Brian Dlugash v. Ed Mayers
Read the full judgment text of HCA 8423/1994 on BabelCite. This High Court CFI judgment was delivered on 26 May 1997.
1. Prior to severing their business interests in 1992, the Plaintiff and the Defendant through nominee companies each owned 50% of Imcor Limited ("Imcor"), a company incorporated in Hong Kong. Imcor was the beneficial owner of an inactive company called Wise Pearl Limited ("Wise Pearl"). Imcor carried on a business in the sourcing, manufacturing, exporting and sale of bags and other similar items in Europe, the United States of America and elsewhere ("the Business"). In March 1992 the Plaintiff
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HCA008423/1994 1993, No.A9424 IN THE SUPREME COURT OF HONG KONG HIGH COURT ______________
______________ AND 1994, No.A8423 ______________
______________ Coram: The Hon Mrs Justice Le Pichon in Court Dates of trial: 7, 8, 9 and 12, 13 May 1997 Date of handing down judgment: 26 May 1997 _______________ J U D G M E N T _______________ Introduction 1. Prior to severing their business interests in 1992, the Plaintiff and the Defendant through nominee companies each owned 50% of Imcor Limited ("Imcor"), a company incorporated in Hong Kong. Imcor was the beneficial owner of an inactive company called Wise Pearl Limited ("Wise Pearl"). Imcor carried on a business in the sourcing, manufacturing, exporting and sale of bags and other similar items in Europe, the United States of America and elsewhere ("the Business"). In March 1992 the Plaintiff and the Defendant agreed in principle that the business activities, assets and liabilities of Imcor and Wise Pearl should be distributed between them in a manner equitable to both parties. Because differences had arisen or were anticipated to arise in relation to the manner of the distribution, and to avoid any further differences, they agreed to appoint an independent third party to resolve any differences and to determine the manner in which the distribution should take place. On 30 March 1992, the Defendant, its nominee company Far East Diversified Investments Limited ("FEDI") and the Plaintiff entered into a Deed of Submission referring all these matters to the final determination of Mr Charles Dickson of Horwath & Co. 2. Pursuant to the Deed of Submission, by letter dated 26 June 1992, Mr Dickson made a determination ("the Letter of Determination") such that, inter alia, the Defendant would acquire the Plaintiff's interest in Imcor and the Plaintiff would acquire the Defendant's interest in Wise Pearl. For the purpose of implementing the Letter of Determination, the Plaintiff and the Defendant entered into an Agreement ("the Agreement"). It is to be noted that the Letter of Determination scheduled to the Agreement was expressly made part of the Agreement as if it had been set out in the body of it. 3. Mr Dickson in his capacity as expert made a number of interim determinations, namely on 28 August 1992 ("the first interim determination"); 16 April 1993 ("the second interim determination") and 23 June 1993 ("the third interim determination"). He made a final determination on 28 February 1994 ("the final determination") and an amended final determination on 17 March 1994 ("the amended final determination"). It is common ground that the Defendant made the first interim payment of US$200,000 as requested by Mr Dickson in his first interim determination on 20 October 1992 to the Plaintiff. In this action, the Plaintiff seeks to recover, inter alia, the amounts determined to be payable by the second and third interim determinations, alternatively, the amount under the final determination, alternatively the amount under the amended final determination. The reference to Mr Dickson 4. As the provisions of the Deed of Submission, the Letter of Determination and the Agreement are of central importance in this dispute, it is necessary to set out the relevant provisions in extenso and I do so below. The Deed of Submission 5. As noted above, the parties to the Deed of Submission were the Defendant's nominee company, FEDI, the Defendant and the Plaintiff. After reciting how the shares in Imcor were held and the business of Imcor, it provided as follows :
The Letter of Determination 6. On 26 June 1992, Mr Dickson sent to each of the parties a letter in identical terms being a determination pursuant to the Deed of Submission. Mr Dickson determined that the business, the assets and liabilities of Imcor should be dealt with as set out in the letter. In essence, FEDI was to purchase Imcor shares beneficially owned by the Plaintiff and Imcor was to sell its 100% interest in Wise Pearl to the Plaintiff or his nominee. The Letter contained further material provisions :
7. The Agreement which was made between the Defendant and the Plaintiff on the same day as the Letter of Determination contained, inter alia, the following provisions :
Because the net asset value ("NAV") of Imcor was greater than that of Wise Pearl, and because Imcor's volume of business was likewise expected to exceed that of Wise Pearl inasmuch as Wise Pearl had until April 1992 been inactive, it was accepted that the effect of the restructuring pursuant to the terms of the Letter of Determination and the Agreement would result in a payment from the Defendant to the Plaintiff. Mr Dickson's role 8. Mr Dickson's role in this reference came before Kaplan J. in Mayers v. Dlugash [1994] 1 HKLR 442 where the Plaintiff sought the removal of Mr Dickson for misconduct pursuant to the provisions of s.25(1) of the Arbitration Ordinance. As a preliminary issue, the Court dealt with the question whether Mr Dickson was in fact appointed as arbitrator or as an expert. The learned judge found that there was no sufficiently formulated dispute referred to Mr Dickson. As appears from the judgment (at p.450), the learned judge found that Mr Dickson was not asked to determine the dispute but to decide what to do in all the circumstances; he was given inquisitorial powers not normally given to an arbitrator; he was empowered to make a thorough investigation of the business and was given other powers rather than required to make a determination on the formulated disputes. As an essential pre-requisite of a submission to arbitration was that a formulated dispute is referred to the arbitrator, its absence is determinative or virtually determinative of the issue. It was further held that the procedure agreed on by the parties, in which Mr Dickson was given wide discretionary and investigating powers, which do not appear to be judicial, was far more consistent with an intention to appoint Mr Dickson as an expert rather than as an arbitrator. 9. The Defendant does not seek to challenge the decision of Kaplan J. and accepts that the reference to Mr Dickson was as an expert and not as arbitrator. Chronology of events April/May 1992 10. After the parties entered into the Deed of Submission on 30 March 1992, a de facto separation of the Business took place in that the Plaintiff left Imcor to run Wise Pearl. Although director in name of Imcor until August 1992, the Plaintiff effectively ceased to have any responsibilities or functions at Imcor other than to render assistance and to provide information as requested by the auditors in order to complete the audit for the year ended 30 June 1992 pursuant to para.9 of the Letter of Determination during the second half of 1992. Derek Tam who was the accountant at Imcor also effectively left Imcor by the beginning of May 1992 to work for the Plaintiff at Wise Pearl. 29 June 1992 11. Mr Dickson issued his Letter of Determination and pursuant to his direction, the Plaintiff and the Defendant entered into the Agreement to implement the restructuring provided for in the Letter of Determination. August 1992 12. Imcor shares held by the Plaintiff's nominee were transferred to FEDI and the Plaintiff formally resigned as a director of Imcor. 13. On 28 August, Mr Dickson made a first interim determination that the Defendant transfer to the Plaintiff US$200,000 (the first interim payment) which was approximately half the amount he calculated to be due to the Plaintiff based on draft financial statements then available. 20 October 1992 14. The Defendant made the first interim payment. 27 November 1992 15. HMSL informed the parties of the year-end 1992 audit status of the accounts of Imcor and Wise Pearl. It listed a number of outstanding issues for Imcor which included :
16. By letter of even date, Mr Dickson informed the parties of a number of issues determined by him by way of further implementation of the Agreement :
This letter also referred to a report drafted by Carole Tong concerning the state of the books and records of Imcor. The report listed specific problems which included, inter alia, payments to RI. It noted that there was no documentation to explain the nature of the advances to RI and that Ron Slowick ("Mr Slowick") would only be able to provide information to identify which amounts to be expensed and which to be capitalised in the 30 June 1992 accounts on his return to Hong Kong in January 1993. Pausing here, it is pertinent to note that the RI payments and its treatment became a major issue in this dispute. 17. The Letter also identified 9 general problems causing the delay. Suffice to say that at the hearing, each of the parties sought to put the blame or cause for the delay in finalising the June 1992 accounts on the other. March 1993 18. On 18 March 1993, Mr Dickson notified the parties that he would be making a determination on the net asset value of Imcor and Wise Pearl by 26 March 1993 which would be of an interim nature as there were still some areas which could not be finalised. The determination would be made from the standpoint that Imcor would be later paying Wise Pearl the agreed commission of 20% of its gross profits on sales to the old customer base and that subsequent adjustments to the net asset value could be deducted from those liabilities. This letter followed a meeting between Mr Dickson and the Defendant and Mr Kimman on 12 March 1993 and subsequent discussions with the Plaintiff at which time it was envisaged that the parties would endeavor to minimise the areas for determination by Mr Dickson. In October 1992, Mr Kimman was engaged as a consultant to advise Imcor on its financial restructuring. He became a non-executive director in March 1993 and in July 1995 acquired management control of Imcor. 19. On 20 March 1993, Mr Dickson advised the parties that he would also be producing an interim determination of gross profits, having shortly before received from Imcor and Wise Pearl their profit and loss statements for the six months ended 31 December 1992. April 1993 20. By letter dated 1 April 1993, Mr Dickson notified the parties of the proposed terms of the second interim determination and inviting the parties' response in order that it could be finalised no later than 16 April 1993. The amount of US$216,500 payable under the proposed second interim determination comprised two elements :
The letter further advised as follows :
In arriving at this determination I have applied following principals (sic) :
21. A "proforma determination" of the net book value of Imcor and Wise Pearl together with calculations of commission on gross profits for the two quarters ended December 1992 in the form of four appendices were enclosed. As appear from Appendix 2, the profit before taxation was based on draft financial statements of Imcor as at 29 January 1993 with 8 items of "further audit adjustments" including a provision for taxation based on "offshore" treatment of profits being available as to part. Appendix 3 specified 9 items of adjustment to the net book values for the purpose of determining the amounts due and payable between the parties and included an item relating to Fee Note No.12064 from Stevenson Wong whereby two-thirds of the fees (or $7,667) for services rendered from 1 January to 23 September 1992 were disallowed as the Defendant's personal expenditure. 22. The Defendant was out of Hong Kong from about mid March to the end of April. However, he was in Hong Kong on or about 4 April when he became aware of the letters of 18 and 20 March and 1 April from Mr Dickson. His evidence is that he wanted to get hold of Mr Dickson to raise a number of issues with him but found that Mr Dickson had gone on vacation for two weeks. There is no evidence that the Defendant left any messages for Mr Dickson or that he responded in writing as requested. 23. The Plaintiff responded to Mr Dickson by fax dated 9 April 1993. 24. On 16 April 1993, Mr Dickson issued his second interim determination in the terms set out in his letter of 1 April. 25. Upon the Defendant's return to Hong Kong at the end of April, he had a meeting with Mr Dickson and Mr Kimman concerning the second interim determination. The Defendant did not agree with Mr Dickson that Imcor's income could properly be treated as being "offshore" and therefore not subject to Hong Kong profits tax. Although Imcor had previously received advice from a partner of Horwath & Co. as to how it could structure its affairs to ensure that its income would be treated as "offshore", the Defendant and Mr Kimman maintained that that advice had never been properly implemented. May 1993 26. A meeting took place in mid May attended by Mr Dickson, the Plaintiff, the Defendant and Mr Kimman to discuss the tax issue further. The evidence of the Defendant and Mr Kimman is that they understood that "the other issues" arising from the second interim determination would be deferred until resolution of the tax issue. That, however, was not Mr Dickson's understanding. Specifically, he disagrees with the suggestion that the conclusion of the meeting in May was that pending resolution of the tax issue, all other questions were deferred. 27. On 21 May 1993, Mr Dickson received a telephone call from Mr Kimman to the effect that the audit of the financial statements for the year ended June 1992 be made on the basis that profits tax would be payable on Imcor's entire profits. June 1993 28. On 7 June 1993, Mr Dickson wrote to the Defendant expressing his disappointment at not having received the gross profit calculation for the quarter ended March 1993 and supporting documents and explanation not only for that quarter but also for the two quarters ended December 1992 as requested in the letter of 1 April although it was Mr Dickson's understanding that such documentation and statistics had been available for sometime. In those circumstances, the Defendant was informed that the commission payable was calculated by reference to the previous year's figures. On the same day, in a letter addressed to the Plaintiff but copied to and received by the Defendant, Mr Dickson made a number of determinations regarding, inter alia, RI payments (50% of which would be added back as an asset of Imcor as of 30 June 1992) and the payment of $51,168 to Hansei, a supplier ("the Hansei purchases"). 29. The Defendant responded by letter dated 11 June setting out his objection to the treatment of the RI payments, contending that that determination coupled with what the Defendant believed to be the rationale behind the gross margin payment under the Letter of Determination amounted to an unacceptable "double dip". 30. In his response to the Defendant dated 23 June 1993, Mr Dickson said :
Mr Dickson also noted that he had never received a reply to his letter of 16 April 1993 and observed (as it transpires erroneously) that in that letter he had given a deadline for the supply of the RI information. The letter went on to deal with commission on gross profits which was calculated on historical profit margins because despite of repeated requests, the Defendant had failed to provide the information and documentation sought. Mr Dickson went on to say that -
31. Mr Dickson sent to the parties his third interim determination directing that the Defendant pay the Plaintiff the sum of US$94,522 of which US$5,023 was further payable in respect of net asset value and the balance in respect of commission on gross profits for the quarter ended March 1993. This determination was premised on 50% of the payment being added back in deriving the net asset value and full provision for Hong Kong profits tax in respect of both years ended 30 June 1991 and 1992. Gross profits for the 9 months to 31 March 1993 were estimated in accordance with the previous year's figures, except that only 60% was assumed to have been shipped by 31 March "assuming delays in shipments, as reported by the Imcor directors". The Defendant takes issue with three of the adjustments made for the first time to the net asset value of Imcor by the third interim determination, i.e. RI payments, the Hansei purchases and medical insurance of approximately $20,000 paid for Ms Marcelo ("the insurance premium"). July 1993 32. On 23 July 1993, the Defendant made submissions regarding the three adjustment items mentioned above with which he disagreed as well as the disallowance of two-thirds of Stevenson Wong's fees, which was an adjustment that had been made under the second interim determination. Under cover of that letter, Mr Dickson was sent, inter alia, a handwritten monthly operating expense projection dated 20 December 1991 for RI and a transactions activity summary for RI for the first 6 months of 1992. The letter also raised matters arising from the personal accounts between the Plaintiff and the Defendant, namely, the Defendant's loan of HK$211,076 to Imcor and the Defendant's capital contribution to Sportsource. October - December 1993 33. The Plaintiff issued his writ in the first action claiming the amounts payable under the second and third interim determinations in October. In December an O.14 summons was issued in the first action in support of which Mr Dickson filed an affidavit. January 1994 34. Mr Dickson notified the Defendant that if the information requested in his letter of 14 January 1994 was not provided by 25 January, he would proceed to make a final determination based on what information he (Mr Dickson) had to date and upon arbitrary estimates of the information that the Defendant had failed to provide. The Defendant did not respond. February 1994 35. The final determination was issued on 28 February 1994 but owing to the failure by Imcor to supply information requested, it had to be made on a number of assumptions in arriving at the final determination. After taking into the account the first interim payment, it was determined that the sum of US$475,395 was due to the Plaintiff. March 1994 36. On 17 March 1994, Mr Dickson revised the final determination due to an incorrect adjustment made to the net asset value when such an adjustment had already been taken into account in the audited accounts of Wise Pearl. The revised figure came to US$487,976. August 1994 37. In August 1994, the Plaintiff commenced the second action claiming the amount payable under the amended final determination. The two actions were subsequently consolidated. The issues 38. The Defendant has raised a number of defences, some of which are applicable to all the alternative claims and others to only some of them. They are considered below. A. Jurisdiction to make interim determinations 39. It is common ground that in construing Mr Dickson's powers, one has to look at the "whole agreement" meaning not only the Agreement but also the Deed of Submission and Letter of Determination : see Clause 13.1 of the Agreement. Given the purpose of the reference to Mr Dickson and this is apparent from the recitals to the Deed of Submission and the Agreement, as well as the very wide powers conferred on Mr Dickson to determine the manner in which the separation of the parties' business interests was to take place, it would not be a correct approach to construe parts of what is a composite agreement in isolation. 40. Counsel for the Defendant submitted that the provision in Clause 3.3 concerning "partial payment on account in respect of the payment of the Consideration" could not be invoked until after a final determination of the Consideration payable under Clauses 3.1(a) and (b) had been made. It is common ground that at the time of the second and third interim determinations, Mr Dickson had not made any final determination under either Clause 3.1(a) or (b). Further, the Defendant contended that although Clause 6.5 of the Deed of Submission envisaged that "the price, mode of payment, indemnity and other terms in respect of the purchase of one party's interest from the other" be referred to Mr Dickson for final determination, that power became "spent" upon the issuance of the Letter of Determination. 41. I do not agree with the Defendant's reading of Clause 3.3 of the Agreement. There is nothing in that clause that made a final determination of the Consideration a pre-requisite to any direction to effect a partial payment on account. The Consideration as defined in the Agreement comprises two elements : one which was based on the NAV of Imcor and Wise Pearl; the other is a commission calculation based on Gross Margins ("the commission"). 42. So far as the commission element is concerned, it is clear from the Letter of Determination that this "commission" would be paid in instalments by reference to sales effected in each of the four relevant quarters. The second interim determination dealt with the amount of commission payable by the Defendant for the two quarters ended December 1992 whilst the third interim determination dealt with the amount payable for the quarter ended March 1993. The fourth quarter commission could not be determined until after 30 June 1993. On the Defendant's reading of Clause 3.3, even if the NAV was ascertained and the final audited accounts were despatched well before that date, no payment can be due until the last quarter's commission had been determined. That reading flies in the face of the clear terms of the Letter of Determination and the Agreement and is unsustainable. 43. Moreover, the words "on account" clearly envisaged payments being made pending the determination of the final amount. If Clause 3.3 were to be read in the sense contended for by the Defendant, there would be little point in having such a provision since the NAV part of the Consideration is due within 30 days of the finalisation and dispatch of the Accounts as Adjusted : see Clause 3.2(a) of the Agreement. 44. In my judgment, Clause 6.5 of the Deed of Submission and Clause 3.3 of the Agreement conferred jurisdiction on Mr Dickson to direct that partial payments be effected on account of the NAV element of the Consideration. By making the interim determinations, Mr Dickson was effectively determining (as he had power to do) that the Defendant had sufficient disposable funds to effect partial payment. Insofar as the interim determinations dealt with the commission element, each related to specific quarters which was envisaged by the Letter of Determination. The Defendant's objection to the instalments of commission determined in the second and third interim determinations are accordingly misconceived. B. Whether there was an error as to jurisdiction 45. The Defendant submitted that Mr Dickson misinterpreted the relevant provisions of the Agreement which set out the manner in which the consideration for the Imcor and Wise Pearl shares was to be calculated and determined. Under Clauses 3 and 5 of the Agreement, the relevant Consideration was to be calculated by reference to the NAVs as shown in the Imcor/Wise Pearl Accounts as "Adjusted by the Auditors". Because the phrase "as Adjusted by the Auditors" was defined as meaning "such adjustments shall be determined by the Auditors to be necessary to provide a fair value of the NAV of Imcor and Wise Pearl as shown in their respective Accounts", any adjustment to the Accounts had to be made by Horwath & Co. and not Mr Dickson and that Mr Dickson had no jurisdiction to make any adjustments whatsoever to the Accounts. It is thus the Defendant's contention that the "adjustments" which Mr Dickson made to the net book values per financial statements were invalid as he had no jurisdiction so to do. In particular, the Defendant took exception to the adjustments relating to the RI payments, the Hansei purchases and the insurance premium. 46. As noted above, the Agreement is not a stand-alone document but one in a series of documents that together formed a composite agreement. It is plain from the Letter of Determination that it is Mr Dickson rather than the Auditors who was to determine the consideration payable based on a fair NAV from the audited financial statements as at 30 June 1992 as may be adjusted to reflect, inter alia, a number of matters. What was set out under paragraph 3 of the Letter of Determination was illustrative but not exhaustive of the adjustments that Mr Dickson might see fit to make. The apparent discrepancy between what is in the Letter of Determination and what is in the Agreement, particularly the definition of the phrase "Accounts as Adjusted" is to be resolved and can easily be resolved by construing "auditors" as referring to Mr Dickson. First, the definitions apply "except where the context otherwise requires". As the Letter of Determination is part of the Agreement (see Clause 1.1 of the Agreement) the context of Clause 3 of the Agreement "otherwise requires" having regard to paragraph 3 of the Letter of Determination. Second, the raison d'être of the Agreement was to implement the terms of the Letter of Determination. Plainly, where the Agreement conflicts with the Letter, the Letter must prevail. This accords with the overall scheme and the key role to be played by Mr Dickson in effecting a division of the Business. For these reasons, the jurisdictional point has no merit and is to be rejected. 47. Insofar as the objection to the three specific items go beyond this general jurisdictional argument as to Mr Dickson's authority to make adjustments, it is not supported by the cases. The leading authority is the English Court of Appeal's decision in Jones v. Sherwood Computer Services Plc. [1992] 1 WLR 277 which held that :
48. Counsel for the Defendant referred to the recent House of Lords decision in Mercury Communications Limited v. Director General of Telecommunications [1996] 1 WLR 48. Assuming (but without deciding) that Mercury is capable of being interpreted as enlarging the scope for intervention by the court, it is of little assistance in the present case. Mercury is distinguishable on the facts because of the absence of provisions remitting matters of interpretation exclusively to the expert and excluding the intervention of the court which are present here. C. Whether an expert must act fairly and reasonably 49. The Defendant submitted that it was an implied term of the Deed of Submission and the Agreement that in arriving at any determination, Mr Dickson would act fairly, impartially and according to the rules of natural justice. (Impartiality is considered separately under the next heading) Counsel for the Defendant relied on two building contract cases for this proposition. 50. In Balfour Beatty Civil Engineering Ltd. v. Docklands Light Railway Ltd. [1996] 78 BLR 42 at 58, the question which arose were the circumstances in which the court would interfere with decisions of an employer's representative in disputes between the employer and its contractor relating to extensions of time for completion under ICE Conditions of Contract where the standard condition for the arbitration of disputes was omitted and the employer's representative took the place of the engineer in the standard conditions. In that case, the employer conceded that it was bound to act honestly, fairly and reasonably even where no such obligation was expressed in the contract. John Barker Construction Ltd. v. London Portman Hotel Ltd. [1996] 12 Const.L.J.277 which was also relied on by the Defendant does not take this aspect any further. The architect whose certificate was in question was, as in the Balfour Beatty case, an agent of the defendant owners. It was held that there was implicitly an obligation on the architect to act lawfully and fairly. 51. It is to be noted that special circumstances existed in both the Balfour Beatty and John Barker cases since in each case the employer was himself the party issuing the certificate. Those decisions are of limited assistance given those special circumstances and the fact that they gave little guidance as to how whether a procedure is fair is to be assessed, specifically whether the whole doctrine of natural justice applies. 52. While as a general principle, an implied term that an expert will conduct his determination fairly is unexceptionable, the question (and it is one which must necessarily depend on the particular facts pertaining to each case) is whether fairness necessarily brings with it the whole doctrine of natural justice. See Kendall on Expert Determination, 2nd Ed. at p.190. As noted by the learned author, there is no machinery for the setting aside of experts' decisions for failing to observe the rules of natural justice as there is with arbitration awards; an expert determination, as decisions made under private contracts, are not susceptible to judicial review, for example, for failing to comply with the rules of natural justice. See R. v. Disciplinary Committee of the Jockey Club, ex parte Aga Khan [1993] 1 WLR 909, 933 F-G. For my part, I am not persuaded that the duty of an expert to act fairly necessarily brings into play the principles of natural justice in its full rigour. Further I do not accept that "fairness" requires that the expert's conduct be subjected to microscopic examination which is what the Defendant has sought to do. A common sense approach is required and nothing short of conduct that cannot, on any reasonable view, be said to be broadly fair would suffice to impugn an expert's determination. In other words, some degree of egregiousness must be established. 53. On the facts has Mr Dickson acted fairly? I will deal with the alleged breaches as pleaded in paras.19 to 21 and 15C(2)(a) of the Defence. As will become apparent, the allegations of unfairness and/or unreasonableness simply do not withstand scrutiny. The second interim determination 54. On the Defendant's own evidence, he became aware of Mr Dickson's letter of 1 April (not to mention his earlier letters of 18 and 20 March) on 4 April. All he did was to make a telephone call to Mr Dickson and upon learning that Mr Dickson was away on vacation, simply left it at that. There is no evidence that he left any message for Mr Dickson whether orally or in writing. Much less did he attempt to state his objections in writing. That Mr Dickson would have wished to make an interim determination could not have come as a surprise since by then, it was already long pass the date for finalizing the transaction contemplated by the parties. It was a year after the Plaintiff's de facto parting. There was no reason for the Defendant to think that the deadline imposed by Mr Dickson in his letter of 1 April was not meant to be observed. Clause 8 of the Deed of Submission could not have been clearer : Mr Dickson was authorised to proceed ex parte if his requests were not complied with after reasonable notice. 55. In any event, the only matter of substance that arose out of the second interim determination was the tax issue. The Defendant complained the undertaking required of the Plaintiff was never provided. In fact, Mr Dickson had accepted the Defendant's stance by making the appropriate adjustments by the time the third interim determination was made. The tax issue was thus a non-issue. Unfortunately it exemplified the pedantic approach adopted by the Defendant, an approach favoured by litigants who have no arguments of substance to advance. 56. Even if the adjustment had not been made by Mr Dickson in his third interim determination, the tax issue was capable of being reopened because it is an "adjusting event" within para.8 of the Letter of Determination. Mr Dickson's treatment of the tax issue was therefore not a reason at all for impugning the second interim determination. (It is noteworthy that for the year ended 30 June 1993, Imcor's accounts show an overprovision of tax in prior years of over $500,000. Prima facie, it would suggest that Hong Kong profits tax was not payable for part of the prior years' profits. Mr Kimman denied that this was so but his explanation for this can only be described as opaque.) 57. Contrary to the Defendant's assertion, the RI issue (in the sense of a determination of its treatment) did not arise out of the second interim determination. At that stage, no determination of the treatment of RI payments had yet been made by Mr Dickson although he had informed the parties as early as 27 November 1992 as to the approach he was proposing to adopt, namely, adjustments to the NAV of Imcor in respect of unsupported items or items of a capital asset nature. The RI issue only arose on 7 June 1993, well after the second interim determination. In this connection, I also reject the evidence of the Defendant and Mr Kimman to the effect that at the meetings with Mr Dickson in April and May 1993, there was any understanding that "the other issues" would be shelved pending resolution of the tax issue. The only other issue that could conceivably be said to arise out of the second interim determination is the disallowance of two-thirds of Stevenson Wong's fee note which concerns a de minimis amount. The fee note contained a comprehensive description of services rendered which would not have required any further representations by either of the parties. Mr Dickson's determination of that item is neither demonstrably unreasonable or unfair. The third interim determination 58. The three adjustments with which the Defendant takes issue relate to RI, Hansei, and the insurance premium. By letter dated 7 June 1993, Mr Dickson set out his proposed treatment of the RI payments and Hansei purchases. All Mr Dickson received from the Defendant by the time he made the third interim determination on 23 June was the Defendant's letter of 11 June objecting to the treatment of the RI payments, complaining that it amounted to a "double dip". No mention was made of the other two issues. Was Mr Dickson under any obligation to hear the parties further on these issues before making a determination? (i) The RI payments 59. The relevant chronology shows that as early as 27 November 1992, Mr Dickson's stance regarding these payments were made known to the parties. It is Mr Dickson's evidence (corroborated by his letter of 23 June) that in December 1992, Mr Slowick who ran RI in the U.S. promised Mr Dickson that he would return to Hong Kong in January with a full explanation of the expenditure together with supporting documentary evidence. In April, the Defendant went to the U.S. and one of the purposes of that visit was to bring back information. The Defendant also informed Mr Dickson that he had appointed an auditor to produce a report on the expenditure so that he could rely on that for his audit. None of this was forthcoming. Mr Dickson continued to seek this information as is apparent from his letters of 1 and 16 April. Whilst contrary to his belief, the April letters did not specify a deadline for the provision of this information as opposed to the provision of detailed analysis of sales and cost of sales for the gross margin calculation, after the 7 June communication, the Defendant did not respond by providing the necessary information and documentation; instead he confined his response to complaining about the treatment being a "double dip". 60. In these circumstances, on 23 June, having waited in vain for 6 months for information, Mr Dickson made his determination to add back 50% of the RI payments to the NAV of Imcor. A month later, on 23 July, the Defendant provided some information to Mr Dickson. However, that information was wholly inadequate : there was no audit report as promised and no supporting documentary evidence. Mr Dickson's evidence was that in those circumstances, having regard to his determination of 23 June he was not prepared to invest further time on these payments by carrying out a full audit. The Defendant submitted that Mr Dickson's failure or refusal to consider the information supplied on 23 July was unfair and unreasonable. I disagree. 61. Having regard to the reference to Mr Dickson, the terms of the Deed of Submission, in particular Clause 8 which enabled him to proceed ex parte upon the failure of a party to provide information within a reasonable time and the history of events, the Defendant's complaint that Mr Dickson had acted unfairly is not sustainable. The Defendant has but himself to blame. 62. Another complaint is that Mr Dickson's treatment of the RI payments was arbitrary as acknowledged by Mr Dickson in cross-examination. But that response has to be placed in context. It was "arbitrary" in the sense that it was not based on any proper audit which was justified by reason of the unkept promises of Mr Slowick and the Defendant to provide supporting documentary evidence and an audit report. 63. It was also put to Mr Dickson that the add-back was arbitrary in that the proper accounting treatment required it to be stated as a receivable to Imcor. Mr Dickson explained that to treat the "improper expenditure" as a receivable, was to imply that it was recoverable. In the present case, Mr Dickson's view was that as the Defendant would not be taking any steps to recover the debt, there would be no case for stating it as a receivable. Having challenged the propriety of the add-back as a matter of accounting practice, the Defendant did not see fit to adduce expert evidence to substantiate his attack. The Defendant could not have been serious in launching this attack : it served no purpose except to prolong the hearing. Such strategy is to be deplored. (ii) Hansei 64. This was a payment to a supplier of raw materials. The payment was made within a month or two of the year ended June 1992. Mr Dickson's evidence was that he was unable to obtain documentation from Imcor and was never provided with documents to prove how those raw materials had been consumed. Given the timing of the payment, Mr Dickson's examination proceeded on the assumption that the materials could not have been consumed by the factory and converted into finished goods and sold to a customer prior to that year end and was therefore treated as an asset of Imcor. The information which Mr Dickson sought was plainly within the Defendant's control in as much as only his staff would have had access to it. The Defendant's inability (or refusal) to provide the information sought can hardly be converted into "unfairness" on the part of Mr Dickson. (iii) The insurance premium 65. The expense in question related to a new insurance policy that had been taken out for Ms Marcelo after the Plaintiff had departed from Imcor. The expense was thus incurred after the de facto parting. Although Ms Marcelo had been remunerated for many years as an employee of Imcor, there was a question as to whether payments to her were to some extent gratuitous. The disallowance of the cost of this new policy was made against those background facts. It is thus not a question of the Defendant not having been heard regarding this particular item. Rather, his grievance appears to be that Mr Dickson did not agree with or accept his submissions. It was a judgment call on the part of Mr Dickson and the fact that he took a view different from that of the Defendant does not render his determination either unfair or unreasonable nor entitle the Court to second-guess that determination. D. Whether an expert's determination may be set aside for being "fundamentally flawed" 66. A subsidiary issue is whether the fairness test has been extended by the decision in John Barker so that an expert's determination may be set aside if it is "fundamentally flawed". In addition to the three matters considered above (relating to RI, Hansei and the insurance premium) the Defendant also relied on Mr Dickson's failure to take into account an outstanding liability of US$180,000 allegedly due under a Joint Venture Contract dated 4 April 1996 in respect of a PRC joint venture company Yangzhou Yun Yang Packing Ltd. ("the Joint Venture"). It was contended that the determinations were thus "fundamentally flawed" and invalid as a result. As I have already found, Mr Dickson's determinations on the three matters cannot be impugned. I now turn to consider the Joint Venture issue. 67. The Defendant was not in a position to provide a certified English translation of the Joint Venture Contract under which the alleged liability arose. Instead, he relies on differences in the notes to the financial statements of Imcor to establish the fundamental flaw. 68. The relevant part of note (6) to the Financial Statements of Imcor for the year ended 30 June 1990 reads as follows :
The corresponding entry for the year ended 30 June 1992 is as follows :
Counsel for the Defendant submitted that the omission of Imcor's commitment to supply machinery up to US$300,000 from the 1992 accounts amounted to a fundamental flaw and that an adjustment should have been made to the NAV of Imcor to reflect an outstanding liability of US$180,000, because according to Mr Kimman US$120,000 of the US$300,000 liability had been "settled". It is to be noted that the evidence as to the alleged "settlement" was far from satisfactory but is not material for present purposes. 69. The change in the notes to Imcor's account first occurred for the year ended 30 June 1991. Those accounts were approved by the directors of Imcor in 1991 and the Defendant was one of them. It is disingenuous for the Defendant now to seek to impugn Mr Dickson's determination based on those accounts which he himself had approved. Moreover, on this issue, the Defendant has again not seen fit to adduce any expert evidence to establish that the absence of any provision for liability in respect of the Joint Venture is a treatment which no accountant could properly have made. It is thus unnecessary to go into Mr Dickson's evidence as to why it was appropriate to alter the wording of note (6) and why from an accounting point of view there was no liability. 70. In John Barker, the learned Recorder found that the expert in that case had "misapplied the contractual provisions". It was demonstrated that the expert did not properly apply the provisions of the contract because of his unfamiliarity with SMM7. It was for that reason that the expert's determination was found not to have been fairly or rationally based. That decision did not go beyond the parameters set by the Court of Appeal in Jones v. Sherwood Computer Services plc (supra). John Barker is not authority for the proposition that a court may second-guess expert determinations by finding them to be "fundamentally flawed" in every case where the court itself (assuming it possessed the relevant expertise) would have come to a different conclusion. If it is indeed authority for the wider proposition that counsel for the Defendant submitted, then with the greatest respect to the learned Recorder, it is one which this Court would decline to follow as being in conflict with Jones v. Sherwood Computer Services plc. It would render wholly nugatory the perceived advantages of expert determinations. E. Partiality 71. The Defendant submitted that Mr Dickson's role in the O.14 proceedings initiated by the Plaintiff and the assistance he rendered in the Plaintiff's preparation of this litigation (in the form of commenting on the accuracy of the facts pleaded so far as that was within his knowledge) would lead a reasonable person to conclude that there was a real likelihood of bias on Mr Dickson's part and that accordingly, Mr Dickson was disqualified from proceeding further with the determination with the result that both the final determination and the amended final determination are invalid. 72. The affidavit of Mr Dickson does no more than set out, albeit in detail, how the interim determinations came to be made and the sequence of events. These matters are reflected in the pleadings. It is not suggested that what Mr Dickson has set out in his affidavit is untrue. 73. Logically, assistance rendered to the Plaintiff in these proceedings including the O.14 proceedings which took place well after the interim determinations (even assuming such assistance to constitute bias for the sake of argument) cannot on any rational and objective view have a retroactive effect so as to taint determinations that had already been made. 74. But did the assistance rendered to the Plaintiff in his proceedings against the Defendant amount to bias? 75. There are few authorities relating to the setting aside of an expert's determination because of partiality. It requires actual bias or a real danger of injustice resulting from the alleged bias and not just conflicts of interest or apparent lack of independence. See Kendall (op.cit.) at 15.3.2. In Midland Montaqu Leasing (UK) Ltd. v. Tyne & Wear Passenger Transport Executive and Ernst & Whinney (1990) unreported, Chancery Division, 23 February, the expert in a finance leasing case attended a meeting at which the lessors and their solicitors discussed tactics for dealing with the lessees. Whilst the expert should have remained aloof from tactical discussions, his attendance did not invalidate the expert's decision. 76. Here the proceedings were brought by the Plaintiff to enforce the determinations. It is the obverse of an application to set aside a determination. In the context of an arbitration, as stated in Boyd & Mustill on The Law and Practice of Commercial Arbitration in England, 2ndEd. at 254,
As a matter of principle, there is no reason why this should not apply to the enforcement of an expert's determination. 77. Viewed objectively, Mr Dickson's conduct falls squarely within the principles set out above and cannot be impugned on the ground of partiality. F. Whether there is power to amend a final determination 78. In addition to his bias argument (which I reject), there is an additional defence raised by the Defendant as to the validity of the amended final determination which is that having made a final determination, Mr Dickson had no power and was not authorised to make any amendments. 79. I do not accept that in the absence of any express provision to that effect, an expert has no power whatsoever to correct clerical errors. The error that led to the amended final determination was the making of an adjustment twice in respect of the same item. It is in substance no different from an arithmetical error. It flies in the face of common sense that an expert has no implied power to correct clerical errors in his determination. G. Conclusion 80. It follows from the above that all the defences raised fail. 81. Having heard several days of evidence, I am convinced that this litigation stems from the fact that the terms upon which Imcor and Wise Pearl were to be restructured were not to the Defendant's liking. The Defendant's unwillingness to bring about a speedy determination by Mr Dickson is evident from about the end of 1992 or early 1993, well after the Plaintiff had transferred the Imcor shares to FEDI and resigned as a director. When delay and non-cooperation (by not providing relevant information) did not prevent Mr Dickson from making determinations, every effort was made to challenge and impugn those determinations. 82. It is most regrettable that what was an eminently sensible arrangement for an "out of court" division of the business between the parties and a speedy resolution of their disputes should have resulted in a protracted and costly court battle, particularly when the defences raised were so devoid of merit. Counterclaim and set-off 83. Under Clause 7.1 of the Agreement, only "such consideration as shall be payable by either of [the Plaintiff or the Defendant] to Imcor and/or Wise Pearl and/or [the Defendant] and/or [the Plaintiff] in respect of the transactions herein" may be set off. It is to be noted that Clause 5.2 of the Deed of Submission conferred on Mr Dickson the power to compromise or release all claims and counterclaims the parties may have against one another or Imcor. 84. The Defendant claims to set-off various items particularized in paras.32 and 33 of the Amended Consolidated Counterclaim against any amount found due to the Plaintiff. (The Defendant is not pursuing the claim made in para.34) 85. I have already dealt with the items referred to in para.33 and found that Mr Dickson's treatment of these items cannot be challenged. It follows that the Defendant has failed to establish his entitlement to those amounts. 86. As to the three items claimed under para.32, the first two (totalling US$11,195.50) relate to Sportsource. The evidence is that the Sportsource expenditure incurred in August/September 1990 (as opposed to RI expenditure) was never an issue. It was never raised by the Defendant until his letter of 23 July 1993 and was never put to Mr Dickson as items that required his determination despite the request made in Mr Dickson's letter of 27 November 1992. 87. On the evidence this expenditure arose out of a partnership between the parties and Mr Greg Thompson. Any claim relating to it is a partnership matter and is not a claim against the Plaintiff personally. If (contrary to my view) it is within the scope of Mr Dickson's determination, the Defendant may not go behind Mr Dickson's final determination which effectively rejected the claim. Moreover, it is to be noted that the Plaintiff's evidence that these items had been reimbursed to the Defendant through the "Director's Current Account" was not challenged by the Defendant. 88. As to the alleged loan of $211,076 to Imcor, on 27 November 1992 the Defendant was asked "to examine the books of Imcor to establish precisely what was off-set against [his] salary in prior years". The Defendant did nothing except to assert eight months later, on 23 July, that there was "a loss of collective memory" (except his) regarding this balance. 89. I accept the evidence of Derek Tam regarding the operation of the Director's Current Account. I also accept his evidence that the Defendant's personal expenses exceeded his salary for the year ended 30 June 1989 and that Imcor's accounting files contained entries and documentary support relating to personal expenses duly authorized by the Defendant. I hold that on the evidence, the Defendant has failed to establish the Imcor is indebted to him in the sum of $211,076. Even if established, it is not within the set-off provision, not being consideration payable to Imcor. 90. Accordingly, the Defendant's claim to a set-off fails. Order 91. As I have found that the second and third interim determinations, the final determination as well as the amended final determination are all valid, I order that the Defendant pay the Plaintiff the sum of US$487,976 together with simple interest pursuant to s.48 of the Supreme Court Ordinance, Cap.48
The Defendant's Counterclaim is dismissed. 92. I also make an order nisi for costs of the action and the counterclaim in the Plaintiff's favour.
Representation: Plaintiff in person Mr Ashley Burns, inst'd by M/s Stevenson Wong & Co., for Defendant |