Richarvey Ltd v. Victor Fung

HCA002730/1979

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 2730 OF 1979

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Coram: Mr. Commissioner Gittins, Q.C.

Date of Judgment: 27th October, 1980

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JUDGMENT

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1. The plaintiff claims against the defendant under an agreement made on 25th January 1979 whereby in consideration of the plaintiff releasing the defendant from all claims proceedings liabilities matters causes of action which the plaintiff possessed against the defendant arising out of the defendant's employment as manager of the plaintiff; the defendant would carry out his obligations set out in a hand written document entitled "Heads of Agreement" which was signed by the parties on 25th January 1979.

2. The Statement of Claim pleads that the agreement was made partly orally and partly by the said written document. But the evidence as to the oral part of the agreement adds nothing material to the terms set out in the written document.

3. The material breach of agreement alleged by the plaintiff is that the defendant has failed to transfer his interest in Flat A2, 6th floor, Parkview Kansion, 16 Chiu Pak Road to the plaintiff within 30 days of the 25th January 1979, that through his then solicitors he repudiated the agreement on 26th January 1979 and on or about 9th February 1979 he sold his interest in the said Flat to a third party without the plaintiff's knowledge and consent.

4. By his defence the defendant denied that there was any final binding agreement concluded on 25th January 1979, that the contents of the "Heads of Agreement" document were merely expressions or terms which were to be further negotiated upon so that there was no legally binding agreement. Further, that it was not the intention of either party that the document should give rise to legal relations.

5. In the alternative even if there was an agreement, the defendant alleged that the consideration therefor is illegal and prejudicial to the administration of justice because the plaintiff alleged that the down payment and instalments made by the defendant on the flat had been made out of secret benefits or commissions received by defendant in the course of his employment by the plaintiff and therefore the agreement was to the effect that if the defendant agreed to transfer his interest in the flat to the plaintiff, the plaintiff would not report the offences of receiving secret benefits without authorisation to the Independent Commission Against Corruption and would treat the receipts as rectified.

6. In the further alternative the defendant alleged that the plaintiff is estopped from commencing the present proceedings by Clause 8 of the Agreement which stipulates that "neither party to reveal the terms of this settlement to outsiders except for the purpose of Clause 6 above" and that Clause 6 is not relevant to the present proceedings.

7. The defendant also counterclaimed for salary in lieu of notice, annual bonus payable at the end of the lunar year 27th January 1979 and damages for wrongful dismissal.

8. Harvey Philip Gold testified that he and Richard Franklin Chestnov were the major shareholders of the plaintiff company which was established early in 1975; that they are both American citizens resident in the U.S.A., that he spent 4 to 6 months each year in Hong Kong, alternating with Chestnov; that at times the defendant was in sole charge of the plaintiff company; that the defendant's functions included the making and supervision of arrangements for textiles manufactured by suppliers in Hong Kong to be shipped overseas, to secure and negotiate export quotas and generally run the plaintiff's office. That in the latter half of 1978 matters came to his and Chestnov's notice which caused them to have suspicions of the defendant's loyalty and of wrongdoing in the plaintiff's office. That on 24th January 1979 he went with Chestnov and the plaintiff's auditor Michael Shane Kelly to consult the plaintiff's solicitor Gary Paul Miller of Wilkinson & Grist; that after apprising Miller of their suspicions Miller advised a confrontation with the defendant but that none of the Company's representatives was to intimidate and coerce the defendant; that the defendant was then called to the meeting; that at first he denied taking secret profits, but that after being confronted with evidence of his ownership of a car and the purchase of the said flat and generally living beyond his means, the defendant admitted that he had taken secret commissions from suppliers and quota brokers; that he was willing to make restitution to the plaintiff and would produce records of his assets. The witness was emphatic that he and the other representatives of the plaintiff complied with Miller's instructions not to threaten the defendant with exposure to the police or the ICAC, and that they gave no undertaking to the defendant that if he cooperated with the plaintiff there would be no report to the police of ICAC.

9. The further meeting arranged for the afternoon of 24th January 1979 was postponed to the next day at the request of Derek CHUNG, solicitor, of Peter Mo & Co. who informed Miller that he was acting for the defendant.

10. The next morning, 25th January 1979, the same persons met at Miller's office with the addition of Derek CHUNG who accompanied the defendant as his solicitor.

11. Gold's evidence of that meeting is that the defendant produced about 5 bank pass books in some of which Gold saw pencilled insertions of code letters. On examining the 6 pass books produced by the defence in Court he could not be certain that these were the same as those produced on 25th January 1979 because there were no pencil markings on the former. He recalled seeing a Citibank pass book on 25th January 1979 which was not among those produced in Court. He said that Miller asked for the pass books to be photo-copied but CHUNG refused this request. Gold gave as the reason for acceding to CHUNG's refusal the wish of the plaintiff's representatives to keep the tone of the meeting as one of cooperation, their object being to recover the plaintiff's money. There was no threat to or pressure on the defendant. In so doing the plaintiff's lay representatives were following the directions given by their solicitor. There was free negotiation between the solicitors of the parties.

12. Gold testified that the pencil markings in the bank pass books produced by the defendant on 25th January 1979 consisted of code words which he recognised as those used in the plaintiff's telexes in connection with and to identify some of their suppliers. He also saw pencilled words "labels", "polybags" and "hand tags". On being questioned about these the defendant said that the amounts in the pass books against these words were the kickbacks he received from suppliers and manufacturers. Gold said that on 25th January 1979 it took the 2 solicitors a long time to work out the terms of the agreement; eventually all was agreed and the agreement in its manuscript form was signed by Gold, Chestnov and the defendant. A typewritten copy was not made because Miller was moving his office that day and his secretarial services were not available, that subsequently the defendant did not perform the agreement and he sold the flat to a third party; that it was made clear to the defendant that he was dismissed during the meetings.

13. It was put to Gold in cross examination that he and Chestnov raised their voices and shouted at the defendant accusing him of taking kickbacks and that the defendant's reply was that he did not take kickbacks and his extra income came from a side business of his, that of ordering labels and selling them to the plaintiff's suppliers and also from buying materials for the suppliers. These allegations were denied by Gold. Gold admitted that the defendant asked for the inclusion in the agreement of a further term, viz. that the plaintiff company shall give authorisation to the defendant to receive commissions and to do side business etc; but that this request was made by Chung to Miller on 26th January 1979 after the agreement had been signed and this request was rejected by Miller. That this further term had not been raised in the negotiations on 25th January 1979.

14. Richard Franklin Chestnov gave evidence which corroborated that of Gold's. In cross examination he was asked whether he would have gone to the ICAC if the defendant had not come to an agreement with the plaintiff. His answer was that the question was never brought up, that they never got that far because agreement was reached. He said that the ICAC may have been mentioned at the meetings with the defendant, but not as a threat.

15. Michael Shane Kelly, an accountant and a partner in Charles Mar Fan & Co., gave evidence that he dealt with the accounts of the plaintiff and was its auditor; that he attended the meetings on 24th January 1979 and 25th January 1979, but that he left the meeting on the second day before it closed.

16. On examination of the bank pass books produced in court he spotted the faint remains of initials on one of them.

17. In cross examination he stated that not only Miller, but the witness himself had mentioned to Gold and Chestnov that for an employee to receive secret commissions without the consent of the employer would be an offence under the Prevention of Bribery Ordinance and he thought that Gold and Chestnov were already aware of this. He said that the ICAC was mentioned in the defendant's presence, but the view taken was that although the situation may be a case for the ICAC, Miller emphasized that he did not want to confuse that with the matter of restitution by the defendant. Kelly recalled the defendant stating his wish to have some understanding as to the attitude the plaintiff had with respect to the ICAC, but Miller cut in to avert the question of the ICAC, that not being the purpose of the meeting. Kelly denied hearing Gold or Chestnov tell the defendant that unless he admitted taking secret commissions they would take the matter to the ICAC.

18. Gary Paul Miller, the plaintiff's solicitor confirmed the meeting on 24th January 1979 when Gold, Chestnov and Kelly went to his office; that he explained to them there may be criminal implications in the defendant's conduct but that those implications were not to be discussed with the defendant. That the defendant was then called into the meeting and the witness explained to the defendant the basis of the plaintiff's suspicions concerning his activities as the plaintiff's employee; that there was evidence about his car, his flat in the New Territories and his generally living above his means; that the plaintiff's whole object was to obtain restitution, and that depending on what compensation he could make to the plaintiff, the plaintiff would consider what action to take; that the plaintiff's object was to settle its civil claim against the defendant for his breach of duties as an employee. Miller stated that at first the defendant made a complete denial of anything wrong, but after the defendant was confronted with further information that one or more of the plaintiff's suppliers had approached Chestnov and informed him that the defendant was asking for too much money, the defendant "basically" broke down and admitted that he had taken money from suppliers of the plaintiff,s that after this admission the defendant was asked what assets he had in order to work out an agreement with him which would reasonably compensate the plaintiff.

19. The meeting then broke up on the understanding that the defendant would return with documents, records and evidence of his assets that same afternoon. That afternoon Miller was informed by Derek Chung, solicitor, of Peter Mo & Co., that he was representing the defendant and that the defendant would return the next morning with his solicitor.

20. Miller's evidence as to the events on 25th January 1979 was that he summarised the events of the previous day to Derek Chung, the defendant's solicitor, told him the plaintiff wished to arrive at a reasonable compromise and then asked for the information as to the defendant's assets which had been promised the previous day; that 5 or 6 bank pass books were handed over; that Chung refused to let him take photocopies of them; that he did not insist on making copies because he had no legal right and because the purpose and tenor of the meeting was to achieve a compromise; that he and Chung worked out the defendant's net assets from the pass books, bank statements, the car and the flat and then the 2 solicitors negotiated to formulate an agreement between the defendant and the plaintiff. Eventually the document "Heads of Agreement" was agreed, part of the writing was by Miller and part by CHUNG.

21. The document in manuscript showed numerous amendments.

22. Miller said that he intended and considered the document to be legally binding and he was sure that CHUNG shared this view. That he was positive that Gold, Chestnov and the defendant thought the same. He said that this was the final agreement between the parties; that what was left to be done was to put the text into longer and more grammatical sentences, for it to be typed and signed by the parties.

23. Miller also testified that the next morning CHUNG telephoned him saying that he was extremely concerned about his clients' position under the criminal law and wanted to amend the agreement by inserting a clause to the effect that the plaintiff had actually consented at the outset to the defendant making secret commissions. That he (Miller) told CHUNG that the agreement was final but that he would take his clients' instructions as to whether they would consent to the amendment; that the plaintiff did not consent to the amendment; that CHUNG said he was not prepared to have the agreement typed out and signed by his client unless the amendment was agreed to; that did not come to pass and the agreement was not typed out by CHUNG.

24. Miller said that at no time was it said by or on behalf of the plaintiff that it would not report the defendant's offences to the ICAC if the defendant signed the agreement; nor was it said that the plaintiff would report the defendant if he did not sign.

25. Neither the plaintiff nor his then solicitor Derek CHUNG was called to give evidence so that the allegations put on behalf of the defendant in cross examination were not corroborated.

26. I accept the evidence of the plaintiff's witnesses and I find that the document "Heads of Agreement" was prepared with the approval of and in part by the defendant's solicitor, signed by the defendant on his solicitor's advice, and is legally binding. I also find that the defendant entered into the agreement without any threat of exposure to the ICAC or Police if he did not sign it nor any promise by the plaintiff's representatives not to make such report if he did sign it.

27. I therefore hold against the defendant on the first limb of his defence that the agreement was not a final binding agreement, that its terms were intended to be further negotiated upon and that neither party intended that it should give rise to legal relations.

28. The second limb of the defence as pleaded in paragraph 3 is that if there was an agreement the consideration therefor is illegal and prejudicial to the administration of justice. Clause 10 of the document "Heads of Agreement" is relied on for this pleading; the clause reads -

"10. Except as stated above the parties hereby mutually release each other from whatever claims, proceedings, matters, liabilities, causes of action which they may have against the other arising out of the employment of Victor (i.e. the defendant) in the Company and which release includes, without prejudice to the generality of foregoing secret benefits received by Victor in the course of his employment with the Company and all such breaches are deemed to be rectified."

29. The second sentence of paragraph 3 of the defence reads -

"Because the defendant had paid a down-payment and some instalments of the said flat, the plaintiff alleged that the defendant must have done so out of secret benefits or commissions received by him in the course of his employment with the plaintiff."

30. The evidence of the plaintiff's witnesses establishes that the plaintiff did make these allegations, although the case for the defendant as put by his counsel in the cross examination of the plaintiff's witnesses was a denial of these allegations and that the plaintiff's funds for the purchase of the flat and of a car came from a side business carried on by the defendant.

31. The third sentence of paragraph 3 of the defence reads -

"And therefore, the alleged agreement was to the effect that if the defendant agreed to transfer the said flat or his interest therein to the plaintiff, the latter would not report the alleged offences of receiving secret benefits without authorisation to the Independent Commission Against Corruption and would them as rectified."

Although so pleaded this was not the defendant's case as put to the plaintiff's witnesses in cross examination. The defendant's case as put was that the defendant's funds for the purchase of the flat and the car did not come from secret benefits but from a side business of the defendant. The plaintiff's case is that although its directors were convinced that the defendant had taken secret commissions, they did not have conclusive evidence and compromised its claim for restitution by agreeing to receive from the defendant a fraction of what the defendant had taken as represented by the defendant's interest in the flat. The plaintiff's witnesses were emphatic that the defendant was not threatened with the ICAC or otherwise coerced into signing the "Heads of Agreement" document.

32. Counsel for the defendant cited from Volume 1 of 24th Chitty on Contracts p. 417 para 908 -

"Both parties aware of legally objectionable features. Neither party can sue upon a contract if

The benefit of the public, and not the advantage of the defendant, being the principle upon which a contract may be impeached on account of such illegality, this objection may be taken by either of the parties to the contract. 'The principle of public policy' said Lord Mansfield, 'is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and the defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis.' "

He submitted that all the 4 situations (a) to (b) were present.

33. He also cited from 9th Cheshire & Fifoot's Law of Contract 338 :-

34. Counsel for the defendant referred also to Cheshire & Fifoot 343 for the principle that if the contract is illegal in its inception, neither party can assert that he did not intend to break the law, that the very contract is unlawful in its formations.

35. He also cited from the same authority at p. 345 that the general principle, founded on public policy, is that any transaction that is tainted by illegality in which both parties are equally involved is beyond the pale of law and no person can claim any right or remedy whatsoever under an illegal transaction in which he has participated. The following cases were cited in support: Pearce v Brooks (1866) L.R. 1 Exch. 213; Re Mahmoud and Ispahani, (1921) 2 K.B. 716; Chettiar v Chettiar, (1962) A.C. 294; Kwok Chung Ho v Wong Chuen Sang (1969) H.K.L.R. 1; and Smith v Selwyn (1914-1915) A.E.R. 229.

36. The submissions on behalf of the plaintiff on this limb are that the evidence of the plaintiff's witnesses is that they gave no undertaking not to report the defendant to the ICAC or the Police; nor to stifle any prosecution; nor to keep silent; nor to give false evidence. That there was no undertaking as to any of these matters in the Heads of Agreement. That the only possible argument against the plaintiff is that its directors entered into the Heads of Agreement in the belief that the defendant had taken secret commissions and that the words "secret benefits" covered this point. But that the directors had no evidence that the defendant had taking secret commissions, that no evidence that he had was before the Court; that the Statement of Claim did not allege he had taken secret commissions; that the defendant's case in Court denied the taking of secret commissions; that the pleading in his defence did not admit that he had taken secret commissions; that his counter-claim for damages for wrongful dismissal rested on his innocence in that respect; so that the plaintiff's claim was not tainted with illegality and was not contrary to public policy.

37. As to Clause 10 of the Heads of Agreement releasing the defendant from "secret benefits", counsel for the plaintiff submitted that these words were wide enough to include the profits from the side business which the defendant claimed through his counsel to have carried on and was the source of his wealth. That if these words were intended to cover secret profits or commissions and/or profits, such words would have been used expressly, as the defendant's then solicitor sought to include by the amendment he requested on 26th January 1979 and which was rejected by the plaintiff. That further, the whole of Clause 10 was drafted by the defendant's then solicitor Derek Chung.

38. The evidence of the plaintiff's witnesses was not controverted by any defence evidence. I do not find any of it implausible and accept all of it.

39. I accept the submissions on behalf of the plaintiff and hold that the agreement sued upon and the circumstances in which it was entered into do not fall within the principles cited on behalf of the defence and that the agreement is not tainted by illegality.

40. The second limb of the defence therefore fails.

41. The third limb of the defence is pleaded in paragraph 4 of the Statement of Defence that "the plaintiff is estopped from commencing the present proceedings in that Clause 8 of the alleged agreement stipulates that 'neither party to reveal the terms of this settlement to outsiders except for the purpose of Clause 6 above.' Clause 6 is not relevant to the present proceedings."

42. Having held that the agreement is a legally enforceable contract, I am of the opinion that on its breach, legal proceedings may be instituted to enforce its terms, notwithstanding Clause 8 and I so hold.

43. On the plaintiff's claims I give judgment in favour of the plaintiff and order:-

44. I make no order on the other claims by the plaintiff as they have not been proved.

45. The defendant has counterclaimed for salary in lieu of notice, bonus for the lunar year ending 27th January 1978 and damage for wrongful dismissal.

46. I hold that the defendant was rightfully dismissed summarily on the ground either of the plaintiff's belief that he had taken secret commission or of his case that he was carrying on a side business with the plaintiff's customers for his own profit.

47. The counter-claim is accordingly dismissed with costs.

Representation:

Allman-Brown (Wilkinson & Grist) for Plaintiff

Ming Huang (W.K. Lore & Co.) for Defendant