Michael Alexander Trzecieski and Another v. Kai Gruenenwald
|
HCA 910/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 910 OF 2011 ____________ BETWEEN
____________ Before: Deputy High Court Judge L. Chan in Chambers Date of Hearing: 2 December 2011 Date of Decision: 2 December 2011 ____________ D E C I S I O N ____________ 1.This is an application by the 1st defendant for stay of this action in favour of arbitration pursuant to an arbitration clause in a Memorandum of Understanding dated 25 November 2007 (“MoU”). Alternatively, the 1st Defendant seeks an extension of 14 days from the date of the order to be made on this application for him to file and serve his defence. The Plaintiffs oppose the application to stay. The view of the 2nd Defendant of this application is unknown and the 2nd Defendant is not represented at the hearing of this application. BACKGROUND 2.The 1st Plaintiff is the sole shareholder and director of the 2nd Plaintiff. The 1st Defendant is the majority shareholder and a director of 2nd Defendant. The terms of two homemade documents are relevant. They are the MoU and a Letter of Intent dated 25 April 2008 (“LoI”).
3.The MoU stated that it was made between the 2nd Plaintiff and the 1st Defendant, but the terms of the LoI (as referred to below) suggest that the 1st Plaintiff was also a party to the MoU at least for the purpose of observing the confidentiality obligations therein. 4.The relevant terms of the MoU are as follows:
5.The parties agree that, in a nutshell, the MoU provided for the parties to negotiate for a joint venture of adult toys and the negotiations should be done within a time frame. There is a confidentiality clause to facilitate free flow of information and ideas in the negotiations. There is also an arbitration clause for resolution of disputes arising therefrom.
6.The relevant terms of the LoI are:
7.The LoI is the contemplated agreement or one of which as it sets out the general scope and terms of co-operation between the Plaintiffs and the 1st Defendant with regard to the Project. 8.The identification of parties at its beginning shows that the 1st Plaintiff was also a party to the MoU. 9.The parties agree that the NDA or nondisclosure agreement referred to in the LoI is the MoU. 10.The LoI provides for the contributions to be made by the 1st and 2nd Plaintiffs and the 1st Defendant to the 2nd Defendant. The return to the 1st and 2nd Plaintiffs for their contributions are the 12 per cent shares of the 2nd Defendant to be issued to the 2nd Plaintiff and, depending on funding, possibly a salary to the 1st Plaintiff for working as the Chief Technology Officer of the 2nd Defendant. 11.By Article 10.2 of the MoU, the LoI superseded the confidentiality provisions in the MoU to the extent as provided in the LoI. By Article 10.3 of the MoU, no further confidential information was to be furnished thereunder upon the making of the LoI. 12.Regarding the parties to the LoI, the 1st Defendant says that it was made between the 2nd Plaintiff and the 2nd Defendant as they are the only signatories to it. However, the Plaintiff pleads in the Statement of Claim that the LoI is only the evidence of an agreement and the parties thereto are the Plaintiffs and the Defendants. I observe without deciding that the Plaintiffs’ position is not unarguable as the LoI has provided for obligations to be discharged by the 1st Plaintiff and the 1st Defendant to the 2nd Defendant. 13.Unlike the MoU, which does not create any liability in relation to the negotiations save the confidentiality obligation, the LoI is a legally binding document. It, however, does not contain any arbitration clause. THE CLAIM 14.The Plaintiffs plead in the Statement of Claim that various matters had been discussed between the parties under the confidentiality provisions of the MoU. They further plead that following the signing of the LoI, the 1st Plaintiff had provided two working samples of the products to the 1st Defendant. The 2nd Plaintiff, in complying with its own obligations under the LoI, had filed a provisional patent application covering a number of concepts of the products. 15.The Plaintiffs then plead that the provisional patent application substantially covered the intellectual property discussed between the parties under the confidentiality provisions in the MoU. However, I think this averment may not be correct as Article 10.2 of the MoU provided that the confidentiality provisions of the MoU should be superseded by the LoI to the extent as provided by the LoI. Article 10.3 of the MoU also provided that no further confidential information was to be furnished under the MoU upon the making of the LoI. If the provision of working samples and filing of provisional patent application were done pursuant to the terms of the LoI, then the confidential information disclosed in them would not be covered by the MoU. 16.The Plaintiffs also plead that the 1st Plaintiff had in January 2008 paid his contribution of €5,000 to the 2nd Defendant under the LoI for the 12 per cent shares of the 2nd Defendant by making a working sample of one of his products. The 1st Plaintiff had also worked with a manufacturer on the layout of the products in order to build a prototype. 17.However, the 1st Defendant dismissed the 1st Plaintiff from the 2nd Defendant and later used the 1st Plaintiff’s design and intellectual property in the 2nd Defendant’s product. Such design and intellectual property had been shown by the 1st Plaintiff to the 1st Defendant on 29 May 2008 after the making of the LoI on 15 April 2008. 18.The Plaintiffs then claim the 1st and 2nd Defendants for return of the €5,000 to the 1st Plaintiff and payment for the 1st Plaintiff’s investment for 46 weeks at 10 hours per week from 1 November 2007 to 20 September 2008 valued at US$78,200, the royalties on projected sales valued at €1,128,750 and the loss of profit of the 12 per cent shares of the 2nd Defendant from incorporation to 2013 valued at €568,287. There is a further claim for breach of contract and alternatively an account of profits and royalties received by the Defendants as a result of the use of the Plaintiff’s intellectual property. ANALYSES AND DECISION 19.Though the Statement of Claim refers to both the MoU and the LoI, it is quite clear that the claim is based on the alleged breach by the Defendants of the LoI by exploiting the intellectual property contributed by the 1st and 2nd Plaintiffs pursuant to the LoI to the 2nd Defendant and ousting the 1st and 2nd Plaintiffs from the 2nd Defendant.
20.Mr Hart for the Plaintiffs also confirmed this morning that the claims are grounded on the LoI and not the MoU. He also confirmed that the alternative claim for account of profits for the Defendant’s use of the Plaintiff’s intellectual property is put in for abundance of caution. It is to cater for the event that the court may find no breach of the LoI by the Defendants but that they have wrongfully exploited the Plaintiff’s intellectual property conveyed pursuant to the LoI. 21.Upon this confirmation of the plaintiffs, it is clear that this action is based on the alleged breach of the LoI by the Defendants. I again observe without deciding that there does not appear to be a sound basis for the alternative claim for account of profits or any basis for the return of €5,000, payment of US$78,200 or €1,128,750. This claim could have been presented in a simple and straightforward fashion but for the pleader’s ambition to embrace more than a simple breach of contract claim may allow. Since this is a claim based on the LoI which does not have an arbitration clause, then there does not appear to be any basis for staying the action for arbitration. 22.However, Mr Yuen, counsel for the 1st Defendant, submitted that the LoI is an amendment or exhibit of the MoU. By article 11. 1 of the MoU, it is an integral part of the MoU, hence it is bound by the arbitration clause in the MoU as well. I disagree with that. I do not think the LoI is an amendment or exhibit of the MoU. It is rather the contemplated agreement or one of them. 23.Mr Yuen then argued in the alternative that the LoI came from the MoU and was reached by negotiations within the scope of the MoU, therefore the parties’ intent to arbitrate in terms of the MoU should apply to the LoI. I again disagree. The LoI is of a very much different nature from the MoU. The LoI is the fruit of the MoU and is legally binding. For the MoU, save the confidential provisions to facilitate negotiation, nothing was binding. I do not think I can infer the intent to arbitrate into the LoI when the parties have not provided for it. ORDER 24.In the premises, I dismiss the 1st Defendant’s application for stay on the ground that the claim is based on the LoI which does not have a provision for arbitration. I therefore allow an extension of time to the 1st Defendant to file and serve his defence within the next 14 days. 25.I also make a costs order nisi that the 1st Defendant do pay the Plaintiffs half of the cost of this application. I do not order full costs because the Statement of Claim has failed to present matters in a clear and straightforward manner as it should have. The presentation of the claims has provided some unnecessary inducement to the 1st Defendant’s application. 26.I also direct the parties to fix a 9:30 am appointment outside the next 14 days for summary assessments of the amount of costs payable unless an application for variation of the costs order nisi should be made within the next 14 days or the amount can be agreed.
Mr Andrew Hart, of Messrs Hart Giles, for the 1st and 2nd Plaintiffs Mr Carl Yuen, instructed by Messrs So, Lung & Associates, for the 1st Defendant | |||||||||||||||||