Chinascreen Ltd. v. China Silk Enterprise Ltd. and Others
Read the full judgment text of on BabelCite. was delivered on 16 July 1999.
1. Chinascreen Limited ("Chinascreen" or "the Company") is a company incorporated in Hong Kong. It carried on business in the trading of silk garments. It bought silk garments manufactured on the Mainland and sold them to companies in German-speaking countries in Europe.
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1992 No.2411 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2411 OF 1992 --------------------------
(By Counterclaim) Coram: The Hon Madam Justice Yuen in Court Dates of hearing: 12-16, 19-23, 26-28, 30 April 1999 Date of handing down of Judgment: 16 July 1999 ----------------------------------- JUDGMENT ----------------------------------- Background 1. Chinascreen Limited ("Chinascreen" or "the Company") is a company incorporated in Hong Kong. It carried on business in the trading of silk garments. It bought silk garments manufactured on the Mainland and sold them to companies in German-speaking countries in Europe. 2. The shareholders of the Company were Madam Mak Yin who had 65% of the shares registered in her name, and Goldyork Development Ltd. ("Goldyork") which had 35% of the shares registered in the name of its nominee F&C Management Services Ltd. 3. However, it is common ground that the Company was set up and run by two persons, viz. Madam Ho Lin Wah also known as Mrs. V. Chan (" Madam Ho") and Mr Benjamin Ting Hin Shun ("Mr Ting"). They were the main protagonists in these proceedings. Madam Ho 4. Madam Ho controlled the majority shares and was responsible for marketing. She had previously been the Merchandising Manager of a German company in Hong Kong called Seidensticker and had experience in the German-speaking market. Mr Ting 5. Mr Ting was the executive director of Goldyork, in which he had a 25% shareholding. He had previously been employed in the garments industry and was knowledgeable in the production side of the silk garment manufacturing business. He left his employers in 1985, forming Goldyork in 1987, which carried on business buying garments manufactured on the Mainland and selling them to buyers abroad. 6. Both Madam Ho and Mr Ting were, by the time the events in this case occurred, directors of Chinascreen. China Silk 7. Since 1988 Goldyork had bought silk garments from China Silk Enterprise Ltd. ("China Silk"), one of the largest manufacturers of silk garments on the mainland, with a number of factories in Shekou. 8. In 1989, Chinascreen was formed by Madam Ho and Mr Ting pooling their respective talents in marketing and production. The idea was that the Company would obtain their supplies of silk garments from China Silk, and sell them to buyers in German-speaking companies in Europe. Otto Kern 9. One such buyer was Otto Kern Gmbh & Co. ("Otto Kern") which had an agent in Hong Kong, Brixon Overseas Ltd ("Brixon"), a company run by Mr Chris Brogsitter-Finck. Otto Kern was at that time a leading supplier of high-grade silk garments in German-speaking countries in Europe. Production of garments 10. Otto Kern was a demanding customer. The garments it bought from Chinascreen were "made to order", in that Otto Kern would provide specifications in terms of fabrics, styles, designs, colours and quantities, etc. in advance of a particular season, of which there were two a year. Chinascreen would co-ordinate Otto Kern's demands with China Silk's manufacturing capabilities. - Preparation 11. The production of garments was a labourious process, as fabrics had to be sourced from weavers, their dyes had to match the colours demanded by Otto Kern's designers, silk screens had to be painted to incorporate the designs, and the garments had to be cut according to patterns provided by Otto Kern. Modifications might be required along the way. 12. Nevertheless, by a process of trial and error, with experience gained from the past seasons' manufacturing processes, garments meeting Otto Kern's demands were produced. China Silk was also able to acquire know-how from a German technician sent by Otto Kern to China Silk's factory in Shekou, and a technician employed by Chinascreen was also stationed there. - Samples 13. Samples would be made at two stages. There would be an initial sample made at a preliminary stage. Subsequently, "salesmen's samples" would be made which would be delivered to Europe for Otto Kern's salesmen to show at fashion fairs for orders to be taken from buyers such as boutiques. - Bulk production 14. Bulk production of the garments would finally be done at China Silk's factories for delivery by truck to Chinascreen in Hong Kong, and hence by sea or air to Europe. By reason of the quantities involved, bulk production would start a few months before the commencement of each fashion season. Thus, for the Spring/Summer 1992 season, bulk production had to start in October or November 1991 for deliveries to conclude before the Chinese New Year. 15. However, as shall be seen below, the expected sales from Chinascreen to Otto Kern for that season, and for subsequent seasons, did not materialise. Chinascreen's profits 16. Chinascreen made its profit from the difference between the price at which it bought the garments from China Silk and the price at which it sold them to Otto Kern. By late 1991, the Otto Kern orders took up one-third of Chinascreen's turnover, and Chinascreen was, by all accounts, operating very successfully. Between February 1990 and August 1991, Chinascreen's gross profits from Otto Kern's orders amounted to some $27m. 17. Madam Ho has said in evidence that Chinascreen's mark-up was some 40-45%. Of course, from this profit would have to be deducted the cost of accessories, freight, and Chinascreen's overheads such as office rent, salaries, telephone charges, and so on. Further, Chinascreen had to pay Brixon a rebate or commission of $40 for each piece of garment ordered by Otto Kern. 18. However, even Mr Ting has accepted in evidence that during that early period, "middle-men" such as Goldyork were able to make handsome net profits with a relatively small capital investment and limited expenses. 19. Silk garments were then in great demand in Europe, at least for the period between 1989 and 1991, and according to Mr Brogsitter-Finck, this was due to the introduction of washed silk garments into German-speaking countries by Otto Kern. 20. Chinascreen also benefited from its financing arrangements with China Silk. Whereas Otto Kern had to provide Chinascreen with Letters of Credit, Chinascreen was able to obtain interest-free credit of some 30-60 days from China Silk. Chinascreen's operations 21. By the summer of 1991, Chinascreen had been operating successfully for at least one and a half years. The division of labour within the Company was spread 3-ways :-
22. From Chinascreen's success, it is obvious that all the main players were extremely capable. There was an attempt made by Madam Ho in the earlier stages of this case to play down Mr Ting's importance. Thus, in paragraph 17 of her Affirmation made on 14 May 1992, Madam Ho said that since Chinascreen commenced trading, she was the person who was in charge of the management and administration of Chinascreen, and Mr Ting never took any active part in the running of Chinascreen. 23. Then in paragraph 12 of her Witness Statement, Madam Ho said that Mr Ting never made any constructive contribution to the business of Chinascreen, except for being one of the pool of signatories able to sign cheques and bank documents. 24. This was clearly wrong, because Mr Ting was responsible for acquiring the Company, finding office premises, employing and training staff, and dealing with documentary work since Madam Ho was busy with trips abroad. Even after the merchandisers had gained enough experience to work independently, and even after Chinascreen had moved its offices so that Mr Ting was no longer based there, the merchandisers still looked to Mr Ting for assistance on the production side. 25. In her oral evidence, Madam Ho tried to explain her statements by saying that as a person involved on the marketing side, she tended to under-estimate the importance of the production side, on the basis that without orders, there would be no business at all, and so sales were more important than production. 26. However that reasoning does not explain paragraph 17 of the May 1992 Affirmation. I find that Madam Ho deliberately intended to downplay Mr Ting's importance in Chinascreen because it was then in her (or rather, Chinascreen's) interests to do so. The Affirmation was made at a time when China Silk was attempting to obtain a Mareva injunction against Chinascreen after Mr Ting was ousted as a required signatory for Chinascreen's cheques. 27. Ironically, Mr Ting has also, in his evidence at trial, tried to downplay his role in the Otto Kern orders. This was because it was in his interests, for the reasons appearing later, to portray that he kept a distance from these orders. 28. It is regrettably clear from the respective cross-examination of Madam Ho and Mr Ting that neither person's evidence could be accepted in its entirety. They were both able and intelligent people, but they regarded the truth as being expendable when it did not suit their case. A large number of factual disputes have been thrown up in this case, but I will deal only with those which are important to this Judgment. Original Action and Counterclaim 29. This action started in April 1992 when China Silk sued Chinascreen for the price of goods sold and delivered amounting to more than $8.5m. 30. Chinascreen pleaded a defence of set-off and counterclaim. The set-off was pleaded against China Silk alone, and was based on allegedly defective quality of garments and late delivery. 31. Chinascreen's counterclaim was pleaded against China Silk, Mr Ting, Goldyork and a company called Goldwin International Ltd. which (it is now admitted) is controlled by Goldyork. 32. The Counterclaim arose out of the loss of Otto Kern's Spring 1992, and subsequent, orders to Goldyork. The details of the circumstances in which this occurred are hotly disputed, but the following facts are reasonably clear. Events of 1-11 October 1991 33. On or about 1 October 1991, Lilian Chung told Mr Brogsitter-Finck that she and the other merchandisers of Chinascreen who had been dealing with Otto Kern's orders would be leaving Chinascreen to join Goldyork. 34. On 4 October, Mr Brogsitter-Finck saw Mr Zhai Xiao Ping ("Mr Zhai") the General Manager of China Silk. There was a discussion in the course of which Mr Brogsitter-Finck suggested to Mr Zhai that business should thenceforth be conducted through Goldyork in place of Chinascreen. Mr Zhai agreed. 35. On the same day, Lilian Chung and her assistant Miss May Lam resigned from Chinascreen without giving notice. 36. On 8 October, 4 other members of staff of Chinascreen who had been dealing with the Otto Kern orders (actually 3 merchandisers and a shipping clerk) gave notice to Chinascreen to terminate their employment. By setting off accrued leave, they actually left Chinascreen within days. 37. Within a few days of 4 October, Mr Ting had secured a furnished office in the same building as Goldyork's office, from which Lilian Chung and the other ex-Chinascreen staff worked. 38. So, by that time, everything was in place for Goldyork to take over Otto Kern's orders from Chinascreen - it had its supplier (China Silk) and it had its staff (Lilian Chung and the other 5 merchandisers). 39. On 10 October, Brixon sent a fax message to Chinascreen to "unconditionally cancel all orders placed with [Chinascreen] for Spring 1992/Summer '92". The reasons given were :-
40. On 11 October, Madam Ho went to China Silk's factory in an attempt to secure for Chinascreen the fabrics that China Silk had produced for the Otto Kern orders. China Silk refused to supply the fabrics to Chinascreen. Mr Zhai told her that China Silk was going to deal directly with Otto Kern. This discussion was evidenced in a fax sent by Chinascreen to China Silk the following day, to which there was no reply. 41. Within days, Goldyork had taken Chinascreen's place as purchaser of silk garments from China Silk for sale to Otto Kern. This relationship continued until 1996, when Lilian Chung left Goldyork. On her departure from Goldyork, Brixon started to deal directly with China Silk with her as agent. Counterclaims 42. As a result, Chinascreen counterclaimed against China Silk, Mr Ting, Goldyork and Goldwin (the company which was used by Goldyork to employ the ex-Chinascreen merchandisers) for :-
Settlement with China Silk 43. On Day 6 of the trial, Chinascreen settled with China Silk. None of the persons in China Silk's employ took any part in the remaining proceedings, so the Court had no evidence from Mr Zhai, or from Mr Ding Chi Ping. 44. There was also no evidence from Lilian Chung, whose departure played such an important part in the events leading to this case. China Silk's interests in Goldyork and Chinascreen 45. Before I move on to the causes of action however, it is necessary to deal with one issue which has been disputed between Chinascreen of the one part and Mr Ting, Goldyork and Goldwin of the other part. 46. This concerns the interests of China Silk in Goldyork, and through Goldyork's shareholding, in Chinascreen. I note of course that China Silk, after settling its case against Chinascreen, took no further part in the trial and it has presented no evidence on this issue. However since the issue remained in contest between Chinascreen and Mr Ting/Goldyork, the court would be failing in its duty if no findings are made on this issue, which may be relevant to the decision that China Silk took on 4 October 1991 in agreeing to Goldyork taking the place of Chinascreen. 47. According to its company returns, Goldyork is owned as to 50% by Mr Chan Cho Kan ("Mr Chan"), 25% by Mr Ting and 25% by Mr Kam Chun Chak. The issue is whether China Silk was the beneficial owner of shares in Goldyork, possibly through the shareholding of Mr Chan. I find on the evidence before me that it was. - Mr Ting's claims of China Silk's shareholding 48. First, Madam Ho has testified that she had been told by both Mr Ting and by Mr Ding Chi Ping, the Managing Director of China Silk, that China Silk was a shareholder of Goldyork. Mr Ding Chi Ping did not give evidence at trial, so this piece of evidence was not rebutted. As for Mr Ting, he has in fact admitted that he did tell Madam Ho that China Silk owned shares in Goldyork. 49. Mr Ting has also been video-taped telling an inquiry agent that China Silk was the parent company of Goldyork, and that in turn Goldyork was the parent company of Chinascreen, so that China Silk was like a grandfather to Chinascreen. This video tape has been exhibited and shown in Court. 50. Mr Ting says that these were mere puffs, used to persuade potential buyers that Goldyork had good connections to a reliable supplier. 51. However, it is one thing for names to be dropped in conversations in order to impress, it is another when it comes to "black-and-white" statements in literature. 52. There was also exhibited and shown in Court Goldyork's promotion video which it distributed to potential customers. In that video, China Silk's shareholding in Goldyork was given some prominence in a number of scenes, and was emphasised in the voice-over. The fact that the relationship was announced in such a permanent form lends considerable support for the truth of that representation. - Mr Brogsitter-Finck's evidence 53. Further there is the evidence of Mr Brogsitter-Finck, who said that someone in China Silk's management had told him that China Silk was a shareholder of Goldyork. This is a significant piece of evidence, because it could not be excused as a middle-man's mere puff. China Silk as a supplier had nothing to gain from making such a representation. - Non-appearance of Mr Chan 54. No-one from China Silk has given evidence in the trial, and neither has Mr Chan. Suspicion has centred on Mr Chan being the nominee for China Silk because he has never been seen. Madam Ho has given evidence that while she had been introduced by Mr Ting to Mr Kam and even the representative of Chinascreen's secretarial service company, she had never been introduced to Mr Chan in the 2 years from 1989 to the summer of 1991. 55. This is indeed surprising. Mr Chan was said to be the majority shareholder in Goldyork, a 3-man company, which was itself the only other shareholder of Chinascreen. Further, according to Mr Ting, Mr Chan was also in the garments business, so it is surprising that he was never interested in meeting Madam Ho, who had been quite successful in cultivating business in this field. 56. In fact Mr Ting has admitted that personally he really did not know Mr Chan. He said that it was China Silk who had introduced him to Mr Chan when he (Mr Ting) was establishing Goldyork. He said China Silk had known Mr Chan for a longer period than it knew him, and since China Silk was giving interest-free credit to Goldyork, it wanted a person it could trust within Goldyork. It was on that basis that Mr Chan became a shareholder of Goldyork. 57. However this explanation is implausible. Mr Chan was not an executive director of Goldyork. Nor was he a required signatory for cheques drawn by Goldyork. From Mr Ting's evidence, it would appear that Mr Chan had little knowledge of, or interest in, day-to-day administration of Goldyork. Therefore it is not as if Mr Chan ever kept a watchful eye over Mr Ting within Goldyork. 58. On the contrary, the evidence was that China Silk was itself directly showing interest in matters which would normally be regarded as part of Chinascreen's internal management. - China Silk's interest in Chinascreen's internal management 59. There are notes written by Mr Zhai of a meeting in China Silk's office in May 1991, when Chinascreen was about to move to a new office about a block away from Goldyork's office. Not only did Mr Zhai participate in the discussions, it would appear from his own notes that he expressed China Silk's requirements that Chinascreen's bank mandate be continued, and that Chinascreen continue banking with the same bank. Mr Ding Chi Ping is also noted by Mr Zhai as having expressed that Madam Ho should assume the post of "legal person" for Chinascreen officially. These all point towards China Silk taking more than a supplier's interest in Chinascreen's internal management. 60. If China Silk had been concerned about Chinascreen's management simply for financial reasons, it could have taken other steps to secure payment for itself instead of giving substantial interest-free credit. But it never asked for payment by Letter of Credit, even when Chinascreen was first established and when China Silk would not have known how successful Chinascreen might or might not be. 61. So I find on the basis of the above evidence that China Silk was interested in Goldyork, and through Goldyork in Chinascreen, to a lesser extent. Procurement of breach of contract 62. The first cause of action in the Counterclaim is procurement by Mr Ting/Goldyork/Goldwin of Otto Kern's breach of its contract with Chinascreen. This cause of action may be considered by asking the following questions :-
(a) Contracts made between Chinascreen and Otto Kern 63. It is noted that no Sales Confirmations had been signed between Chinascreen and Otto Kern before Brixon's fax cancelling the orders on 10 October 1991. However there is sufficient evidence showing that binding agreements had already been made between Otto Kern as buyer and Chinascreen as seller of 63,212 pieces of garments. 64. In the early summer of 1991, samples of garments were manufactured by China Silk to Otto Kern's specifications. Further samples called "salesmen samples" were in due course made for each type of garment. These salesmen samples were delivered to Otto Kern between early July 1991 and mid-August 1991 as evidenced by invoices. 65. These "salesmen sample" invoices stated first, the unit price of each type of garment and then, a 50% surcharge was expressly and separately added for the manufacture of the salesmen sample. Madam Ho's evidence was that these unit prices had already been agreed prior to the sending of the invoices. 66. The unit prices formed the basis on which Otto Kern fixed its own prices and instructed its salesmen to promote the garments and to obtain orders from potential buyers. 67. After the fashion fairs had taken place in Germany in August, and after Otto Kern's salesmen had obtained orders, Otto Kern sent a number of "Bestellung/Order"s to Chinascreen from 22 August 1991 to 3 October 1991. These documents gave the design, colour and quantities of the articles of garments required. Size breakdowns for the quantities required were also provided for some of the Bestellung/Orders at a later stage. Instructions for labels were given on 30 August 1991. 68. These Bestellung/Orders were admitted by Mr Brogsitter-Finck in cross-examination to be "firm orders", and I find they evidence binding agreements for the purchase of the 63,212 pcs of garments ordered in them. 69. Although prices were not shown in the Bestellung/Orders, the unit prices for each type of garment had been agreed and shown in the invoices for the salesmen samples. I find that these unit prices were, in the absence of subsequent variation, binding on Chinascreen and Otto Kern for bulk production. 70. It would be surprising if the prices were not binding. There would be no point in Chinascreen first stating the unit prices, and then adding the stated surcharge for salesmen samples, if the prices were (as the Defendants suggest) inapplicable and irrelevant to bulk production. 71. More importantly, if those unit prices were not binding, that would enable Chinascreen to demand a higher price after Otto Kern's salesmen had already promoted the garments and taken orders from their buyers on the strength of Otto Kern's own prices fixed in reliance on those unit prices. This would give Chinascreen the upper hand in the price-fixing for bulk production. The parties could hardly have intended such an uncommercial situation, palpably unfair to Otto Kern, to apply. 72. Although Mr Brogsitter-Finck said in his evidence that the unit prices were to be "re-confirmed", and prices might change due to various circumstances, that does not mean anything more than a chance for either party to try to persuade the other to vary the unit price agreed. Parties to a contract are of course free to ask the other party to reconsider agreed prices, and depending on commercial factors, the other party may agree, but that is not to say that there was no binding agreement originally. 73. Accordingly, the fact that prices had not been stated in Bestellung/Orders is not an impediment to the finding that they evidence binding agreements for the sale and purchase of the garments ordered. 74. Delivery dates were also not stated in the Bestellung/Orders, but it is common ground that Chinascreen was aware of Otto Kern's required delivery dates. For instance, Chinascreen's documents to China Silk asked for confirmation that the production schedule would meet the Otto Kern delivery dates. 75. On 7 October 1991, before Brixon's fax cancelling the orders, Chinascreen faxed a summary of orders received from Otto Kern, itemising the articles, design, fabrics, styles, quantities, delivery dates and prices for 63,212 pieces. There has been no evidence from the Defendants to contradict any of those details. Given that by that date, Mr Brogsitter-Finck had already intended to terminate the relationship with Chinascreen, one would expect Brixon's immediate disavowal if Chinascreen's summary of orders was in any way incorrect. There was none. 76. By reason of the above, I find that there were binding agreements by Otto Kern for the purchase of the 63,212 pcs of garments listed in the summary of 7 October 1991. Further Mr Ting must have known of the orders, if not in detail, then at least generally, through Lilian Chung, who was the merchandiser with primary responsibility for following-up the Otto Kern orders and who, as will be seen later, was the person who approached Mr Brogsitter-Finck, leading to the cancellation of Otto Kern's orders to Chinascreen and to their replacement with orders to Goldyork. (b) Breach of contracts 77. The next question is whether Otto Kern's cancellation of the orders was in breach of contrract. In the fax sent on 10 October 1991 Brixon gave three reasons for the cancellation. Mr Brogsitter-Finck did not offer any other reasons in his evidence at trial. 78. Accordingly, the Court must on the basis of these three given grounds see firstly, whether any of those grounds were true, and secondly, if any were true, whether that ground would entitle Otto Kern to lawfully terminate the contracts. If the answer to either of these questions is "No", then Otto Kern would have had no grounds for terminating the contracts for 63,212 pcs of garments and it would be in breach. (i) - Did Chinascreen show Otto Kern's styles to other customers ? 79. The first ground given was that Chinascreen had shown Otto Kern's styles to other customers. Chinascreen's case is simply that this had never happened. - Inability to indicate nature of "written proof" 80. In the fax, Brixon referred to there being "written proof" that Chinascreen had done so. No such proof was produced, either at the time or at trial. I do not consider this adverse to the Defendants' case, because Chinascreen did not challenge Brixon to produce that proof at the time. As to the time of trial, I take into account the fact that Brixon was not a party to the action, and Mr Brogsitter-Finck was not asked to make a Witness Statement for the Defendants until 1997, some 6 years after the event. 81. However what is rather surprising is that Mr Brogsitter-Finck was unable to even identify the nature of that "written proof". He was only able to say that he "must have had written information from Otto Kern" but he was "not sure" what it was. 82. Of course one cannot expect anyone after 6 years to remember dates or details, but I find most surprising Mr Brogsitter-Finck's inability to even identify the nature of that "written proof" (say, an order from other customers bearing an Otto Kern design, or a brochure from Chinascreen displaying an Otto Kern style, or whatever). He and Madam Ho had been close, and he allegedly felt "betrayed" by Madam Ho's disclosure of Otto Kern styles to other customers. If that were truly the case, the "written proof" would have made a deep impact on him. Yet he is unable to say even what sort of "proof" it was. - Otto Kern's alleged complaint inconsistent with contemporaneous Orders 83. Indeed the contemporaneous documentary evidence goes the other way. The timing of Otto Kern's orders throws doubt on the veracity of the allegation that Otto Kern was unhappy that Chinascreen had shown its styles to other customers. 84. According to Mr Brogsitter-Finck, Mrs Rittersbacher of Otto Kern had called him with this complaint 2-3 days before Mr Brogsitter-Finck went to see Mr Zhai. He went to see Mr Zhai on 4 October, so on his timing, Mrs Rittersbacher had complained to him on 1-2 October Hong Kong time. 85. However it would be noted that as late as 2 October 1991 German time (3 October 1991 Hong Kong time according to the fax), Otto Kern was still faxing Bestellung/Orders to Chinascreen. That belies the allegation that Otto Kern was so unhappy that Chinascreen had disclosed its styles that it wanted the orders summarily cancelled. - Failure by Chinascreen to challenge allegation 86. It is true that Chinascreen for its part did not challenge in writing Brixon's allegation in the fax. Madam Ho's explanation was that she had called Mr Brogsitter-Finck on the telephone many times but was given the message that he was not in Hong Kong. She sensed that he was avoiding her because she would have expected a friend to have at least afforded her an opportunity to meet an accusation like that before simply sending a fax to cancel all the orders summarily. 87. This was at a time when all the merchandisers dealing with the Otto Kern orders had suddenly either left without giving notice, or had given notice and claimed to set-off accrued leave. 88. Madam Ho then hoped to salvage the situation for Chinascreen by trying to secure the fabrics first from China Silk. To this end she travelled to Shekou to see Mr Zhai the next day. When Mr Zhai informed her that China Silk was going to deal directly with Otto Kern, it was obvious that Brixon had already gone behind her back. In those circumstances, it was clearly pointless to write to Brixon/Otto Kern to deny their allegation. - No attempts by Mr Brogsitter-Finck to clarify situation 89. It was common ground between Madam Ho and Mr Brogsitter-Finck that they regarded each other as friends, and not just business acquaintances. And yet in the 9-10 days between 1-2 October (when Mr Brogsitter-Finck said he received the telephone call from Mrs Rittersbacher) and 10 October (when the cancellation fax was sent by Brixon to Chinascreen), Mr Brogsitter-Finck never asked Madam Ho about the allegations to see if there might have been a misunderstanding, so as to avoid having to have a last-minute change of trading company. 90. Mr Brogsitter-Finck's evidence was that he believed Mrs Rittersbacher, but that does not answer the point. The point was that he never tried to find out if the showing of styles to other customers might simply have been in error. 91. I find Mr Brogsitter-Finck did not make inquiries of Madam Ho for the simple reason that he knew that Lilian Chung and all the merchandisers servicing Otto Kern were going en masse to Goldyork, and after 4 October, that China Silk was going to deal through Goldyork, so remaining with Chinascreen was no longer an option in any event. - No request for return of samples 92. One important factor that belies Mr Brogsitter-Finck's evidence that he cancelled the orders because Madam Ho had shown the designs to others was the fact that he never asked her to return the "keep" samples kept at Chinascreen. 93. If Otto Kern had really taken such a serious view of Chinascreen having shown its designs to others, such that it was prepared even to terminate a long-standing relationship at a critical time, one would have expected Otto Kern to have demanded its designs back immediately. It would have wanted its "keep" samples in safe hands, in case Chinascreen procured China Silk or other manufacturers to start running off similar designs. 94. Yet Mr Brogsitter-Finck never asked for the return of the "keep" samples even though they were for the upcoming Spring 1992 season. His explanation that he did not think about it is disingenuous: if the reason for the cancellation was truly Chinascreen's showing of the designs to others, an experienced businessman such as he was must have thought of containing the damage immediately. - Otto Kern continuing to do business with Mr Ting without inquiries 95. Further, Mr Brogsitter-Finck made no inquiries with Mr Ting about his possible involvement with Chinascreen's display of Otto Kern's designs before doing business with him in Goldyork. 96. Mr Brogsitter-Finck was aware that Chinascreen was run by Madam Ho and Mr Ting. If Otto Kern no longer wanted to have anything to do with Chinascreen because of its alleged breach of confidence in showing its designs, one would have thought that, before starting a relationship with Goldyork (whom Mr Brogsitter-Finck knew was controlled or at least managed by Mr Ting), Mr Brogsitter-Finck would first have made sure Mr Ting was innocent of any implication in Chinascreen's breach of confidence. 97. Yet Mr Brogsitter-Finck's evidence was that he did not even try to find out from Mr Ting whether Mr Ting knew about the showing of the Otto Kern designs. 98. At first his explanation was that Mr Ting had nothing to do with Otto Kern. That answer is disingenuous. Mr Ting was one of the two executive directors of Chinascreen. He was not a "sleeping director". He certainly knew about Otto Kern's orders and their designs. Brixon's staff Lydia So was stationed in Shekou and would chase up Mr Ting when there were problems with the Otto Kern orders. There was at least a possibility that Mr Ting was aware of what his co-director at Chinascreen was doing. 99. Mr Brogsitter-Finck later said in his evidence that he simply did not think of asking Mr Ting about it, even though he had spoken to Mr Ting between 3-4 October to discuss about switching to Goldyork. If Otto Kern was really so concerned about Chinascreen's actions vis-a-vis Otto Kern's designs, that omission on the part of Mr Brogsitter-Finck would have been completely implausible. - Conclusion on the first alleged ground in the cancellation fax 100. It is clear from the evidence discussed above that the allegation that Chinascreen had shown Otto Kern's styles to others is suspect, and I find that it could not have been the real reason for the cancellation of Otto Kern's orders. (ii) - Were there disagreements between Chinascreen and China Silk? 101. The second reason given in Mr Brogsitter-Finck's fax was "the meanwhile obvious-enormous arguments between [Chinascreen] and China Silk ... endangering execution and delivery of our orders". 102. However the evidence does not establish that there were such "enormous" arguments that execution of the Otto Kern orders would be "endangered". Mr Brogsitter-Finck admitted in oral evidence that there was nothing "enormous". When he went to see Mr Zhai, the latter did not complain about Chinascreen. According to Mr Brogsitter-Finck, Mr Zhai was a low-profile, simple person who just wanted to get on with production. 103. Further, there was no evidence from Mr Ting of any "enormous arguments" between Chinascreen and China Silk. He would have known because he was the connection between the 2 companies; it was he who had brought Madam Ho and China Silk together, and if there had been any unhappiness, it would be reasonable to expect that he would have been approached by either party. There was no evidence from him of any complaints from either party. 104. In cross-examination, Mr Ting said that on 5 October 1991, Mr Zhai telephoned him to tell him that Goldyork would replace Chinascreen as the trader for Otto Kern's orders. As Mr Ting recounted the telephone call, Mr Zhai had told him that was because Mr Brogsitter-Finck was angry, because the customer had said that its samples had been shown to others. No other reason was given by Mr. Zhai: in other words, as far as China Silk was concerned, the replacement had nothing to do with its relationship with Chinascreen. 105. The evidence of the conduct of the parties also proves that even after the cancellation of the Otto Kern orders in October 1991, relationships were good enough that China Silk still delivered quite substantial volumes of garments to Chinascreen on interest-free credit up to March 1992. 106. Therefore it is obvious that the second reason given by Mr Brogsitter-Finck in his fax was not the true reason for the cancellation. (iii) - Cancellation because merchandisers left to join Goldyork 107. I find that on the evidence, the real reason why Otto Kern (through Mr Brogsitter-Finck) cancelled the Spring 1992 orders with Chinascreen was because Chinascreen's merchandisers, especially Lilian Chung, were leaving en masse to join Goldyork. 108. Mr Brogsitter-Finck regarded China Silk (not Chinascreen) as Otto Kern's supplier, and relied heavily on Lilian Chung and her team of merchandisers. That is clear from Mr Brogsitter-Finck's oral evidence. Mr Brogsitter-Finck explained that it was very important for Otto Kern to have continuation of follow-up of their orders. The orders had been "100% handled" by Lilian Chung at Chinascreen. 109. So when Lilian Chung told Mr Brogsitter-Finck that she was intending to leave Chinascreen to join Goldyork, Mr Brogsitter-Finck discussed the matter with Mr Ting who confirmed that Goldyork could take Chinascreen's place and that Lilian Chung would handle the orders if they were transferred to Goldyork. Mr Brogsitter-Finck then went to see Mr Zhai, in his words "nominating" Goldyork, and Mr Zhai also agreed to Goldyork's replacement of Chinascreen. 110. On the same day that Mr Zhai agreed to Goldyork's replacement of Chinascreen, Lilian Chung (and her assistant May Lam) resigned from Chinascreen without giving notice, followed successively by the team of merchandisers who had serviced the Otto Kern orders at Chinascreen. 111. It was as a consequence of those events that Otto Kern cancelled its orders with Chinascreen and started business with Goldyork. The prospect of Lilian Chung and the team of merchandisers handling Otto Kern's orders suddenly all leaving Chinascreen forced Otto Kern to transfer its business from Chinascreen to Goldyork. (In fact after a few years, when Lilian Chung left Goldyork, Otto Kern also terminated its relationship with Goldyork). 112. I find as a fact that the departure of Lilian Chung and the merchandisers for Goldyork was the only real reason for Otto Kern's cancellation of orders. 113. However, their departure is not a reason that entitles Otto Kern to do so. It was never a condition of the placing of the Otto Kern orders with Chinascreen that Lilian Chung and the merchandisers were to continue to service these orders. And there was no evidence that Chinascreen would have been unable to service these orders after those merchandisers had left. 114. Consequently I find that there was no legitimate reason for Otto Kern's cancellation of its orders just to follow Lilian Chung and the other merchandisers to Goldyork, and Otto Kern was in breach of its contracts with Chinascreen when the orders were cancelled. - No economic benefits to Otto Kern or Brixon for switch to Goldyork 115. I have dealt above with the reasons given by Mr Brogsitter-Finck in his cancellation fax. I find that there were no other reasons for the cancellation which were not given in the fax. 116. First, Goldyork did not offer substantially lower prices than Chinascreen such as to tempt Otto Kern to, so to speak, "change horses mid-stream". In fact the evidence was that Mr Brogsitter-Finck and Mr Ting did not even discuss prices until after the cancellation. And the table prepared by Mr Thomson, counsel for the 2nd- 4th Defendants by Counterclaim, shows that prices charged by Goldyork were not necessarily lower than Chinascreen. 117. Secondly, the commission given by Goldyork to Brixon was not larger than that given by Chinascreen either. 118. Accordingly, it is clear that the reason for Otto Kern's breach of contracts was because of the departure of Lilian Chung and the other merchandisers en masse to Goldyork at a critical time. The question then is whether that breach had been procured by Mr Ting, Goldyork and/or Goldwin. (c) Mr Ting and Goldyork procured Otto Kern to breach the contracts 119. As there is seldom direct evidence of procurement of breach of contract, a court has to be more careful than usual when considering the existence and weight of evidence for the proof of such a tort. 120. However I find that on the evidence presented in this case, Mr Ting and Goldyork did intend to interfere with Otto Kern's contracts with Chinascreen, and to procure Otto Kern to transfer its business to Goldyork in breach of its contracts with Chinascreen. 121. I have found that Otto Kern cancelled its orders with Chinascreen because Lilian Chung and all the merchandisers servicing the Otto Kern orders were suddenly leaving Chinascreen for Goldyork. That sudden mass defection of the merchandisers would not have happened (as will be seen, at the cost of losing their bonus) unless someone made it worth their while - that someone were, I find, Mr Ting and Goldyork, because they were the only persons who stood to benefit from Otto Kern's change from Chinascreen to Goldyork. - Reason for Otto Kern's change from Chinascreen to Goldyork 122. In the analysis, the first question one has to ask is why Otto Kern should have terminated its relationship with Chinascreen at that critical time in October 1991, after what Mr Brogsitter-Finck has accepted were 2 successful years of co-operation, during which a friendship had also been forged between Mr Brogsitter-Finck and Madam Ho, and when there were no economic benefits to Otto Kern or Brixon for the change. 123. I have found (for the reasons set out earlier in this Judgment) that the true reason was the departure of Lilian Chung and the other merchandisers for Goldyork, which through Mr Ting confirmed that it could take over from Chinascreen. - Reason for merchandisers' departure from Chinascreen to join Goldyork 124. So the question then is why Lilian Chung and the other merchandisers suddenly left Chinascreen for Goldyork en masse at that point in time. 125. I am mindful that neither Lilian Chung, nor any of the merchandisers who had serviced Otto Kern, has given evidence as to why they all decided to leave Chinascreen for Goldyork at that juncture. 126. I am also mindful of the evidence about a company called Eurocoin which Madam Ho had set up, apparently in competition with Chinascreen, and in which she clearly had an interest, contrary to her evidence. 127. However I do not accept that Lilian Chung and the other merchandisers would have suddenly all left Chinascreen, simply because of their distaste for Madam Ho's conduct which had nothing to do with them, and certainly there was no evidence of any catalytic event in that regard that led to their sudden mass departure in October 1991. - Sudden departure 128. Their departure was sudden because Lilian Chung and her assistant May Lam both left giving no notice. If they had given the usual 1-month's notice, Madam Ho, being an astute businesswoman, would have been prepared for their departure as there would have been time to train others to take their place, and Otto Kern might have been less concerned with servicing of their orders. 129. As for the other merchandisers who did give notice, they claimed the benefit of accrued leave, so in effect they all left within the course of October. - Giving up bonus to leave 130. It is important to note that when the merchandisers left Chinascreen in October 1991, they were giving up their lucrative year-end bonuses (equivalent to one-third of their annual income), which they would have received in 2-3 months time as a reward for the previous year's work. 131. The bonus was known to them, as they had received a similar bonus the year before, and on all accounts, Chinascreen had been going from strength to strength. Further Madam Ho reminded them of the year-end bonus in her bid to persuade them to remain, but to no avail. - Reason for giving up bonus to change employers 132. Normally a reasonable person making a living would not give up a bonus which would be paid shortly, unless (i) there was alternative employment, (ii) which required him to leave immediately and (iii) the new employer would make it worth his while to leave without the bonus. 133. The alternative employment in the present case was employment by Goldyork/Goldwin. 134. The requirement for their immediate departure was obvious - Otto Kern's bulk production was about to begin, and Goldyork would have to start servicing Otto Kern, as in fact these merchandisers did when they joined Goldyork, or rather its wholly owned subsidiary Goldwin. 135. So it is reasonable to infer that these merchandisers gave up their bonus to join Goldyork immediately because Mr Ting made it worth their while; and it is reasonable to deduce that he did that because he knew that through their sudden mass defection, Goldyork would obtain Otto Kern's orders. 136. Mr Ting's case was that he had done nothing to attract the merchandisers to join Goldyork. If he is to be believed, the only better term of employment offered by Goldyork was an extra month's basic pay, but he said he did not discuss any bonus package with them. 137. In my view, it simply does not stand to reason for these merchandisers to abandon the certainty of the bonus to be paid by Chinascreen shortly, for a future with Goldyork/Goldwin when the terms were so uncertain. 138. Goldyork through Mr Ting must have offered the merchandising team a sufficiently attractive package for them to suddenly leave Chinascreen en masse (without bonus) to defect to Goldyork. He would not have done that if he had not intended and planned throughout to obtain Otto Kern's orders. - Merchandisers not needed for Goldyork's existing business 139. Mr Ting's evidence that Goldyork needed more merchandisers for its existing business was disingenuous. It turned out from his evidence that Goldyork had only needed 1-2 more merchandisers for its existing business, but a total of 6 merchandisers and support staff from Chinascreen were taken on. 140. It is to be noted that Mr Ting's evidence was that he had hired the other merchandisers only after they had left Chinascreen. However I find he must have offered them employment first. Otherwise I find it implausible that these merchandisers would have given up their bonus, and handed in their resignation on 8 October, giving up the security of employment, without any promise of employment anywhere else. - Separate office unit 141. Moreover the fact was that a 1000 sq ft separate office unit was taken up by Mr Ting early in October at $12,000 pm. Yet he said that he did not know that the other merchandisers were joining until after they had left Chinascreen. 142. One would have thought that if he was only taking on Lilian Chung and May Lam, he would just have accommodated them in the existing Goldyork premises (as there was space which had previously been occupied by Chinascreen). By taking up the separate unit of some 1,000 sq ft early in October at a not insubstantial additional cost of $12,000 a month, it was obvious that he knew more staff were on their way. - No attempts to retain Lilian Chung for Chinascreen 143. Further it is to be noted that Mr Ting had never tried to dissuade Lilian Chung from leaving Chinascreen. If he had not intended to induce Lilian Chung to leave Chinascreen and join Goldyork so as to get the Otto Kern orders, then one would have expected him (as a director of Chinascreen) to try to keep her services at Chinascreen when she told him that she intended to leave, much in the same way as Madam Ho tried to persuade Lilian Chung and the other merchandisers not to leave. - Ho not informed of Lilian Chung's intention to leave 144. Even if he did not think he could succeed in so doing, one would expect him to have told Madam Ho as soon as possible after he was aware of Lilian Chung's intention, so that they (as directors of Chinascreen) would be able to prepare a replacement in the company for Lilian Chung. 145. Yet, even on his own evidence, Mr Ting never did so. No plausible explanation was offered. This is consistent with the fact that he was behind it. - No attempts to retain Otto Kern 146. Secondly, he had never tried to dissuade Otto Kern from cancelling with Chinascreen, even though he was a director of that company. According to Mr Ting's own evidence he had spoken informally with Mr Brogsitter-Finck on 2-3 October, when Lilian Chung had asked him whether Goldyork would take up Chinascreen's role. That is supported by Mr Brogsitter-Finck's evidence that he had probably spoken with Mr Ting before he nominated Goldyork to China Silk on 4 October. 147. Yet Mr Ting never informed Madam Ho, his fellow-director, of the threatened departure of such a very important client. On the contrary he indicated Goldyork's willingness to replace Chinascreen. - Acquisition of Goldwin on 7 October 148. That readiness to replace Chinascreen was put into action on 7 October, i.e. 3 days before the cancellation fax, when Mr Ting acquired Goldwin. There was no other explanation given for the acquisition of Goldwin at that point in time. Conclusion 149. As far as the defection of Otto Kern and the merchandisers to Goldyork is concerned, it is obvious on analysis that Mr Ting and Goldyork were behind it. 150. Lilian Chung would not have initiated it in the absence of incentive from Mr Ting or Goldyork, because as a merchandiser, it would have made no difference to her personally whether she worked for Chinascreen or Goldyork. 151. Mr Brogsitter-Finck and Otto Kern did not initiate it, because as I have found, the cancellation of orders was a response to the merchandisers' departure, and was a sudden change that Otto Kern could well have done without, just as bulk production was due to start. 152. So clearly Mr Ting and Goldyork were behind it, as they were the ones who reaped the benefit of the change. As far as Goldyork was concerned, it would obtain 100% of the profits of the Otto Kern business, instead of just 35% as a shareholder of Chinascreen. As far as Mr Ting's personal share was concerned, he was nearly tripling his interest in a profitable business (as he had 25% of the shares in Goldyork, as opposed to only 8.75% of Chinascreen). 153. In the face of the allegation that he had procured the merchandisers to leave Chinascreen, and thereby to obtain the Otto Kern orders, Mr Ting's rather curious evidence was that Lilian Chung had told him that she was resigning because Brixon was cancelling Otto Kern's orders with Chinascreen. 154. That evidence is curious for 2 reasons: first, it was not explained why a merchandiser should leave her employer just because a customer was cancelling orders. No explanation was proffered by Mr Ting. Secondly, that evidence contradicts Mr Brogsitter-Finck's evidence, which was that Lilian Chung told him that she was leaving Chinascreen for Goldyork at about the same time as Mrs Rittersbacher's telephone call - so on this scenario, Lilian Chung's decision to leave was not caused by the cancellation. 155. By reason of the matters above, I find on the evidence that Lilian Chung and the other merchandisers servicing Otto Kern did not leave Chinascreen (abandoning their bonus) purely on a whim just when Otto Kern's bulk production started. I find that they defected to Goldyork en masse as a result of enticement by Mr Ting and Goldyork, and that Mr Ting and Goldyork did so with the intention and the design of forcing Otto Kern's hand into cancelling with Chinascreen and into doing business with Goldyork. 156. I find therefore that the cause of action of procurement of breach of contract proved against Mr Ting and Goldyork. 157. I do not make that finding against Goldwin as it was acquired only after the procurement had succeeded. It was acquired by Mr Ting on 7 October 1991, after Mr Brogsitter-Finck had discussed the situation with Mr Ting for Goldyork to take over from Chinascreen, and spoken to Mr Zhai of China Silk on 4 October 1991, and after Lilian Chung had left. There does not appear to have been anything said or done on behalf of Goldwin between 7 October and 10 October (when the cancellation fax was sent) in furtherance of the procurement. (d) Damages 158. The measure of damages in tort is the amount that Chinascreen would have made from the Otto Kern orders if they had not been cancelled. 159. As part of this consideration, it is necessary to see whether Chinascreen had any binding contracts with China Silk for China Silk to supply the garments, because if Chinascreen could not in any event have executed Otto Kern's orders by supplying the garments, then Chinascreen would not have suffered any damages from the loss of those orders. Contracts with China Silk 160. I find that there were contracts between Chinascreen and China Silk for the supply of the garments ordered by Otto Kern from Chinascreen. This can be traced from the following evidence of the sequential steps taken. 161. With a view to and with the expectation of entering into contracts for the supply of garments to Chinascreen for on-sale to Otto Kern, China Silk had undertaken a lengthy process for the manufacture of samples, such as the preparation of silk screens, printing of fabric, etc. This was substantially prior to the Sample Orders which had been given as from July 1991. These were investments of time and effort which China Silk would have been anxious to recover by way of contracts for the bulk supply of the garments so developed. 162. Sample Orders were given by Chinascreen to China Silk for the production of samples for each style as from July 1991. 163. The prices for each style of garment were quoted by China Silk to Chinascreen, on the basis of production according to the Sample Orders. There was apparently no difference in prices for different sizes of garments. Chinascreen had accepted the prices quoted by China Silk in a process which had started as early as 9 July 1991 when Chinascreen faxed China Silk's quotations back to it with Madam Ho's endorsements of acceptance of prices for each of the different styles. 164. Meanwhile, China Silk had ordered materials from their weavers for the production of the garments. Where certain orders were discarded by Otto Kern, e.g. the 15,000 yards of Bubble Silk referred to in China Silk's fax to Chinascreen dated 9 July 1991, China Silk regarded Chinascreen as being liable for the fabrics produced. This was obviously the common intention of the parties as Chinascreen did not attempt to avoid liability for payment for those fabrics, e.g. by claiming that there was no contract between them. This also shows that China Silk had no use itself for the materials produced, and their production was referable only to the orders from Chinascreen. 165. On 22 July 1991 Chinascreen provided a written order to China Silk specifying 118,000 pieces of garments for Otto Kern's Spring 1992 order with allocation of the garments between the various fabrics. This totalled some 389,000 yards of different types of specified materials. Chinascreen also asked China Silk to keep to the delivery dates of the fabrics strictly, and to prepare in advance printing, dyeing and related production procedures, so that shipment dates could be punctually adhered to. Thus, by this time, both the maximum quantities of garments to be produced and the prices of each style of garments had been agreed. (It would be noted that although by 10 October 1991, Otto Kern had only sent Bestellung/Orders for 63,212 pieces of garments, Mr Brogsitter-Finck had orally informed Madam Ho that the total order for Spring 1992 would be about 100,000 pieces, which together with wastage, accounted for Chinascreen's reference to 118,000 pieces). 166. China Silk's conduct was consistent with their agreement to the production of those garments for Chinascreen. That can be seen from their order of substantial quantities (400,000 yards) of grey cloth from weavers to fulfil Chinascreen's orders. 167. After the fashion fairs in Germany in August, specific fabric orders were given by Chinascreen to China Silk, with details given as to quantities for each design, although there were variations from time to time. The 9 fabric orders given by Chinascreen to China Silk by mid-September 1991 were summarised in a 3-page fax from Lilian Chung to Chinascreen on 16 September 1991, with a proposed printing schedule and tentative delivery dates for some of the garments. 168. Meanwhile, all Bestellung/orders from Otto Kern were immediately forwarded by Chinascreen to China Silk for production. 169. The quantities for each style, the confirmed prices for each style and the delivery dates for each style were collated and confirmed in Chinascreen's fax to China Silk at E5/261-266. As noted above, China Silk's quoted prices made no difference for sizes, so it did not matter that the quantities for each size were not provided. 170. In light of the above, I find that China Silk were bound to supply the garments ordered to Chinascreen, so that if not for the procurement of Otto Kern to breach their contracts with Chinascreen, Chinascreen would have been ready and able to deliver the garments ordered. Quantum of damages 171. As far as the quantum of damages is concerned, the damages would be the profits Chinascreen would have been made from the Otto Kern orders, less their cost of producing those profits. 172. Otto Kern had given Bestellung/Orders to Chinascreen for a total of 63,212 pieces of garments. By comparing the price that Chinascreen would have received from Otto Kern with the price payable by Chinascreen to China Silk for each style of garments, one can derive the profits that Chinascreen would have made from the Otto Kern orders. The difference in prices as calculated in the table prepared by counsel for Chinascreen entitled "Spring Collection Profit -2" (and which I annex hereto for ease of reference as Table XX) was $8,189,180. 173. One would then have to deduct from that :-
to arrive at a deduction of $63 per piece, totalling $3,982,356. 174. From that one would also have to deduct the overheads. This had to be done on a rough and ready basis in view of the fact that no tax returns had been filed by Chinascreen prior to these events. 175. The overheads were about $500,000 a month, i.e. $6,000,000 a year. There were 2 seasons a year, so the overheads for each season would be $3,000,000. Otto Kern accounted for about one-third of Chinascreen's turnover. Therefore, assuming that the overheads to have been applied proportionately to turnover, Chinascreen would have had to expend $1,000,000 by way of overheads to produce the profits for the Otto Kern spring 1992 season. 176. Accordingly, I find that the net profits that Chinascreen would have derived from the cancelled Spring 1992 orders for the 63,212 pieces of garments were $3,206,824 (i.e. $8,189,180 profits - $3,982,356 cost of accessories, commission and transport - $1,000,000 overheads), and I hold that this is the appropriate quantum of damages for the cause of action in procurement of breach of contract. 177. In arriving at this quantum, I did not add the surplus percentage of 18% which Chinascreen had ordered from China Silk on top of the quantities that Otto Kern had ordered from Chinascreen. Although Madam Ho's evidence was that in previous years, Otto Kern had accepted extra garments produced which had not been consumed in wastage, in law Otto Kern was under no contractual obligation to accept this extra quantity. Further, it is not known what part (if any) of this surplus would or would not have been consumed in wastage. 178. I have also not included under this cause of action possible profits on the balance of the 100,000 pieces of garments that Mr Brogsitter-Finck had indicated would be ordered by Otto Kern. No Bestellung/orders had been sent by Otto Kern, and apart from Mr Brogsitter-Finck's round figure orally given to Madam Ho, there appeared to be very little evidence concerning the ordering of the balance of these garments. (It would be noted that Otto Kern did not order anything approaching this 100,000 pc quantity from Goldyork for the Spring 1992 season. The quantity ordered was slightly more than 70,000 pcs). In my view the evidence in this regard was too uncertain for any damages to be properly considered. 179. I have also not included under this cause of action profits for following years. No authority has been submitted to me to support a proposition that for procurement of breach of contract, the tortfeasor should also be liable for the loss of profits on future contracts not yet made, and as can be seen in the present case, the orders from Otto Kern were given season by season, year by year. Conspiracy 180. The second cause of action was conspiracy. The first formulation submitted was that there was a conspiracy amongst the Defendants to the Counterclaim to injure Chinascreen as the predominant purpose. There was no or no sufficient evidence before the Court that the predominant purpose of any of those parties was to injure Chinascreen. It was clear from the evidence as a whole that the purpose that drove their actions was the acquisition of the benefit of the Otto Kern orders, so as to derive profits for themselves. 181. The second formulation submitted was that there was a conspiracy amongst the Defendants to the Counterclaim to use unlawful means, viz. the procurement of Otto Kern to breach its contracts with Chinascreen. It is to be noted that no conspiracy is alleged with Otto Kern or Brixon or its representative Mr Brogsitter-Finck. 182. In this regard there is no or no sufficient evidence to show that China Silk had conspired with Goldyork/Goldwin (acting through Mr Ting) to effect the procurement of breach of contract. Even though I have found on the balance of probabilities that China Silk was the beneficial owner of 50% of the shares in Goldyork, there is no evidence on which this court could determine that China Silk took any part in the decision by Goldyork to entice the merchandisers from Chinascreen, so as to force Otto Kern to transfer their orders to Goldyork. 183. Further the only evidence before the Court as to the part that China Silk played was the evidence of Mr Brogsitter-Finck of his visit to Mr Zhai on 4 October 1991. Mr Brogsitter-Finck's evidence was that it was he, not Mr Zhai, who nominated Goldyork to take over from Chinascreen. Mr Brogsitter-Finck said that Mr Zhai agreed, but there was no evidence of any further action or encouragement from China Silk such as might lead one to think that China Silk was participating in the design of Goldyork/Goldwin acting through Mr Ting to procure Otto Kern to breach its contracts with Chinascreen. 184. There was contact between Mr Zhai and Mr Ting on 5 October 1991 when Mr Zhai told Mr Ting about Mr Brogsitter-Finck's visit, but there was no evidence before the court that was part of or in furtherance of any conspiracy or agreement between them. 185. It is true that when Madam Ho went to see Mr Zhai on 11 October, he refused to supply Chinascreen with the fabrics, but that was at a point in time when Otto Kern had already cancelled with Chinascreen. In the circumstances, there is no or no sufficient evidence to show any participation by China Silk in any conspiracy with Goldyork, Goldwin or Mr Ting. 186. The question then is whether Goldyork, Goldwin and Mr Ting had conspired with each other to commit the tort in question. As I have found Goldwin was brought into play only after the tort had been committed. 187. So the only possible conspirators left are Mr Ting and Goldyork. Although it is theoretically possible for a director to conspire with a company, it is to be noted that Mr Ting controlled Goldyork and appeared to be its only executive director. There was no evidence before the court to show that Mr Chan Cho Kan or Mr Kam Chun Chak took any part in any discussions with Mr Ting prior to any decision being taken by Goldyork. So in truth this was a one-man run company, and the corporate machinery was not exercised in any way in the operation of the conspiracy. 188. Accordingly I do not find that in reality there was any conspiracy such as to support such a cause of action. Breach of fiduciary duty by Mr Ting and constructive trust 189. This is the third cause of action. A number of necessary ingredients are clearly present. 190. First it is obvious that Mr Ting was in a fiduciary position to Chinascreen, being a director. Secondly, it is clear from the findings of fact made in the earlier parts of this Judgment that Mr Ting had encouraged and facilitated the departure of Lilian Chung and the other merchandisers to Goldyork, in a plan devised to cause Otto Kern to breach its contracts with Chinascreen. - Goldyork not entitled to compete for established customers 191. These are actions that would normally be clear breaches of the fiduciary duties of a director. However Mr Ting's case was that in doing the acts above, he was acting as director of Goldyork, and his case was that it was understood between Chinascreen and Goldyork when Chinascreen was first established that he (Mr Ting) could carry on acting as a director of Goldyork, including competing for business with Chinascreen. 192. It is correct that Mr Ting was a director of Goldyork before Chinascreen was established, and Goldyork was also in the business of purchasing garments from the mainland for export to buyers abroad. 193. However it is common ground that Otto Kern had been cultivated and acquired as a customer by Chinascreen, and I find that the episode involving Ellen Co. shows quite clearly that the understanding between Chinascreen and Goldyork was that Goldyork would not compete with Chinascreen for its clients. (The fax from Goldyork to Ellen Co. dated 10 October 1990 shows that Goldyork was withdrawing from doing business with this company in favour of Chinascreen and I reject Mr Ting's evidence regarding this episode). 194. This is consistent with the evidence of the surreptitious way in which the Otto Kern orders had been serviced by Goldyork/Goldwin after Otto Kern had cancelled with Chinascreen. Although Chinascreen had recently vacated some 1400 sq ft of office space in Goldyork's premises, Mr Ting took up a separate unit of 1000 sq ft in the same building to house Lilian Chung and the merchandisers in October 1991. If Mr Ting's evidence is to be believed that he intended at first to take on only 1-2 merchandisers, the acquisition of the separate unit would be even less explicable. 195. Further, Mr Zhai did not inform Madam Ho that Goldyork/Goldwin would be taking over the Otto Kern orders. On the contrary he informed her that China Silk would be dealing directly with Otto Kern. This can be seen from the contemporaneous fax sent by Madam Ho to Mr Zhai on 12 October 1991 recording their discussion the day before. Obviously Mr Zhai did not wish to alert Madam Ho to the fact that Goldyork had taken over the Otto Kern orders. If however Goldyork and Chinascreen were free to compete, there would have been no need for that charade. 196. There is also the curious feature that the earlier sales contracts from China Silk to Goldyork or Goldwin were not addressed to them, but to Otto Kern, although they were signed by Goldyork staff. 197. Although it is obvious that with the passage of time (especially with the possibility of Chinascreen's staff and Goldyork's staff meeting in China Silk's factories, or on the ferry to Shekou), Chinascreen would have discovered that Goldyork had taken over the Otto Kern orders, it is to be noted that even as late as the Mareva injunctions, Mr Ting had not disclosed to the Court that Goldyork was purchasing garments from China Silk for on-sale to Otto Kern. 198. I therefore do not accept Mr Ting's contention that Goldyork was free to compete with Chinascreen for an established Chinascreen client such as Otto Kern. - Breach of fiduciary duties 199. Mr Ting was clearly in breach of his fiduciary duties to Chinascreen by causing Goldyork to entice Lilian Chung and the other merchandisers to Goldyork, and to provide the facilities and back-up necessary to take over the Otto Kern orders. Even if he had not enticed them, he certainly took no steps to inform Chinascreen of the proposed departure of Lilian Chung, or the other merchandisers, or of its single largest customer Otto Kern, so that the directors could decide what action to take to avoid Otto Kern's cancellation or to limit the loss that Chinascreen would suffer from it. 200. It became obvious from the oral evidence that Mr Ting regarded Chinascreen as Madam Ho's company and Goldyork as his. When asked why he did not inform or even discuss with Madam Ho between 5-10 October that Otto Kern was going to ask Goldyork to replace Chinascreen, the surprising answer Mr Ting gave was that if there was a problem, it was she who should resolve it. That shows that he never had the interests of Chinascreen, or his duties as its director, at heart. - Constructive Trust 201. In law, a constructive trust is imposed over benefits knowingly received from a fiduciary's breach of his duties. Mr Ting took advantage of his position as a director of Chinascreen to acquire on behalf of Goldyork (i) the knowledge of the profitable Otto Kern business, (ii) contact with Lilian Chung and the other merchandisers then employed by Chinascreen so as to win them over to Goldyork, and thereby (iii) the business opportunities presented by Otto Kern's orders. 202. The profits made from the Otto Kern orders were of course made by Goldyork. (I note that although some orders were issued in the name of Goldwin, a wholly-owned subsidiary of Goldyork, it would appear that it was only a nominee for Goldyork). 203. The profits made by Goldyork were made from the business opportunities presented by Otto Kern's orders, and were thus acquired from the breach of Mr Ting's fiduciary duty to Chinascreen. 204. Mr Ting was in sole control of Goldyork as executive director. His knowledge that the opportunities were acquired by his breach of fiduciary duty to Chinascreen was thus imputed to Goldyork, so that Goldyork has knowingly received those benefits for which it must account as constructive trustee. 205. As far as Mr Ting personally is concerned, no dividends have been declared by Goldyork, so he has not received any benefits directly for which he must account. - Account of profits for Spring 1992 206. Counsel for Chinascreen has shown in his document called in Court "Profit Table A" and entitled "Comparison 2" (and which I annex hereto for ease of reference as Table YY) that for the Otto Kern Spring 1992 orders, Goldyork had received orders for 71,014 pcs (as opposed to the 63,212 pcs ordered from Chinascreen before cancellation) from which it made a profit of $7,105,053. This profit is calculated by deducting from the price paid by Otto Kern to Goldyork, the price paid by Goldyork to China Silk for production of the garments. 207. From this profit must be further deducted:-
to arrive at a deduction of $63 per piece, totalling $4,473,882. 208. From this must be further deducted Goldyork's overheads, which Mr Ting has estimated at $75,000 for some 3 months, i.e. $225,000. 209. Accordingly for the Otto Kern Spring 1992 orders, Goldyork's net profits were $2,406,171 ($7,105,053 profits - $4,473,882 cost of accessories, commission and transport - $225,000 overheads). - Election 210. Of course Chinascreen cannot recover both damages for procurement of breach of contract, as well as the profits so derived by Goldyork, in respect of the Otto Kern Spring 1992 orders as that would be double recovery. Counsel for Chinascreen accepts that it would have to elect which remedy to pursue, and insofar as further submissions are required, the hearing can be restored for argument. - Profits for the following years 211. Goldyork continued trading with Otto Kern for 4 more years, until Otto Kern terminated its relationship with it and appointed Lilian Chung as its direct agent. 212. These profits should also be accounted for. The type of constructive trust which arises from breach of fiduciary duty is not a trust of properties as such. It is an obligation which arises from the consequence of a breach of fiduciary duty. There is no reason why that obligation should be limited in point of time just to that season or to that year, and it has not been so argued. The consequences of the breach, i.e. the obligation to account, should include the profits Goldyork made from trading with Otto Kern for the following years, as there was no evidence that Otto Kern would for any other reason have stopped trading with Chinascreen during that period if Mr Ting's breach of fiduciary duty had not taken place. - Account of profits for following years 213. No tax returns for Goldyork were presented to the Court. Counsel for Chinascreen has prepared a table entitled "Other Profit" (and which I annex a copy hereto for ease of reference as Table ZZ) to show Goldyork's profits for post-Spring 1992 sales from Goldyork to Otto Kern/Brixon. I have informed the parties that the data shown in that table would be assumed to be correct unless proved otherwise. There has been no demur by counsel for the 2nd- 4th Defendants by Counterclaim, so I shall take the figures appearing in that table as primary data. 214. It is to be noted from this table that the initial 3-digit profit made by Goldyork from each garment shown as "Prx Diff" had dwindled considerably with the passage of time. Indeed there were some instances of price differences of only $11 or $20. 215. It would be surprising indeed if Goldyork was prepared to accept orders where the price difference would be less than the $63 cost per piece for accessories, commission to Brixon and transport (assuming that these costs stayed at the same level for those years). 216. Certainly Mr Ting did not give evidence that Goldyork took on loss-making orders. The evidence was that there were variations in the cost of the accessories and in the commission payable to Brixon, but in the absence of evidence of the specific items for which there were variations, the fairest course to take would be to disregard all items in the table where the price difference is less than $63. 217. The profits so derived would thus be $18,625,150 (i.e. the profits of $21,679,914.20 shown in Table ZZ less the profits shown for those items where the price difference is less than $63). 218. From these profits must be deducted :-
(I should add that Mr Ting also referred to embroidery charges of $40-80 per piece, but there was no evidence of the quantity of items which had to be embroidered, and hence this charge has been excluded from this calculation). 219. The quantity of garments which produced those profits of $18,625,150 was 183,354 pcs (i.e. the total quantity of 277,175 pcs less the quantity of items where the price difference is less than $63). Applying the $63 cost for accessories, commission and transport to these 183,354 pcs, those costs would come up to $11,551,302. 220. According to Mr Ting bank charges were 0.025% on the bill amount. The total bill amount on Table ZZ was in the region of about $64m. Applying this percentage, the bank charges would thus be about $16,000. 221. As to overheads, Mr Ting's evidence was that salaries for the merchandisers who serviced the Otto Kern orders were $75,000 a month. 222. Rent for the unit which was later used to accommodate those merchandisers was $24,000 a month. Mr Ting was unable to say what the charges for electricity, transport, telephone, or printing costs were, but he accepted that $30,000 a month would be more or less accurate. Thus total overheads including salaries were $105,000 a month. 223. Mr Ting accepted that these merchandisers also serviced other customers, and that a 50-50 split would be acceptable for the allocation of those overheads to the Otto Kern orders. 224. Thus for the 4 years when Goldyork traded with Otto Kern, the overheads would be $2,520,000 ($105,000 x 48 mths x 50%). 225. When the costs for accessories, commission and transport ($11,551,302), bank charges ($16,000) and overheads ($2,520,000) are deducted from the profits of $18,625,150 derived by Goldyork from the Otto Kern orders, the profits for which Goldyork has to account would thus be $4,537,848. Orders 226. The orders I would therefore make on the Counterclaim are that the Plaintiff by Counterclaim is entitled to (1) payment of the sum of $3,206,824 from the 2nd and 3rd Defendants by Counterclaim for damages for procurement of breach of contract, or the sum of $2,406,171 from the 2nd Defendant by Counterclaim being the sum found to be due on the taking of the account of profits for the Spring 1992 orders; (2) payment of the sum of $4,537,848 from the 2nd Defendant by Counterclaim being the sum found to be due on the taking of the account of profits for the post- Spring 1992 orders; and (3) interest thereon at the commercial rate of prime + 1% from the date when those sums accrued due to date of judgment, and thereafter at judgment rate until payment. 227. I will also make an order nisi that the costs should follow the event, i.e. that the 2nd and 3rd Defendants by Counterclaim do pay the costs of the Plaintiff by Counterclaim. Although no orders have been made against Goldwin, it was actually only a nominee for Goldyork, and it is unlikely that any discrete costs would have been incurred by it. Therefore as between the 4th Defendant by Counterclaim and the Plaintiff by Counterclaim, I would make an order nisi that there should be no order as to costs. 228. I will also give liberty to apply for the drawing up or working out of the order. 229. Finally I would like to thank counsel for their assistance.
Representation: Mr Chan Chi Hung and (until 20 April 1999) Mr Justin Wong (instr'd by Johnson Stokes & Master) for the Plaintiff by Counterclaim Mr Neil Thomson (instr'd by Massie & Clement) for 2nd - 4th Defendants by Counterclaim |