Adp Pentagon Pets Ltd v. Pets Central Asia Inc.
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HCA 1381/2009 & HCA 1941/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 1381 OF 2009 _____________
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HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 1941 OF 2008 _____________ BETWEEN
Before: Deputy High Court Judge Seagroatt in Court Date of Hearing: 4, 7-11, 14 -19, 21 -23 May 2012 Date of Delivery of Judgment: 31 May 2012 _______________ J U D G M E N T _______________ INTRODUCTION 1.This consolidated action arises out of a Joint Venture Agreement, dated 9 July 2006 and linked Licence Agreements dated in the months of July, August and October 2006. 2.The plaintiff is a company operating a chain of pet shops under the names “Red Carrot” and “Q‑Pets”. The former shops sell pets and related services and the latter are smaller “neighbourhood” convenience stores selling some pets and related services. 3.The business started in or about 1996 and developed over time from 3 shops to about 36 in 2006, the year with which I am primarily concerned as the starting point. By that time at the latest, it was the exclusive distributor in Hong Kong of over 20 international pet product brands. 4.In 2006 it had obviously excited the interest of the defendants’ companies in the shape of their principal directors, Dr Pauline Taylor and Mr Peter de Krassel. Dr Taylor is a veterinary surgeon practising mainly, it would seem, in small animal medicine. She has numerous qualifications in this field and is clearly a practitioner of some experience since she graduated from Edinburgh University in 1978. 5.Mr de Krassel is also a graduate in disciplines including law from American Universities. He is not a practising veterinary surgeon but was involved in the management side of the defendants’ business which is concerned, he states, with providing veterinary, grooming and insurance services and the sale of pet related products. 6.It appears that the defendants, taken as a unit, were, to use the term of Mr Norman Nip, Counsel for the plaintiff, a start-up business. That is, without any track record, but it appears to have had an extremely ambitious programme. The 1st defendant is the holding company of the other four defendants. All were parties to the Joint Venture Agreement except the 5th defendant, but that makes no difference. 7.The parties were introduced to each other through the estate agency of Wilson & Associates of Hong Kong, in early June 2006. Mr de Krassel sought to under‑play the reason for the contact suggesting that the defendants were simply responding to an advertisement seeking a sub‑lessee for some premises. The documents belie this and he seemed at the outset to be keen to disparage the status of the plaintiff’s business a stance which he maintained in many of his rambling answers to questions. The first written contact came in the form of an E-mail of 6 June 2006 from Dr Pauline Taylor following a meeting the previous day and referring to an agreed further meeting for the coming Saturday (10 June). She was to visit the plaintiff’s Mong Kok store that same Tuesday. She enclosed a copy of the defendants’ business plan (Executive Summary) and operational chart. 8.The ambitious flavour of the defendants’ projected business is indicated by the following sentences from the Introduction to the Executive Summary:
9.I am not concerned with assessing how realistic these projected ambitions were. As the next paragraph makes clear there was no track record:
10.Whatever the factual basis of any of the assertions, this document appears to be a typical commercial “puff”, legitimate in itself but clearly designed to impress or convince on the basis of expressed aspirations without any proven business achievement other than that expressly attributed to individuals. 11.By July 2006 a Joint Venture Agreement by the parties had been drawn up and signed in the form of a letter to Mr Alex Yip, the Managing Director of the plaintiff, from Mr Peter de Krassel, as Director of the defendants, using no doubt his experience as a lawyer in its drafting. It reflected the meetings which had taken place during the previous month and expressed in the words used by Mr de Krassel “that the synergy of the principals in both companies…and between the two companies…can only benefit the profitability of each company and it is therefore in their interest to work together to build the business of both companies with the idea of merging ADP into Pets Planet in the first quarter 2007 and building Pets Planet so that its revenue and the PC revenues can be combined to support an initial public offering to be made in 2011 or whenever the financial performance of the two companies and market conditions justify.” 12.The initial ambitious flavour of the Executive Summary, provided in June 2006, had now expanded into a projected Stock Exchange flotation, all before any business had commenced on the ground. 13.The terms of the Joint Venture Agreement are clear, in my view unequivocal, and bear initial scrutiny at this stage:
14.For the reason just stated I do not need to consider the contents of the Merger and Acquisition clause. 15.It is now relevant to consider in a little detail the provision in the Joint Venture Agreement relating to the 10% shareholding which the plaintiff was to receive which I had earlier set out. The documents dealing with this aspect are self‑evident and raise significant matters, if not entirely straightforward, which call for examination before I deal with the evidence of witnesses relating to them. The plaintiff contends that it never received any share certificate and was, in fact, never a shareholder to any extent. The documents emanating from the defendants are quite inconsistent on this matter. If the plaintiff was never a shareholder, then the defendants were in breach of Clause I of the Agreement and are liable to the defendants for all the rent of the said premises in the proportions set out in the licence agreements as well as for payments of any of the compensation provided for in the specific clauses. The Joint Venture Agreement provided for the shares to be allocated “on or before the 8 August 2006.” In fact, on 16 August 2006 Mr Alex Yip signed an application to the defendants for the 5,000 shares. 16.On 21 August 2008, two years after the shares were to have been allocated and issued to the plaintiff by the defendants, Mr Alex Yip sent an E-mail to the defendants for the attention of Mr Peter de Krassel. I quote from the first paragraph:
17.In reply to this there is a letter sent by post (and also in E‑mail form) dated 27 August 2008 by Mr de Krassel. It contains what in the context of this litigation and of what is contended on the pleadings and in witness statements, some startling contentions. Again I propose to quote directly rather than use indirect narrative :
18.Mr de Krassel went on to deal with a number of contentious issues which have been ventilated in the course of the trial of this action and then came back to the question of directorship and shareholding:
The references to “prospective shareholder” and “shareholder agreement” are obscure and Mr de Krassel never properly explained what he meant by these words. 19.He went on:
and then:
20.At this stage I do not need to deal with other statements in the letter which include an acknowledgement of liability for back rent and payment for utilities etc. What the letter noticeably does not say is that he, Mr de Krassel, handed a share certificate for 5,500 shares shortly after 8 March 2007 to Mr Alex Yip and that there was a resolution of the Board of Directors of the defendants dated 8 March 2007 allocating 5,500 shares to ADP Pentagon Asia Ltd, being 5,000 shares under the Joint Venture Agreement and 500 shares for Alex Yip as Director and for personally guaranteeing a loan from Orix Asia for the defendants’ benefit. The resolution states this quite clearly. Mr Yip’s signature is on these minutes signifying his attendance and approval of the resolution. 21.Yet according to the copy share certificate for 5,500 shares produced by the defendants, it had been issued on 30 September 2006, some six months earlier than the resolution. 22.In 2009 as the question of the plaintiffs’ shareholding loomed large in the dispute, by then in the hands of solicitors, the defendants purported to issue a “replacement certificate” in respect of 5,500 shares to support their contention that the plaintiffs were actual shareholders. Yet that “certificate” was dated 16 June 2009. What validity that could have escapes me. The defendants’ then solicitors wrote in a letter dated 16 December 2009, six months after the dating of the “replacement” certificate
The defendants contended that Amy Chow had taken a copy of the “original” certificate dated 30 September 2006 and kept it on file. They “disclosed” a copy of this eventually in their documents. I have used inverted commas in the above respects because I am unable to elevate those documents to the status of authenticity which the defendants claim. The obvious question is why, if a copy had been kept of a genuine share certificate in the file, was a copy of that so-called original not forwarded to the plaintiff’s solicitors with the simple explanation that Mr de Krassel had personally handed the original to Mr Alex Yip within a few days of 8 March 2007？ WAS THE PLAINTIFF COMPANY A SHAREHOLDER IN THE DEFENDANTS COMPANY AT THE MATERIAL TIME? 23.The answer to this question is crucial to the issues. There is no doubt that Mr Alex Yip believed that, in accordance with paragraph 1(b) of the Joint Venture Agreement of the 9 July 2006, the plaintiff was to hold 10% of the shares in Pets Central Asia, artificially proportioned as set out in that material paragraph but totaling 5,000 shares. As a consequence he wrote to the defendants on 16 August 2006 requesting the certificate for the shares. There was no response to that letter. Pursuant to the Joint Venture Agreement and in accordance specifically with the clauses relating to the share equity, a number of licensing agreements had been signed giving the defendants the right to carry on their business in certain of the plaintiff premises. The main premises are those at Tsuen Wan, Sai Kung, Mongkok and North Point but there were stores in Aberdeen, Whampoa, Chi Fu and elsewhere. At or about this time the plaintiff had over 30 retail premises. The plaintiff therefore carried out its part of the Agreement and the defendants had the advantage of rent free business premises until such time as the credit sum was exhausted. The initial licensing agreements were dated July, and August 2006. Alex Yip attended the Board Meeting on 8 March 2007 at which a resolution was passed “allocating and issuing the shares” as set out in a schedule in the record or minutes of the meeting. It referred to 5,500 shares representing the 10% shareholding provided for in the Joint Venture Agreement, and an additional 500 shares for Mr Yip to reflect his guarantee in respect of a loan made by Orix Asia to the defendants. 24.Mr Yip not unnaturally continued to believe that his company was a shareholder and to use his words in their context “anticipated” receiving the certificate at some stage. He acted as a director of the defendant company until June 2007 and continued on occasions to ask for the shares. Nothing was done to change his rational expectation until he received the letter of the 27 August 2008 from Mr de Krassel, Chairman of the defendants, which I will need to consider in some more detail later. The equity of the plaintiff in the defendants was an integral part of the Joint Venture Agreement. The defendants’ ability to develop their business in the premises at Sai Kung, Tsuen Wan, Mongkok and North Point was predicated upon that shareholding, 7% of which had been valued at a credit sum of USD 350,000 in the form of rental for those premises viz. rental, calculated as a proportion of the premises occupied by them, which would not be payable until the sum owing in respect of the premises licensed by them reached that credit figure. 25.Problems were clearly arising in 2007 and 2008 and relations between the parties were deteriorating. I do not need to consider the reasons for this or how they manifested themselves in any detail. On 21 August 2008 Mr Alex Yip wrote by e-mail and by post to Mr de Krassel of the defendants pointing out that the plaintiff still had not received the shares provided for in the Agreement to be allotted “on or before the 8 August 2006”. The time was important since the defendants had exhausted their credit in respect of the rental in July 2008. Reference was made to the request of 16 August 2006. Rent now had to be paid at the rate of HK$ 119,540.65 monthly with effect from, and including August. The shares were demanded “within 7 days.” 26.Within that seven day period Mr de Krassel replied to Mr Yip’s letter. For the moment I will deal only with the matter of the shares — the letter contained a number of complaints, some of which will fall to be determined in due course. As I have earlier, I will note the exact wording of the defendants’ reply:
27.That letter came as some surprise to Mr Yip. Its contents call for explanation from the defendants. It is clear that it says that neither Mr Alex Yip nor the plaintiff company was ever a shareholder in the first defendant company. It is equally clear that Mr de Krassel made no mention of a share certificate having been issued in the plaintiff’s name on 30 September 2006, nor of the Board Meeting of 8 March 2007 purporting to allocate 5,500 shares to the plaintiff, nor that he had handed the original of the share certificate to Mr Alex Yip shortly after 8 March 2007. 28.Mr Yip replied to Mr de Krassel’s letter on the 1 September 2008. It was unsurprisingly a somewhat briefer letter. He terminated the Joint Venture Agreement in view of the defendants’ failure to comply with clauses 1(b) — the allotment of shares. There had been a failure of consideration on the defendants part which they clearly acknowledged in Mr de Krassel’s letter. Shortly I shall deal with the defendants’ evidence on this core feature. 29.On 16 December 2009 the matter of the shareholding took a further bizarre turn when the defendants through their solicitors wrote as we have seen to the plaintiff’s solicitors as follows:
30.There is no mention of Mr de Krassel having personally handed the certificate to Mr Yip a few days after the 8 March 2007, an allegation which was specifically put to Mr Yip by the defendants’ Counsel, and equally specifically stated by Mr de Krassel in paragraph 3 of his Supplemental Statement:
31.There are some curious inconsistencies in what purport to be the Register or Registers of Members of the 1st defendant company. A “replacement certificate” is entered in the latest so-called Register of Members as being dated 27 February 2009. I now return to their solicitors’ letter:
32.How this certificate came to be dated “16 June 2009” when the “so-called Register” records a date of issue of 27 February 2009 is unclear. It is sent by the solicitors six months after the manuscript dating on the certificate. What validity it could possibly have at that stage is entirely dubious. Why was not a copy of the “so-called” certificate dated 30 September 2006, which I was informed had been kept by Miss Amy Chow on file, sent with a simple explanation that that is what it was? 33.Reverting to Mr de Krassel’s Supplemental Statement, paragraph 1, he said:
34.In view of that one may reasonably ask why the share certificate was not then given to ADP, the plaintiff. The agreement provided for allotment “on or before the 8 August 2006”. Mr Yip had written asking for it on 16 August 2006. The delay until a few days after 8 March 2007 (accepting for the purpose of this argument the defendants’ evidence) was unjustified. There is a further point of note. In August/September 2006 only 5,000 shares were due to the plaintiff under the agreement. The extra 500 shares to be given to the plaintiff (or Mr Yip) for his giving a guarantee to the extent of HK$ 1,000,000 in respect of a Orix Asia bank loan, did not become due until he signed the guarantee on 19 December 2006. How then could there have been total allotment of 5,500 shares to the plaintiff in August or September 2006? I am left with the clear impression that the defendants were bringing documents relating to the shares, into existence on a contingency basis to try and lend some authenticity and/or veracity to their case at a later stage. 35.It is against this background and these oddities that I need to consider the evidence of Mr de Krassel in particular. 36.Throughout his evidence which lasted for 3-1/2 days he demonstrated an inability to give a straight answer to a straight question. Of course, some of the questions posed serious difficulty because he was being asked to explain what he had drafted, written or done. It was clear that on many occasions he sought refuge in argument and a speech. 37.When asked about the term in the Joint Venture Agreement providing for the issue of shares to ADP on or before 8 August 2006, he said that this was entirely flexible and would only be done when the Board approved and allocated shares. In relation to Mr Alex Yip’s application of 16 August 2006 asking for the issue of the shares which must have been prepared by the defendants — it is identical in format to the consent to act, as a director, signed and also dated 16 August 2006 — he put forward the same sort of vague explanation. 38.According to Miss Amy Chow who acted as the defendants’ in-house legal adviser and whose company Chediston acted as the defendants’ Corporate Secretary until 30 September 2006, she had been asked by Mr de Krassel sometime in August 2006 to prepare a number of documents. These are significant and create problems for Mr de Krassel in the light of what he had said in his written statements. 39.One was an application for 5,500 shares in the defendant company (Bundle B – p 194E) being the 5,000 shares provided for in the Joint Venture Agreement and a further 500 shares in recognition of what was said to be a personal several guarantee for an equipment loan of HK$1,000,000. The defendants have not been able to produce a signed or dated copy of that application. It remains in the bare form prepared by Miss Chow and e‑mailed by her to Mr de Krassel. Mr de Krassel also asked her to prepare a Written Resolution. This eventually bore the signatures of Dr Taylor and Mr de Krassel and was dated August 2006 but without a specific date in August. It referred to Shareholders Agreements to be entered into and includes ADP, the plaintiff Company. But, of course, there already existed the Joint Venture Agreement of 9 July 2006 by which 5,000 shares were to be allotted to the plaintiff on or before 8 August 2006. There was clearly in my judgment some delaying tactic being pursued. It also recorded a resolution that Alex Yip be appointed as a director. The defendants already had Alex Yip’s consent to act as such dated 16 August 2006. The final document within this timescale was the share certificate purporting to issue 5,500 shares to the plaintiff. It was dated 30 September 2006, a copy has been produced and its allotment of those shares was recorded by Miss Chow in the Register of Members as 30 September 2006. 40.There was apparently a Board Meeting on 1 September 2006. No explanation has been put forward as to why the minutes did not record the obligation of the defendants to issue ADP with 5,000 shares pursuant to the Joint Venture Agreement and Mr Yip’s formal application of 16 August 2006 which had been prepared for him to sign. 41.Miss Chow cannot recall preparing that document but does not exclude the possibility of her having done so. I am satisfied that either she or someone else, did so on Mr de Krassel’s instructions. 42.Two questions arise. Why were documents prepared in August / September 2006 purporting to reflect a share holding of 5,500 shares when the obligation to give Alex Yip 500 shares on the strength of his guarantee to Orix Asia did not arise until 19 December 2006 at the earliest? As is clear from his e-mails to Mr de Krassel, Mr Yip was worried about the extent of his commitment and made it clear that he could not go further than a guarantee of a maximum of HK$ 1,000,000. As transpired, even the guarantees given by his co guarantors did not prevent his being persuaded to sign the guarantee to Orix Asia for HK$ 1,300,000. Mr de Krassel sought to suggest that the documentation reflecting a further 500 shares for the guarantee had been created earlier because it was all agreed in principle much earlier — he said at a time even before the Joint Venture Agreement — and therefore it could reflect that earlier agreement. I do not accept this. It is neither credible nor sensible. The guarantee was not finalised until 19 December 2006. It then was recorded in the minutes of the Board Meeting of 8 March 2007. There is no reasonable explanation for the share certificate dated 30 September 2006 including an allotment of 500 shares in respect of the guarantee. 43.The second question is why the plaintiff was not issued with and given the 5,000 shares promised on or before 8 August 2006, when a share certificate was prepared and signed on or about 30 September 2006. He had reminded the defendants of their obligation on 16 August 2006. He could and should have been given a certificate for those 5,000 shares by the time of the Board Meeting of 1 September 2006 at the very latest. It was an express term of the Joint Venture Agreement. It did not require a resolution of the Board, merely a confirmation that it had been done pursuant to a contractual obligation. 44.I have concluded without any reservation that neither ADP, the plaintiff, nor Mr Alex Yip was at any time a shareholder of the defendant company. THE NATURE AND STATUS OF THE DOCUMENTS RELIED UPON BY THE DEFENDANTS 45.The share certificate dated 30 September 2006 was brought into being on the express instructions of Mr de Krassel. It purported to include 500 shares for an action which did not occur until 19 December 2006. I do not accept Mr de Krassel’s vague and illogical assertions that discussions and agreement in principal in relation to the “shares for a guarantee” had been reached around the time of the Joint Venture Agreement. It would have made more sense if a share certificate for 5,000 shares had been issued shortly after Mr Yip’s application of 16 August 2006. The Board minute of the 1 September 2006 Board Meeting gives the lie to Mr de Krassel’s oral evidence. It recorded that the Chairman (himself) was authorised to approach persons interested in being guarantors in exchange for shares. It was quite clear that the extent of Mr Yip’s guarantee was not agreed until 19 December 2006. How then could his future unknown settlement have crystallised in the shape of 500 shares in September 2006 or before? 46.The unsigned, undated application for 5,500 shares showing the breakdown of the various considerations was prepared on Mr de Krassel’s instructions by Miss Chow. It was pointless. There had already been a signed application for 5,000 shares. A simple application for 500 shares, at the appropriate time was all that was required. This was another piece of paper created for the false paper trail. 47.The entry into the Register of Members made by Miss Chow on or about 30 September 2006 was either on Mr de Krassel’s express instructions, or was an automatic action by Miss Chow consequent upon her having been told to issue the certificate for 5,500 shares. A later entry in the Members Register was made on or about 8 March 2007 by the succeeding corporate secretariat (Stephenson Harwood & Lo) using Miss Chow’s initials. But she had ceased to be the corporate secretary at the end of September 2006 although she remained as an in-house lawyer after that date before reverting to the corporate secretariat in March of this year. The oddity continued when on or about 27 February 2009 a further entry was made in the Register showing the plaintiff being issued with a “replacement” certificate for 5,500 shares. But this certificate was in fact dated 16 June 2009, over three months later and was forwarded by the defendants’ solicitors on 16 December 2009, a further six months later. The “certificate” was signed by Mr de Krassel. In multiple e-mails and letters emanating from Mr de Krassel there is no mention of his having handed personally to Mr Alex Yip the share certificate dated 30 September 2006, nor is there anywhere in the correspondence from the defendants’ solicitors any mention of that allegation. To my mind this was a highly material matter and it emerged as a very late allegation. Dr Pauline Taylor sought to provide support for this allegation by describing Mr de Krassel in an “excited” state, holding the share certificate and disappearing up the communal stairs to Alex Yip’s office. In her case I think the wish is father to the thought. She knows just how important that item of evidence is, how late it features in the history of this case and she has allowed her evidence to be coloured by a perceived need to support him. That need can sometimes be turned into a state of convincing oneself that something that a business partner says happened, in fact happened. It did not and her evidence is defective. 48.The minutes and resolution of the Board Meeting of 8 March 2007 do not fit the situation Mr de Krassel has tried to construct. The wording is:
49.There had been no signed or dated application for the 500 shares to Mr Alex Yip. That, however, is less important than the resolution “share certificates… be issued.” It does not say that the share certificate dated 30 September 2006 over five months earlier be confirmed. It speaks quite clearly of an event which will be on or subsequent to 8 March, not retrospective approval or confirmation of a past event. Mr de Krassel was unable to explain why, if the certificate dated 30 September 2006 was to be valid and operative, it took such a long time to call a Board Meeting to validate it. 50.I am quite unable to regard the entry of ADP as members in the register recorded on 30 September 2006, 8 March 2007 and 27 February 2009 as valid, legitimate entries. I regard the creation of these documents as some form of jiggery pokery. For the reasons stated they are not genuine documents and this is borne out additionally by Mr de Krassel’s own clear-cut statements in his letter of 27 August 2008 when he refers to Mr Yip forfeiting “all your rights as a prospective shareholder” and “ADP is not and never has been a shareholder.” THE NATURE AND VALUE OF THE EVIDENCE Mr de Krassel 51.There were a number of expressions and contentions which suggested at the very least that Mr de Krassel was inclined to gloss over evidential problems for him. He referred to the share certificate as a “piece of paper” in a contemptuous manner as if it was quite unimportant when it was issued, when it was handed over and how it was dealt with in any records. 52.As far as the Joint Venture Agreement was concerned – it had been drafted by him and he is a lawyer – he sought to argue that the words “revenue” and “income”, in fact, meant “net profit”. As a matter of common sense and law they do not. They mean gross receipts not even gross profit. Undoubtedly he was using loose terminology in his drafting but was unable or unwilling to accept this. He fell back upon some vague assertion that in the pre-Agreement discussions with Mr Alex Yip both knew that they were talking about profit. Although he was using these terms, “revenue” and “income” he had earlier in the agreement referred to the “profitability of each company”. Was he indulging in loose terminology or was he genuinely seeking to equate “income” with “revenue” and “profit”? It is, of course, also open to the view that in order to induce or encourage Mr Alex Yip to enter into a joint venture, he was dangling a carrot reflecting a sense of supreme confidence that no such loss would occur and so could afford to be expansive. 53.A particular area where Mr de Krassel sought to re‑write the Agreement by his oral evidence, and thereby distort the natural meaning of words lay in paragraph A (2):
54.He asserted that this re-branding or co-branding meant that ADP logos were to be excluded from the branding. This is clearly non sensical. His term “co-branding” clearly means joint-branding i.e. logos of both businesses being incorporated. And the word “include” cannot be stood on its head and altered to mean ADP’s logos are to be excluded. 55.In sub paragraph (3):
He sought to exclude the words “where appropriate” from the meaning of this sentence so as to give it the force of an absolute fixed obligation. That too did not make sense. The longer Mr de Krassel stayed in the witness box the bigger the web of prevarication, bluster, denial of the obvious, and distortion of language became. If not a compulsive denier of the truth he was certainly an inveterate one. He indulged in short speeches and sought refuge in blaming his lawyers for the failure to produce documents supporting aspects of his case and claims. I am satisfied that he was the principal source of instructions to the defendants’ solicitors. They must have acted on his instructions in forwarding the ‘replacement’ certificate purportedly dated 16 June 2009 by him and signed by him, which the solicitors sent on 16 December 2009. It may be that the solicitors put it forward as a “tongue in cheek” gesture. In my view no lawyer worth his salt can have been under any illusion that this was other than a hollow gesture. It is also difficult to understand why Mr de Krassel wrote to Mr Alex Yip on 25 October 2008 inviting him to a shareholder meeting to be held on 3 November 2008. 56.His letter of 27 August 2008 had made his view of the situation clear enough. Why then was he sending an invitation to such a meeting with “Warmest regards.”? Mr Alex Yip gave him short shrift:
57.Had Mr de Krassel’s devious plan now unravelled too quickly so that he or the defendants were going to lose undeserved gains? Had he over played his hand? Whatever may have been Mr de Krassel’s tactics there is strong ground for thinking that once Alex Yip had resigned as a director and with the earlier failure of the planned Merger & Acquisition brought about by ADP’s rejection of what it considered to be a wholly inadequate offer, Mr de Krassel was keen to “string” Mr Alex Yip and ADP along with an illusory shareholding whilst the defendants established a few commercial toe-holds, rent-free. 58.At some stage Mr de Krassel stated that he was a lawyer, as indeed he is, and was averse to litigation which he regarded as a waste of money. One could properly respond to that by saying it behoves a lawyer drafting agreements for commercial relations, to ensure that they are properly drafted, correctly expressed and complete and unambiguous in reflecting the agreement reached. If they do not do so, there has been neglect or incompetence, or there has been some deliberate ambiguity or omission in order to try and evade obligations apparently reflected in the agreement, at a later stage, and thus lay the basis for a contrived dispute. In my view anyone contemplating any commercial or professional agreement with Mr de Krassel ought to get independent advice before he signs anything. 59.Mr de Krassel says that he has given evidence on several occasions as an expert witness essentially, but not exclusively, in inquiries of some type concerned with motion-picture financing. In the light of my experience of Mr de Krassel in this case – and he was in the witness box for over three and a half days, the prospect of his giving evidence as an expert witness before me would be depressing and likely to be a considerable handicap to any party seeking to use him as such. He has argued the unarguable, defended the indefensible and tried to alter the unalterable. Quite simply he is not a truthful witness. Stating untruths seems to have come relatively easily to him although on every occasion he has used up considerable time in order to achieve his ends. Dr Pauline Taylor 60.There was from the outset of her evidence a limit to the value to be put upon it. Mr de Krassel was the person involved in negotiations, administrative arrangements and direct contact with the plaintiff, Mr Alex Yip and Mr Paul Yip. I gained the impression that she had not really understood the Joint Venture Agreement, seemed to think that the licensing agreements were akin to sub-leases as far as occupier’s rights were concerned and was in effect parroting Mr de Krassel’s evidence in relation to the shareholding due to ADP. 61.Her evidence in relation to the car parking aspect of the counterclaim was quite destructive of her credibility. Although in her statement she said that she had prepared the schedule of calculations supporting her claim initially of HK$18,750 per week, she had to abandon it saying that there were significant errors in it, that others had prepared it and in reality the claim should be about HK$8,440 per month. Two other documents put forward in support of the claim were abandoned by her. The claim itself never had a sound basis. The most Mr Yip had was an oral licence from his landlord. There was never more than an oral licence to Dr Taylor or Mr de Krassel to park a car which could be revoked at any time. It was a grossly inflated claim based on a spurious allegation and purportedly supported by documents which were conceded to be either inaccurate or irrelevant. 62.Dr Taylor also sought to advance documentary evidence in support of part of the defendants’ counterclaim which related to the cost of warehousing and storage. She had to concede that the schedules of expenditure were not relevant if the plaintiff had validly terminated the Joint Venture Agreement in September 2008. That relating to transportation had similar problems but in any event Mr de Krassel had written on 17 January 2008 to Mr Alex Yip cancelling the provision of logistics/transportation by the plaintiff as the defendants would be using its own service. There is not the slightest hint of a complaint by the defendants that they were having to do this because the plaintiff had failed to meet its obligations in this regard under the Joint Venture Agreement. Although Mr de Krassel had tried to put a different construction upon his letter it became another example of his unreal approach and also put an end to any validity in Dr Taylor’s evidence. On the relevant and prime issues — the Joint Venture Agreement and the matter of the shareholding — she gave no credible evidence which to any reliable or material extent supported that of Mr de Krassel. These were quite clearly areas on which she had no independent experience. I do not need to deal with her evidence on the other aspects of the defendants’ counterclaim, or on the aspects of loss and damage in the plaintiff’s claim because the breach by the defendants of the Joint Venture Agreement and all that flows from that render it unnecessary for me to do so. 63.However I should add, lest there be any doubt about the quality of Dr Taylor’s evidence that I am satisfied that she did agree orally to the resumption of sales of cats and dogs at the relevant premises of ADP when it was apparent that there was, as referred to in paragraph (4) of the Joint Venture Agreement :
a loss of sales. It made business sense for the defendants to agree to the resumption of such sales because they would be able to reduce the amount of compensation to be paid, at least to the extent that the resumption of such sales would reduce the loss which they had undertaken to meet. Miss Amy Chow 64.I am satisfied that she was a careful witness seeking to be helpful and truthful. She complied with the instructions given to her by Mr de Krassel. Her entry in the Members Register for 30 September 2006 was the natural and probably obligatory consequence of being told to prepare the share certificate of the same date. I have already dealt with the oddities and my findings in respect of this document, and others, and her action does not, and cannot elevate the entry in the Register to the level of a fact and a status in law. It is as illusory as the share certificate itself. The subsequent entries in the Register with her initials against them were meaningless and part of a deception not necessarily by the person who made them but by the person who authorised or instructed them to be made. Mr Alex Yip 65.What did I make of Mr Alex Yip, the guiding light of the plaintiff company? He is in my judgment an astute business man who was straightforward and straight talking. If he had an obvious fault, it was that he was too trusting of Mr de Krassel in particular. Of course, he genuinely believed that ADP and/or he was a shareholder in the defendants. He was encouraged to believe he was and I think he genuinely wished the Joint Venture Agreement to succeed. He had been the observer and recipient of attractive, if grossly exaggerated plans and publicity for the expansion of the joint businesses even though the Merger and Acquisition did not materialise. He had also put up with Mr de Krassel’s posturing and patronising language in written communications. Mr Alex Yip had been the first to give evidence in this trial but it was only during the course of Mr de Krassel’s evidence that one appreciated the stark contrast between the two men. I had no hesitation in concluding that where there was a conflict in evidence between the two men, I preferred that of Mr Alex Yip. Mr Paul Yip 66.His evidence related to certain aspects of the plaintiff’s claim and I accept his evidence as reliable and truthful. Mr de Krassel sought to make Mr Paul Yip appear as the main contractor in respect of certain works carried out for the defendants by Mr Kwong of Hong Kong New Century Decoration. The documentation was wholly against this allegation as was the evidence of Mr Paul Yip and Mr Kwong himself. Because there had been some minor faulty work easily corrected, as I accept that it was, the defendants in their wide sweeping net of spurious claims had tried to offload responsibility for any perceived shortcomings in the work onto Mr Paul Yip. I accept too Mr Paul Yip’s evidence, in conjunction with that of Mr Wong Kwok Wai, relating to the losses and/or extra cost sustained by the plaintiff on what were referred to as the leasehold investments viz those fixtures and fittings which were to be demolished or removed. Subject to a few items, I am satisfied that they were not capable of being reused. Removal of such items inevitably entails a degree of restoration and redecoration. And where that area of the premises reverts to the lessee or the landlord, it was inevitably to be restored to its former state. Lee Yee Lam 67.The evidence of Lee Yee Lam concerned the veterinary services provided by the defendants to animals in the plaintiff’s shops in late 2007 and early 2008 and the invitation to the defendants to tender for future veterinary services for the plaintiff in respect of different categories of animals. That tender was not accepted and the defendants ceased to provide veterinary services for the plaintiff’s animals thereafter. However it is clear that the plaintiff was continuing to sell animals at some of its shops, which lends support to the contention by Mr Alex Yip that there was an agreed resumption of sales for which the defendants were content to provide veterinary services without complaint that the sales of such animals had resumed or continued in breach of the Agreement. Cheng Kin Yip 68.The accountant, Mr Cheung Kin Yip, had been responsible for preparing the plaintiff’s accounts and financial statements for some years and it was the profit and loss account which received relevant consideration. He was able to prepare from the agreed figures for the drop in the plaintiff’s sales of animals at the various shops consequent upon the phasing out of such sales as provided for in the Agreement, the gross profit lost by the plaintiff. I shall come to this aspect later. He spoke vaguely of revenue in accountancy practice meaning net income. If that is so there is some loose terminology being used. It is an erroneous statement if it is meant to be a legal definition. I have already considered this earlier in my judgment. QUANTUM OF DAMAGES 69.As a result of my finding that the defendants were in breach of the Joint Venture Agreement by reason of their failure to provide consideration the plaintiff succeeds in its claim for damages which flow from that breach and which are in accordance with the terms of the joint venture. I shall consider those under each head. It also follows that the defendants’ counterclaims fail. Although I have considered certain aspects of it in passing, and in the context of the credibility of the witnesses advancing them. I will touch upon other aspects of it only insofar as they impinge upon any of the plaintiff’s heads of damage. The licensing fees in respect of rent and associated charges 70.The figure claimed in the sum of HK$2,644,261.51 was agreed subject to liability. The defendants’ consideration wholly failed and therefore that sum is due to the plaintiff. The loss of revenue following the cessation of sales of cats and dogs 71.This figure is also agreed as a figure subject to liability. This aspect of the plaintiff’s claim is a consequence of the provision in the Joint Venture Agreement. It is separate from the question of consideration concerning the provision of shares. I am satisfied that the plaintiff fulfilled its obligation under the Agreement and as indicated earlier, that the resumption of sales of cats and dogs at certain premises followed an oral agreement between Mr Alex Yip and Dr Pauline Taylor. The loss flowed directly from the phasing out of sales of dogs and cats and the defendants’ contention that the plaintiff started to sell dogs and cats at newly opened stores in Mong Kok does not hold water. I accept Mr Alex Yip’s evidence where it conflicts with that of the defendants on this issue. 72.The sole issue which I now have to consider under this head is whether the plaintiff should recover the amount being the revenue lost or whether it should be some lesser figure — viz. gross profit on the sales lost after deducting the cost of those sales. With the loss of sales of dogs and cats those would inevitably be loss of sales of ancillary items such as collars, leads, dog food, bowls etc and I am satisfied that the figure for loss of sales would include such items. 73.Although Mr de Krassel tried to say that revenue and income, the terms he used, should be construed as meaning profits, the defence did not plead that and so I invited Miss Herbert to amend the defence to allege that if the plaintiff succeeded in its claim it was entitled only to net profit. The plaintiff had not been put to the task of calculating its claim on this basis nor had the defendants put forward any calculations in support of this. 74.Although I rejected Mr de Krassel’s contention, as I have set out earlier in my judgment, I asked Mr Cheung Yip to produce the gross profit figures applying an average percentage of the cost of sales reflected in the plaintiff company’s accounts for the three previous years — i.e. years ending 31 March 2004, 2005 and 2006. I did not ask him to take into account any other costs, e.g. administrative costs including wages and rent because I was prepared to accept directly and by implication from Mr Alex Yip that they would have been incurred in any event and no proportion therefore could be attributed to the loss of sales. I also bore in mind that this aspect had never been raised by the defendants and it was too late at this stage of the trial to explore it, given that on the evidence it would have been a fruitless exercise. I formed the view that although the Joint Venture Agreement on this aspect, as on several others, was drafted sloppily and without the proper application that its author should have given it, if I were to make the award of damages equivalent to the loss of sales it would be punitive in effect and that I ought to have regard to what a competent draftsman would have drafted having regard to what can in law properly be recovered. Accordingly the figure should be the gross profit on the sales lost (which I find to be also the net profit on the sales) and I adopt the calculations helpfully provided by Mr Cheung. The plaintiff is therefore entitled to the sum of $3,296,690.61 damages under this head. LOSS OF VALUE OF LEASEHOLD INVESTMENTS — i.e. fixtures, fittings renovation etc. 75.In order for the defendants to establish their business at the plaintiff’s Sai Kung and Mong Kok premises, a significant amount of alteration, removal and general demolition of existing items and structures had to be carried out. Under the Joint Venture Agreement, the defendants had to compensate the plaintiff for the value lost. I find that it was not restricted to a written down or written off value as if it were an accounting exercise. No doubt if the Merger and Acquisition were to be realised the premises so altered, adapted and decorated to the defendants specifications would continue as wanted, until perhaps the premises were surrendered to the landlord, or, if the Joint Venture broke down and the premises had to be handed back to the licensor, and restored to the plaintiff’s requirements. Although the defendants did not at first accept many of the items in the schedule of valuations for both premises, ultimately there was a more realistic acceptance. A few items at Sai Kung were salvaged but I find were used by the defendants and there is a significant error in the figure for the cashier counter at Mong Kok — it should be HK$600 per unit not HK$6,000. I find that the valuation schedules put forward are a proper basis. Under this head the sum to be reimbursed to the plaintiff for the Sai Kung premises is HK$172,704.50 and for the Mong Kok premises is HK$835,929. The plaintiff is therefore entitled to a total of HK$1,008,633.50. . Forfeiture of the rental deposit at the provident centre, North Point 76.I am satisfied that the work carried out for the defendants at these premises had involved, perhaps unwittingly but certainly carelessly, demolishing the pre-existing partition wall between units G26/27 and G28. The plan of the premises supplied by the landlord, Hutchison Whampoa, clearly showed the original wall running between the pillars. The plans of MID, the architect or design planners instructed by the defendants, showed the change involving the fixing of folding doors and sliding doors on the boundary between the units and with a consequent incursion into G28. When the plaintiff was preparing re-instatement of the premises under the terms of its lease, the landlord demanded the removal of the partition wall and doors erected on the instructions of the defendant and/or its agent MID, and re-instatement of the wall in its original position. The defendant refused. The landlord consequently forfeited the plaintiff’s rental deposit of HK$106,018.9. The other aspect of loss was the rent for the period of the defendants’ unauthorised occupancy of the premises in the sum of HK$28,600. The defendants tried to contend that Mr Paul Yip was responsible for the work involving the partition wall. They argued that there was no such wall as shown in the plans of the landlord and that MID’s plans were a reflection of the layout at the time they were instructed to prepare their plans. Alternatively, Mr Paul Yip was responsible for the removal of the original partition and its replacement. I am satisfied Mr Paul Yip did not assume any such responsibility. He was not a supervisor in any meaningful sense. He acted as a go-between at the most and, as an e‑mail shows, he was in mainland China at the time that the material work was designated or outlined on the site. It was not the first time that the defendants had unrealistically tried to offload responsibility by making out that Mr Paul Yip was a contractor or in some such position of control, direction or responsibility. The plaintiff is entitled to the sum $134,618.09 under this head. The exclusion of the Red Carrot brand name at the Mong Kok premises 77.At one stage when the Merger and Acquisition was still in the parties’ contemplation, the plaintiff agreed to the placing of the defendants’ sign and logo on the outside of the Mong Kok premises in place of the plaintiff’s Red Carrot sign. This is clearly shown in one of the photographs. Once the Merger & Acquisition was no longer likely the plaintiff wanted their Red Carrot sign restored alongside the Pets Central sign. The defendants refused. In this context I bear in mind Mr de Krassel’s attempt to rewrite clause A(2) of the Joint Venture Agreement so as to construe “rebranded to include the names of Pets Central Hospital or Clinic logos” as reading “co-branded to exclude the Red Carrot or Q-Pets logos”. That really defied commonsense. The defendants were in my view trying to establish a benefit to which they was clearly not entitled. 78.The plaintiff claims damages for loss of goodwill, in effect business. There is no direct evidence that customers actually stopped shopping for the plaintiff’s goods at those premises but given the nature of swift change of premises and businesses in Hong Kong and their effect, I can accept that some custom was lost but how much and for how long is a matter to some extent of conjecture. In such an imprecise area I think that a modest nominal award of HK$15,000 is appropriate. Other counter claim allegations 79.I have earlier indicated that the defendants’ counterclaims fall by the wayside since they were in fundamental breach of the Joint Venture Agreement. Some of them are arrant nonsense. 80.There was no request for warehousing or failure to assist on the database information. The plaintiff fulfilled its obligations in regard to sourcing, warehousing, logistics and marketing using the plaintiff’s database. The alleged losses are in any event unsubstantiated. 81.Any effort to devise a revenue sharing formula failed because there was no joint will to do so. I do not need to find how that failed. Agreement was simply not reached. 82.The plaintiff was obliged to keep the doors closed at the North Point premises when the Department of Agriculture and Fisheries intervened. There was no oral agreement as alleged by the defendants. An ad hoc arrangement had existed at some stage before the Department issued its Notice of Breach. 83.I accept the plaintiff’s evidence in relation to the so called Denial of Access to the Defendants groomers. It was a contrived aspect of the counterclaim. The plaintiff agreed to the defendants’ introduction of groomers in or after June 2007 at which time they were employees of the defendants and not independent contractors in competition with the plaintiff which had its own grooming services. 84.The alleged obstruction of the defendants’ right of way at Sai Kung was a baseless, spurious claim. There was no right of way. The defendants’ licence to occupy had been terminated. They held over as trespassers. I am satisfied in any event that the steps taken by the plaintiff were not obstructive. If they had the effect of obstructing any part of the defendants use of the premises they are, as trespassers, in no position to complain. 85.The defendants’ contention on the matter of allocation of adoption areas is another contrived area of complaint. Adoption areas under the Joint Venture Agreement were to be allocated “where appropriate”. There was no absolute obligation. The Joint Venture Agreement had, of course, failed by reason of the defendants’ breach. 86.All the figures put forward as consequential loss are grossly inflated and unsubstantiated by any relevant documentation. One had the impression that the defendants were plucking figures out of thin air, and for good measure doubling them as in the case of the loss of car parking claim. SUMMARY OF PLAINTIFFS DAMAGES
There will therefore be judgment for the plaintiff for HK$7,099,113.71 with costs, and the counterclaim will be dismissed with costs. 87.I have been informed of the sanctioned offer under order 22 rule 24. The Parties lawyers have helpfully come to an agreement that the format for the costs order should be as follows: The 1st – 5th defendants do pay the plaintiff costs of these actions and counterclaims, including all costs reserved; (i) that the costs incurred before and up to 20 June 2011 to be taxed on a party and party basis if not agreed, and (ii) that the costs incurred after 20 June 2011 to be taxed on an indemnity basis if not agreed and with interest on those costs to run at a rate of 10% above judgement rate. 88.As far as interest on the damages is concerned, I order that it be at the rate of 1% over prime rate up to 20 June 2011 (the relevant date with reference to the sanctioned offer) and at the rate of 10% above the judgment rate from 20 June 2011 until payment. 89.I just want to add this, for the record. I am conscious that this trial has exceeded its allotted time and the original estimate of 12 days was generous enough. The crucial matter of whether the plaintiff was ever a shareholder of the 1st defendant could have been tried as a preliminary issue. That would have saved court time and an appreciable amount of costs. 90.Any casual observer during the course of this trial would have realised how the odds were developing as Mr de Krassel extended his stay in the witness-box by taking every conceivable, and inconceivable, line in his evidence. The defendants pursued every point with the exception of those conceded realistically by their counsel, Miss Elizabeth Herbert. As a result, my judgment has been far more extensive than I would otherwise have thought appropriate. 91.I should add, lest there be any lingering uncertainty in the minds of counsel, that although each submitted a judgment for my consideration relating to findings by another judge as to the credibility or otherwise of one of the defendant’s principal witnesses, I did not read either judgment in order that my own impressions were not coloured by the findings of others. 92.However, I have deemed it necessary to make my findings more detailed and make some findings which were not strictly necessary, in view of my decision on the principal points, in order to discourage the defendants from trying to establish a smokescreen of trivia in absorbing further time in these courts. The defence to the plaintiff’s claim had no substance whatsoever and thus was entirely lacking in merit. 93.The defendants’ opposition could properly be described as vexatious, certainly in my view, and the court should not have had its time wasted on litigation like this whilst worthwhile litigants who have genuine issues to be tried are delayed. 94.Having said that, I am grateful to both counsel because I understand, having once been in their position, the difficulties that can arise, do arise, and often persist and it is sometimes quite impossible to overcome those by persuading a client to adopt a realistic, sensible approach, and I think my task has nonetheless been made easier by both of you through the way you have handled it. Thank you very much.
Mr Norman Nip, instructed by F Zimmern & Co, for the plaintiff Ms Elizabeth Herbert, instructed by Oldham, Li & Nie, for the defendants | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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Further hearings and rulings under HCA 1381/2009