Kung Kin Wing and Another v. Splendid Profit International Holdings Ltd and Others

HCIP 78/2019

[2020] HKCFI 894

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INTELLECTUAL PROPERTY PROCEEDINGS NO. 78 OF 2019

_____________

Before:  Hon Lok J in Court

Dates of Trial:  4 to 7 and 12 May 2020

Date of Judgment:  12 May 2020

Date of Reasons for Judgment:  28 May 2020

_________________________

REASONS FOR JUDGMENT

_________________________

1.This is a dispute mainly involving the ownership of the trade mark and goodwill associated with a noodle shop business using the names “SOUR AND SPICY NOODLE” and “傷心酸辣粉”. There is also a side issue as to whether the company running such business is entitled to claim back certain expenses paid to one of its former directors.

2.On the final day of the trial on 12 May 2020, I dismissed the Plaintiffs’ claim and granted judgment on the counterclaim.  I now give my reasons.

BACKGROUND

3.There is no serious dispute about the following background of the case.

4.Mr Chan Man Wai, who is the 1^st Plaintiff in the counterclaim (“Chan”), is a resident of both Hong Kong and the Mainland, and he has investments in various fields including a Chiu Chow restaurant business known as ‘Guangzhou Xin Chao Lou (廣州新潮樓)’.

5.Mr Kung Kin Wing, the 1^st Plaintiff in the original claim and the 1^st Defendant in the counterclaim (“Kung”), is a Hong Kong resident.  Before he started the noodle business, he was at one time working as a driver for one of Chan’s businesses in Hong Kong.

6.Chan and Kung are the main parties involved in the present dispute.  For easy reference, I will refer the parties in Chan’s camp, which include the Defendants in the original claim and the Plaintiffs in the counterclaim, and the parties in Kung’s Camp, which include the Plaintiffs in the original claim and the Defendants in the counterclaim, as “Chan’s Camp” and “Kung’s Camp” respectively.

7.Kung founded a business together with his partner, Mr Tse Fook Cheung (“Tse”), in 2008 in Hong Kong.  The first shop (“the 1^st Shop”) operated under such business (“the Business”) was situated at No 94, Fuk Wing Street at Sham Shui Po.

8.Two main products were sold at the 1^st Shop: noodles and coconut juice.  The name “傷心酸辣粉” (Sour and Spicy Noodle)(“the Trade Name”) was used for the noodle business in the 1^st Shop whilst the name “馬來椰汁大王” (King of Coconut Juice from Malay) was used for the coconut juice business.

9.According to Kung, he founded the noodle business operated in the 1^st Shop.  Kung’s former wife was from Chongqing in the Mainland and Kung introduced the sour and spicy noodles to the Hong Kong market.  Kung came up with the Trade Name and devised a trade mark, “” (“the Trade Mark”), which included the Trade Name and 2 slogans “酸到留口水, 辣到留眼淚” (so sour making you drool, so spicy making you cry) describing the facial expressions of the customers after consuming the sour and spicy noodles.  Kung was the person responsible for the quality of the foodstuff and services provided by the noodle business.  Amongst others, he was the one who sourced the ingredients for the noodles, trained the cooks and staff and designed the decorations in the 1^st Shop.  On the other hand, Tse was mainly responsible for the coconut juice business in the 1^st Shop.

10.As the noodle business was more successful than the coconut juice business, Kung and Tse eventually closed down the latter business and focused on the noodle business in the 1^st Shop.

11.Kung and Tse expanded the noodle business and opened the second shop at No 116, Fuk Wing Street at Sham Shui Po (“the 2^nd Shop”) in June 2009.

12.By chance, Kung and Chan met in the third quarter of 2009 when the latter, upon patronizing the Business, expressed a favourable view on the quality of the food produced by the Business.  Thereafter, Kung and Tse visited Chan at his restaurant in Guangzhou several times to discuss the investment plan for the Business.

13.The parties eventually made an investment agreement (“the Investment Agreement”).  According to a document (“the Written Agreement”) recording the contents of the meeting held at Chan’s restaurant at Guangzhou at 10:00 pm on 12 December 2009 signed by 4 persons including Kung, Tse, Chan and Mr Lin Renxin who is Chan’s cousin (“Lin”), the parties made a “初步協議” (preliminary agreement) for an investment plan to be commenced on 1 January 2010, expanding the number of shops to 5 and involving a financial contribution of $6 million provided by Chan. 

14.The preamble of the Written Agreement reads:

“[Chan] 投資於深水陟經營的兩間傷心酸辣粉鋪 (福榮街#94及#116號) 及傷心酸辣粉的未來發展, 佔該公司的三分之一股權及資產。”

“[Chan] invests in the (business) operated at the 2 shops at Nos. 94 and 116, Fuk Wing Street and their future development owning 1/3 of the company’s shares and assets).” (translations)

15.Clause 1 of the Written Agreement provides:

“投資港幣六佰萬元…其中港幣 $1,000,000元作為給 [Kung and Tse] 收購(福榮街#94及#116號) 的資本…, 另外港幣$5,000,000元作為開新鋪投資金額”

“$6 million would be invested…$1 million of which would be for acquisition of the assets of [Kung and Tse] in Nos.94 and 116, Fuk Wing Street…, and the other $5 million for the investment of new shops” (translations)

16.Clause 2 provides for the time for payments by Chan at different stages.  Clause 5 provides that Kung and Tse would each get a monthly salary of $30,000, with an increase of $5,000 for each new shop opened.

17.There is a dispute between the parties as to whether all the terms of the Investment Agreement were contained in the Written Agreement. According to Kung, there was an oral agreement made with Chan in or about early November 2009.  Under such oral agreement, Chan agreed, inter alia, Kung and Tse shall have full control over the management and operation of the Business free from interference from Chan or Lin.  There was no agreement for the transfer of the Trade Name or the Trade Mark.  Kung also told Chan and Lin that the Trade Mark would belong to him and he had instructed lawyers to apply for registration of the Trade Mark.  He also told them that he would grant a bare licence to all the shops to the use the Trade Mark.

18.Chan denies that these discussions had ever taken place.  According to him, the terms of the Investment Agreement were mainly contained in the Written Agreement.  It was his understanding that the Trade Name and the goodwill associated with the Business (“the Goodwill”) were transferred to the new joint venture business, otherwise he would not have paid so much money to acquire the interest under the Business.

19.On 23 January 2010, the third shop at No 43H, Dundas Street at Mongkok was opened under the Business.  It was regarded as a flagship store of the Business.

20.On 13 May 2010, Sour and Spicy Noodle Co Ltd, the 2^nd Defendant in the original action and the 3^rd Plaintiff in the counterclaim (“SS Noodle”), was incorporated to take over the assets and operation of the Business.  The shares of SS Noodle were allotted as follows: 9 shares to Kung, 9 shares to Tse, 2 shares to Mr Chan Wing Ping (“Chan WP”) and 10 shares to Lin who held the shares as nominee for Chan.  There is an issue as to who paid for the expenses of setting up SS Noodle, but I do not think that it is material to the final outcome of the case.

21.After the incorporation of SS Noodle, notice was given by Kung and Tse to the Business Registration Office to cease the operation of their partnership business.

22.After that, the Business continued to expand with new shops operating in places including Causeway Bay and Whampoa.  A company was also set up to run a hot pot business.

23.On 28 October 2010, the Trade Mark was registered in Kung’s name under no 30174918 in classes 30 and 43.  There is serious dispute between the parties as to when Kung first instructed solicitors to apply for the registration of the Trade Mark and who paid for the expenses concerned.  According to Kung, he first instructed solicitors to apply for registration of the Trade Mark in “late 2008 or early 2009” before the making of the Investment Agreement.  On the other hand, Chan’s Camp suggest that the application must have been made after the making of the Investment Agreement.  It is also clear from the financial records of SS Noodle that it paid for the expenses of the registration.  Kung does not dispute that, but he claims that such expenses were subsequently set off from the amount owed by SS Noodle to him and so it was he who paid for the expenses.

24.In 2011, the Business started to operate franchise business, granting franchises to various franchisees to run noodle shops using the Trade Name and the Trade Mark.  There is no serious dispute that, SS Noodle, which was managed by Kung and Tse at all material times, was responsible for setting up the franchise shops and operating the franchisees’ noodle businesses (“the Franchisees Businesses”).  In return, SS Noodle would obtain from the Franchisees Businesses: (i) 15% of the costs of the foods, ingredients and materials supplied by SS Noodle for the Franchisees Businesses; and (ii) 20% of the net profit of the respective Franchisees Businesses.  There is a dispute between the parties about the nature of these payments, in particular whether they included some of kind of royalties for the right of the Franchisees Businesses to use the Trade Name, the Trade Mark and the Goodwill of the Business.

25.Further shops and franchisees’ shops were opened in the following years.  At one time, there were 19 shops and franchisees’ shops operating the noodle business using the Trade Name and the Trade Mark.

26.In late 2012 and early 2013, Hong Kong Sour and Spicy Noodle Investment Co Ltd, Sour and Spicy Noodle Enterprises Co Ltd and Sour and Spicy Noodle Catering Co Ltd, which are the 3^rd to 5^th Defendants in the original claim respectively (collectively “the Franchisees Companies”), were set up to operate different franchisees’ shops.  Actually, each Franchisee Company involved different investors.  These investors were not interested in the daily operation of the Franchisees Businesses, and it was Kung, Tse and SS Noodle who were responsible for running these businesses.

27.In or about 2016, there were discussions amongst the various investors of the Business and the Franchisees Businesses for the whole business (“the Whole Business”) to be “floated” in the stock market.   Splendid Profit International Holdings Ltd, the 1^st Defendant in the original claim and the 2^nd Plaintiff in the counterclaim (“Splendid Profit”), was set on 4 March 2016 for such purpose.

28.There were then discussions between the investors of the Whole Business about their shares in the intended listed business.  It was planned that the Whole Business would be injected into Splendid Profit and each investor would get a percentage of shares in Splendid Profit.  The investors finally agreed the distribution of their shares which was recorded in a share distribution document (“the Share Distribution Document”).

29.On 28 September 2018, SS Noodle and the Franchisees Companies became the wholly-owned subsidiaries of Splendid Profit, and Mr Chan Kai Lap, who is Chan’s son and the 6^th Defendant in the original claim (“Chan KL”), became a registered shareholder and director of Splendid Profit.

30.Earlier in October 2017, Kung travelled to the United Kingdom to explore the investment opportunity for a warehouse in Manchester (“the 1^st UK Trip”).  SS Noodle reimbursed the costs of the 1^st UK Trip in the sum of $32,892 to Kung.  However, there is a dispute between the parties as to whether such trip was for the benefit of the Business and whether Chan had authorised the reimbursement of the travelling expenses.  SS Noodle seeks to claim back the reimbursement from Kung in the counterclaim.

31.In September 2018, Kung was arrested for drunken driving and failing to provide a breath specimen.  Kung claims that such offence was committed by him after he had a “networking dinner” for the benefit of the Business.  SS Noodle paid a total sum of $75,000 for the legal costs of Kung’s defence in the criminal proceedings (“the Criminal Proceedings”).  SS Noodle now seeks to recover such sum of money from Kung in the counterclaim.

32.In March 2019, Kung flew to the United Kingdom again and there is also similar dispute between the parties as to whether Kung was entitled to claim reimbursement from SS Noodle.  The sum of $12,078.94, being the travelling expenses for such trip (“the 2^nd UK Trip”), is another subject matter in the counterclaim.

33.According to Chan, after he became the chief executor officer of Splendid Profit in May 2019, he was alarmed when he found out that the Trade Mark had all along been registered in the name of Kung.  Coupled with other matters such as the drunken driving offence committed by Kung and other disputes relating to the operation of the Whole Business, Chan took over running the Whole Business and became the chief executive officer in May 2019.

34.In June 2019, the deputy general manager of SS Noodle, Madam Angela Hung (“Hung”), sent a batch of documents to Kung including draft agreement and assignment to assign the Trade Mark to Splendid Profit (“the Draft Documents”).  According to Hung, Chan’s Camp had not consulted lawyers before sending the Draft Documents to Kung for execution.  It so happened that the husband of one of her colleagues was working as a legal executive in a legal firm, and so he offered assistance to Hung to prepare some documents for the assignment of the Trade Mark.

35.On 5 July 2019, Chan and Hung were formally appointed as directors of Splendid Profit.

36.On 12 August 2019, Kung wrote to Splendid Profit stating that the latter’s bare licence to use the Trade Mark was terminated with effect from 24 August 2019.

37.On 23 August 2019, Kung was removed as a director of Splendid Profit.

38.On 18 October 2019, Kung acquired Shing Wing Co Ltd (“Shing Wing”) which is the 2^nd Plaintiff in the original claim and the 2^nd Defendant in the counterclaim.

39.On 12 November 2019, Kung was removed as director of SS Noodle and the Franchisees Companies, and Chan, Hung and Chan KL were appointed as directors of these companies.

40.On 14 November 2019, Shing Wing entered into a consignment agreement (“the Consignment Agreement”) with ParknShop supermarket (“ParknShop”) for the sale of noodle products.  Chan’s Camp claim that the Consignment Agreement was made much earlier on 4 November 2019 before Kung ceased to be director of SS Noodle and the Franchisees Companies on 12 November 2019.  However, I do not think that this is a material issue for the determination of the ownership of the Trade Mark and the Goodwill.

41.On 9 December 2019, Shing Wing began to carry on the noodle business (“the Consignment Business”) at Tin Shui Wai and Nam Cheong stores of ParknShop.  ParknShop and Shing Wing also planned to expand such business in some other stores of ParknShop.

42.On 20 December 2019, Splendid Profit wrote to ParknShop alleging, inter alia, that it was the beneficial owner of the Trade Mark and ParknShop was infringing its Trade Mark.  It also threatened legal proceedings against ParknShop.

43.On 27 December 2019, Kung and Shing Wing commenced the present proceedings against Splendid Profit, SS Noodle, the Franchisees Companies and Chan KL, claiming for infringement of the Trade Mark for its use in the operation of the Whole Business and for making groundless threat of trade mark infringement.

44.On 16 January 2020, Kung and Shing Wing issued a summons applying for interlocutory injunction to stop Chan’s Camp from making groundless threat of trade mark infringement.  The application came before me on 23 January 2020.  I considered that the issues involved in the present case are simple enough that warrants an exceptional early trial.  Early disposal of the case may also help the parties to make future business plans relating to a potential profitable trade mark.  After consulting the court’s diary, the trial date was fixed on 27 April 2020 with 7 days reserved.  In the meantime, I managed to get the parties to provide mutual undertakings not to further expand the existing operation at ParknShop and not to make further threats of legal proceedings.

45.In the Defence and Counterclaim dated 13 February 2020, Chan’s Camp claim that they are the beneficial owners of the Trade Mark and the Goodwill associated with the Business.  They also make a counterclaim against Kung and Shing Wing claiming for, inter alia; (i) a declaration that Chan and/or Splendid Profit and/or SS Noodle are the beneficial owners of the Trade Mark; (ii) an injunction to prevent Kung and Shing Wing from using the Trade Mark and an account for the use of the Trade Mark in the Consignment Business; and (iii) the sums paid by SS Noodle to Kung for the legal costs of the Criminal Proceedings and the travelling expenses for the 1^st and 2^nd UK Trips (collectively “the UK Trips”).

46.Despite the outbreak of the COVID-19 pandemic in late January and early February 2020 and the operation of the General Adjournment Period (“GAP”) in the court, the parties have been able to complete all the works for the preparation of the trial, including exchange of pleadings, discovery and exchange of witness statements.

47.In the PTR before me held during the GAP on 7 April 2020, the parties indicated to me that they were ready and eager to proceed with the trial as scheduled.  I was told that at least one of the witnesses is an overseas witness, and despite the mandatory quarantine requirement, he flew to Hong Kong specifically for the trial.  After learning that the GAP would end on 3 May 2020, I decided to proceed with the trial on 4 May 2020 which was only a few days after the original trial date on 27 April 2020.

MERITS OF CASE

48.The main issues involved in the present case are simple ones: Who is the beneficial owner of the Trade Mark, the Trade Name and the Goodwill of the Business?  Were these assigned to the Business when the parties made the Investment Agreement in late 2009?

(i)  The evidence of the witnesses

49.Because of the issues involved in this case, the parties have agreed that the witnesses for Chan’s Camp would give evidence first at the trial.

50.The following witnesses testified on behalf of Chan’s Camp: Chan, Lin, Hung, Mr Chung Kai Ming Thomas (“Chung”) and Mr Ou Zhong Wei (“Ou”).  Chung and Ou are the investors of two of the three Franchisees Companies.

51.The following witnesses testified on behalf of Kung’s Camp: Kung, Chan WP and Mr Shum Fai Peter (“Shum”).  Chan WP is a friend of Kung who at one stage held some interest in the Franchisees Businesses. Shum is a shareholder of Splendid Profit who paid $3.2 million in 2017 to acquire 8.58% shares in Splendid Profit.

52.Upon the request of Chan’s Camp following further disclosure of documents by Kung’s Camp, Mr Edmund Tsu (“Tsu”) of the solicitors’ firm, Chan & Tsu, also testified at the trial.

53.Tse has retired from the operation of the Whole Business and he is not involved in the present dispute between the two camps.

54.In my judgment, the most important witnesses are Chan and Kung.  Their evidence would be crucial in determining the two main factual disputes in the present case:

(i)  whether the parties had an oral discussion in November 2009 whereby they agreed for Kung to keep the ownership of the Trade Mark and that he would grant a bare licence to the Business to use the Trade Mark?

(ii)  whether Chan had orally agreed with Kung for him to claim reimbursement from SS Noodle the legal expenses for the Criminal Proceedings and the travelling expenses of the UK Trips?

55.On the whole, I find all the witnesses who testified on behalf of Chan’s Camp to be truthful and reliable witnesses.

56.I find Chan to be an honest witness.  His evidence makes a lot of business and common sense, in particular as to why he had paid so much for his investment in the Business.  Chan’s evidence is also supported by various contemporaneous documents such as the Written Agreement and the Share Distribution Document.  His evidence has remained unshaken after cross-examination, and I find his evidence as the truth.

57.I find Hung to be a credible and impressive witness. Though she is still working in the Business, she does not have direct financial interest in the outcome of the proceedings.  In fact, she had been working under Kung for a long period of time and so the court can trust her evidence as to the operation of the Business.

58.I also find Lin, Chung and Ou to be truthful witnesses.  For Chung and Ou who have invested in the Franchisees Businesses, it makes considerable business sense to them to regard the payments to SS Noodle to include royalties for the right to use the Trade Mark and the Goodwill in the Franchisees Businesses.  After all, this is the crux of every franchise agreement.  Having made substantial financial contributions, to suggest that they only have a bare licence to use the Trade Mark from Kung is simply beyond imagination.  I will elaborate this point further in the latter part of these Reasons.

59.For Kung, I do not accept him to be a reliable witness.  As I will further demonstrate in these Reasons, his evidence about him retaining the ownership of the Trade Mark and the granting of the bare licence does not make much business or common sense.  In assessing the potential of a restaurant business, investors would be interested in the goodwill and not just the physical assets of the business.  It is the goodwill and the trade mark of the business which will generate revenues in the future, and it is such potential that would attract investors to make substantial investments in a restaurant business.

60.Furthermore, I find his evidence about the splitting of cheques evasive.  The documentary evidence shows that Kung signed 6 cheques on 3 separate occasions to effect payment by SS Noodle for his legal fees in the Criminal Proceedings.  On each occasion, 2 cheques were signed on the same day in consecutive numbers.  It is clear that the whole arrangement was to nullify the effect of the change of SS Noodle’s bank mandate which required the joint signatory of Chan KL and Kung to effect payment for $20,000 and above.

61.Apparently, Chan’s Camp no longer trusted Kung and Tse to run the Business by themselves and so they required a change in the bank mandate.  The new mandate was effective on 19 October 2018, and on the same day, Kung started the practice of splitting the cheques in order to pay for his own legal expenses.  When cross-examined on such issue, he sought to shift the responsibility to Hung, and he seemed to suggest that Hung made the decision by herself to split the cheques for the sake of convenience.  However, Hung was only an executive in the Business carrying out the instructions given to her by her “bosses”.  I do not accept that, being just an employee, she would have fragrantly disregarded her duties in splitting the cheques simply for her own convenience.

62.The evidence of the other witnesses for Kung’s Camp does not add any more weight to their case.  In any event, I have grave reservation about the reliability of their evidence.

63.For Chan WP, I find it extremely odd he was able to recall exactly when Kung told him about the application of the Trade Mark, whereas he could recall the details of the registration of the other trade marks relating to the Business.  This kind of “selective memory” certainly undermines the credibility of his evidence.

64.For Shum, his evidence is simply against any common or business sense when he insisted that he invested in the Business not because of the Goodwill or the Trade Mark, but because of the good taste of the products and his trust in Kung’s management.  Shum made a substantial investment in the sum of $3.2 million.  Being a businessman himself, his assertion that he was buying a restaurant business without a goodwill is simply beyond imagination.  Eventually, Shum agreed that he invested in the Business because of its “賺錢能力” (ability to earn money).  Even to a layman, the ability of a business to earn money depends substantially on the goodwill of the business, and so his evidence that he was investing in the Whole Business without consideration of the Goodwill is simply not capable of being believed.

65.For the reasons mentioned above and in the latter part of these Reasons, save for the evidence of Tsu, I reject the evidence of the other witnesses who testified on behalf of Kung’s Camp.

(ii)     What were assigned to the Business under the Investment Agreement?

66.I then turn to the main issue in the present case: What were assigned to the Business under the Investment Agreement?

67.In the pleaded case of Kung’s Camp, it seems to be suggested that the Investment Agreement was only contained in the oral agreement made between the parties in November 2009.  However, after the cross-examination of Kung, Kung’s Camp now accept that the Investment Agreement was made partly orally and partly contained in the Written Agreement.  Kung agreed that the parties had spent 6 to 8 hours on 12 December 2009 in the restaurant in Guangzhou to discuss and negotiate the terms of Chan’s investment into the Business, and it was necessary to confirm the parties’ contractual rights and liabilities in the Written Agreement.  In his oral testimony, Kung no longer maintained that he was drunk when the Written Agreement was signed in the restaurant.

68.There is some suggestion that the Written Agreement is only a minutes and so it cannot be regarded as recording all the terms of the Investment Agreement.

69.In my judgment, the Written Agreement is an important piece of document recording the main terms of the Investment Agreement.  Though it appears in the form of a minutes of a meeting, it was signed by the main parties involved in the Investment Agreement, i.e. Chan, Lin, Kung and Tse.  The presence of signatures must mean that the signatories approved the contents of the document.  Further, there is no dispute between the parties that the meeting on 12 December 2009 started at around 2:00pm and the document itself was signed at around 10:00pm.  It shows that the contents of the documents were agreed after prolonged discussions between the parties.

70.There is some issue as to the true nature of the Investment Agreement: whether it was simply an investment agreement whereby Kung and Tse were selling one third of the interest of the physical assets of the Business to Chan, or whether it was an agreement whereby Chan acquired the Business whilst allotting one third of the interest each to Kung and Tse.

71.In my judgment, the distinction is really a non-issue.  The most important thing under the Investment Agreement is that the parties would be running the Business together as some kind of partnership or joint venture.  By the use of the word “收購” (acquire) in the Written Agreement and the cessation of the business registration of the former partnership business, it is clear that the assets of the Business would be transferred to the new partnership and joint venture, and the court has to determine whether the assets so transferred included intangible assets such as the Trade Name, the Trade Mark and the Goodwill of the Business.  Further, out of the $6 million invested by Chan, $1 million thereof would be paid to Kung and Tse for the acquisition of the assets in the 1^st and 2^nd Shops.  By such arrangement, it is clear that the former business including its assets would be transferred to the partnership or joint venture of the new business.

72.The payment arrangement under the Written Agreement and the evidence of the case also show that it was Chan who provided the capital for the expansion of the Business whilst Kung and Tse were responsible for its daily operation.  Kung seeks to rely on the financial records of SS Noodle to show that the 1^st and 2^nd Shops (which included Kung and Tse themselves) also made financial contributions to the expansion of the Business.  However, the entries in the general ledgers only support that certain payments were made by the 1^st and 2^nd Shops, it cannot support that these payments were made for the expansion of the Business.  In any event, the payments do not show that, as opposed to Chan himself, Kung or Tse had made any personal financial contributions for the future expansion of the Business.

73.As mentioned above, the crucial issue in this case is to ascertain the assets that were assigned to the Business as stated in the preamble of the Written Agreement, whether they only included tangible assets as alleged by Kung’s Camp or also intangible assets such as Trade Name, the Trade Mark and the Goodwill as alleged by Chan’s Camp.

74.It is common ground that the terms of a contract and the contractual intentions of the parties have to be construed objectively.  The crucial issue is the intentions of the parties at the time of the making of the contract.  Subsequent conducts may be relevant to ascertain the intentions of the parties at the time of the making of the contract.

75.There is no hesitation in my mind that the Investment Agreement included the transfer of the Trade Mark, the Trade Name and the Goodwill of the Business.  One must bear in mind that Kung’s business was only in its early stage when the Investment Agreement was made.  The 1^st and 2^nd Shops were operated in leased premises. The decoration of the shops, the rental deposits paid to the shop owners, the cooking and eating utensils were not valuable assets, and yet Chan was prepared to pay substantial sums to Kung and Tse to acquire the assets of their business and to expand the business.  Obviously, goodwill would be established by the expansion of the Business.  It would be beyond imagination that Chan would be prepared to shoulder the main responsibility for financing the expansion without enjoying the fruit of such expansion.

76.Imagine the scenario that Chan had made so much financial contribution for the expansion and Kung suddenly revoked the alleged bare licence to use the Trade Mark, Chan would then be held at the ransom of Kung or else substantial part of Chan’s financial contribution would be wasted.  I do not think that any sensible businessman, in particular those involved in the restaurant business of which goodwill is so important, would have accepted such kind of arrangement.  Hence in my judgment, it would go against any business sense if the acquisition of the Business at substantial consideration would have proceeded without the Trade Mark forming part of the assets being transferred to the new business.

77.These are also the reasons as to why I reject Kung’s evidence about the alleged oral discussions between the parties in November 2009.

78.In fact, Kung admitted at cross-examination that the Goodwill of the Business belongs to SS Noodle.  In such case, it must mean that SS Noodle (and subsequently Splendid Profit) also owns the beneficial interest in the Trade Mark, for it cannot be argued that the Goodwill is separable from the Trade Mark used in the Business.

79.I accept the submission of Mr Chong, counsel for Chan’s Camp, that when a business is conducted and operated, at all times, under a trade mark (whether registered or otherwise) and a reputation is earned therefrom, it is difficult to see how it may be contended that the trade mark, used in the course of the business, would not form part of the business’ goodwill. The reasoning being that reputation of the business is earned from usingboth the name of the business and its trade mark as representing the business.

80.In Inland Revenue Commissioners v Muller & Co.'s Margarine Ltd[1], Lord Macnaghten said the following:[2]

“The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates."

81.It is especially so when the trade name and the trade mark used in the business are identical or substantially identical, which is exactly the case here.  Even a layman is able to understand such concept.

82.Upon cross-examination, Kung and Shum eventually agreed that the investors of the Business were also purchasing its existing and future “ability to earn money”.  Again, “ability to earn money” of a business is, in fact, laymen’s term of goodwill, and that should have been the understanding of all the parties of the investment agreements involved in this case.

83.The subsequent conducts of the parties also support that it was the intention of the parties that the Trade Mark and the Goodwill were assigned to the Business under the Investment Agreement.

84.Firstly, it is clear from the evidence that SS Noodle paid for the expenses for the registration of the Trade Mark.  If Kung was the beneficial owner of the Trade Mark, it would be difficult to explain why SS Noodle would have to pay for such expenses.

85.Kung suggested that it was SS Noodle which first paid for such expenses, but it might have set off such expenses from the amount owed by SS Noodle to Kung.  The basis for him in saying so is that, on many occasions in the past, SS Noodle would provisionally make payments on his behalf and would thereafter make deductions from his director’s account or account receivable.  However, Hung, despite a search into the accounts and records of SS Noodle, was unable to find any trace supporting the making of such set off.  Even Kung himself does not know whether such set off had indeed been made, and so his belief is nothing more than mere speculation.  He tried to put the blame on Chan’s Camp by not providing the full financial accounts of SS Noodle to him for investigation. As he was no longer involved in the operation of the Business, Kung claimed that he had no access to the financial records.  However, as he was responsible for running SS Noodle most of time, I find it odd that he was unable to produce any documents to support the making of such set off.  I also have no reason to doubt the evidence of Hung in this regard.

86.It is true that the Trade Mark was registered in the name of Kung alone, and the ledger for the payment of the registration expenses contained an express reference to Kung himself.  However, this is not surprising as Kung and Tse were responsible for the operation of the Business and the Franchisees Businesses, and Chan only found out in around May 2019 that Trade Mark had all along been registered in Kung’s name.  Prior to that and due to the then mutual trust between the parties, they did not care or pay attention to the details of the operation of the Business including who was actually the registered proprietor of the Trade Mark.

87.There is an issue as to when Kung first gave instruction to the solicitors’ firm, Chan & Tsu, to apply for the registration of the Trade Mark, but I do not think that it would be material in determining the merits of the case.  Even if Kung gave such instruction as early as late 2008 or early 2009, the Trade Mark intended to be registered should have been transferred to the Business under the Investment Agreement. Hence, after the successful registration of the Trade Mark, Kung has been holding the Trade Mark as trustee for the benefit of SS Noodle and the Business.

88.Secondly, the arrangement under the franchise agreements also supports that the parties had all along regarded SS Noodle as the owner of the Trade Mark.  The object of every franchise agreement is to enable the franchisee to use the trade name, trade mark and goodwill of the franchisor as a springboard to promote the franchisee’s business.  In return, the franchisor would obtain royalties for the granting of such licence.  Though there was no specific reference to the payments as royalties, it is clear from the arrangement between SS Noodle and the Franchisees Companies that the payments made by the latter included monetary consideration for the licence to use the Trade Mark and the Goodwill of SS Noodle.  In other words, by making such payments to SS Noodle, the parties acknowledged that SS Noodle was the owner of the Trade Mark and the Goodwill.

89.This also applies to the use of the name “Sour and Spicy Noodle” as part of the company names of the Franchisees Companies.  If Kung was the owner of the Trade Mark, it is very difficult to understand why he had allowed them to use such name for the Franchisees Businesses without asking for some reward or royalty for himself.  It does not make sense at all.

90.Thirdly, the arrangement made by the parties for the allotment of shares in the Share Distribution Document also shows that the parties had all along regarded the Business and the Whole Business as owning the Trade Mark and the Goodwill.

91.To most investors in the stock market, one of the important assets of a listed company, in particular one operating a restaurant business, is the goodwill of the business.  As mentioned above, the ability of a restaurants-chain to generate revenues depends very much on its goodwill.   Management of such kind of business may change in the course of time and the tangible assets of the business may not worth much, in particular when most of the shops are operated in leased premises.  Hence, it would be beyond imagination that the investors in the stock market would buy the shares of a restaurant business if the listed company does not own the goodwill.

92.For these reasons, when Splendid Profit was incorporated on 4 March 2016, it is difficult to see how it could be ‘floated’ as a listed company without owning the Trade Mark and the Goodwill which were crucial to the operation of the Whole Business.  In such case, it would be most surprising that Kung had not asked for additional shares of Splendid Profit be allotted to him for the Trade Mark he “owned”.

93.Furthermore, when the parties discussed the shares distribution, the various investors of the Whole Business agreed the sums of $30 million and $20 million as the values of the Business and the Franchisee Businesses respectively, making a total valuation of $50 million. However, it is clear from the financial accounts of SS Noodle that its net tangible assets were by then only worth a total of $7 odd million.  The only logical explanation as to why the parties adopted a figure of $50 million is that such valuation also included the Goodwill of the Whole Business.  Yet there were no additional shares allotted to Kung for the Trade Mark he “owned”.  In my judgment, the shares distribution arrangement made by the parties clearly shows that even Kung himself regarded the Trade Mark as owned by SS Noodle and the Business and not himself.

94.Ms Ho, counsel for Kung’s Camp, submits that there was no specific reference to the Goodwill in the valuation and so the court should not assume that the total valuation included the value of the Goodwill.  Further, the arrangement agreed under the Share Distribution Document was only the product of the preliminary and not final discussions between the parties, and so the court should not attach too much weight to such document.

95.However, Splendid Profit was set up for the purpose of the listing of the Whole Business.  When the parties discussed the shares distribution, it could not have been done casually as such distribution would affect the interests of the various investors in the intended list company.  Further, whether the parties had expressly referred to the Goodwill in the total valuation is neither here or there.  As the agreed total value of the Whole Business far exceeded that of its tangible assets, the court has reason to believe that the parties had taken into account the intangible assets of the Whole Business, including the Goodwill, in the total valuation.

96.In support of the case of Kung’s Camp, Ms Ho relies heavily on the Draft Documents in which there was an express acknowledgement by the proposed assignee (Splendid Profit) that the proposed assignor (Kung) was the proprietor of the Trade Mark and that a licence had been granted for the use of the Trade Mark previously.  Ms Ho submits that the acknowledgment shows Chan’s Camp at all times knew that Kung was the beneficial owner of the Trade Mark.

97.In my judgment, the acknowledgement in the Draft Documents carries no weight at all.  For such acknowledgement to be a meaningful one, it has to be shown that Chan’s Camp knew their legal positions by that time and accepted the acknowledgement as the truth.  However, there is no evidence to show that Chan’s Camp prepared the document themselves.  I accept the evidence of Hung that the Draft Documents were prepared casually without the benefit of full instructions given to solicitors and the provision of legal advice.  There was no trace of the involvement of a qualified solicitor.  In fact, the backsheets of the Draft Documents do not show the name of any firm of solicitors and Chan KL was named as a witness instead of a staff of a solicitors’ firm.  Hence, I do not find that Chan’s Camp had genuinely accepted the contents of the acknowledgement as the truth.

98.Further even if Chan’s Camp were aware of the acknowledgment when the Draft Documents were sent to Kung for execution, it does not advance the case of Kung’s Camp any further.  To Chan’s Camp, the dispute between the parties could be resolved quickly if Kung simply agreed to sign the Draft Documents.  If that happened, they would not have minded the acknowledgment in the Draft Documents.  In fact, I would be most surprised if Chan’s Camp were to accept the acknowledgement as the truth.  As mentioned above, having made substantial financial contribution to the expansion of the Business, it would be hard to imagine that Chan would simply accept that Kung was the owner of the Trade Mark without any protests.  Hence, the acknowledgement did not reflect the true understanding of Chan’s Camp by that time.

99.Ms Ho submits that Chan’s Camp must have received legal advice for the preparation of the Draft Documents, as Chan admitted the involvement of solicitors in his affirmation filed to oppose the interlocutory injunction application.

100.In his oral testimony, Chan confirmed that neither Splendid Profit nor SS Noodle had retained solicitors to prepare the Draft Documents.  I accept such explanation.  One has to bear in mind that there was only limited time available for the preparation of the opposing affirmation, and Chan was still relying on Hung in the daily operation of the Whole Business despite becoming its chief executive officer in May 2019. Further, the history of the case shows that Chan could not have conceded the ownership of the Trade Mark so easily.  If proper legal advice had been obtained, the solicitors would have taken appropriate measures to protect the interests of Chan’s Camp.  For these reasons, I find that these documents had been prepared casually with a view to achieve a speedy resolution of the dispute without incurring any legal costs.

101.Ms Ho argues that if Chan’s Camp are the beneficial owners of the Trade Mark, it is strange that they did not follow up on the matter after Kung refused to sign the Draft Documents.  However, not everyone would resort to legal proceedings soon after a dispute becomes apparent.  Before Kung’s Camp started the Consignment Business in the ParknShop, it was in effect business as usual for Chan’s Camp.  By then, there was no pressing need for Chan’s Camp to bring legal proceedings against Kung’s Camp.

102.Ms Ho also seeks to rely on the judgment of Chow J in Dacheng International Legal Services Ltd v Sze Yeuk Lung Benedict[3] to show that the court should consider the acknowledgement by Chan’s Camp in determining the ownership of the Trade Mark.  However, that case was about a dispute between a large Mainland legal firm and the Hong Kong branch office about the ownership of the goodwill built up in Hong Kong.  That case only supports the proposition that if there are clear contractual terms governing the ownership of the local goodwill, the court would give effect to them.  The present case is very different.  Hung only casually asked for assistance from the husband of her colleague to draft some legal documents with a view to get Kung to transfer the Trade Mark back to Splendid Profit.  Chan’s Camp were not aware of the acknowledgment in the Draft Documents or its legal effect, and so the acknowledgement carries no weight in determining the understandings of the parties by that time.

103.For the above reasons, I find that either Splendid Profit or SS Noodle is the beneficial owner of the Trade Mark, and Kung has been holding the Trade Mark as trustee for the beneficial owner.  I therefore dismissed the claims for unlawful threat and trade mark infringement by Kung’s Camp.  I also made, inter alia, a declaration that the beneficial interest of the Trade Mark belongs to Chan’s Camp and an order compelling Kung to transfer the Trade Mark to them.

104.At the trial, I made declarations and transfer order in favour of Chan, Splendid Profit and SS Noodle.  However, such order may cause practical problem as the Registrar of Trade Marks would have to know the specific proprietor of the Trade Mark.  The parties are therefore directed to agree on the actual beneficial owner of the Trade Mark.  In the case of disagreement, the parties are at liberty to restore the hearing for further arguments on such matter.  The final order will not be approved pending such agreement between the parties.

(ii)     Whether Kung’s Camp have committed passing-off by carrying on the Consignment Business in ParknShop?

105.There is no serious dispute that, in the event the court finds that Splendid Profit and SS Noodle are the beneficial owners of the Trade Mark, Kung’s Camp have committed passing-off by carrying on the Consignment Business in ParknShop.  In fact, the evidence shows that the Goodwill has been built up by the Business throughout the year.  Kung has done nothing to promote the Goodwill in his own personal capacity.   I therefore granted the relief for the passing-off claim by Chan’s Camp.

(iii)    Whether Kung was entitled to claim reimbursement from SS Noodle for his legal costs in the Criminal Proceedings and the travelling expenses of the UK Trips?

106.For the legal expenses relating to the Criminal Proceedings, Kung claims that he was entitled to be reimbursed from SS Noodle because the “networking dinner” that night was for the benefit of SS Noodle’s Business.

107.I have great reservation about the true purpose of the dinner that night as no further particulars have been given about the dinner itself.  Even accepting such allegation as the truth, it is clear that Kung was not entitled to such reimbursement.  Drunken driving is a crime. There were other lawful ways for Kung to go home after the dinner.  It is certainly a lame excuse to put the responsibility on SS Noodle.  The legal expenses were Kung’s own personal expenses and SS Noodle was not obliged to reimburse him for the same.  As the drunken driving incident had brought adverse publicity to the Business, it is quite unbelievable to suggest that Chan would have approved Kung to claim back his legal expenses from SS Noodle.

108.For the travelling expenses for the UK Trips, Kung claims that Chan had agreed for him to get the reimbursements from SS Noodle. First, as Chan was not a director or shareholder of SS Noodle, such agreement given by Chan, even if made, would have no effect at all.  Second, as there was no board resolution approving the reimbursements, Kung was not authorised to claim for such reimbursements.  Third, there is no evidence to support that the UK Trips were made for the benefit of the Business.  For the 1^st UK Trip, neither Splendid Profit nor SS Noodle had carried on any business in the United Kingdom and so it is difficult to see how the investment of a warehouse had anything to do with the Business in Hong Kong.  There might be some WeChat messages exchanged between Kung and Chan relating to the investment opportunity in United Kingdom, but there was nothing in these exchanges to show that such plan was made for the benefit of SS Noodle.  For the 2^nd UK Trip, Kung seeks to rely on the minutes of Splendid Profit’s AGM on 15 March 2019 recording a report from him about the 2^nd UK Trip relating to something about “sauce”.  However, there is no further details given for such business plan, nor is there anything to show that the Board of Directors of SS Noodle had authorised the trip or the reimbursement of the travelling expenses. Ms Ho argues that if Chan or Hung were to object the reimbursement of the travelling expenses, they should have raised it in the AGM.  However, there is nothing to show that Chan was by that time seriously engaged in the management of the Whole Business, and Hung was by then only an employee, and so the absence of objection cannot assist Kung’s case.

109.As none of the defences relating to the reimbursement claims has any substance, I granted judgment in favour of Chan’s Camp on these claims.

COSTS

110.It is common ground that costs should follow the event.

111.Mr Chong asks the court to award costs on an indemnity basis on the ground that the claim by Kung’s Camp is totally unmeritorious and should not have been made.  He relies on certain “dishonest conducts” on the part of Kung, and he submits that the claim was brought in bad faith in retaliation to him being removed from the management of the Whole Business.  Mr Chong also argues that there is no point in suing Chan LP as the 6^th Defendant in the original claim.

112.In my judgment, the facts of the present case do not justify an award of costs on a higher scale.  This is nothing more a dispute between different partners of a joint venture business.  Since Kung was the registered proprietor of the Trade Mark, his claim cannot be regarded as wholly unreasonable.  Further as Chan LP would continue to use the Trade Mark for his business, bringing him in the proceedings is not wholly unreasonable.  Hence I only awarded costs on the party-to-party basis.

THE OPERATION OF THE NEW INTELLECTUAL PROPERTY LIST

113.In my view, this case sets a perfect example as to how an intellectual property (“IP”) litigation should be handled by the court.  When the Intellectual Property List (“the IP List”) was set up in May 2019, I have said on many occasions that IP disputes should be handled without delay.  The Supreme Court of England made a pertinent observation “that litigation devalues IP rights, by increasing the cost and delay associated with their enforcement”.[4] In most cases, small enterprises or start-up businesses cannot wait for years before they know whether their IP rights would be protected or whether they can safely launch a product in the market.  In a fast changing world, it would also mean that the economic life of IP rights may be shorter.  From a business point of view, it may be better for businessmen to make alternative commercial plans rather than to wait for the uncertain result of litigations.  Hence there is a real need for the speedy resolution of IP disputes.

114.The writ of this case was issued a few months earlier on 27 December 2019.  When the case first came before me for the interlocutory injunction application, I identified this case to be an appropriate one for speedy trial.  By that time, the court diary allowed me to fix the trial date on 27 April 2020.  Despite the outbreak the COVID-19 pandemic and the operation of the GAP in court, the parties were able to file the pleadings and witness statements and complete the discovery within the limited period.  The parties also attended a meaningful mediation session.  Eventually, the trial started on 4 May 2020 after the termination of the GAP.  The trial was completed within a few days and the parties obtained judgment on 12 May 2020.  Unless any of the parties seeks to take this case elsewhere, they now know their legal rights and are able to plan their businesses accordingly.

115.As the judge in charge of the IP List, I would like to see more cases be disposed of in such manner.  However, it would depend on the availability of the scarce judicial resources and not all cases can be handled expeditiously.  Nonetheless, I must emphasise once again that efficient disposal of IP cases would help to protect and strengthen IP rights and to promote Hong Kong as an IP hub in the region for the management of IP rights and the resolution of IP disputes.

Ms Sabrina Ho and Ms Sakinah Sat, instructed by T C Foo & Co, for the Plaintiffs by original action and the Defendants by counterclaim

Mr K M Chong, Mr Alvin Chong and Mr Alvin Cheng, instructed by K C Ho & Fong, for the Defendants by original action and the Plaintiffs by counterclaim