Alec Rudge and Another v. Ko Gra Yu and Others

HCA001577/1968

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO.1577 OF 1968

-----------------

-----------------

Coram: Briggs, J. in Court.

Date of Judgment: 11 December 1969

-----------------

JUDGMENT

-----------------

1. The plaintiffs, Mr. and Mrs. Rudge, are the sole proprietors of a school in Hong Kong called the Royden House College to which I shall refer as "the school" in this judgment. At the material time the first, second and fourth defendants were teachers in this school. The third and fifth defendants were clerks employed at the school: the third defendant having the duty of collecting the school fees from the students.

2. The plaintiffs commenced to run Royden House School in 1964. In November 1965 they were registered as the managers of the school for the purposes of the Education Ordinance. In July 1968, at the end of the school year, there were about 430 students. In September 1968 at the start of the new school year there were 356. There were 19 teachers including Mrs. Rudge and three other members of the staff, of whom two are the third and fifth defendants.

3. The plaintiffs lease the land on which the school stands from the Crown. It was leased in 1964 and is mortgaged for the sum of one million dollars. This attracts interest at approximately $8,800 per month, or over $115,000 per year.

4. Since 1964 the school has been run at a loss which in some years was considerable. In consequence, in August 1968, Mr. and Mrs. Rudge decided to close down the school. Mrs. Rudge made tentative arrangements to transfer the teachers and students to another college, and it was to be agreed that all Royden House Scholarships would be honoured.

5. In, I think, the second week in August 1968 she called a meeting of the teaching staff and informed them of her intentions. This news was not welcome to the teachers and the second defendant asked her to defray coming to a conclusion until the teachers had discussed the matter among themselves.

6. The teachers or some of them, then seem to have had several discussions to attempt to find a way to save the school. Prominent among them was the first and second defendants and a Mr. Hou. A person rarely acts from a single motive and these three persons were not only concerned to save the school. They had their own positions as teachers to consider and, esurient or not, they hoped to secure better positions for themselves in the school. The first defendant was quite frank about this but he added there was never any intention to oust Mrs. Rudge from her position as principal. Mr. and Mrs. Rudge took part at least in some of the discussions which were held. The matter was urgent because the new academic year was to start in earliest September.

7. The suggestion was that the school should be reorganised. The school was to be run by a committee consisting three members, namely the first and second defendants and Mr. Hou.

8. A tentative draft embodying this idea was produced. It consisted of 5 paragraphs and was expressed in very general terms. The draft was discussed between Mr. and Mrs. Rudge, the first and second defendants and Mr. Hou. As a result a document was produced which was exhibited at the trial as Exhibit A8. I will refer to this as "the scheme" in this judgment. This originated from the first and second defendants and Mr. Hou.

9. This document lies at the root of this action. It consists of 16 clauses. It is written in English and is headed "Royden House College". It is a scheme for the management of the school. And it is signed on each of the six pages with twelve signatures including that of Mrs. Rudge and the five defendants. The document does not bear the signature of Mr. Rudge. The school is to be managed by a committee which was to consist of "Mrs. Rudge and all teachers willing to take part in the enterprise". Mrs. Rudge was to be the chairman. This committee was to authorise the first and second defendants and Mr. Hou "to run the school" for one year as from September 1st 1968. The sum of $8,800 was to be paid to Mrs. Rudge for rent for the school buildings.

10. By far the most important clauses concern the salaries of teachers. It is stated that any teacher participating in the scheme or enterprise will have his then present salary reduced by 20% and he will only receive 60% of the reduced salary each month. The remaining 40% was to be regarded as an investment in the school and would not be paid out until the end of the academic year. This being so even if a teacher resigned.

11. Though the document containing the scheme is dated October 10th 1968 it was signed by the various signatories on or about August 13th.

12. Mr. Hou never took any part in the scheme and two other signatories withdrew during September. By the end of October there were only five persons left in the scheme, namely the five defendants. As early as October 3rd Mr. and Mrs. Rudge pointed out to the defendants that the scheme was unworkable because it had insufficient support. But the defendants disagreed and continued to manage the school. Despite this Mrs. Rudge treated the scheme as having been abandoned and so she sent cheques to the five defendants for the full amount of their October salaries. These cheques were returned.

13. The relationship between the parties somewhat deteriorated and the defendants held a meeting at which certain resolutions were passed. Mrs. Rudge also attended and protested against them. The defendants calling themselves "the Committee of Investors (Partnership)" resolved to take charge of all income and expenditure of the college and to open a new bank account to be operated by the first and second defendants. They also made it clear that they would brook no interference from Mrs. Rudge.

14. I do not intend to deal with the subsequent relations of the parties. Various accusations of misconduct by the defendants or some of them have been made and the defendants have complained of various actions of Mrs. Rudge. For the purposes of this case this period of time can be ignored. What I have to decide is what was the legal effect of any of the scheme exhibited as Exhibit A8.

15. Upon mature consideration I have come to the conclusion that the document in question was not intended to create a legal relationship between the parties and that it is not therefore a contract. It was in the nature of a domestic arrangement which was obviously not designed to be legally binding.

16. I have reached this conclusion only after studying the circumstances surrounding the making and the attempted operation of the scheme and from a consideration of the express terms of the scheme itself.

17. First as to the surrounding circumstances. In the academic year ending in August 1967 the school suffered a net loss of $182,000. There had been a loss annually since the school opened. That the school was running at such a loss is of the greatest importance for the scheme was intended to alleviate the financial difficulties of the school. When Mrs. Rudge informed the teachers that the school was to be closed down she was pleased and flattered at their reaction. They showed confidence in the school and loyalty to her. Everything had to be done in a hurry and in Mr. Rudge's words, the final scheme bore but little resemblance to the original proposition for the new management.

18. Mrs. Rudge said in evidence that it was more or less understood that all the teaching staff would participate in the scheme. But at best the scheme was a temporary measure. It was "a try on" she said.

19. The first defendant agreed that if the scheme were to succeed it must save the school enough money to enable it to carry on. He tried to persuade all the teachers to join but was unsuccessful. The second defendant did not go as far as this. He said that the scheme depended on enough people supporting it to some extent. It was hoped that new teachers could be employed at lower salaries. If this proved impossible then the scheme would not function: the only effect of this being that the risk of the participants in the scheme of having to make good any loss made by the school would be increased.

20. From this the correct inference to draw is that underlying the scheme was the implication that unless all or nearly all the teachers participated it could not succeed and must be abandoned. This has been the position of the plaintiffs throughout.

21. After a very short period of time the scheme was left with only the five defendants as participants. None of the defendants is on a high salary and only three are teachers. Before reduction under the scheme salaries of the five defendants totalled $3,460 per month. Under the scheme the total of their reduced salaries was $1,816 per month which includes $100 per month given to the fifth defendant as a special case. The total monthly saving to the school by the operation of the scheme was therefore $1,644.

22. Mr. Rudge estimated that the loss for the year 1968 - 1969 would be in the nature of $80,000. The object of the scheme was to save the school. If operated with only five participants it would be singularly ineffective to do this.

23. As to the operation of the scheme, it was palpably non-effective. Some teachers did not join; others withdrew from it when they realised how little their wage packet was under the scheme or for other reasons. All the teachers on higher salaris withdrew.

24. It was never suggested that this was the only measure to be taken to save the school. Any new teacher joining the school would be employed at a salary lower than was paid before the scheme was put into operation. And indeed new teachers were in fact employed. In addition there was to be a drive for more students. Neither of these matters are mentioned in the scheme.

25. I now come to the express terms of the scheme itself. It is full of uncertainties and it contains no express provision of the intention of the parties who signed it to consider themselves legally bound by it. It contains an exhortation to the teachers to fulfil their responsibilities. And it refers to teachers only. There is no mention of participation in the scheme by the staff. Yet the 3rd and 5th defendants are not teachers.

26. The scheme does not affect the position of Mr. and Mrs. Rudge as principals of the school. What it does do is to vest the management of the school for one year in three people, the first and second defendants and Mr. Hou. In effect it gives recognition to the fact that certain employees of the school are to bear extra responsibilities. This is quite apart from the provisions as to the reduction of the salaries of the teachers. That this is so is clear from the evidence of Mrs. Rudge. And there is a letter from Mrs. Rudge dated October 7th in which it was made clear to the first and second defendants - Mr. Hou having long left for Canada - that their control of the school was unimpeded despite what Mrs. Rudge called the failure of the scheme.

27. As I have said the school was being run at a loss and this must have been known to the defendants because that was the reason for the scheme for the school. However the scheme does not state who will bear the loss if there is a loss. Mrs. Rudge is specifically exempt from this responsibility.

28. The scheme provided for the retention by the school of a proportion of the salary of each participant. This amount is referred to as a "share". At the end of the academic year this would be returned to the participant with a proportion of such profits as had been made. Fifty per cent of any profit made was to be paid to Mrs. Rudge who was to bear no responsibility for any loss incurred after the scheme came into operation. The participants would receive the other fifty per cent proportionately. How or in what proportion is not stated. This is left to the committee.

29. Again the committee is of an indeterminate number of members depending upon the number of participants in the scheme. What is to happen at the end of the academic year is left in the air.

30. But, as I have said, it is not clear who is to bear any loss. And it is obvious from the evidence that a loss was to be expected. If there were a loss I can find nothing in the scheme to make a participant in the scheme liable for it. The second defendant disagreed with this referred to the use of the phrase that "all persons participating will be responsible for all the obligation stated in the scheme". But this does not carry us any further. There is no obligation to pay any loss stated in the scheme. And surely it was not in the contemplation of the parties that if and when the participants had dwindled to five persons, whose salaries were not large, that such persons should be responsible for any loss incurred by the school, a loss which in the previous year was about $180,000.

31. The position of teachers who did not participate in the scheme is far from clear. The committee could not insist upon a teacher joining the scheme nor could a teacher participating in the scheme be forced to continue to pay his monthly contribution. The scheme specifically states that a teacher can withdraw from the scheme at will. And we know several teachers availed themselves of this provision. The contracts of all teachers were made with Mrs. Rudge. And the scheme contemplates new contracts for those who participate in the scheme. Such contracts are to be made not with the committee but with Mrs. Rudge. This is expressly stated. However the first defendant said he read the scheme to include a power to dismiss any teacher who did not join or who withdrew from the scheme. The scheme also seems to state that those teachers who are not within the scheme are not under the management of the first and second defendants and Mr. Hou, the new manager. How they could be expected efficiently to run the school if that were so is beyond comprehension.

32. There are other uncertainties. For example it is uncertain what the position of a new investor would be and it is no where stated what would happen if an investor withdraws his share. Indeed what does that phrase signify? Is a share a debt? Will a participant be paid if the school makes a loss? Finally Mrs. Rudge is given a half share in any profit made by the school. She is given power to sell part or all of this. But to whom? Only a teacher participating in the scheme is to have a share. The matter of the transfer and ownership of shares (if 'ownership' is the correct term to use in the circumstances) like so much more of this scheme just simply was not worked out. It is needless to pursue the matter further. The scheme was embryonic and was never properly constituted so as to enable an action to be founded upon its terms. I look upon the scheme as notes or a policy document to guide the first and second defendants and Mr. Hou in their new job of reorganising the school. In addition there is the outline of a scheme of teachers participation in running the school which never got off the ground.

33. It was not suggested in court that the defendants were partners. The emphasis was that the scheme was a binding contract. However, I do not think that it was a partnership. What I have said above as to the uncertainty of the terms applies equally if the scheme is regarded as such. And it is more than obvious from the surrounding circumstances that the participants in the scheme never for one moment considered that they were entering into a partnership with each other.

34. At first the first and second defendants took their new responsibilities seriously but so soon as it was apparent that the plaintiffs considered that the scheme had failed and must be abandoned, they begun to assert themselves. They arrogated to themselves powers which by no stretch of the imagination could be said to come within the terms of the scheme.

35. For example the third defendant was responsible for the collection of all school fees. These he paid into the school bank account which was operated by Mr. and Mrs. Rudge jointly. Mrs. Rudge was responsible for all payments out, payments which were made without the knowledge of the third defendant. However after the beginning of December, the defendants ceased to pay any school fees into the bank account. They attempted to open an account on their own but, I understand, were unsuccessful. However they still collected school fees from which they made certain payments on behalf of their running of the school. These included payments to themselves of salary at the rate allowed for under the scheme.

36. I only mention this because the defendants' case is that the scheme allowed them to do this and even more. Again though the first defendant admitted that the scheme did not allow of the dismissal of Mrs. Rudge, a letter was at one time sent to her threatening her with such a procedure. This was signed by the first and second defendants.

37. I must make it clear that all the moneys expended by the defendants have been properly accounted for. There is no suggestion that the defendants have embezzled any of the money obtained by them from the payment of school fees.

38. The defendants rely upon the wording of the scheme itself. When giving evidence the second defendant took me through the scheme explaining it clause by clause. It was noticeable how much had to be read into nearly every clause in order to construct the general words of the scheme as something approaching a legally binding contract.

39. The second defendant particularly stressed the words of clause 2 of the scheme where it says that the new committee will "take over" the school. This he said meant to take over and to possess not merely to manage or to run.

40. At the beginning of the trial as the defendants were not represented I pointed out that from the pleadings it appeared that they agreed that the plaintiffs were and are the sole proprietors of the school. I was assured that what was intended was something quite different.

41. It was not admitted that the plaintiffs owned the school after the scheme came into operation. The present owner of the school is the committee of shareholders consisting of Mrs. Rudge and the five remaining signatories of the scheme, the five defendants. The scheme does not state this.

42. The explanation of the various clauses were fluent and ingenious. It is enough to say that the defendants read more into the scheme than can be inferred from the circumstances in which it was drafted and the actual wording itself. A considerable amount of time was wasted in showing that the scheme was designed to present one teacher-shareholder from becoming more powerful than the others. Among other things I was told that it was contemplated that a teacher's original salary would be restored to him so soon as he withdrew from the scheme. I do not see how that could benefit the financial position of the school. It was alleged that the scheme gave the defendants power to interfere with a contract made between Mrs. Rudge and a teacher and that if a teacher withdrew from the scheme and refused to be reemployed at a lower salary he could be dismissed.

43. I must confess I was not impressed by the suggestions and explanations of the scheme given by the first and second defendants and considered them far fetched.

44. In my view the scheme was not a binding legal contract and was indeed never intended to be such.

45. The plaintiff is entitled to the declaration that they are the sole persons having the management and/or control of the school as prayed in paragraph 15(a) of the statement of claim. There is no need to make any order concerning the two injunctions dated 13th December 1968 and 11th January 1969 which remain in force until further order. They will remain in force.

46. The defendants were ordered to file an account which they most properly did. Taking into consideration the fact that the defendants are entitled to their salaries up to the date of the termination of their contracts by the plaintiffs at the original, the pre-scheme rate - and also that they have possession of certain moneys which they have collected on behalf of the school, there remains the sum of $3,573.35 due and owing to the plaintiffs. There will be judgment for the plaintiffs for that amount. The contracts of the defendants were terminated in December 1968 but there is no claim for wrongful dismissal.

47. The counterclaim must be dismissed. The plaintiffs are entitled to their costs on the claim and the dismissal of the counterclaim.

48. I cannot leave this case without a word of congratulation to the first and second defendants for the manner in which they conducted their case. Though they were unrepresented they did not miss a point. They were courteous to the court, wasted no time and expressed themselves with clarity and assurance.

Representation:

M. Asome (Peter Mo & Co.) for Plaintiffs.

All 5 Defendants in persons.