Dynamic Way International Limited and Another v. Ho Kui Chee and Others

HCA 16149/1999

HCA 16149/1999

BETWEEN

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Before: Deputy High Court Judge To in Court

Dates of Hearing: 18-22 December 2000, 28-31 May and 1, 5-7 June 2001

Date of Judgment: 22 November 2001

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J U D G M E N T

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Background:

1.Mr Yip is a director of the 1^st and 2^nd Plaintiff companies.  Shortly after commencing business in December 1993, the 1^st Plaintiff was awarded the sole distributorship of Eurolook shutters in Hong Kong, Macau, Taiwan and the People’s Republic of China.  Eurolook shutter is a transparent polycarbonate security shutter. At the time there were no comparable products in the market.  Initially, Yip tried to market the shutters to roller shutter contractors, but he met with little success.  Then he decided to market the shutters direct to end users, which would require the 1^st Plaintiff teaming up with a roller shutter contractor to provide installation and maintenance for the shutters.  He discussed with the 1^st Defendant who was the proprietor of Hung Fat Roller Shutter Engineering Company (hereinafter called “Hung Fat”), who was receptive to the idea.  On 20 April 1994, the 1^st Plaintiff entered into a cooperation agreement with the 1^st Defendant.  Under the terms of that agreement, the 1^st Plaintiff would subcontract the installation and maintenance of Eurolook shutters to the 1^st Defendant. The parties operated successfully under that agreement for a few months.

2.On 1 August 1994, the 1^st Plaintiff and the 1^st Defendant formed a joint venture using the 2^nd Plaintiff as the corporate vehicle.  Under the joint venture agreement, the 1^st Plaintiff was responsible for marketing the shutters and liaising with clients while all installation and maintenance work would be subcontracted to the 2^nd Plaintiff as the 1^st Plaintiff’s nominated subcontractor. The 2^nd Plaintiff would in turn subcontract the work to the 1^st Defendant.  In servicing the Plaintiffs’ clients, the employees of the 1^st Defendant had to present themselves as employees of the Plaintiffs. The 2^nd Plaintiff would receive a fee or commission from the 1^st Plaintiff and the 1^st Defendant in respect of each shutter installed.  Yip and Ho of the 1^st Plaintiff and the 1^st Defendant were appointed directors of the 2^nd Plaintiff.  The 2^nd Defendant, who is the son of the 1^st Defendant, also became involved in the business and management of Hung Fat and the 2^nd Plaintiff.  He attended directors meeting of the 2^nd Plaintiff.  The operation of the joint venture made it necessary for a lot of Eurolook plates and parts belonging to the Plaintiffs to be stored in the workshop of the 1^st Defendant.

3.The joint venture was very successful.  The 1^st Defendant’s turnover increased from about $2 million in 1994 to over $20 million in 1997 while the goodwill of the 1^st and 2^nd Plaintiffs began to build up.  On the other hand, the relation between Yip and the 1^st and 2^nd Defendants took a down turn.  There were disputes about contract fees, liability for maintenance and delay allegedly due to the 1^st Defendant’s inadequate manpower. The 1^st Plaintiff introduced an apprenticeship scheme into the 1^st Defendant’s workshop with a view to ease the manpower problem.  The 1^st Defendant was not receptive to the scheme which became another cause of dispute. In March 1997, Yip incorporated Dynamic Way (Hong Kong) Limited (hereinafter called “DWHK”) to handle the work which allegedly was beyond the capacity of the 1^st Defendant.  About 40% of the 1^st Plaintiff’s orders went to DWHK, which also became another cause of discontent between the 1^st Defendant and Yip.  In order to resolve all these disputes, the 1^st and 2^nd Plaintiffs and the 1^st Defendant signed an agreement titled “Engineering Contract and General Conditions” on 5 July 1997. The agreement was mistakenly dated as “5 July 1996”. It provided for a system of certification for the purpose of settling disputes about liability for maintenance, an annual revision of contract fees, an undertaking by the 1^st Defendant not to increase contract fees during the year and a restrictive covenant. At the same time, Yip was negotiating with the 1^st Defendant about a merger of Hung Fat with DWHK and an accountant was engaged to examine the business of Hung Fat. The target date of the merger was 1 December 1999 as the tenancy of the workshop of Hung Fat was due to be terminated on 30 November 1999.  However, the parties could not come to terms about the merger.  Eventually, the 1^st Defendant resigned from his directorship in the 2^nd Plaintiff on 26 July 1999 and terminated the joint venture agreement with the 1^st Plaintiff in October 1999.  Just a few months prior, in June 1999, the 2^nd Defendant set up the 3^rd Defendant company which has a similar Chinese name as Hung Fat.

4.The Plaintiffs claim against the 1^st Defendant for his breach of duty as director of the 2^nd Plaintiff, against the 1^st and 4^th Defendants for conspiracy to injure the Plaintiffs in relation to the Tung Chung Project, against the 1^st to 3^rd Defendants for breach of confidentiality and against the 1^st Defendant for breach of covenant and for costs of materials which have not been accounted for.  The Defendants counterclaimed for unpaid cost of works and for defamation.  It would be convenient to consider the issues in the following order: the Plaintiffs’ claim for breach of covenant, the Tung Chung Project which is relevant for both the claims against the 1^st and 4^th Defendant for conspiracy and against the 1^st Defendant for breach of fiduciary duty, the 1^st Defendant’s breach of fiduciary duty generally, the Plaintiffs’ claim for unaccounted for materials and then the Defendants’ counterclaim.

Breach of covenant by the 1^st Defendant:

5.Initially the Plaintiffs’ claim was for breach of duty of confidence imposed by the oral agreement in April or May 1994 and breach of restrictive covenant contained in the Engineering Contract and General Conditions signed by the 1^st Defendant in 1997.  At the conclusion of the hearing, Mr Ho for the Plaintiffs confirms that the Plaintiffs are contented to limit this claim to breach of Clause 12 of the Engineering Contract and General Conditions.  He submits that it is unnecessary for the Plaintiffs’ purpose to show or prove that there was any breach of the duty of confidence or duty of confidentiality in equity.

6.Clause 12 provides that the Plaintiffs’ clients and their particulars are property of the Plaintiffs and upon referral of a client by the Plaintiffs to the 1^st Defendant for installing shutters, unless the 1^st Defendant forthwith produced documentary proof that he had prior business relations with that client, the client shall be deemed to be the Plaintiffs’ property.  It further provides that during the currency of the agreement and for a period within one year of its termination, the 1^st Defendant may not promote, introduce or sell his products to the Plaintiffs’ clients.  The issue that immediately arises is whether the scope of the restraint is reasonable and enforceable.

7.Mr Ho submits that the restraint is for a period of one year which is a very short period and the object of prohibition is extremely limited being only confined to promoting, introducing or selling the 1^st Defendant’s products to the 1^st Plaintiff’s clients.  I have no quarrel that a one year covenant is not unreasonable, but the reasonableness of the object of the prohibition is open to dispute.  On the face, the restraint covers all aspects of the 1^st Defendant’s work and all products and services of the 1^st Defendant.  On that interpretation, the restraint may appear to be wider than necessary.  The 1^st Defendant has been carrying on business in the manufacture of shutters and iron grills.  The 1^st Plaintiff is the distributor of Eurolook plates.  The joint venture was in respect of the installation of Eurolook shutters marketed by the 1^st Plaintiff.  The parties benefited from the other under the joint venture: the 1^st Plaintiff in respect of the 1^st Defendant’s technical support and the 1^st Defendant in respect of the business introduced.  The clients were introduced by the 1^st Plaintiff.  It deserves some protection in respect of its business interest and its effort in developing the product and its market in Hong Kong.  But the 1^st Plaintiff’s interest is only in Eurolook products.  To restrain the 1^st Defendant after termination of the joint venture from introducing, marketing and selling any of its own products which are unconnected with the 1^st Plaintiff’s Eurolook products to the 1^st Plaintiff’s clients must, in any view, be more than necessary to protect the 1^st Plaintiff’s legitimate business interest.

8.Mr Ho submits that the restraint only applies to Eurolook shutters.  With respect, I cannot agree.  In construing a contractual term, the Court should attempt to discover what a reasonable person would have understood the parties to mean.  In ascertaining that meaning, the Court should have regard to the factual matrix in which the parties were at the time of the contract.  The restraint is phrased in the widest and unqualified term that the 1^st Defendant may not promote, introduce or sell “his products” to the Plaintiffs’ clients.  The words “his products” must mean any of the products of Hung Fat, be they clear shutters, or metal grills, or minute hole shutters or whatever. The restraint is tied to the 1^st Defendant’s products and not to the Plaintiffs’ business.  I find it impossible to draw out from the words “his products” the restrictive meaning which Mr Ho sought to put to those words nor can I interpret it to mean the products in competition with the Plaintiffs’ business.

9.In Kao Lee & Yip v John Richard Edwards [1994] HKLR 232, Litton JA, as he then was, dismissed counsel’s suggestion that the width of a restrictive covenant may be sized down to the extent as is reasonable.  He held at 242:

“… if wide covenants were to be construed in this way, so that they would always be cut down to the extent necessary to protect the employer’s legitimate interest as found by the court, what incentive would there be for employers to draft their covenants restrictively? And how is the employee, faced with a covenant in wide terms to know that the courts would ultimately trim the covenant down?  The burden is upon the plaintiff to satisfy the court that, by the words used by him the covenant is no wider than necessary to protect his interests.  The court should not strain to give an artificial construction to the clause in order to preserve its validity.”  

The Court always views any restrictive covenant with jealous as covenants in restraint of trade or restricting an employee’s liberty to work are contrary to public interest.  The party seeking to rely on a covenant must ensure that it is not drafted in terms wider than reasonably necessary to protect its legitimate interest.  In the words of Litton JA, the burden is on the plaintiff to satisfy the court that, by the words used by him the covenant is no wider than necessary to protect his interests. The Plaintiffs have, in my view, failed utterly to discharge that burden. Clause 12 must be struck out as being void and unenforceable.

10.Having reached the above conclusion, the Plaintiffs’ claim under this head must be dismissed.  It is not necessary to consider if the business activities of the 3^rd Defendant and the assistance given by the 1^st and 2^nd Defendants constituted any breach of covenant.

The Tung Chung Project:

11.In June 1998, Yip was introduced to the architect in charge of a property development project in Tung Chung.  The developer was Newfoundworld Limited (hereinafter called “Newfoundworld”), which was a conglomerate of five major property developers in Hong Kong.  Yip and the 1^st Defendant attended a number of meetings with representatives from the architect, the principal contractor and Mr Wingle Fong of Newfoundworld to discuss installation of shutters for the Food Court and Retail Bridge Outlet of the project.  In respect of the Food Court, the designer had specified Eurolook shutters to be used and the contract with the principal contractor was confirmed in February 1999.  As for the Retail Bridge Outlet, 32 minute hole stainless steel shutters were required.  This type of shutter was not popular in Hong Kong and the cost of punching minute holes was very expensive. Yip was informed that there was a Japanese competitor in this portion of the project.  He was asked to give quotations for two mock up shutters of 9 metres and 4 metres in width.  The 1^st Plaintiff quoted a price of $99,100 and $48,600 with a 5% discount respectively for the two shutters on 2 March 1999 (the first quotation).  Newfoundworld placed an order for the 9 metre mock up shutter. This shutter was delivered and installed by Hung Fat in April 1999 for the Plaintiffs.  Newfoundworld did not place any order for the 4 metre mock up shutter with the Plaintiffs.  Instead, it obtained another quotation of $98,923 and $23,667 respectively for the 9 metre and 4 metre mock up shutters from the 4^th Defendant on 22 March 1999. It should be noted that the quotation for the 9 metre mock up shutter was slightly higher than that of the 1^st Plaintiff’s but the one for the 4 metre mock up shutter was about half that of the 1^st Plaintiff’s.  Subsequently, Newfoundworld placed an order for the 4 metre mock up shutter with the 4^th Defendant who then subcontracted the work to Hung Fat.  Thus, in fact, both shutters were made by Hung Fat.

12.Then Newfoundworld invited both the 1^st Plaintiff and 4^th Defendant to tender for the 32 minute hole steel shutters on 26 April 1999.  In the meantime, Fong told Yip that he had obtained a quotation from the 4^th Defendant which was 20% cheaper than the 1^st Plaintiff’s.  As a result, the 1^st Plaintiff reduced its quotation by 41% from the rate under the first quotation to a total of $1,079,400 for the 32 shutters.  The 4^th Defendant quoted a price of $1,065,881.  Again Fong told Yip that the 4^th Defendant offered a lower tender. Then on 2 June 1999, the 1^st Plaintiff voluntarily reduced its quotation by about 25% to $824,175 to secure the tender, representing a total price reduction of $915,000.

13.The Plaintiffs’ case against the 1^st and 4^th Defendants is that Mr Franklin Ma of the 4^th Defendant is personally known to the 1^st Defendant and had visited the workshop of DWHK with the 1^st Defendant in 1998.  The 4^th Defendant is in the business of installing fire shutters and not security shutters.  The 4 metre mock up shutter supplied by the 4^th Defendant was installed and made by Hung Fat with materials left over from the manufacture of the 9 metre mock up shutter.  According to Yip, Fong told him in May 1999 that the 4^th Defendant offered “Clearlook” shutters which were similar to the Plaintiffs’ Eurolook shutters.  He produced a polycarbonate plate which was allegedly given to him by Fong as a sample of the 4^th Defendant’s “Clearlook” plate.  The sample is similar to a Eurolook plate except that there are some scratch marks at the corresponding position of the plate where the Eurolook logo is embossed.  Yip said that the sample is in fact a Eurolook plate with the Eurolook logo scrapped off.  Mr Ho submits, on the above evidence, that the irresistible inference to be drawn is that the 1^st and 4^th Defendants conspired together to damage the Plaintiffs’ business by undercutting the 1^st Plaintiff’s price.

14.The 1^st Defendant denied that he was a party to any conspiracy to damage the Plaintiffs’ business. He admits that the 4 metre mock up shutter was manufactured in the workshop of Hung Fat as a private job by his brother-in-law using his workshop facilities. He denied that the materials used were left-overs from the manufacturing of the 9 metre shutter.

15.The 4^th Defendant’s defence is in marked contrast with the 1^st Defendant’s. Ma of the 4^th Defendant knew the 1^st Defendant since 1989. In the same year, he set up the 4^th Defendant company.  Initially the 4^th Defendant’s business was to install imported fire shutters and fire doors.  Since 1991, it also dealt in metal security shutters and since 1999, Clearlink shutters as well. He knew nothing about the 1^st Plaintiff’s involvement in the Tung Chung Project. He was introduced to Fong of Newfoundworld by his client, Taikoo Property Development. Fong asked him to give a quotation for a 9 metre and a 4 metre minute hole steel shutter and two clear polycarbonate sliding shutters.  In turn, he asked the 1^st Defendant for a quotation in respect of the two minute hole shutters and Ring-Gard (UK) Ltd (hereinafter called “Ring-Gard”) for quotation in respect of the clear shutters.  All along he liaised with the 1^st Defendant and had never talked to his brother-in-law.  When he received the purchase order from Newfoundworld for the 4 metre mock up shutter, he subcontracted the work to Hung Fat for $19,550.  He produced an invoice from Hung Fat signed by a person named “Chan Kee” and impressed with the chop of Hung Fat.  He had no knowledge that the materials used were left-overs from the production of the 9 metre shutter.  Then the 4^th Defendant was invited by Newfoundworld to tender for 32 similar shutters of various sizes.  The 4^th Defendant gave its quotation but never received any response from Newfoundworld.

16.Ma denied having given any Eurolook plate to Newfoundworld.  He started marketing Clearlink plates in 1999.  He produced a fax transmission dated 13 January 1999 from the British Consulate General in Hong Kong in support of his allegation that he had made inquiries from the Consulate about Ring-Gard which is a supplier of polycarbonate plates. He denied intending to use Eurolook plates to be supplied by the 1^st Defendant to meet any contract obtained from Newfoundworld.

17.I find Ma an honest and credible witness.  His evidence is supported by contemporaneous documents.  More than three months before he became involved with Newfoundworld, he had made inquiries with the British Consulate General about Ring-Gard.  He said his quotation for the polycarbonate shutters was based on the price from Ring-Gard.  This is supported by a fax dated 18 March 1999 from Ring-Gard.  The specifications he quoted in his letter to Newfoundworld were Ring-Gard specifications, in particular that the metal tube to be used in holding the plates together was 15.8 mm in diameter. Yip emphasised in his evidence that the eyes in the Eurolook plates are 17 mm in diameter and the tubes used are 17 mm in diameter which are not available in the local market. Yip initially ordered the tubes from Holland but later turned to tailored made supply from China. If the 1^st Defendant had access to sufficient quantity of Eurolook plates for the project, he would probably have access to the necessary quantity of 17 mm tubes from the 1^st Plaintiff. If the plates and parts were to be supplied by the 1^st Defendant as part of the conspiracy, it is unlikely that the 4^th Defendant would have paid so much regard to details as to specify in its own quotation that the tubes used would be 15.8 mm which was the Ring-Gard specification.  I am satisfied that the 4^th Defendant had contacted Ring-Gard before giving its quotation and had in mind using supplies from Ring-Gard.

18.The Plaintiffs produced a letter dated 26 August 1999 from Ring-Gard confirming that they have ceased selling Clearlink products and that they intended to replace Clearlink products with Eurolook products.  This letter is inconsistent with the one dated 17 March 1999 produced by the 4^th Defendant.  The two letterheads are different, but the logo is the same. The writer of the letter dated 17 March 1999 also appeared among the names of the directorate in the letter dated 26 August 1999.  I have no doubts that both letters are authentic.  I attribute the inconsistency to a change in Ring-Gard’s marketing policy between March and August 1999.  I do not consider the 4^th Defendant’s credibility impugned by Ring-Gard’s letter of 26 August 1999.  The contemporaneous letter from Ring-Gard dated 17 March 1999 shows that the 4^th Defendant acted upon that quotation from Ring-Gard for Clearlink products which Ring-Gard was then in a position to supply in March 1999.

19.The 4^th Defendant was subsequently appointed as distributor of Clearlink product by a distribution agreement dated 1^st June 1999 with Jonathan Goose Marketing Limited. The Plaintiffs attempted to contradict that agreement by producing a letter from the said Jonathan Goose Marketing Limited undertaking not to deal with products which fell within the scope of Eurolook’s registered design with effect from 4 March 1996.  Even if Jonathan Goose Marketing Limited was in breach of its undertaking, that could not affect the credibility of the 4^th Defendant.  In any event, these matters are irrelevant as they occurred after March 1999 and also that by 3 June 1997 Jonathan Goose Marketing Limited had obtained a Certificate of Registration of Design in respect of its own clear shutter plates and could have lawfully supplied Clearlink plates to the 4^th Defendant.

20.The marked contrast between the 4^th Defendant’s case and the 1^st Defendant’s is significant.  The 4^th Defendant’s case is supported by an invoice from the 1^st Defendant.  The 1^st Defendant’s case is that when Ma asked him for quotation for the 4 metre shutter, he referred him to his brother-in-law, Mr Chan Ping Kee, as Hung Fat was busy.  This is denied by Ma and is also inconsistent with the invoice issued under the letter head and company chop of Hung Fat.

21.As for Chan, he said that the 1^st Defendant informed him about the 4 metre shutter and told him that he may make the shutter as his own private job because Hung Fat was too busy.  He said he charged $24,800 for the shutter. That is out of line with all the evidence and is higher than the price quoted by the 4^th Defendant to Newfoundworld.  He said after the invoice was issued he received $23,000 only.  If this is true, it would only leave the 4^th Defendant with a profit of $667.  That is inherently improbable.  What he said is also contrary to the invoice from Hung Fat, which showed an invoice price of $19,550.  He said he purchased the perforated steel sheets from the 1^st Defendant for $11,000 which he set off against a debt of about $100,000 which the 1^st Defendant owed him.  This piece of evidence is also wholly incredible as the cost of punching holes in the steel sheet alone was more than $16,000.

22.Furthermore, according to the 1^st Defendant, the perforated steel sheets ordered for making the 9 metre shutter had all been used up because of excessive wastage and the waste had been sold as scrap.  But he could not produce evidence as to placing further order for making perforation in steel sheets which he allegedly sold to Chan for making the shutter.  The 1^st Defendant’s and Chan’s account that the work was given to Chan as a private job because Hung Fat was too busy is also incredible because the shutter was in fact manufactured and installed by workers of Hung Fat and when installing the shutter the workers of Hung Fat who were instructed to put on a different uniform.  I do not accept the 1^st Defendant’s and Chan’s evidence.

23.The Plaintiffs’ case against the 1^st and 4^th Defendants is based on inference.  I accept the 4^th Defendant’s evidence but reject the 1^st Defendant’s and Chan’s.  It may appear too much a coincidence that Taikoo Property Development had introduced Ma to Newfoundworld and even greater coincidence that Ma sought quotation from the 1^st Defendant and subcontracted the work to Hung Fat.  However, Taikoo Property Development is a member of the conglomerate. Accepting that it brought Ma in contact with Newfoundworld, it is not much a coincident that Ma sought the help from the 1^st Defendant as they know each other well and have business connection. For reasons as explained above, I have no doubt about Ma’s honesty. His evidence is fully supported by contemporaneous documentary evidence. 

24.The 4^th Defendant’s quotation for the 4 metre shutter was markedly lower than the 1^st Plaintiff’s while that for the 9 metre shutter was slightly higher than the 1^st Plaintiff’s.  The 1^st Plaintiff’s quotation for the 9 metre shutter offered on 2 March 1999 was $99,100 with a 5% discount, i.e. $94,145 net.  Its second quotation dated 29 March 1999 was a special price of $98,610 net from the list price of $103,800.  On the other hand, the 4^th Defendant’s quotation dated 22 March 1999 and 1 April 1999 after some changes of specification were $98,923, which was higher than either of the quotations by the 1^st Plaintiff.  If there was any conspiracy to outbid the 1^st Plaintiff, the 4^th Defendant’s quotation for the 9 metre shutter would have, like that for the 4 metre shutter, been lower than the 1^st Plaintiff’s, if not significantly lower.  A quotation of $47,000 would have been proportionate with its quotation for the 4 metre shutter. Of course the 4^th Defendant gave its quotation by marking up on the price offered by the 1^st Defendant. The 4^th Defendant’s quotation for the 9 metre shutter was about double that of 4 metre shutter on a per unit area basis.  This suggests that probably the 1^st Defendant quoted a cheaper price for the smaller shutter as he had left-over materials to complete the job and he took it as an one off job at the time he gave the quotation to the 4^th Defendant.

25.In view of the contemporaneous documents in support of the 4^th Defendant’s business connection with Ring-Gard, I also reject Yip’s evidence that the sample he received from Fong with the Eurolook logo scrapped off came from the 4^th Defendant. To some extent this finding damages Yip’s credibility.  Fong is a very important witness for both the Plaintiffs and the 4^th Defendant.  As the Plaintiffs bear the burden of proof, his absence is more detrimental to the Plaintiffs than to the 4^th Defendant.  It is also highly probable that Fong had been manipulating the 1^st Plaintiff and the 4^th Defendant so as to strike a better deal for Newfoundworld. This is just commercial reality. On balance I am not satisfied that the Plaintiffs have proved that the 4^th Defendant was a party to any conspiracy to damage the Plaintiffs’ business. In fact, on the contrary, I am quite satisfied that he was not. Accordingly, I dismiss the Plaintiffs’ claim against the 4^th Defendant.

26.With this conclusion, it must necessarily mean that the Plaintiffs’ claim against the 1^st Defendant in conspiracy must also fail.  However, that does not mean the 1^st Defendant had not been in breach of his duty as a director of the 2^nd Plaintiff.  It would be convenient to consider next his liability for breach of fiduciary duty generally as director of the 2^nd Plaintiff.

1^st Defendant’s breach of fiduciary duty as director:

27.There are three situations where the 1^st Defendant’s conduct as a director of the 2^nd Plaintiff was called into question. These are, firstly, his permitting the 3^rd Defendant to use the address, telephone and fax numbers of Hung Fat and his mobile phone in connection with the 3^rd Defendant’s competing business; secondly, his involvement or assistance in the business of the 3^rd Defendant as discovered by the private investigators employed by the Plaintiffs and thirdly, his assistance to the 4^th Defendant in the Tung Chung Project.  The first two situations can be disposed of quickly. I do not think the Plaintiffs have any property in the 1^st Defendant’s telephone and fax numbers or mobile phone.  There is nothing sinister or unusual for the father to allow his son to have use of these facilities. As for the 1^st Defendant’s involvement or assistance in the 3^rd Defendant, the motive of the 1^st Defendant was suspicious, to say the least. However, the surveillance was conducted on 18 August 1999, three weeks after his resignation as director of the 2^nd Plaintiff on 26 July 1999, when his fiduciary duty had come to an end. These complaints may have more significance in a claim for breach of confidentiality or breach of covenant.  But the Plaintiffs are not proceeding on the basis of breach of confidentiality and the claim for breach of covenant will be dealt with later.

28.The only relevant complaint is the 1^st Defendant’s involvement in the Tung Chung Project. The Plaintiffs’ complaint is that the 1^st Defendant assisted the 4^th Defendant in outbidding the 1^st Plaintiff by providing it with the Plaintiff’s costs and quotations of the shutters to be submitted to Newfoundworld and in supplying the 4 metre minute hole mock up shutter to the 4^th Defendant in fulfilment of its contract with Newfoundworld.

29.On the facts, I find that the 1^st Defendant supplied and installed the 4 metre mock up shutter as a subcontractor of the 4^th Defendant for $19,550.  There is no evidence in support of a conspiracy between the 1^st and 4^th Defendants to injure the Plaintiffs’ business.  In connection with the mock up, the 1^st Defendant attended a number of site meetings with Yip and representatives of Newfoundworld.  Because of the dimensions of the two shutters and that they were to be installed in Tung Chung, the 4^th Defendant must have known that the quotation requested by the 4^th Defendant was required for the Plaintiffs’ customer.  Even if he had no knowledge at that stage, when Ma told him to take measurements from the site, he must have known that the shutter ordered by the 4^th Defendant was to be installed in the same project that the Plaintiffs were interested in.  This is reflected by his arranging his workers to wear different uniform when installing the shutter.  By giving a quotation to the 4^th Defendant and subcontracting the work from it in competition with the Plaintiffs, he must have known he was doing an act detrimental to the Plaintiffs.  No point has been taken by counsel for the 1^st Defendant that he was a director of the 2^nd Plaintiff and not of the 1^st Plaintiff to whom he owed no fiduciary duty.  I assume that whatever business the 1^st Plaintiff obtained would be subcontracted to the 2^nd Plaintiff.  Hence, the 1^st Defendant would be in breach of his duty as director of the 2^nd Plaintiff if he did any act which would damage the 1^st Plaintiff’s business and, hence in turn, the 2^nd Plaintiff’s.

30.Though there is no evidence what price he quoted to the 1^st Plaintiff and to the 4^th Defendant and how from those prices they made up their quotations to Newfoundworld, it is obvious that the price he quoted for the 4 metre mock up shutter to the 4^th Defendant must be substantially lower than that he quoted to the 1^st Plaintiff.  When so doing, he must have foreseen that the price he quoted for the 4 metre mock up shutter will result in the 1^st Plaintiff losing out on the 4 metre mock up and probably in the entire project.  I have no hesitation to find that by supplying and installing the 4 metre mock up shutter, the 1^st Defendant was in breach of his fiduciary duty as a director of the 2^nd Plaintiff.  This is the only breach of fiduciary duty which the Plaintiffs are able to prove against the 1^st Defendant.

31.The remedy sought by the Plaintiffs is for an account.  But as the breach that could be established related to an one off incident, an account is not appropriate.  I could have proceeded to assessment, but prudence would require that I hear the views of counsel first. Accordingly I enter judgment on liability in favour of the Plaintiffs against the 1^st Defendant in respect of breach of fiduciary duty with damages to be assessed.  In view of the likely legal costs involved and the damages that may be awarded, it would be advisable for the parties to agree on the quantum if possible and only in default of such agreement, should the matter be restored before me for assessment. Any agreement reached should, of course, be without prejudice to the parties’ right to appeal against my judgment on liability.

Plaintiffs’ claims for unused material:

32.The Plaintiffs claim a sum of $7,975.10 being unaccounted for materials retained by the 1^st Defendant.  The Plaintiffs’ claim is based on contemporaneous computations signed and acknowledged by the 1^st Defendant and on a summary acknowledged by the 2^nd Defendant dated 9 September 1999 shortly before termination of the joint venture.  The 1^st Defendant’s defence is that he signed the acknowledgment under protest as he was hard pressed for cash and Yip knew about it.  Another reason was that he wished to maintain on good terms with the Plaintiffs as he still expected to have business from them after the termination of the joint venture.

33.At the time, there was apparently a total breakdown in his relations with the Plaintiffs. On his own evidence about Invoice 1319 and 1361 (see below), he said he had told the Plaintiffs that the understanding under the joint venture was no longer extant and he would charge the Plaintiffs what he called “outside rate” for emergency repairs and he complained to the Plaintiffs’ client about non payment and threatened not to continue with the work.  If that was his attitude at the time, there could not be any truth that he signed the computation for comity reason.  He would have argued for each and every item that he disputed.  Furthermore, as a result of my adverse finding against him in relation to the Tung Chung Project, I have serious doubts on his credibility, though to a lesser extent on Yip’s as well.  I do not consider the 1^st Defendant’s explanation credible, particularly in the light of the contemporaneous record.  On balance, I am satisfied that this claim is proved.

34.Another claim is for $16,247 which was the apportioned cost of punching holes on a roll of steel used by the 1^st Defendant in making the 4 metre minute hole mock up shutter.  There is no dispute that an entire roll of steel of 548 linear metres was punched at the cost of $42,169 but only 337 metres was actually used on the shutter.  The 1^st Defendant’s explanation is that the perforated steel roll was difficult to shape and cut and this accounted for a wastage of about 38.5%.  He said that the wasted steel had been sold as scrap.  But on the other hand, he could not account for the source of perforated steel which he allegedly sold to his brother-in-law for making the 4 metre shutter.  He could not produce any documentary evidence of paying for the perforation.  The price that he allegedly sold the punched steel to his brother-in-law is also inconsistent with the cost of perforation, which makes his account incredible.  His evidence was contradicted by his former employee, Mr Chung, who resigned from his employ and joined the Plaintiffs.  Chung said that the perforated steel had been used in making the 4 metre mock up shutter.  Even without taking into account Chung’s evidence, I would reject his evidence as incredible.  I am satisfied that the perforated steel used in making the 4 metre mock up shutter was from material left over from the same roll of perforated steel used for manufacturing the 9 metre mock up shutter.  The 1^st Defendant is therefore liable to the Plaintiffs in the amount as claimed.

35.Accordingly, I enter judgment in favour of the Plaintiffs under this head of claim against the 1^st Defendant in the amount of $24,222.10.

1^st Defendant’s counterclaims for work done:

36.The 1^st Defendant counterclaims for $176,965.46 unpaid charges.  An amount of $66,777.20 is admitted by Yip, leaving two payments under invoice No. 1319 and 1361 in dispute.

37.Invoice 1319 is in respect of an urgent emergency on site repair which took about half an hour.  The 1^st Defendant’s reason for the charge was that three workers, including himself and his wife, were engaged on the job.  Their daily rate was $600 and as the work was performed on Sunday they were entitled to double pay.  Under cross-examination, he does not dispute that the work only took half an hour and involved only one worker while the other two were there to render supporting service only.  According to Yip there was an agreed practice that where the repair costs exceeded $1,000 the 1^st Defendant had to seek prior approval because the Plaintiffs had in turn to seek approval from the client. He considered $350 would have been reasonable. To that the 1^st Defendant replied that prior to the termination of the joint venture he had informed Yip that the prior practice was cancelled and he would charge at the usual outside rate. 

38.I consider the established practice reasonable and sensible.  Where costs of repairs are high, business efficacy and business sense would require that the client should be informed first and his prior approval obtained before repairs commence. The work that was involved was only a minor one occasioned by a faulty bracket.  In view of my adverse finding of the 1^st Defendant’s credibility, I reject his evidence as incredible.  There was a complete breakdown of cooperation at that stage and the 1^st Defendant was grossly overcharging.  I consider the cost of labour of one man-day appropriate and assess his claim at $600 only.

39.Invoice No 1361 in the sum of $106,688.26 is a demand for payment of 70% of the contract sum under contract 2514-4a.  At the time the 1^st Defendant had completed about 80% of the work under that contract.  He demanded payment and upon the Plaintiffs’ refusal, he wrote to the Plaintiffs’ client alleging non payment and threatening that he would not send any more workers to the site to complete the work.  The Plaintiffs accepted that as repudiation of the contract on the part of the 1^st Defendant.  The dispute then between the parties was whether Clause 7 of the Engineering Contract and General Condition which provided that payment would only be made 14 days after receipt from the client was applicable.  The 1^st Defendant considered he was not bound by that clause as the joint venture was about to terminate.  I hold a contrary view as Clause 7 must be part of the term of contract 2514-4a and he had also signed a written confirmation on 10 July 1999 that the Engineering Contract and General Condition would continue to apply.  Their dispute is now academic as the Plaintiffs do not dispute that they had received payment or that the work was not performed.  Yip claimed that the Plaintiffs were entitled to a number of set offs.

40.The Plaintiffs claim to set off $15,000 as the cost of a mould retained by the 1^st Defendant and payment of deposit of $10,609.60 to the 1^st Defendant.  These set offs are supported by acknowledgements signed by the 1^st Defendant and must be allowed.

41.The Plaintiffs claim $101,490 as value of unreturned materials.  By their letter dated 14 October 1999, the 1^st Defendant’s solicitors agreed to release the materials on condition that the 1^st Defendant was not required to install the remaining two shutters under two of the contracts.  Thus both liability and quantum are not in dispute.  These materials may not be used by the 1^st Defendant without infringing the Plaintiffs’ right.  Justice would require that they be returned to the Plaintiffs as they should have done in October 1999 rather than to force a sale on the 1^st Defendant of materials which he could put to no use.  The 1^st Defendant shall make good any shortfall or materials damaged while in his possession. Such damages shall be assessed on the basis of the Plaintiffs’ list price.

42.The Plaintiffs claim a total of $59,459.76 represented by three debit notes in respect of unaccounted for materials. On 1 September 1999, the 1^st Defendant wrote to the 1^st Plaintiff to request for the amounts to be set off against the sums payable to the 1^st Defendant in the following month.  I accept this as sufficient evidence of the 1^st Defendant’s acknowledgement of liability and quantum.

43.Thus on the 1^st Defendant’s counterclaim, I enter judgment in the amount of $89,115.09 which is assessed as follows:

Invoice NoAmount

1319$          600.00

1354$  66,777.20

1361$106,888.25

Sub-total:$174,265.45

LessMould:$15,000.00

Deposit:$10,609.60

Materials:$59,459.76$               85,069.36

Balance:$  89,196.09

Defamation:

44.The Defendants’ counterclaim arose out of the following circumstances.  In late September 1999, soon after the termination of the joint venture agreement, the Plaintiffs issued two letters to their clients (hereinafter referred to as the “First Letter” and “Second Letter” respectively). These letters are similar in nature.  The Second Letter is a Chinese version of the First Letter which is in English.  The letters allege that it has come to the Plaintiffs’ attention that the 3^rd Defendant claims to be the exclusive distributor or sales agent of a transparent shutter called “Clearlink shutter” supplied by Ring-Gard and that the 3^rd Defendant is strongly associated with the 1^st Defendant who is the sole proprietor of Hung Fat and director of the 2^nd Plaintiff.  They also enclose copies of two letters from Ring-Gard indicating that the 1^st and 3^rd Defendants were not exclusive distributor of Ring-Gard and that Ring-Gard was not selling Clearlink Shutters and intended to replace the Clearlink product with Eurolook shutters.  All these are factually correct and not defamatory.

45.In late October 1999, the Plaintiffs issued a third letter (hereinafter called the “Third Letter”) to some of their clients enclosing copies of the present writ of summons.  Paragraph 2 of the letter reads:

“During the terms when Mr Ho and Mr Chris Ho were the director and de facto director of our subsidiary company, Dynamic Way Engineering Co Ltd, and when Hung Fat was a contractor of our companies, they were wrongfully and unlawfully in breach of the following:

1.Duties & fiduciary duties;

2.Contracts and agreements reached and signed with our companies;

3.Retaining or using our materials to do mock up in the same project for our competitor to injure our business;

4.Unlawfully disclosed our confidential information to third party(ies);

5.Misrepresentation; &

6.Misuse of our confidential information, business connections and/or information they acquired in the course of acting respectively as the director and/or de facto director and the contractor of our companies for the purpose of gaining an advantage for themselves or others.”

46.The Plaintiffs do not dispute that the content of this letter is defamatory but rely on the defence of justification and qualified privilege.  The Plaintiffs are not now proceeding against the 2^nd Defendant for breach of fiduciary duty as a de facto director of the 2^nd Plaintiff.  Thus even though I have found that the 1^st Defendant had been in breach of his duty as a director, or in breach of the Engineering Contract and General Conditions and using materials belonging to the Plaintiffs in making the 4 metre mock up shutter, these findings could not provide any justification in respect of the defamatory imputations made against the 2^nd Defendant.  In view of my finding against the existence of a conspiracy between the 1^st and 4^th Defendants to injure the business of the Plaintiffs, the allegation of wrongful use of confidential information must also fail against the 1^st to 3^rd Defendants.  Hence, the defence of justification must fail against all the Defendants.

47.The other situations where a person may escape liability for defamation even if the defamatory statement is in fact untrue is that the statement was published on occasion of absolute or qualified privilege.  Obviously, no absolute privilege is attached to the defamatory letters issued by the Plaintiffs.  To claim protection under the principle of qualified privilege, the Plaintiffs have to show that the statement was fairly warranted by the occasion, that is to say, was reasonably necessary to achieve the purpose for which the law grants the privilege; that the maker had a duty to make the statement and the recipient had a corresponding interest to receive it; and that he made the statement without malice, i.e. knowing it to be untrue or with some indirect or improper motive: Drummond v Kwaku [2000] 1 HKLRD 604.  The burden lies on the party, i.e. the Plaintiffs, to establish the facts and circumstances necessary to create the privilege.

48.Mr Ho submits that the dispute amongst the parties had led to litigation and the purpose of issuing the letter was to clarify the position of the 1^st and 2^nd Defendants and numerated the claims contained in the statement of claim.  He submits that the general purport of the letter was purely to report the fact that an action had been commenced against the 1^st Defendant.

49.Implicit in a statement of claim is that a defendant has committed a wrongful act, which the plaintiff seeks to put right by instituting legal action.  If the wrong alleged to have been committed by the defendant is defamatory of the defendant, it is as much an act of defamation circulating that statement of claim to people who are not parties to the action as if one is publishing the defamatory remarks to the rest of the world unless the statement is true.  To hold otherwise would be to allow the legal process to be abused as a pretext for defaming one’s opponent in a litigation.

50.The occasion which Yip sought to justify the Plaintiffs’ response was that he came to know that the 1^st and 3^rd Defendants contacted the Plaintiffs’ clients.  As a result, there were enquiries from the Plaintiffs’ clients whether his partner, Mr Paul Ho, and the 1^st Defendant were the same person and about the relation between the 1^st and 2^nd Defendants with the Plaintiffs which prompted the issue of those letters.  I do not consider they justify the defamatory response contained in the third letter.

51.Yip cited an occasion when one of the Plaintiffs’ clients, Ichiban, gave him a letter allegedly issued by the 3^rd Defendant under the name of Ken Ho which is defamatory of the Plaintiffs.  A similar letter was received by Maxim Caterers Limited and referred to the Plaintiffs.  In these letters, the writers accused the Plaintiffs of using counterfeit and substandard products from China, bribery, false accounting and defaming the Plaintiffs.  The Defendants denied issuing the letter. I consider the Defendants’ evidence in this respect inherently improbable.  There is no reason why the Plaintiffs would have issued this letter to their own clients to their own damage.  Nor have the Defendants shown there is any real likelihood that anyone else would have done that to injure the Plaintiffs’ reputation and put the blame on the Defendants.  The letters also invited the reader to contact the 3^rd Defendant for its Clearlink product. Obviously, the Defendants are the only persons who would benefit from the issue of those letters.  For reasons as is apparent from the other parts of this judgment, I do not consider any of the defence witnesses credible.  I have no doubt that the letters were issued by the Defendants.  Even if the Defendants had not issued the letters, I would have to consider on the basis that they had for the purpose of considering the Plaintiffs’ claim to privilege.

52.There are two versions of the letter.  The earlier version contains four allegations while the later version contained six allegations of dishonesty against the Plaintiffs.  The letters that were produced were all undated.  The earliest one could put a date to those letters is early December 1999 as shown in a chop mark recording the date of receipt on one of the earlier version of the letter.  The one received by Maxim Caterers Limited, which is a later version, was received in October 2000, according to the Plaintiffs’ solicitors.  The Plaintiffs were unable to produce the letter received by Ichiban or any other letter pre-dating the date of the Third Letter containing the defamatory response, i.e. October 1999.  Yip is a very business like and careful person.  If he has received such letters from his clients before October 1999, he must have carefully kept and documented them. The order of event as I find them is as follows.  Firstly, the Plaintiffs issued the first two letters in September 1999 to protect their interest upon learning of the competing business operated by the Defendants.  Three days after issuing the writ of summons on 17^th October 1999, they issued the Third Letter to their clients, enclosing the writ and a summary of their accusations against the Defendants.  It was then that the Defendants retaliated with theirs accusing the Plaintiffs of defamation and dishonesty.  In my view, the timing of the Plaintiffs’ three letters are such that it could not fairly be said that the issue of their Third Letter was provoked by the Defendants’ letters.  I cannot be satisfied that the making of the defamatory response contained in the Plaintiffs’ Third Letter was warranted by the occasion as suggested by Yip or by any occasion at all. There was also no duty on the Plaintiffs to make the statement and no corresponding interest in the Plaintiffs’ clients to receive it.  The defence of qualified privilege must fail.

53.Mr Ho suggests that the Defendants are only entitled to nominal damages as the Defendants suffered little or no loss in business. In my view, the defamatory imputations against the 1^st Defendant are substantially justified.  He was in breach of his fiduciary duty as a director of the 2^nd Plaintiff, he used materials belonging to the Plaintiffs to manufacture and install the 4 metre mock up shutter in competition with the Plaintiffs and to their detriment.  He was in breach of the Engineering Contract and General Conditions towards the end of the joint venture.  His conduct in relation to the Tung Chung Project puts suspicion on himself as to whether he was engaged in a conspiracy with the 4^th Defendant to injure the Plaintiffs’ business.  In my view, he is only entitled to nominal damages.  Accordingly, I award him $1 as nominal damages.

54.The position of the 2^nd Defendant is different.  He was not a director of the 2^nd Plaintiff and the Plaintiffs are not proceeding against him as a de facto director.  There is no evidence of his involvement in the Tung Chung Project.  He has put suspicion on himself with his using different names and setting up the 3^rd Defendant company in competition with the Plaintiffs’ business.  But with the restrictive covenant struck out as against the 1^st Defendant, his conduct becomes insignificant and irrelevant.  The letter damages the 2^nd Defendant’s reputation as an honest and fair handed person to have business with.  The 3^rd Defendant is the alter ego of the 2^nd Defendant. The Third Letter was only published to the Plaintiffs’ clients and not extensively circulated.  About 50 letters were issued to clients of the Plaintiffs who obviously know the 2^nd Defendant.

55.Mr Ho submits that there was no evidence that the 2^nd and 3^rd Defendants suffered loss.  It is unlikely that the Defendants could win them over to trade with the 3^rd Defendant and little damage could be done to the 2^nd and 3^rd Defendants by the Third Letter.  However, damages for defamation is not to compensate for business loss only, but to compensate for the loss of esteem and reputation.  Having considered the nature of the imputation, the circulation of the Third Letter and the people to whom the Third Letter was published, I consider a total award of $100,000 for the 2^nd and 3^rd Defendants together appropriate in the circumstances.  Accordingly, I award the 2^nd and 3^rd Defendants $50,000 each against the Plaintiffs jointly.

Conclusion:

56.As against the 1^st Defendant, I enter judgment on liability in favour of the Plaintiffs in respect of breach of fiduciary duty with damages to be assessed.  I award the Plaintiffs $24,222.10 against the 1^st Defendant in respect of unaccounted for materials.  I award the 1^st Defendant $89,196.09 on his counterclaim against the Plaintiffs in respect of cost of work done and $1 as damages for defamation.  The net amount due to the 1^st Defendant is $64,974.99.  Accordingly, I enter judgment in favour of the 1^st Defendant in the amount of $64,974.99.  There shall be stay of execution pending assessment of damages for breach of fiduciary duty and the 1^st Defendant’s return of the Plaintiffs’ materials to the value of $101,490.

57.The Plaintiffs are only partially successful against the 1^st Defendant.  The 1^st Defendant is successful against the Plaintiffs in his claim for cost of works and defamation. As 1^st Defendant is only awarded nominal damages for defamation and in view of his conduct and that the defamation was substantially justified, I do not think he should have his costs for the counterclaim in defamation. The Plaintiffs are over confident with their right in confidentiality and mounted a case far wider than supported by the fact and allowed by the law.  They were probably ill- advised about the propriety of the issue of the Third Letter. Having regard to all the circumstances, I consider as between the Plaintiffs and the 1^st Defendant, a fair costs order would be that the Plaintiffs be awarded half of their costs in this action.  I make a costs order nisi to that effect.

58.As between the Plaintiffs and the 2^nd and 3^rd Defendants, all of the Plaintiffs’ claims against them are dismissed with costs.  I enter judgment in favour of the 2^nd and 3^rd Defendant each in the amount of $50,000 as damages for defamation with costs against the Plaintiffs.

59.The Plaintiff’s claim against the 4^th Defendant is dismissed with costs to the 4^th Defendant.

60.All such costs are to be taxed, if not agreed.

Mr B K Ho, instructed by Messrs Knight & Ho, for the Plaintiffs

Mr Eric Yung, instructed by Messrs Leung Chan & Pang, for the 1st to 3rd Defendants

Mr Simon K C Lam, instructed by Messrs Fung Wong Ng & Lam, for the 4th Defendant