Home Essentials (HK) Ltd v. John Mclennan
Read the full judgment text of DCCJ 7954/2002 on BabelCite. This District Court judgment.
1. DCCJ 7954/2002 is a claim by an employer against a former employee for breach of fiduciary duties. The breaches alleged were: (1)After the termination of his employment, the defendant disclosed to his new employer pricing methods invented by the plaintiff and designs of furniture and collections of furniture the defendant developed while he was employed by the plaintiff (the “Post-Termination Breach Allegations”); and (2) During his employment with the plaintiff, the defendant engaged in busi
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DCCJ 7954/2002 & 943/2003 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 7954 OF 2002 & 943 OF 2003 ------------------------ BETWEEN
(consolidated pursuant to the order of Master K.W. Wong on ------------------------
Coram: Deputy District Judge Anthony Chow in Court Dates of Hearing: 11th, 12th , 13th and 16th October 2006 Date of Handing down of Judgment: 29th November 2006 ------------------------ JUDGMENT ------------------------ BACKGROUND 1.DCCJ 7954/2002 is a claim by an employer against a former employee for breach of fiduciary duties. The breaches alleged were: (1)After the termination of his employment, the defendant disclosed to his new employer pricing methods invented by the plaintiff and designs of furniture and collections of furniture the defendant developed while he was employed by the plaintiff (the “Post-Termination Breach Allegations”); and (2) During his employment with the plaintiff, the defendant engaged in business that were in competition with the plaintiff and made secret profits (the ‘Pre-Termination Breach Allegation”) 2.The plaintiff originally prayed for an injunction to restrain the defendant from disclosing confidential information of the plaintiff, damages for breach of confidence, damages for breach of trust and in the alternative, an account of the secret profits received by the defendant. 3.In his opening statement, Mr. Chang, counsel for the plaintiff, withdrew the Post-Termination Breach Allegations and the claim proceeded solely on the Pre-Termination Breach Allegation and the alternative prayer for an account of secrete profits. 4.DCCJ 943/2003 is a claim by the employee against the employer for the following:
5.Between 15/3/2002 and 31/5/2002, the defendant received 4 payments from the plaintiff, the defendant therefore claimed against the plaintiff for the sum of HK$208,178.71. 6.Just prior to trial, the plaintiff filed a summons to amend the Statement of Claim, the Reply and Defence to Counterclaim and add a Counterclaim to Counterclaim. With the exception of the addition of the Counterclaim to Counterclaim, the amendments were not controversial and not opposed by Mr. Wong, counsel for the defendant. 7.The plaintiff’s Counterclaim to Counterclaim was on two specific items. First, the plaintiff alleged the defendant failed to provide any notice prior to termination of his employment and therefore counterclaimed the sum of HK$56,000.00, for one month’s wages in lieu of notice. Second, the plaintiff alleged during his employment period, the defendant took excessive paid annual leave and claimed the sum of HK$34,435.07 as repayment. 8.Mr. Wong initially objected to the addition of the Counterclaim to Counterclaim because additional evidence must be filed in support of the second item of the Counterclaim to Counterclaim. Although Mr. Chang did not immediately appreciate Mr. Wong’s concern, after my explanation, it was understood that the Counterclaim to Counterclaim required an additional statement from Mr. Christopher Allan Exline (“Mr. Exline”), the plaintiff’s founder, majority shareholder and director, that there had been no amendment to the alleged employment agreement between the parties. 9.I gave leave for the plaintiff to prepare the additional witness statement. Mr. Wong withdrew his objection to the filing of the Counterclaim to Counterclaim and the trial proceeded accordingly. 10.As the Claim and the Counterclaim (together with the Counterclaim to Counterclaim) are totally independent of each other, I will deal with them separately. THE CLAIM The plaintiff’s case: 11.The plaintiff is a company engaged in the business of, inter alia, renting furniture, appliances and other household items in Hong Kong. 12.The defendant was employed as managing director of the plaintiff from 1/11/1999, with responsibility for the general running of the plaintiff office in Hong Kong, supervising sales, marketing, pricing, inventory, personnel, delivering merchandizing, and interior design. 13.In accordance with a written employment contract dated 1/11/1999 (the “Employment Contract”), the defendant was required to "devote his whole time and attention and abilities", and to "do all in his power to promote, develop, and extend" the business of the plaintiff. 14.Before the defendant became managing director, he ran his own interior design business under the business name "J.W. McLennan Group" ("JML Group"). The parties entered into the Employment Contract on 1/11/1999. 15.Under Clauses 8(a) and (b) of the Employment Contract, after commencement of his employment with the plaintiff, the defendant must not, without the prior consent of the plaintiff: i. participate in any other business (of whatever nature); or
16.Irrespective of the terms of the Employment Contract, the defendant admitted that he owes the plaintiff fiduciary duties to:
17.When the defendant first joined the plaintiff in November 1999, Mr. Exline allowed him to finish projects (whether under the defendant’s name or under the name of the JML Group) which were then currently in-progress but had not yet finished, after these in-progress projects were completed, the defendant must devote full-time to the business of the plaintiff and must not engage in any side business during his employment. 18.In breach of his contractual and fiduciary duties to the plaintiff, the defendant engaged in side businesses through the JML Group during his employment with the plaintiff and derived secret profits therefrom. 19.The exact extent of such side businesses could not be fully quantified at this stage pending full account and inquiry; however the defendant admitted providing services to, and receiving payments from four clients as follows:
20.The plaintiff now seeks an order against the defendant to account for the secret profits. The defendant’s case: 21.Prior to joining the plaintiff on a full-time basis in November 1999, the defendant carried out work for the plaintiff, as an independent contractor, on an hourly basis. 22.While working for the plaintiff as an independent contractor, Mr. Exline was fully aware of the fact that the defendant was developing his own business and had encouraged the defendant to continue. 23.When Mr. Exline asked the defendant to joint the plaintiff full-time, the defendant agreed to do so on condition that he be allowed to serve existing clients and to work with new ones, provided his work did not take time away from his work with the plaintiff. 24.The negotiation to move from hourly basis to full-time basis was a long drawn out process, because Mr. Exline was often not in Hong Kong. At the end, the parties had a verbal agreement, which included Mr. Exline’s consent that the defendant could, through JML Group, do interior design work with both existing and new individual clients. The defendant however could not do any rental business or interior design business for corporate clients. 25.Although the defendant attempted to get a written employment contract from the plaintiff, because Mr. Exline was very busy and was rarely in Hong Kong for more than a few days in a row, the parties never put their agreements into writing. 26.Originally, the defendant’s immigration status in Hong Kong was as a dependant of his wife’s work visa, in or around September 2000, the defendant’s wife changed jobs and the defendant asked Mr. Exline to sponsor his application for a work visa. One of the essential documents for the defendant’s work visa application was a written employment contract. Because the plaintiff could not afford a lawyer, the defendant drew up a written employment agreement from the plaintiff’s standard form employment agreements. 27.Both Mr. Exline and the defendant knew the terms in the Employment Contract submitted to the Immigration Department, did not reflect the true terms of agreement between the parties and therefore the defendant never signed the same. 28.After signing the Employment Contract, Mr. Exline never requested a copy and the defendant received two increases in salaries without any written documentations. Although the defendant asked about having their real terms of employment put into writing, these requests were brushed aside and the parties continued to rely on their verbal agreement. The Law: 29.The first issue is whether the Employment Contract truly reflected the defendant’s terms of employment? If it did, then by admission, the defendant was in breach and must account for the profits he made. This issue is a question of fact that must be decided by the veracity of the testimonies of the parties, their respective witnesses and the documentation submitted as evidence. The parties are however in agreement that irrespective of whether there was a written employment agreement, as managing director, the defendant owes the plaintiff the following fiduciary duties:
30.In Kao Lee & Yip v. Koo Hoi Yan & Ors [2003] 3 HKLRD 296, Ma J. (as he then was) canvassed relevant case laws and postulated two fiduciary duties owed by an employee to his employer. Mr. Chang succinctly summarized these duties as follows: General
Non-Conflict Duty The test is an objective one, namely whether a reasonable man looking at the relevant facts would think there to be "a real sensible possibility of conflict". Where an outside party engages or seeks to engage or involve the fiduciary in some venture or transaction in his personal capacity, the fiduciary must not act for the benefit of that outside party to the detriment or possible detriment of his beneficiary, unless the beneficiary's informed consent is given. A fiduciary will not be able to use the time during which he was meant to be working for the beneficiary to be working for his own and anyone else's interests. Generally, a fiduciary is entitled to use his spare time for whatever activities he chooses to indulge in, as long as these are not inconsistent with the fiduciary duties he owes to the beneficiary or in direct competition with the beneficiary's interests. Not to Profit Duty A fiduciary must not make a profit out of his trust. This means that a fiduciary must not, without the informed consent of the beneficiary, make a profit deriving from the position of trust and confidence in which he has been placed. In general terms, a fiduciary who has taken advantage of an opportunity made available to him in the course of a fiduciary relationship to secure for himself a business opportunity, will be in breach of fiduciary duty, for which he will be liable to account for any profits he has made, even if this business was one which would not have been available to the beneficiary. 31.Therefore if the defendant failed to obtain Mr. Exline’s consent to continue his side business after he commenced full time employment with the plaintiff, there is little difficulty to find he took advantage for himself of business opportunities during the time he is still in a fiduciary relationship with the plaintiff and was clearly in breach of the Not to Profit Duty. The Issues: 32.The two main issues in the claim are: (1)Whether the Employment Contract truly reflected the defendant’s term of employment? (2) If it did not, did the defendant obtained Mr. Exline’s consent to continue his side business, after he commenced full time employment with the plaintiff? (1)Whether the Employment Contract truly reflected the defendant’s term of employment? 33.The burden of proving the Employment Contract reflected the defendant’s term of employment was clearly on the plaintiff and there is nothing better than a signed copy of the Employment Contract as evidence. Yet, the plaintiff did not even have a copy of the Employment Contract. The plaintiff had to obtain the copy filed from the Immigration Department’s file and that copy was not signed by the defendant. 34.In fact, the only evidence the plaintiff had was Mr. Exline’s testimony. However, on whether the defendant signed the Employment Contract, even Mr. Exline’s testimony was equivocal. He never stated he saw the defendant signing the Employment Contract, nor did he testify he saw a signed copy of the Employment Contract. When questioned by Mr. Wong, Mr. Exline only said the defendant signed it and turned it into the Immigration Department. The copy turned into the Immigration Department was of course not signed. 35.The defendant testified that the reason he did not sign the Employment Contract was because it did not truly reflect the terms of his employment. Mr. Chang argued since the defendant had drafted the Employment Contract from the plaintiff’ standard form employment contract, it would have been easy for the defendant to include the true terms of his employment into the same. 36.Whilst it was not difficult for anyone with reasonable command of the English language to amend a few details, like name, job title and monthly salary to change the plaintiff’s standard employment contract into the Employment Contract, it is a much more difficult task to come up with an employment contract that contains specialized and custom clauses to reflect terms agreed by the parties. It was totally reasonable for the defendant to avoid play acting as solicitor and not tried to draft an employment contract. 37.After careful consideration of all of the testimonies and the documents available, I find as a matter of fact that the defendant never signed the Employment Contract. The only reasonable explanation he did not sign the Employment Contract was because it did not reflect his terms of employment with the plaintiff. (2) Did the defendant obtained Mr. Exline’s consent to continue his side business after he commenced full time employment with the plaintiff? 38.The burden of proving Mr. Exline had consented to the continuation of his side business was on the defendant. This is again a matter of fact that must be decided based on the parties’ and their respective witnesses’ testimonies and all relevant documentary evidence. 39.According to Mr. Exline, he agreed the defendant could complete only those projects he had already started prior to commencing full-time employment with the plaintiff. There was no further discussion on this matter until he discovered the Wynant invoice in April 2002. Mr. Exline also testified that in and around October 1999, he attended a drinks gathering with the defendant’s friends at the Conrad Hotel but they did not discuss the defendant’s terms of employment. 40.The defendant’s allegation was at the beginning of his negotiation with Mr. Exline before becoming a full-time employee, there was an agreement that he could continue to serve his existing clients and develop new interior design business. In addition to his own testimony, the defendant’s evidences are as follows:
41.In his final submission, Mr. Chang criticized the defendant’s evidence that Mr. Exline had agreed to let him take on new clients subject to two caveats:-
42.I find Mr. Chang’s criticism valid. Particularly, when the second caveat was not pleaded in the original Defence and Counterclaim. I find the defendant’s ability to added more and more details to this part of his evidence difficult to accept and I reject this part of his evidence. 43.The defendant’s evidence was however not the only evidence on this point. Of all of the other defendant’s evidence, I am most impressed by Ms. Lechner’s testimony. Ms. Lechner flew in from Germany specially to testify at this trial, there is no reason for her to fly all the way to Hong Kong to lie. In any event, I have carefully observed her demeanor during her testimony and I find her an honest and truthful witness. 44.Although she admitted having discussed the correct use of wording in her witness statement with Mr. Wyborn, this did not have any negative impact on the trustworthiness of her statement nor to her testimony. Ms. Lechner may not have confidence on her written English, but from her testimony, I find she has excellent command of spoken English and would have no problem understanding the conversation between Mr. Exline and the defendant in October 1999. 45.I was also impressed with the emails between the defendant and Ms. Carver. These were contemporaneous documents and showed clearly the defendant was concerned about his ability to continue working to develop his interior business and supported the defendant’s allegation that unless he was able to continue with his business, he would not have agreed to join the plaintiff on a full-time basis. 46.There was also the witness statement of Ms. Craver and Mr. Wyborn, but in view of the fact that neither testified at trial, I have applied an appropriate discount to their statements. 47.Having considered all of the above, I find as a matter of fact the defendant did obtain Mr. Exline’s consent to continue his side business after he commenced full-time employment with the plaintiff, so long as it did not interfere with his work with the plaintiff. There being no evidence that the defendant’s work with his own clients interfered with his work with the plaintiff, the defendant did not breach of his fiduciary duties to the plaintiff. The claim is dismissed. THE COUNTERCLAIM 48.In his final submission, Mr. Wong made certain concessions and quantified the counterclaim as follows:
Salary in lieu of notice 49.This head of counterclaim presupposed that the defendant gave one month’s notice of termination to the plaintiff; however, there is no evidence that such notice was ever given. 50.The notice of termination dated 15/6/2002 simply stated:
There was no written notice. 51.During cross-examination, the defendant admitted he never said anything to Mr. Exline about continuing working for the plaintiff after the date of resignation. There was no verbal notice either. 52.If there was no written and no verbal notice to the plaintiff, I wonder what the defendant meant by having given notice to the plaintiff? 53.Finally, there was the vacation trip to Vietnam on the same date of the defendant’s resignation. I find the defendant’s argument that he anticipated Mr. Exline would not want him to serve out his notice period, therefore he arranged the Vietnam trip on the same day he submitted his resignation, contrived and totally unbelievable. 54.The fact that he planned to leave for an extended vacation trip on the same day of his resignation clearly demonstrated the lack of any intention to give notice of resignation. The words used in his resignation letter and the lack of any verbal notice, clearly showed the defendant never intended to continue working for the plaintiff beyond 18/6/2002. This part of the counterclaim is dismissed. Unpaid salaries, Chinese New Year Bonus, Days for Dollars and Expenses 55.For convenience, I will deal with these four items together. The plaintiff admitted it owed the defendant the sums as claimed under these items, except it alleged, after HK$500.00 was deducted from the wages for the period 16/1/2002 to 28/2/2002 as defendant’s MPF contribution, cheque number 012859 dated 9/2/2002 in the sum of HK$22,000.00 (the “Cheque”) was issued to the defendant. 56.The defendant denied having received the Cheque. As the burden of proving wages were paid is on the plaintiff, the plaintiff also had the burden of proving the Cheque was delivered and cashed by the defendant. All of the evidence adduced by the plaintiff dealt with issuance of the Cheque but there was no evidence that it was ever delivered or cashed by the defendant. 57.The plaintiff only had to look at its monthly bank statements to find evidence that the Cheque was cashed. It was not difficult, time consuming nor involve great expenses. The plaintiff’s failure to adduce its banking record to show the Cheque had been cashed left me to the irresistible inference that the Cheque was never delivered and therefore never cashed by the defendant. 58.The defendant should have judgment for this part of his counterclaim, less the amount he has received. Accrued Leave 59.The defendant’s case was prior to commencing full-time employment with the plaintiff, on or around September and October 1999, Mr. Exline agreed the defendant would be entitled to take 9 days for Christmas holidays in 1999 and for each year thereafter he would be entitled to 10 to 14 days of paid annua1 leave each summer and 10 to 14 days each Christmas. In accordance with this agreement and with the plaintiff’s knowledge and consent, the defendant took the following paid annual leaves:
60.The defendant therefore stated he only took: (a) 9 paid annual leave days in 1999;
61.The defendant alleged he worked 169 out of 365 days and only took 3 days of annual leave in 2002. Based on the above listed annual leave dates taken and the agreement between him and Mr. Exline, the defendant argued he was entitled to 28 days of paid annual leave each year and was therefore entitled to be paid accrued untaken annual leave of HK$18,600.18 [i.e. HK$56,000 x (1/30) x (28 x (169/365) - 3)]. 62.Mr. Wong, in his final submission, admitted that I am entitled to accept only the lower of the agreed range of paid annual leave, the defendant’s total entitlement for accrued annual leave should be HK$11,685.84 [i.e. HK$56,000 x (1/30) x (20 x (169/365) –3 )]. 63.The plaintiff’s case was, in accordance with the Employment Contract, the defendant was only entitled to 14 days paid annual leaves. 64.I have already found as a matter of fact that the Employment Contract did not reflect the terms of employment between the parties, but the burden of proving the plaintiff agreed the defendant could have 9 days for Christmas holidays in 1999 and for each year thereafter 10 days of paid annual leave each summer and 10 days each Christmas, was on the defendant. 65.The defendant’s allegation was nonsensical because:
66.Adding all of the above, the evidence points indubitably to an ad hog arrangement instead of an agreed fixed number of annual leave days per year. I find as a matter of fact the parties did not agree on any fixed annual leave entitlement and the defendant was not entitled to any annual leave, beyond his minimum entitlement under the Employment Ordinance, unless agreed to by the plaintiff on a case by case basis. This part of the counterclaim is dismissed. THE COUNTERCLAIM TO COUNTERCLAIM 67.The plaintiff’s Counterclaim to Counterclaim was based on the following:
Wages in lieu of notice: 68.I have already held that the defendant did not give any notice of termination to the plaintiff; however this does not automatically entitle the plaintiff to counterclaim for wages in lieu of such notice. Since the Counterclaim to the Counterclaim was filed in the last minute, without the defendant having an opportunity to consider and file a formal defence, I have to deduce the defence to the Counterclaim to Counterclaim from the defendant’s final submissions. Mr. Wong in his final submission, stated: “ It is unsurprising that (Mr.) Exline did not want (Mr.) McLennan to service out his notice period when McLennan was going to join a competitor. This is confirmed by the fact that Exline had told Mr. Clarence Chan of The Birdcage that he had fired McLennan on 18 June 2002 and the fact that HEL (the plaintiff) wrote to the Immigration Department the next day withdrawing sponsorship of McLennan’s work visa with immediate effect.” 69.Mr. Chang objected to the production of Mr. Clarence Chan’s letter as evidence, because Mr. Chan did not testify and hearsay notice of this letter was never given. In any event, taken to its highest, Mr. Wong’s defence to this part of the Counterclaim to Counterclaim was that of a waiver by election. 70.The principles of waiver by election was set out by Yuen JA in Large Land Investments v. Cheung Siu Kwai [2003] 1 HKLRD 313 (at paragraph 15) as follows :
71.Here, there was nothing that suggested Mr. Exline was aware of the plaintiff’s legal right to insist the defendant should serve a notice of termination or to pay wages in lieu thereof. There was no waiver by Mr. Exline and the plaintiff should recover this part of the Counterclaim to Counterclaim. Overtaking 2.72 Days of Annual Leave 72.I have already found as a matter of fact the parties had an ad hoc arrangement on annual leave. The plaintiff’s argument that the defendant took excessive annual leaves without the approval and consent of Mr. Exline simply did not accord with the evidence. 73.First, the plaintiff knew how many annual leave days the defendant took. Mr. Exline’s evidence that he did not have record of the defendant’s annual leave is unbelievable, since he set out all of the defendant’s leave periods, including the purpose of each leave period in the plaintiff’s defence at the Labour Tribunal claim. 74.Second, Mr. Exline had never complained about the defendant’s alleged excessive annual leave. 75.Third, even when the plaintiff was having financial difficulties and had to implement the so-called Days-For-Dollars scheme, if the defendant took excessive and unauthorized annual leaves, it would be natural for the plaintiff to deduct the defendant’s wages, yet it continued to pay full salaries to the defendant. 76.Having considered all of the evidence, I find as a matter of fact the plaintiff and the defendant had an ad hoc arrangement for annual leave and all of the defendant’s annual leaves were taken with the consent and approval of the plaintiff. This part of the Counterclaim to Counterclaim is dismissed. Order:
Representation: Mr. Jonathan Chang, instructed by Messrs. Haldanes, for the Plaintiff Mr. Jonathan Wong, instructed by Messrs. Richards Butler, for the Defendant |
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