in the sum of $94,979 are made in favour of AEL but not in favour of Pratt (ie the 2^nd plaintiff).  This is because the rental liability and the loss of profits are the liability and loss of AEL instead of the liability and loss of Pratt or any particular director or shareholder of the company. 

44.AEL, being a limited company, has a separate legal entity distinct from its directors and shareholders.  As for the rental liability, I received no evidence suggesting that Pratt would be the one who personally meets that rental liability on behalf of AEL.  As for loss of profits, whether any profits of AEL are to be distributed to its shareholders is matter for the company to decide.  Unless and until there is a decision to distribute profits, no question of loss of profits of shareholders arises.  

45.For Pratt, I accept on a balance of probabilities and in the normal course of events that the cessation of AEL’s business would cause some loss of income to Pratt in the capacity as a director. From the documentary evidence produced by the plaintiffs, I note of no objective evidence on the amount of such loss suffered by Pratt. The spread sheet prepared by the plaintiffs which claims to set out the projected income and expenditure of AEL for the first two years of operation do not contain any figure for payment of directors’ salary or allowance.

46.Nominal damages may be awarded where the fact of a loss is shown but the necessary evidence as to its amount is not given: see McGregor on Damages, 20^th ed., at p.408 at para 12-004.  In the absence of sufficient evidence on the amount of such loss, I would allow a nominal sum of $10,000 in favour of Pratt (ie the 2^nd plaintiff) for his loss of income as a result of the abuse of process by the defendants.      

47.To sum up, all defendants in counterclaim are jointly and severally liable to AEL (ie the 1^st plaintiff) for a sum of $284,553 being the rental liability and loss of profits suffered by AEL, and jointly and severally liable to Pratt (ie the 2^nd plaintiff) for a sum of $10,000 being the loss of income suffered by Pratt following the cessation of AEL’s business as a result of the abuse of process by the defendants in commencing this action.

Aggravated / Exemplary Damages

48.The rationale for exemplary damages is not to compensate, but to punish. They are additional to an award which is intended to compensate a plaintiff fully for the loss he has suffered, both pecuniary and non-pecuniary. Their general objectives may be stated as being punishment, deterrence and denunciation. 

49.Aggravated damages are part of the compensatory award and may be granted to compensate for additional injury caused to the plaintiff's feelings by the defendant's conduct of the action. Examples of aggravating conduct are any kind of high-handed, oppressive, insulting or contumelious behaviour by the defendant which increases the mental pain and suffering caused to the plaintiff.

50.I consider that the above award I made against the defendants in this action is adequate and sufficient to punish and deter the defendants, exemplary damages is thusly not considered. By reason of my analysis in paragraph 23 above in particular, I do not consider that aggravated damages are justified on the facts of this case.

Other Causes of Action

51.In the submissions made in the assessment hearing, the plaintiffs substantially expanded the scope of their claims to include other causes of action as well such as the tort of negligence, inducing a breach of contract, the tort of intentional infliction of harm etc and further prayed for criminal investigation and prosecutions of the defendants. 

52.I must point out that the present judgment on liability was not obtained through trial on the merits, but was entered pursuant to an “unless” order for default in compliance with interlocutory directions. Such judgment is necessarily one based on implied admission of the plaintiffs’ pleaded claim in the Amended Counterclaim, see the comments of Ma J (as he then was) in Lam Chi Fai v Liberty International Insurance [2002] 3 HKLRD 480, 488-489.

53.As the expanded claims are not pleaded properly or at all in the Amended Counterclaim and, in any event, do not give rise to additional loss and damage on top of those already assessed, they will not be dealt with in this assessment of damages.

Costs

54.AEL and Pratt claim a total sum of $48,371 as the costs incurred in this action.  Having considered the Statement of Costs for Summary Assessment which was filed on 1 August 2018 by Pratt on behalf of himself and as the representative of AEL, I consider the amount claimed reasonable.

55.I would allow $24,185.50 being 50% of the claimed amount in favour of AEL (ie the 1^st plaintiff) and $24,185.50 being 50% of the claimed amount in favour of Pratt (ie the 2^nd plaintiff) by way of summary assessment.

Interest

56.The judgment entered on 1 November 2016 already caters for interest on the damages to be assessed at judgment rate until full payment.

The 1^st and 2^nd plaintiffs by counterclaim (the 1^st and 2^nd defendants by original action) appeared in person

The 1^st to 4^th defendants by counterclaim were not represented and did not appear

[1] Aside from this action the 1^st defendant and Pratt had some other legal proceedings in motion. One set of proceedings is the labour tribunal proceedings (LBTC 339/2015 and 591/2015) commenced by Pratt and some other parties against the 1^st defendant to recover the wages in arrears. When these set of labour tribunal proceedings was still underway, the 3^rd defendant (who is one of the directors of the 1^st defendant) filed a claim in the Small Claims Tribunal (ie SCTC013356/15) seeking to recover a sum of $7,000 allegedly being the money obtained by Pratt from the 3^rd defendant through intimidation. When this set of small claim proceedings was still underway, the 1^st defendant commenced this action in this court in June 2015.