DYNAMIC WAY INTERNATIONAL LTD. AND ANOTHER v. HO KUI CHEE AND OTHERS

HCA 16149/1999

BETWEEN

____________

_______________

J U D G M E N T

_______________

Background:

1. Mr Yip is a director of the 1^st and 2^nd Plaintiff companies.  Shortly after commencing business in December 1993, the 1^st Plaintiff was awarded the sole distributorship of Eurolook shutters in Hong Kong, Macau, Taiwan and the People’s Republic of China.  Eurolook shutter is a transparent polycarbonate security shutter. At the time there were no comparable products in the market.  Initially, Yip tried to market the shutters to roller shutter contractors, but he met with little success.  Then he decided to market the shutters direct to end users, which would require the 1^st Plaintiff teaming up with a roller shutter contractor to provide installation and maintenance for the shutters.  He discussed with the 1^st Defendant who was the proprietor of Hung Fat Roller Shutter Engineering Company (hereinafter called “Hung Fat”), who was receptive to the idea.  On 20 April 1994, the 1^st Plaintiff entered into a cooperation agreement with the 1^st Defendant.  Under the terms of that agreement, the 1^st Plaintiff would subcontract the installation and maintenance of Eurolook shutters to the 1^st Defendant. The parties operated successfully under that agreement for a few months.

2. On 1 August 1994, the 1^st Plaintiff and the 1^st Defendant formed a joint venture using the 2^nd Plaintiff as the corporate vehicle.  Under the joint venture agreement, the 1^st Plaintiff was responsible for marketing the shutters and liaising with clients while all installation and maintenance work would be subcontracted to the 2^nd Plaintiff as the 1^st Plaintiff’s nominated subcontractor. The 2^nd Plaintiff would in turn subcontract the work to the 1^st Defendant.  In servicing the Plaintiffs’ clients, the employees of the 1^st Defendant had to present themselves as employees of the Plaintiffs. The 2^nd Plaintiff would receive a fee or commission from the 1^st Plaintiff and the 1^st Defendant in respect of each shutter installed.  Yip and Ho of the 1^st Plaintiff and the 1^st Defendant were appointed directors of the 2^nd Plaintiff.  The 2^nd Defendant, who is the son of the 1^st Defendant, also became involved in the business and management of Hung Fat and the 2^nd Plaintiff.  He attended directors meeting of the 2^nd Plaintiff.  The operation of the joint venture made it necessary for a lot of Eurolook plates and parts belonging to the Plaintiffs to be stored in the workshop of the 1^st Defendant.

3. The joint venture was very successful.  The 1^st Defendant’s turnover increased from about $2 million in 1994 to over $20 million in 1997 while the goodwill of the 1^st and 2^nd Plaintiffs began to build up.  On the other hand, the relation between Yip and the 1^st and 2^nd Defendants took a down turn.  There were disputes about contract fees, liability for maintenance and delay allegedly due to the 1^st Defendant’s inadequate manpower. The 1^st Plaintiff introduced an apprenticeship scheme into the 1^st Defendant’s workshop with a view to ease the manpower problem.  The 1^st Defendant was not receptive to the scheme which became another cause of dispute. In March 1997, Yip incorporated Dynamic Way (Hong Kong) Limited (hereinafter called “DWHK”) to handle the work which allegedly was beyond the capacity of the 1^st Defendant.  About 40% of the 1^st Plaintiff’s orders went to DWHK, which also became another cause of discontent between the 1^st Defendant and Yip.  In order to resolve all these disputes, the 1^st and 2^nd Plaintiffs and the 1^st Defendant signed an agreement titled “Engineering Contract and General Conditions” on 5 July 1997. The agreement was mistakenly dated as “5 July 1996”. It provided for a system of certification for the purpose of settling disputes about liability for maintenance, an annual revision of contract fees, an undertaking by the 1^st Defendant not to increase contract fees during the year and a restrictive covenant. At the same time, Yip was negotiating with the 1^st Defendant about a merger of Hung Fat with DWHK and an accountant was engaged to examine the business of Hung Fat. The target date of the merger was 1 December 1999 as the tenancy of the workshop of Hung Fat was due to be terminated on 30 November 1999.  However, the parties could not come to terms about the merger.  Eventually, the 1^st Defendant resigned from his directorship in the 2^nd Plaintiff on 26 July 1999 and terminated the joint venture agreement with the 1^st Plaintiff in October 1999.  Just a few months prior, in June 1999, the 2^nd Defendant set up the 3^rd Defendant company which has a similar Chinese name as Hung Fat.

4. The Plaintiffs claim against the 1^st Defendant for his breach of duty as director of the 2^nd Plaintiff, against the 1^st and 4^th Defendants for conspiracy to injure the Plaintiffs in relation to the Tung Chung Project, against the 1^st to 3^rd Defendants for breach of confidentiality and against the 1^st Defendant for breach of covenant and for costs of materials which have not been accounted for.  The Defendants counterclaimed for unpaid cost of works and for defamation.  It would be convenient to consider the issues in the following order: the Plaintiffs’ claim for breach of covenant, the Tung Chung Project which is relevant for both the claims against the 1^st and 4^th Defendant for conspiracy and against the 1^st Defendant for breach of fiduciary duty, the 1^st Defendant’s breach of fiduciary duty generally, the Plaintiffs’ claim for unaccounted for materials and then the Defendants’ counterclaim.

Breach of covenant by the 1^st Defendant:

5. Initially the Plaintiffs’ claim was for breach of duty of confidence imposed by the oral agreement in April or May 1994 and breach of restrictive covenant contained in the Engineering Contract and General Conditions signed by the 1^st Defendant in 1997.  At the conclusion of the hearing, Mr Ho for the Plaintiffs confirms that the Plaintiffs are contented to limit this claim to breach of Clause 12 of the Engineering Contract and General Conditions.  He submits that it is unnecessary for the Plaintiffs’ purpose to show or prove that there was any breach of the duty of confidence or duty of confidentiality in equity.

6. Clause 12 provides that the Plaintiffs’ clients and their particulars are property of the Plaintiffs and upon referral of a client by the Plaintiffs to the 1^st Defendant for installing shutters, unless the 1^st Defendant forthwith produced documentary proof that he had prior business relations with that client, the client shall be deemed to be the Plaintiffs’ property.  It further provides that during the currency of the agreement and for a period within one year of its termination, the 1^st Defendant may not promote, introduce or sell his products to the Plaintiffs’ clients.  The issue that immediately arises is whether the scope of the restraint is reasonable and enforceable.

7. Mr Ho submits that the restraint is for a period of one year which is a very short period and the object of prohibition is extremely limited being only confined to promoting, introducing or selling the 1^st Defendant’s products to the 1^st Plaintiff’s clients.  I have no quarrel that a one year covenant is not unreasonable, but the reasonableness of the object of the prohibition is open to dispute.  On the face, the restraint covers all aspects of the 1^st Defendant’s work and all products and services of the 1^st Defendant.  On that interpretation, the restraint may appear to be wider than necessary.  The 1^st Defendant has been carrying on business in the manufacture of shutters and iron grills.  The 1^st Plaintiff is the distributor of Eurolook plates.  The joint venture was in respect of the installation of Eurolook shutters marketed by the 1^st Plaintiff.  The parties benefited from the other under the joint venture: the 1^st Plaintiff in respect of the 1^st Defendant’s technical support and the 1^st Defendant in respect of the business introduced.  The clients were introduced by the 1^st Plaintiff.  It deserves some protection in respect of its business interest and its effort in developing the product and its market in Hong Kong.  But the 1^st Plaintiff’s interest is only in Eurolook products.  To restrain the 1^st Defendant after termination of the joint venture from introducing, marketing and selling any of its own products which are unconnected with the 1^st Plaintiff’s Eurolook products to the 1^st Plaintiff’s clients must, in any view, be more than necessary to protect the 1^st Plaintiff’s legitimate business interest.

8. Mr Ho submits that the restraint only applies to Eurolook shutters.  With respect, I cannot agree.  In construing a contractual term, the Court should attempt to discover what a reasonable person would have understood the parties to mean.  In ascertaining that meaning, the Court should have regard to the factual matrix in which the parties were at the time of the contract.  The restraint is phrased in the widest and unqualified term that the 1^st Defendant may not promote, introduce or sell “his products” to the Plaintiffs’ clients.  The words “his products” must mean any of the products of Hung Fat, be they clear shutters, or metal grills, or minute hole shutters or whatever. The restraint is tied to the 1^st Defendant’s products and not to the Plaintiffs’ business.  I find it impossible to draw out from the words “his products” the restrictive meaning which Mr Ho sought to put to those words nor can I interpret it to mean the products in competition with the Plaintiffs’ business.

9. In Kao Lee & Yip v John Richard Edwards [1994] HKLR 232, Litton JA, as he then was, dismissed counsel’s suggestion that the width of a restrictive covenant may be sized down to the extent as is reasonable.  He held at 242:

“… if wide covenants were to be construed in this way, so that they would always be cut down to the extent necessary to protect the employer’s legitimate interest as found by the court, what incentive would there be for employers to draft their covenants restrictively? And how is the employee, faced with a covenant in wide terms to know that the courts would ultimately trim the covenant down?  The burden is upon the plaintiff to satisfy the court that, by the words used by him the covenant is no wider than necessary to protect his interests.  The court should not strain to give an artificial construction to the clause in order to preserve its validity.”  

The Court always views any restrictive covenant with jealous as covenants in restraint of trade or restricting an employee’s liberty to work are contrary to public interest.  The party seeking to rely on a covenant must ensure that it is not drafted in terms wider than reasonably necessary to protect its legitimate interest.  In the words of Litton JA, the burden is on the plaintiff to satisfy the court that, by the words used by him the covenant is no wider than necessary to protect his interests. The Plaintiffs have, in my view, failed utterly to discharge that burden. Clause 12 must be struck out as being void and unenforceable.

10. Having reached the above conclusion, the Plaintiffs’ claim under this head must be dismissed.  It is not necessary to consider if the business activities of the 3^rd Defendant and the assistance given by the 1^st and 2^nd Defendants constituted any breach of covenant.

The Tung Chung Project:

11. In June 1998, Yip was introduced to the architect in charge of a property development project in Tung Chung.  The developer was Newfoundworld Limited (hereinafter called “Newfoundworld”), which was a conglomerate of five major property developers in Hong Kong.  Yip and the 1^st Defendant attended a number of meetings with representatives from the architect, the principal contractor and Mr Wingle Fong of Newfoundworld to discuss installation of shutters for the Food Court and Retail Bridge Outlet of the project.  In respect of the Food Court, the designer had specified Eurolook shutters to be used and the contract with the principal contractor was confirmed in February 1999.  As for the Retail Bridge Outlet, 32 minute hole stainless steel shutters were required.  This type of shutter was not popular in Hong Kong and the cost of punching minute holes was very expensive. Yip was informed that there was a Japanese competitor in this portion of the project.  He was asked to give quotations for two mock up shutters of 9 metres and 4 metres in width.  The 1^st Plaintiff quoted a price of $99,100 and $48,600 with a 5% discount respectively for the two shutters on 2 March 1999 (the first quotation).  Newfoundworld placed an order for the 9 metre mock up shutter. This shutter was delivered and installed by Hung Fat in April 1999 for the Plaintiffs.  Newfoundworld did not place any order for the 4 metre mock up shutter with the Plaintiffs.  Instead, it obtained another quotation of $98,923 and $23,667 respectively for the 9 metre and 4 metre mock up shutters from the 4^th Defendant on 22 March 1999. It should be noted that the quotation for the 9 metre mock up shutter was slightly higher than that of the 1^st Plaintiff’s but the one for the 4 metre mock up shutter was about half that of the 1^st Plaintiff’s.  Subsequently, Newfoundworld placed an order for the 4 metre mock up shutter with the 4^th Defendant who then subcontracted the work to Hung Fat.  Thus, in fact, both shutters were made by Hung Fat.

12. Then Newfoundworld invited both the 1^st Plaintiff and 4^th Defendant to tender for the 32 minute hole steel shutters on 26 April 1999.  In the meantime, Fong told Yip that he had obtained a quotation from the 4^th Defendant which was 20% cheaper than the 1^st Plaintiff’s.  As a result, the 1^st Plaintiff reduced its quotation by 41% from the rate under the first quotation to a total of $1,079,400 for the 32 shutters.  The 4^th Defendant quoted a price of $1,065,881.  Again Fong told Yip that the 4^th Defendant offered a lower tender. Then on 2 June 1999, the 1^st Plaintiff voluntarily reduced its quotation by about 25% to $824,175 to secure the tender, representing a total price reduction of $915,000.

13. The Plaintiffs’ case against the 1^st and 4^th Defendants is that Mr Franklin Ma of the 4^th Defendant is personally known to the 1^st Defendant and had visited the workshop of DWHK with the 1^st Defendant in 1998.  The 4^th Defendant is in the business of installing fire shutters and not security shutters.  The 4 metre mock up shutter supplied by the 4^th Defendant was installed and made by Hung Fat with materials left over from the manufacture of the 9 metre mock up shutter.  According to Yip, Fong told him in May 1999 that the 4^th Defendant offered “Clearlook” shutters which were similar to the Plaintiffs’ Eurolook shutters.  He produced a polycarbonate plate which was allegedly given to him by Fong as a sample of the 4^th Defendant’s “Clearlook” plate.  The sample is similar to a Eurolook plate except that there are some scratch marks at the corresponding position of the plate where the Eurolook logo is embossed.  Yip said that the sample is in fact a Eurolook plate with the Eurolook logo scrapped off.  Mr Ho submits, on the above evidence, that the irresistible inference to be drawn is that the 1^st and 4^th Defendants conspired together to damage the Plaintiffs’ business by undercutting the 1^st Plaintiff’s price.

14. The 1^st Defendant denied that he was a party to any conspiracy to damage the Plaintiffs’ business. He admits that the 4 metre mock up shutter was manufactured in the workshop of Hung Fat as a private job by his brother-in-law using his workshop facilities. He denied that the materials used were left-overs from the manufacturing of the 9 metre shutter.

15. The 4^th Defendant’s defence is in marked contrast with the 1^st Defendant’s. Ma of the 4^th Defendant knew the 1^st Defendant since 1989. In the same year, he set up the 4^th Defendant company.  Initially the 4^th Defendant’s business was to install imported fire shutters and fire doors.  Since 1991, it also dealt in metal security shutters and since 1999, Clearlink shutters as well. He knew nothing about the 1^st Plaintiff’s involvement in the Tung Chung Project. He was introduced to Fong of Newfoundworld by his client, Taikoo Property Development. Fong asked him to give a quotation for a 9 metre and a 4 metre minute hole steel shutter and two clear polycarbonate sliding shutters.  In turn, he asked the 1^st Defendant for a quotation in respect of the two minute hole shutters and Ring-Gard (UK) Ltd (hereinafter called “Ring-Gard”) for quotation in respect of the clear shutters.  All along he liaised with the 1^st Defendant and had never talked to his brother-in-law.  When he received the purchase order from Newfoundworld for the 4 metre mock up shutter, he subcontracted the work to Hung Fat for $19,550.  He produced an invoice from Hung Fat signed by a person named “Chan Kee” and impressed with the chop of Hung Fat.  He had no knowledge that the materials used were left-overs from the production of the 9 metre shutter.  Then the 4^th Defendant was invited by Newfoundworld to tender for 32 similar shutters of various sizes.  The 4^th Defendant gave its quotation but never received any response from Newfoundworld.

16. Ma denied having given any Eurolook plate to Newfoundworld.  He started marketing Clearlink plates in 1999.  He produced a fax transmission dated 13 January 1999 from the British Consulate General in Hong Kong in support of his allegation that he had made inquiries from the Consulate about Ring-Gard which is a supplier of polycarbonate plates. He denied intending to use Eurolook plates to be supplied by the 1^st Defendant to meet any contract obtained from Newfoundworld.

17. I find Ma an honest and credible witness.  His evidence is supported by contemporaneous documents.  More than three months before he became involved with Newfoundworld, he had made inquiries with the British Consulate General about Ring-Gard.  He said his quotation for the polycarbonate shutters was based on the price from Ring-Gard.  This is supported by a fax dated 18 March 1999 from Ring-Gard.  The specifications he quoted in his letter to Newfoundworld were Ring-Gard specifications, in particular that the metal tube to be used in holding the plates together was 15.8 mm in diameter. Yip emphasised in his evidence that the eyes in the Eurolook plates are 17 mm in diameter and the tubes used are 17 mm in diameter which are not available in the local market. Yip initially ordered the tubes from Holland but later turned to tailored made supply from China. If the 1^st Defendant had access to sufficient quantity of Eurolook plates for the project, he would probably have access to the necessary quantity of 17 mm tubes from the 1^st Plaintiff. If the plates and parts were to be supplied by the 1^st Defendant as part of the conspiracy, it is unlikely that the 4^th Defendant would have paid so much regard to details as to specify in its own quotation that the tubes used would be 15.8 mm which was the Ring-Gard specification.  I am satisfied that the 4^th Defendant had contacted Ring-Gard before giving its quotation and had in mind using supplies from Ring-Gard.

18. The Plaintiffs produced a letter dated 26 August 1999 from Ring-Gard confirming that they have ceased selling Clearlink products and that they intended to replace Clearlink products with Eurolook products.  This letter is inconsistent with the one dated 17 March 1999 produced by the 4^th Defendant.  The two letterheads are different, but the logo is the same. The writer of the letter dated 17 March 1999 also appeared among the names of the directorate in the letter dated 26 August 1999.  I have no doubts that both letters are authentic.  I attribute the inconsistency to a change in Ring-Gard’s marketing policy between March and August 1999.  I do not consider the 4^th Defendant’s credibility impugned by Ring-Gard’s letter of 26 August 1999.  The contemporaneous letter from Ring-Gard dated 17 March 1999 shows that the 4^th Defendant acted upon that quotation from Ring-Gard for Clearlink products which Ring-Gard was then in a position to supply in March 1999.

19. The 4^th Defendant was subsequently appointed as distributor of Clearlink product by a distribution agreement dated 1^st June 1999 with Jonathan Goose Marketing Limited. The Plaintiffs attempted to contradict that agreement by producing a letter from the said Jonathan Goose Marketing Limited undertaking not to deal with products which fell within the scope of Eurolook’s registered design with effect from 4 March 1996.  Even if Jonathan Goose Marketing Limited was in breach of its undertaking, that could not affect the credibility of the 4^th Defendant.  In any event, these matters are irrelevant as they occurred after March 1999 and also that by 3 June 1997 Jonathan Goose Marketing Limited had obtained a Certificate of Registration of Design in respect of its own clear shutter plates and could have lawfully supplied Clearlink plates to the 4^th Defendant.

20. The marked contrast between the 4^th Defendant’s case and the 1^st Defendant’s is significant.  The 4^th Defendant’s case is supported by an invoice from the 1^st Defendant.  The 1^st Defendant’s case is that when Ma asked him for quotation for the 4 metre shutter, he referred him to his brother-in-law, Mr Chan Ping Kee, as Hung Fat was busy.  This is denied by Ma and is also inconsistent with the invoice issued under the letter head and company chop of Hung Fat.

21. As for Chan, he said that the 1^st Defendant informed him about the 4 metre shutter and told him that he may make the shutter as his own private job because Hung Fat was too busy.  He said he charged $24,800 for the shutter. That is out of line with all the evidence and is higher than the price quoted by the 4^th Defendant to Newfoundworld.  He said after the invoice was issued he received $23,000 only.  If this is true, it would only leave the 4^th Defendant with a profit of $667.  That is inherently improbable.  What he said is also contrary to the invoice from Hung Fat, which showed an invoice price of $19,550.  He said he purchased the perforated steel sheets from the 1^st Defendant for $11,000 which he set off against a debt of about $100,000 which the 1^st Defendant owed him.  This piece of evidence is also wholly incredible as the cost of punching holes in the steel sheet alone was more than $16,000.

22. Furthermore, according to the 1^st Defendant, the perforated steel sheets ordered for making the 9 metre shutter had all been used up because of excessive wastage and the waste had been sold as scrap.  But he could not produce evidence as to placing further order for making perforation in steel sheets which he allegedly sold to Chan for making the shutter.  The 1^st Defendant’s and Chan’s account that the work was given to Chan as a private job because Hung Fat was too busy is also incredible because the shutter was in fact manufactured and installed by workers of Hung Fat and when installing the shutter the workers of Hung Fat who were instructed to put on a different uniform.  I do not accept the 1^st Defendant’s and Chan’s evidence.

23. The Plaintiffs’ case against the 1^st and 4^th Defendants is based on inference.  I accept the 4^th Defendant’s evidence but reject the 1^st Defendant’s and Chan’s.  It may appear too much a coincidence that Taikoo Property Development had introduced Ma to Newfoundworld and even greater coincidence that Ma sought quotation from the 1^st Defendant and subcontracted the work to Hung Fat.  However, Taikoo Property Development is a member of the conglomerate. Accepting that it brought Ma in contact with Newfoundworld, it is not much a coincident that Ma sought the help from the 1^st Defendant as they know each other well and have business connection. For reasons as explained above, I have no doubt about Ma’s honesty. His evidence is fully supported by contemporaneous documentary evidence. 

24. The 4^th Defendant’s quotation for the 4 metre shutter was markedly lower than the 1^st Plaintiff’s while that for the 9 metre shutter was slightly higher than the 1^st Plaintiff’s.  The 1^st Plaintiff’s quotation for the 9 metre shutter offered on 2 March 1999 was $99,100 with a 5% discount, i.e. $94,145 net.  Its second quotation dated 29 March 1999 was a special price of $98,610 net from the list price of $103,800.  On the other hand, the 4^th Defendant’s quotation dated 22 March 1999 and 1 April 1999 after some changes of specification were $98,923, which was higher than either of the quotations by the 1^st Plaintiff.  If there was any conspiracy to outbid the 1^st Plaintiff, the 4^th Defendant’s quotation for the 9 metre shutter would have, like that for the 4 metre shutter, been lower than the 1^st Plaintiff’s, if not significantly lower.  A quotation of $47,000 would have been proportionate with its quotation for the 4 metre shutter. Of course the 4^th Defendant gave its quotation by marking up on the price offered by the 1^st Defendant. The 4^th Defendant’s quotation for the 9 metre shutter was about double that of 4 metre shutter on a per unit area basis.  This suggests that probably the 1^st Defendant quoted a cheaper price for the smaller shutter as he had left-over materials to complete the job and he took it as an one off job at the time he gave the quotation to the 4^th Defendant.

25. In view of the contemporaneous documents in support of the 4^th Defendant’s business connection with Ring-Gard, I also reject Yip’s evidence that the sample he received from Fong with the Eurolook logo scrapped off came from the 4^th Defendant. To some extent this finding damages Yip’s credibility.  Fong is a very important witness for both the Plaintiffs and the 4^th Defendant.  As the Plaintiffs bear the burden of proof, his absence is more detrimental to the Plaintiffs than to the 4^th Defendant.  It is also highly probable that Fong had been manipulating the 1^st Plaintiff and the 4^th Defendant so as to strike a better deal for Newfoundworld. This is just commercial reality. On balance I am not satisfied that the Plaintiffs have proved that the 4^th Defendant was a party to any conspiracy to damage the Plaintiffs’ business. In fact, on the contrary, I am quite satisfied that he was not. Accordingly, I dismiss the Plaintiffs’ claim against the 4^th Defendant.

26. With this conclusion, it must necessarily mean that the Plaintiffs’ claim against the 1^st Defendant in conspiracy must also fail.  However, that does not mean the 1^st Defendant had not been in breach of his duty as a director of the 2^nd Plaintiff.  It would be convenient to consider next his liability for breach of fiduciary duty generally as director of the 2^nd Plaintiff.

1^st Defendant’s breach of fiduciary duty as director:

27. There are three situations where the 1^st Defendant’s conduct as a director of the 2^nd Plaintiff was called into question. These are, firstly, his permitting the 3^rd Defendant to use the address, telephone and fax numbers of Hung Fat and his mobile phone in connection with the 3^rd Defendant’s competing business; secondly, his involvement or assistance in the business of the 3^rd Defendant as discovered by the private investigators employed by the Plaintiffs and thirdly, his assistance to the 4^th Defendant in the Tung Chung Project.  The first two situations can be disposed of quickly. I do not think the Plaintiffs have any property in the 1^st Defendant’s telephone and fax numbers or mobile phone.  There is nothing sinister or unusual for the father to allow his son to have use of these facilities. As for the 1^st Defendant’s involvement or assistance in the 3^rd Defendant, the motive of the 1^st Defendant was suspicious, to say the least. However, the surveillance was conducted on 18 August 1999, three weeks after his resignation as director of the 2^nd Plaintiff on 26 July 1999, when his fiduciary duty had come to an end. These complaints may have more significance in a claim for breach of confidentiality or breach of covenant.  But the Plaintiffs are not proceeding on the basis of breach of confidentiality and the claim for breach of covenant will be dealt with later.

28. The only relevant complaint is the 1^st Defendant’s involvement in the Tung Chung Project. The Plaintiffs’ complaint is that the 1^st Defendant assisted the 4^th Defendant in outbidding the 1^st Plaintiff by providing it with the Plaintiff’s costs and quotations of the shutters to be submitted to Newfoundworld and in supplying the 4 metre minute hole mock up shutter to the 4^th Defendant in fulfilment of its contract with Newfoundworld.

29. On the facts, I find that the 1^st Defendant supplied and installed the 4 metre mock up shutter as a subcontractor of the 4^th Defendant for $19,550.  There is no evidence in support of a conspiracy between the 1^st and 4^th Defendants to injure the Plaintiffs’ business.  In connection with the mock up, the 1^st Defendant attended a number of site meetings with Yip and representatives of Newfoundworld.  Because of the dimensions of the two shutters and that they were to be installed in Tung Chung, the 4^th Defendant must have known that the quotation requested by the 4^th Defendant was required for the Plaintiffs’ customer.  Even if he had no knowledge at that stage, when Ma told him to take measurements from the site, he must have known that the shutter ordered by the 4^th Defendant was to be installed in the same project that the Plaintiffs were interested in.  This is reflected by his arranging his workers to wear different uniform when installing the shutter.  By giving a quotation to the 4^th Defendant and subcontracting the work from it in competition with the Plaintiffs, he must have known he was doing an act detrimental to the Plaintiffs.  No point has been taken by counsel for the 1^st Defendant that he was a director of the 2^nd Plaintiff and not of the 1^st Plaintiff to whom he owed no fiduciary duty.  I assume that whatever business the 1^st Plaintiff obtained would be subcontracted to the 2^nd Plaintiff.  Hence, the 1^st Defendant would be in breach of his duty as director of the 2^nd Plaintiff if he did any act which would damage the 1^st Plaintiff’s business and, hence in turn, the 2^nd Plaintiff’s.

30. Though there is no evidence what price he quoted to the 1^st Plaintiff and to the 4^th Defendant and how from those prices they made up their quotations to Newfoundworld, it is obvious that the price he quoted for the 4 metre mock up shutter to the 4^th Defendant must be substantially lower than that he quoted to the 1^st Plaintiff.  When so doing, he must have foreseen that the price he quoted for the 4 metre mock up shutter will result in the 1^st Plaintiff losing out on the 4 metre mock up and probably in the entire project.  I have no hesitation to find that by supplying and installing the 4 metre mock up shutter, the 1^st Defendant was in breach of his fiduciary duty as a director of the 2^nd Plaintiff.  This is the only breach of fiduciary duty which the Plaintiffs are able to prove against the 1^st Defendant.

31. The remedy sought by the Plaintiffs is for an account.  But as the breach that could be established related to an one off incident, an account is not appropriate.  I could have proceeded to assessment, but prudence would require that I hear the views of counsel first. Accordingly I enter judgment on liability in favour of the Plaintiffs against the 1^st Defendant in respect of breach of fiduciary duty with damages to be assessed.  In view of the likely legal costs involved and the damages that may be awarded, it would be advisable for the parties to agree on the quantum if possible and only in default of such agreement, should the matter be restored before me for assessment. Any agreement reached should, of course, be without prejudice to the parties’ right to appeal against my judgment on liability.

Plaintiffs’ claims for unused material:

32. The Plaintiffs claim a sum of $7,975.10 being unaccounted for materials retained by the 1^st Defendant.  The Plaintiffs’ claim is based on contemporaneous computations signed and acknowledged by the 1^st Defendant and on a summary acknowledged by the 2^nd Defendant dated 9 September 1999 shortly before termination of the joint venture.  The 1^st Defendant’s defence is that he signed the acknowledgment under protest as he was hard pressed for cash and Yip knew about it.  Another reason was that he wished to maintain on good terms with the Plaintiffs as he still expected to have business from them after the termination of the joint venture.

33. At the time, there was apparently a total breakdown in his relations with the Plaintiffs. On his own evidence about Invoice 1319 and 1361 (see below), he said he had told the Plaintiffs that the understanding under the joint venture was no longer extant and he would charge the Plaintiffs what he called “outside rate” for emergency repairs and he complained to the Plaintiffs’ client about non payment and threatened not to continue with the work.  If that was his attitude at the time, there could not be any truth that he signed the computation for comity reason.  He would have argued for each and every item that he disputed.  Furthermore, as a result of my adverse finding against him in relation to the Tung Chung Project, I have serious doubts on his credibility, though to a lesser extent on Yip’s as well.  I do not consider the 1^st Defendant’s explanation credible, particularly in the light of the contemporaneous record.  On balance, I am satisfied that this claim is proved.

34. Another claim is for $16,247 which was the apportioned cost of punching holes on a roll of steel used by the 1^st Defendant in making the 4 metre minute hole mock up shutter.  There is no dispute that an entire roll of steel of 548 linear metres was punched at the cost of $42,169 but only 337 metres was actually used on the shutter.  The 1^st Defendant’s explanation is that the perforated steel roll was difficult to shape and cut and this accounted for a wastage of about 38.5%.  He said that the wasted steel had been sold as scrap.  But on the other hand, he could not account for the source of perforated steel which he allegedly sold to his brother-in-law for making the 4 metre shutter.  He could not produce any documentary evidence of paying for the perforation.  The price that he allegedly sold the punched steel to his brother-in-law is also inconsistent with the cost of perforation, which makes his account incredible.  His evidence was contradicted by his former employee, Mr Chung, who resigned from his employ and joined the Plaintiffs.  Chung said that the perforated steel had been used in making the 4 metre mock up shutter.  Even without taking into account Chung’s evidence, I would reject his evidence as incredible.  I am satisfied that the perforated steel used in making the 4 metre mock up shutter was from material left over from the same roll of perforated steel used for manufacturing the 9 metre mock up shutter.  The 1^st Defendant is therefore liable to the Plaintiffs in the amount as claimed.

35. Accordingly, I enter judgment in favour of the Plaintiffs under this head of claim against the 1^st Defendant in the amount of $24,222.10.

1^st Defendant’s counterclaims for work done:

36. The 1^st Defendant counterclaims for $176,965.46 unpaid charges.  An amount of $66,777.20 is admitted by Yip, leaving two payments under invoice No. 1319 and 1361 in dispute.

37. Invoice 1319 is in respect of an urgent emergency on site repair which took about half an hour.  The 1^st Defendant’s reason for the charge was that three workers, including himself and his wife, were engaged on the job.  Their daily rate was $600 and as the work was performed on Sunday they were entitled to double pay.  Under cross-examination, he does not dispute that the work only took half an hour and involved only one worker while the other two were there to render supporting service only.  According to Yip there was an agreed practice that where the repair costs exceeded $1,000 the 1^st Defendant had to seek prior approval because the Plaintiffs had in turn to seek approval from the client. He considered $350 would have been reasonable. To that the 1^st Defendant replied that prior to the termination of the joint venture he had informed Yip that the prior practice was cancelled and he would charge at the usual outside rate. 

38. I consider the established practice reasonable and sensible.  Where costs of repairs are high, business efficacy and business sense would require that the client should be informed first and his prior approval obtained before repairs commence. The work that was involved was only a minor one occasioned by a faulty bracket.  In view of my adverse finding of the 1^st Defendant’s credibility, I reject his evidence as incredible.  There was a complete breakdown of cooperation at that stage and the 1^st Defendant was grossly overcharging.  I consider the cost of labour of one man-day appropriate and assess his claim at $600 only.

39. Invoice No 1361 in the sum of $106,688.26 is a demand for payment of 70% of the contract sum under contract 2514-4a.  At the time the 1^st Defendant had completed about 80% of the work under that contract.  He demanded payment and upon the Plaintiffs’ refusal, he wrote to the Plaintiffs’ client alleging non payment and threatening that he would not send any more workers to the site to complete the work.  The Plaintiffs accepted that as repudiation of the contract on the part of the 1^st Defendant.  The dispute then between the parties was whether Clause 7 of the Engineering Contract and General Condition which provided that payment would only be made 14 days after receipt from the client was applicable.  The 1^st Defendant considered he was not bound by that clause as the joint venture was about to terminate.  I hold a contrary view as Clause 7 must be part of the term of contract 2514-4a and he had also signed a written confirmation on 10 July 1999 that the Engineering Contract and General Condition would continue to apply.  Their dispute is now academic as the Plaintiffs do not dispute that they had received payment or that the work was not performed.  Yip claimed that the Plaintiffs were entitled to a number of set offs.

40. The Plaintiffs claim to set off $15,000 as the cost of a mould retained by the 1^st Defendant and payment of deposit of $10,609.60 to the 1^st Defendant.  These set offs are supported by acknowledgements signed by the 1^st Defendant and must be allowed.

41. The Plaintiffs claim $101,490 as value of unreturned materials.  By their letter dated 14 October 1999, the 1^st Defendant’s solicitors agreed to release the materials on condition that the 1^st Defendant was not required to install the remaining two shutters under two of the contracts.  Thus both liability and quantum are not in dispute.  These materials may not be used by the 1^st Defendant without infringing the Plaintiffs’ right.  Justice would require that they be returned to the Plaintiffs as they should have done in October 1999 rather than to force a sale on the 1^st Defendant of materials which he could put to no use.  The 1^st Defendant shall make good any shortfall or materials damaged while in his possession. Such damages shall be assessed on the basis of the Plaintiffs’ list price.

42. The Plaintiffs claim a total of $59,459.76 represented by three debit notes in respect of unaccounted for materials. On 1 September 1999, the 1^st Defendant wrote to the 1^st Plaintiff to request for the amounts to be set off against the sums payable to the 1^st Defendant in the following month.  I accept this as sufficient evidence of the 1^st Defendant’s acknowledgement of liability and quantum.

43. Thus on the 1^st Defendant’s counterclaim, I enter judgment in the amount of $89,115.09 which is assessed as follows:

Invoice NoAmount

1319$          600.00

1354$  66,777.20

1361$106,888.25

Sub-total:$174,265.45

LessMould:$15,000.00

Deposit:$10,609.60

Materials:$59,459.76$               85,069.36

Balance:$ 89,196.09

Defamation:

44. The Defendants’ counterclaim arose out of the following circumstances.  In late September 1999, soon after the termination of the joint venture agreement, the Plaintiffs issued two letters to their clients (hereinafter referred to as the “First Letter” and “Second Letter” respectively). These letters are similar in nature.  The Second Letter is a Chinese version of the First Letter which is in English.  The letters allege that it has come to the Plaintiffs’ attention that the 3^rd Defendant claims to be the exclusive distributor or sales agent of a transparent shutter called “Clearlink shutter” supplied by Ring-Gard and that the 3^rd Defendant is strongly associated with the 1^st Defendant who is the sole proprietor of Hung Fat and director of the 2^nd Plaintiff.  They also enclose copies of two letters from Ring-Gard indicating that the 1^st and 3^rd Defendants were not exclusive distributor of Ring-Gard and that Ring-Gard was not selling Clearlink Shutters and intended to replace the Clearlink product with Eurolook shutters.  All these are factually correct and not defamatory.

45. In late October 1999, the Plaintiffs issued a third letter (hereinafter called the “Third Letter”) to some of their clients enclosing copies of the present writ of summons.  Paragraph 2 of the letter reads:

“During the terms when Mr Ho and Mr Chris Ho were the director and de facto director of our subsidiary company, Dynamic Way Engineering Co Ltd, and when Hung Fat was a contractor of our companies, they were wrongfully and unlawfully in breach of the following:

1.Duties & fiduciary duties;

2.Contracts and agreements reached and signed with our companies;

3.Retaining or using our materials to do mock up in the same project for our competitor to injure our business;

4.Unlawfully disclosed our confidential information to third party(ies);

5.Misrepresentation; &

6.Misuse of our confidential information, business connections and/or information they acquired in the course of acting respectively as the director and/or de facto director and the contractor of our companies for the purpose of gaining an advantage for themselves or others.”

46. The Plaintiffs do not dispute that the content of this letter is defamatory but rely on the defence of justification and qualified privilege.  The Plaintiffs are not now proceeding against the 2^nd Defendant for breach of fiduciary duty as a de facto director of the 2^nd Plaintiff.  Thus even though I have found that the 1^st Defendant had been in breach of his duty as a director, or in breach of the Engineering Contract and General Conditions and using materials belonging to the Plaintiffs in making the 4 metre mock up shutter, these findings could not provide any justification in respect of the defamatory imputations made against the 2^nd Defendant.  In view of my finding against the existence of a conspiracy between the 1^st and 4^th Defendants to injure the business of the Plaintiffs, the allegation of wrongful use of confidential information must also fail against the 1^st to 3^rd Defendants.  Hence, the defence of justification must fail against all the Defendants.

47. The other situations where a person may escape liability for defamation even if the defamatory statement is in fact untrue is that the statement was published on occasion of absolute or qualified privilege.  Obviously, no absolute privilege is attached to the defamatory letters issued by the Plaintiffs.  To claim protection under the principle of qualified privilege, the Plaintiffs have to show that the statement was fairly warranted by the occasion, that is to say, was reasonably necessary to achieve the purpose for which the law grants the privilege; that the maker had a duty to make the statement and the recipient had a corresponding interest to receive it; and that he made the statement without malice, i.e. knowing it to be untrue or with some indirect or improper motive: Drummond v Kwaku [2000] 1 HKLRD 604.  The burden lies on the party, i.e. the Plaintiffs, to establish the facts and circumstances necessary to create the privilege.

48. Mr Ho submits that the dispute amongst the parties had led to litigation and the purpose of issuing the letter was to clarify the position of the 1^st and 2^nd Defendants and numerated the claims contained in the statement of claim.  He submits that the general purport of the letter was purely to report the fact that an action had been commenced against the 1^st Defendant.

49. Implicit in a statement of claim is that a defendant has committed a wrongful act, which the plaintiff seeks to put right by instituting legal action.  If the wrong alleged to have been committed by the defendant is defamatory of the defendant, it is as much an act of defamation circulating that statement of claim to people who are not parties to the action as if one is publishing the defamatory remarks to the rest of the world unless the statement is true.  To hold otherwise would be to allow the legal process to be abused as a pretext for defaming one’s opponent in a litigation.

50. The occasion which Yip sought to justify the Plaintiffs’ response was that he came to know that the 1^st and 3^rd Defendants contacted the Plaintiffs’ clients.  As a result, there were enquiries from the Plaintiffs’ clients whether his partner, Mr Paul Ho, and the 1^st Defendant were the same person and about the relation between the 1^st and 2^nd Defendants with the Plaintiffs which prompted the issue of those letters.  I do not consider they justify the defamatory response contained in the third letter.

51. Yip cited an occasion when one of the Plaintiffs’ clients, Ichiban, gave him a letter allegedly issued by the 3^rd Defendant under the name of Ken Ho which is defamatory of the Plaintiffs.  A similar letter was received by Maxim Caterers Limited and referred to the Plaintiffs.  In these letters, the writers accused the Plaintiffs of using counterfeit and substandard products from China, bribery, false accounting and defaming the Plaintiffs.  The Defendants denied issuing the letter. I consider the Defendants’ evidence in this respect inherently improbable.  There is no reason why the Plaintiffs would have issued this letter to their own clients to their own damage.  Nor have the Defendants shown there is any real likelihood that anyone else would have done that to injure the Plaintiffs’ reputation and put the blame on the Defendants.  The letters also invited the reader to contact the 3^rd Defendant for its Clearlink product. Obviously, the Defendants are the only persons who would benefit from the issue of those letters.  For reasons as is apparent from the other parts of this judgment, I do not consider any of the defence witnesses credible.  I have no doubt that the letters were issued by the Defendants.  Even if the Defendants had not issued the letters, I would have to consider on the basis that they had for the purpose of considering the Plaintiffs’ claim to privilege.

52. There are two versions of the letter.  The earlier version contains four allegations while the later version contained six allegations of dishonesty against the Plaintiffs.  The letters that were produced were all undated.  The earliest one could put a date to those letters is early December 1999 as shown in a chop mark recording the date of receipt on one of the earlier version of the letter.  The one received by Maxim Caterers Limited, which is a later version, was received in October 2000, according to the Plaintiffs’ solicitors.  The Plaintiffs were unable to produce the letter received by Ichiban or any other letter pre-dating the date of the Third Letter containing the defamatory response, i.e. October 1999.  Yip is a very business like and careful person.  If he has received such letters from his clients before October 1999, he must have carefully kept and documented them. The order of event as I find them is as follows.  Firstly, the Plaintiffs issued the first two letters in September 1999 to protect their interest upon learning of the competing business operated by the Defendants.  Three days after issuing the writ of summons on 17^th October 1999, they issued the Third Letter to their clients, enclosing the writ and a summary of their accusations against the Defendants.  It was then that the Defendants retaliated with theirs accusing the Plaintiffs of defamation and dishonesty.  In my view, the timing of the Plaintiffs’ three letters are such that it could not fairly be said that the issue of their Third Letter was provoked by the Defendants’ letters.  I cannot be satisfied that the making of the defamatory response contained in the Plaintiffs’ Third Letter was warranted by the occasion as suggested by Yip or by any occasion at all. There was also no duty on the Plaintiffs to make the statement and no corresponding interest in the Plaintiffs’ clients to receive it.  The defence of qualified privilege must fail.

53. Mr Ho suggests that the Defendants are only entitled to nominal damages as the Defendants suffered little or no loss in business. In my view, the defamatory imputations against the 1^st Defendant are substantially justified.  He was in breach of his fiduciary duty as a director of the 2^nd Plaintiff, he used materials belonging to the Plaintiffs to manufacture and install the 4 metre mock up shutter in competition with the Plaintiffs and to their detriment.  He was in breach of the Engineering Contract and General Conditions towards the end of the joint venture.  His conduct in relation to the Tung Chung Project puts suspicion on himself as to whether he was engaged in a conspiracy with the 4^th Defendant to injure the Plaintiffs’ business.  In my view, he is only entitled to nominal damages.  Accordingly, I award him $1 as nominal damages.

54. The position of the 2^nd Defendant is different.  He was not a director of the 2^nd Plaintiff and the Plaintiffs are not proceeding against him as a de facto director.  There is no evidence of his involvement in the Tung Chung Project.  He has put suspicion on himself with his using different names and setting up the 3^rd Defendant company in competition with the Plaintiffs’ business.  But with the restrictive covenant struck out as against the 1^st Defendant, his conduct becomes insignificant and irrelevant.  The letter damages the 2^nd Defendant’s reputation as an honest and fair handed person to have business with.  The 3^rd Defendant is the alter ego of the 2^nd Defendant. The Third Letter was only published to the Plaintiffs’ clients and not extensively circulated.  About 50 letters were issued to clients of the Plaintiffs who obviously know the 2^nd Defendant.

55. Mr Ho submits that there was no evidence that the 2^nd and 3^rd Defendants suffered loss.  It is unlikely that the Defendants could win them over to trade with the 3^rd Defendant and little damage could be done to the 2^nd and 3^rd Defendants by the Third Letter.  However, damages for defamation is not to compensate for business loss only, but to compensate for the loss of esteem and reputation.  Having considered the nature of the imputation, the circulation of the Third Letter and the people to whom the Third Letter was published, I consider a total award of $100,000 for the 2^nd and 3^rd Defendants together appropriate in the circumstances.  Accordingly, I award the 2^nd and 3^rd Defendants $50,000 each against the Plaintiffs jointly.

Conclusion:

56. As against the 1^st Defendant, I enter judgment on liability in favour of the Plaintiffs in respect of breach of fiduciary duty with damages to be assessed.  I award the Plaintiffs $24,222.10 against the 1^st Defendant in respect of unaccounted for materials.  I award the 1^st Defendant $89,196.09 on his counterclaim against the Plaintiffs in respect of cost of work done and $1 as damages for defamation.  The net amount due to the 1^st Defendant is $64,974.99.  Accordingly, I enter judgment in favour of the 1^st Defendant in the amount of $64,974.99.  There shall be stay of execution pending assessment of damages for breach of fiduciary duty and the 1^st Defendant’s return of the Plaintiffs’ materials to the value of $101,490.

57. The Plaintiffs are only partially successful against the 1^st Defendant.  The 1^st Defendant is successful against the Plaintiffs in his claim for cost of works and defamation. As 1^st Defendant is only awarded nominal damages for defamation and in view of his conduct and that the defamation was substantially justified, I do not think he should have his costs for the counterclaim in defamation. The Plaintiffs are over confident with their right in confidentiality and mounted a case far wider than supported by the fact and allowed by the law.  They were probably ill- advised about the propriety of the issue of the Third Letter. Having regard to all the circumstances, I consider as between the Plaintiffs and the 1^st Defendant, a fair costs order would be that the Plaintiffs be awarded half of their costs in this action.  I make a costs order nisi to that effect.

58. As between the Plaintiffs and the 2^nd and 3^rd Defendants, all of the Plaintiffs’ claims against them are dismissed with costs.  I enter judgment in favour of the 2^nd and 3^rd Defendant each in the amount of $50,000 as damages for defamation with costs against the Plaintiffs.

59. The Plaintiff’s claim against the 4^th Defendant is dismissed with costs to the 4^th Defendant.

60. All such costs are to be taxed, if not agreed.

HCA 16149/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16149 OF 1999

____________

_______________

D E C I S I O N

_______________

1. This is the Plaintiffs' application for an interlocutory injunction to restrain the 1st to 3rd Defendants from disclosing or using the Plaintiffs' confidential information and misrepresenting shutters installed by the Plaintiffs as their jobs or job references. At the conclusion of the hearing, I dismissed the application with costs and gave brief reasons for the decision. I now reduce the full reasons into writing.

Background

2. The 1st Plaintiff has since December 1993 been the sole distributor of EUROLOOK Shutter. This is a kind of transparent security shutter for installation at shop fronts and entrances. The 1st Defendant is the sole proprietor of Hung Fat Roller Shutter Engineering ("Hung Fat"). In March 1994, Hung Fat was appointed by the 1st Plaintiff as its sole contractor responsible for the assembly, installation, repair and maintenance of EUROLOOK Shutters.

3. In July 1994, the 1st Plaintiff and the 1st Defendant entered into a joint venture and the 2nd Plaintiff was formed as a result. The arrangement was for the 1st Plaintiff to award contracts for the assembly, installation, repair and maintenance of EUROLOOK Shutters to the 2nd Plaintiff, which in turn would assign the work to Hung Fat. Between July 1994 and July 1999, the 1st Defendant was a director and a 40% shareholder of the 2nd Plaintiff.

4. The Plaintiffs contend, but disputed by the 1st Defendant, that the incorporation of the 2nd Plaintiff was with a view to a full merger of the 1st Plaintiff and Hung Fat.

5. The 2nd Defendant is the son of the 1st Defendant and an employee of Hung Fat. The 2nd Defendant had also since the incorporation of the 2nd Plaintiff, been its site supervisor. The affidavit evidence shows that the 2nd Defendant had participated in most of the directors' meeting of the 2nd Plaintiff.

6. On 5 July 1997, the 1st and 2nd Plaintiffs and Hung Fat entered into a written General Conditions which embodied the arrangements between them in relation to the assembly, installation, repair and maintenance of EUROLOOK Shutters ("the General Conditions"). It is the Plaintiffs' case, which the 1st Defendant disputed, that the General Conditions was preceded by an oral agreement between the 1st Plaintiff and the 1st Defendant imposing obligations of confidence and fidelity on the part of the 1st Defendant and Hung Fat in relation to information received from the 1st Plaintiff.

7. The 3rd Defendant was incorporated in June 1999 with the 2nd Defendant as one of its directors and a shareholder holding 50% of the shares. The 3rd Defendant engages in the supply and installation of a type of transparent plastic shutters known as "Clearlink", as the agent for the 4th Defendant.

8. In June 1999, the 1st Defendant proposed to withdraw from the 2nd Plaintiff. With the agreement of the 2nd Plaintiff, this took effect from 1 July 1999. The Plaintiffs then discovered that the 3rd Defendant had in collaboration with the 4th Defendant been engaging in the business of Clearlink transparent plastic shutters, and had approached their customers in relation to this type of shutter. The Plaintiffs also believed that the 1st and 2nd Defendants had been instrumental in the activities of the 3rd and 4th Defendants. The Plaintiffs therefore commenced these proceedings on 12 October 1999 and took out the present summons on 26 November 1999.

The Plaintiffs' Case

9. The Plaintiffs' cause of action against the 1st Defendant is in breach of the General Conditions, and against the 1st to 3rd Defendants, in breach of duty of confidence and for conspiracy to injure the Plaintiffs.

10. It is the Plaintiffs' case that between 1994 and 1999, the Plaintiffs had passed to the 1st and 2nd Defendants confidential information relating to the Plaintiffs' business. These took the forms of job orders from the Plaintiffs to Hung Fat, information disclosed during the directors' meetings of the 2nd Plaintiff and information disclosed in contemplation of a merger of the 2nd Plaintiff and Hung Fat.

11. The Plaintiffs contend that prior to the 1st Defendant's withdrawal from the 2nd Plaintiff, the 1st and 2nd Defendants caused the 3rd Defendant to be incorporated and that they have been in control of the 3rd Defendant. Through the 3rd Defendant, the 1st and 2nd Defendants are said to have mis-used the confidential information of the Plaintiffs in a number of ways. Firstly, it was alleged that the 1st and 2nd Defendants had, through the 3rd Defendant, approached and solicited sales from customers of the Plaintiffs, using the EUROLOOK Shutters supplied by the Plaintiffs as their job references. It was suggested that in so doing the Defendants had made misrepresentations to the Plaintiffs' customers. Secondly, it was alleged that the 1st Defendant had disclosed to the 4th Defendant confidential information of the Plaintiffs in relation to the tender for supplying shutters to a food court in Tung Chung so as to enable the 4th Defendant to compete with the Plaintiffs in bidding for the project.

12. The Plaintiffs say that the 1st Defendant was in breach of the terms of the General Conditions. In particular, under Clause 12 thereof, Hung Fat acknowledged that the information relating to the 1st Plaintiff's customers is the property of the 1st Plaintiff. Hung Fat also agreed not to solicit sales, promote or sell its own products to the 1st Plaintiff's customers during the subsistence of the General Conditions and within 1 year after its termination. Further, under clause 21, Hung Fat contracted not to divulge to third party the 1st Plaintiff's customers list and information relating to the contract sums.

13. The Plaintiffs further said that the 1st Defendant's mis-use of the Plaintiffs' confidential information amounts to a breach of his duty of confidence which arises out of his fiduciary duty as a former director of the 2nd Plaintiff.

14. As against the 2nd Defendant, the Plaintiffs' case is that by reason of his position in Hung Fat and his active participation in the board meetings of the 2nd Plaintiff, he is a "de facto" director of the 2nd Plaintiff and as such he also owes a duty of confidence to the 2nd Plaintiff.

15. As for the 3rd Defendant, the Plaintiffs' case is that it has been the corporate vehicle through which the 1st and 2nd Defendants carried out their unlawful activities.

The Defendants' Objections

16. The 1st to 3rd Defendants oppose the interlocutory injunction principally on the following grounds:

(1) The information which the Plaintiffs seek protection are not confidential information that the law will afford protection in the circumstances of this case.

(2) The ambit of the confidential information as defined in the schedule to the Plaintiffs' summons is too broad and vague.

(3) There is no justifiable basis for proceeding against the 2nd and 3rd Defendants.

(4) There is little or no useful purpose to be served by an injunction against the 1st Defendant when the restrictive covenant (i.e. Clause 12) in the General Conditions will be expiring in a few months' time.

17. I shall now deal with these objections in turn.

The Summons

18. The information which the Plaintiffs say is confidential and require protection is set out in the Schedule to the Summons. There are 7 categories of them. They are information relating to:

(1) The product features and the supply source, including the 1st Plaintiff's pricing elements and formula, for EUROLOOK Shutters;

(2) The names, addresses and contact persons of the 1st Plaintiffs customers, the locations of the shops using EUROLOOK Shutters and the specifications of the shutters installed;

(3) Product test results, pricing elements and formula of EUROLOOK Shutter and other shutters fabricated or manufactured by the Plaintiffs from time to time;

(4) The parts, switch boxes, electronic keypads, tailored made bottom bars and stainless steel coupling tubes of EUROLOOK Shutter and other shutters fabricated or manufactured by the Plaintiffs, being value added services developed by the 1st and 2nd Plaintiffs;

(5) The channels through which applications could be made to be qualified as an approved contractor of major real estate developers, government entities and other public transportation companies'

(6) The Plaintiffs' marketing strategies and product development strategies in relation to EUROLOOK Shutter and other shutters fabricated or manufactured by them;

(7) Shutters and shutter related products, including pricing of the competitors, customers' profile, and other comparative studies undertaken by the 1st Plaintiff, being market data collected and compiled by the 1st Plaintiff at its own costs.

Confidential Information

19. The starting point of the Plaintiffs' case against the 1st Defendant is the provisions in the General Conditions. Clause 12 provides that:

(a) Information relating to the 1st Plaintiff's customers is the 1st Plaintiff's property; and

(b) Hung Fat shall not, during the subsistence and within 1 year after the termination of the General Conditions, solicit sales from, promote or sell its own products to the 1st Plaintiff's customers.

Clause 21 further provides that Hung Fat shall not divulge the 1st Plaintiff's customers list and information relating to the contract sum to third parties.

20. The Plaintiffs rely on these provisions and contend that an injunction ought to be granted to restrain the 1st Defendant from breaching these contractual provisions.

21. I accept that the court will always, though not as a matter of course, act to restrain the breach of a clear and express negative covenant: Doberty v. Allman (1878) 3 App. Cas. 709 per Lord Cairns at p. 720; The Incorporated Owners of Mai On Industrial Building & anor v. Hedit Limited HCA 6529 of 1987 (unreported) at p. 8. This consideration is however inapplicable in the present case. To begin with, it is common ground that the General Conditions had been terminated, although the precise date of termination is in dispute. Clause 21 therefore ceases to be effective. As for Clause 12, it is in essence a restrictive covenant which even on the Plaintiff's case only has less than 7 months to run. The scope of this covenant is narrow and limited. It is confined to approaching the 1st Plaintiff's customers to solicit business and selling products of Hung Fat. This is different from the ambit and purpose of the injunction now sought by the Plaintiffs, which is to restrain the 1st to 3rd Defendants from disclosing or using the Plaintiffs' confidential information. The confidential information covered by the injunction is not limited to information of the 1st Plaintiff's customers. That being the case, it cannot be said that the injunction applied for is to enforce a negative covenant. The observations of Lord Cairns in Doberty v. Allman therefore has no application.

22. The question for the court then is whether on the evidence, the Plaintiffs have raised a serious question that the 7 categories of information can be regarded as confidential information that merits the protection the Plaintiffs are seeking.

23. In Faccenda Chicken Ltd v. Fowler & Others [1987] 1 Ch. 117, an action brought by an employer against his former employers claiming an injunction and damages for breaches of contracts of employment and breach of confidence, Neill L.J. observed (at p. 136B-E):

"The implied term which imposes an obligation on the employee as to his conduct after the determination of the employment is more restricted in its scope than that which imposes a general duty of good faith. It is clear that the obligation not to use or disclose information may cover secret processes of manufacture such as chemical formulae (Amber Size and Chemical Co. Ltd v. Menzel [1913] 2 Ch. 239), or designs or special methods of construction (Reid & Sigrist Ltd v. Moss and Mechanism Ltd (1932) 49 R.P.C. 461), and other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret. The obligation does not extend, however, to cover all information which is given to or acquired by the employee while in his employment, and in particular may not cover information which is only "confidential" in the sense that an unauthorized disclosure of such information to a third party while the employment subsisted would be a clear breach of the duty of good faith."

24. Neille L.J. then went on to observe that when determining whether any particular item of information is entitled to protection upon the termination of an employment contract, it is necessary to consider all the circumstances of the case. One of the matters to which attention must be paid is the nature of the information itself. His lordship pointed out that (at p. 137D):

"[T]he information will only be protected if it can properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine."

25. On the question of what constitutes a confidential information or trade secret, Sir Robert Megavry V.C. suggested in Thomas Marshall Ltd v. Guinle [1979] 1 Ch. 227, at 248E-G, that, in an industrial or trade setting, 4 elements may be of assistance:

(a) The owner believes that the release of the information would be injurious to him or of advantage to his rivals or others;

(b) The owner must believe that the information is confidential or secret in the sense that it is not already in the public domain;

(c) The owner's belief under (a) and (b) must be reasonable;

(d) The information must be judged in the light of the usage and practices of the particular industry or trade concerned.

26. In the present case, the Plaintiffs say that the information is confidential as it was imparted to the 1st and 2nd Defendants in confidence and these Defendants knew full well that they were under a duty of fidelity and confidence in respect of the information. That however is not good enough because not all information given in confidence is a trade secret which the recipient can be prevented from using for his own advantage when, for instance, his employment is over: Printers & Finishers Ltd. v. Holloway [1965] R.P.C. 239, 253.

27. The Plaintiffs also rely heavily on the point that the 1st Plaintiff had put in tremendous effort in soliciting, cultivating and developing its customers and in building its trade connections. No doubt, the Plaintiffs believe that the information relating to the 1st Plaintiff's customers and trade connections is valuable and important. The evidence also shows that the Plaintiffs believe that the disclosure of such information has injured and will injure their business in that it will facilitate competition from third parties. The concern about and the likelihood of competition, however, do not necessarily render the information relating to the customers and trade connections confidential information or trade secret. Similarly, the fact that the 1st Plaintiff had incurred huge efforts in building up its clientele and connections cannot per se prevent other people in the same trade from approaching and cultivating relationship and connections with these customers. Indeed, it cannot be the purpose of injunction to prevent otherwise legitimate competition in business and trade. It is to be noted that the evidence does not show nor suggest that the 1st and 2nd Defendants had taken any list of customers from the Plaintiffs, or had deliberately memorized or learnt the particulars of the 1st Plaintiff's customers for their own benefits and/or to injure the Plaintiffs. It is therefore incumbent upon the Plaintiffs to demonstrate how and why it is said that the information is confidential or is a trade secret.

28. Despite the voluminous evidence filed, the Plaintiffs had said little to explain or to justify the confidentiality nature of the 7 categories of information, nor to demonstrate how the information is peculiar and crucial to the Plaintiffs. The failure to do so is particularly acute in this case. This is because the product in question is transparent shutters installed at shop entrances or shop fronts. Information such as the identities of the customers using the shutters, the features and dimensions of the shutters and the locations of shops installed with such shutters are readily available and discernible to the public. A further consideration is the fact that the 1st Plaintiff is the sole agent and distributor, not only in Hong Kong, but also in the mainland, Macau and Taiwan, of EUROLOOK Shutters. The release of such information as the supply source and the pricing elements and formula will not, prima facie, produce any injurious result to the Plaintiffs.

29. Counsel for the Plaintiff referred to the case of GSL Engineering Ltd v. Yau Hon Yin Sammon & others [1990] 2 HKC 360 and submitted that it would be unsatisfactory to permit the 1st to 3rd Defendants to continue with their breaches and wrongs. In GSL Engineering Ltd, the plaintiff had obtained an ex parte injunction preventing the defendant, who is its former manager director, from contacting its suppliers and customers. The defendant then applied to vary the injunction so as to enable him to deal with the Plaintiff's suppliers and customers. Godfrey J (as he then was) was of the opinion that the information lacked the necessary character of confidentiality for supporting the Plaintiff's case. His lordship nevertheless refused to vary the injunction. That is because the defendant had admitted the plaintiff's case that he had, while acting as managing director, diverted business from the plaintiff and made secret profits thereby. Godfrey J therefore recognized that to vary the injunction was to enable the defendant to continue with his previous course of conduct which was wrongful. The case is therefore plainly different from the present one and is distinguishable. The present Defendants deny the Plaintiffs' allegations of mis-using the information of the Plaintiffs and have gone on oath to do so.

30. I am not persuaded that the Plaintiffs have on the evidence raised a serious question that the 7 categories of information have the necessary degree of confidentiality as to justify an interlocutory injunction

Ambit of the Injunction

31. I turn now to deal with the ambit of the confidential information as defined in the Schedule to the Summons. It is beyond doubt that the terms of an injunction as well as the ambit of the information to be covered by an injunction must be defined with clarity. They must not at the same time be unnecessarily wide and oppressive.

32. In Lock International plc v. Beswick [1989] 3 All ER 373, at p. 378b-d, Hoffman J (as he then was) observed:

"On the other hand, there will be a good deal of other information which an employee could not without breach of duty disclose while he was employed but which he is free to use as part of his own skill and knowledge after his employment has ceased. It is therefore of the essence of a claim against an employee for misuse of confidential information that the employer should be able to identify with particularity the trade secret or similar confidential information to which he lays claim. The terms of any injunction must also be capable of being framed in sufficient detail to enable the defendant to know exactly what information he is not free to use on behalf of his new employer."

33. In a subsequent part of his judgment, Hoffman J observed, in the context of a discussion on the use of anton pillar order, that (at p. 384b-c):

"Even in cases in which the plaintiff has strong evidence that an employee has taken what is undoubtedly specific confidential information, such as a list of customers, the court must employ a graduated response. To borrow a useful concept from the jurisprudence of the European Community, there must be proportionality between the perceived threat to the plaintiff's rights and the remedy granted."

34. In this case, the confidential information as defined in the Schedule to the Summons is unjustifiably wide and lacks particularity. Apart from information relating to EUROLOOK Shutters, categories 3, 4, 6 and 7 extend to other shutters said to be "fabricated or manufactured" by the Plaintiffs, and in the case of category 3, "from time to time". It is difficult to see how the Plaintiffs can justify an injunction extending beyond EUROLOOK Shutters when the Plaintiffs' case is that the dealings between them and Hung Fat and/or the 1st and 2nd Defendants are in relation to EUROLOOK Shutters. There is also no evidence to suggest that the Plaintiffs have been in the business of manufacturing shutters. At any rate, there can be no justification for restraining the Defendants from disclosing or using information of shutters to be manufactured in future. In the case of category 7, it extends not only to information on shutters in general, but also on shutter-related products in general. Again, there is no evidential basis to merit a protection in this regard. The evidence does not show that the Plaintiffs have engaged in business of shutter-related products. It is also unclear as to what is intended to be shutter-related products.

35. The lack of particularity is not confined to category 7. The terms employed in the other categories, such as "value added services" in category 4 and "marketing strategies" and "product development strategies" in category 6, also lack particularity. The evidence filed do not assist in reducing the problem by, for example, identifying what is the specific information or documents that are covered by these general descriptive terms. The many minutes of the directors' meetings of the 2nd Plaintiff, on which heavy reliance is placed, is also of no assistance.

36. Counsel for the Plaintiffs submitted injunctions similar in terms to that sought in the present summons had been granted in Thomas Marshall (Exports) Ltd v. Quinle, supra, GSL Engineering Ltd v. Yau Hon Yin Sammon, supra and Jademan (Holdings) Ltd. v. Francis Leung Pak-to [1989] 2 HKLR 151. It is true that the injunctions granted in Thomas Marshall (Exports) Ltd case are similar in form to the one sought here. However, in that case, the Plaintiff had set out in the supporting affidavit details of the categories of information which are confidential: see p. 248H-249B. Even then, Sir Robert Megavry V.C. when holding that the plaintiff is entitled to the injunctions claimed, stated that it was subject to the question of the wording of the injunctions: see p. 249G. As for the GSL Engineering Ltd case, it is not clear at all from the law report as to what was the precise form or term of the injunction granted. It appears from the headnote that the defendant there was restrained from contacting the suppliers or customers of the plaintiff: pp. 360F, 361H & 36E H-I. In the case of Jademan (Holdings) Ltd, the injunction granted ex parte contained a schedule setting out the documents which the defendant was restrained from disclosing, publishing or making use of. The injunction also exempted information in those documents which is not already in the public domain: p. 152 G. The information to be protected in both Thomas Marshall (Exports) Ltd and Jademan (Holdings) Ltd case is therefore quite specific and well defined, a matter which is vital yet missing in this case.

37. I also agree with counsel for the 1st to 3rd Defendants that category 6 is so wide and general that it can be said to be oppressive. It is completely unclear as to which are the major real estate developers, government entities and other public transportation companies. It is also difficult to accept that information on the ways of becoming a contractor for developers, government entities and public transportation companies can be confidential, let alone all information thereon. These days in Hong Kong, it must be common practice for contracts to be awarded after invitation for tenders, whether open or private. The effect of restraining the 1st to 3rd Defendants from using such information will have the effect of preventing the Defendants from becoming contractors of these developers, entities and companies, irrespective of the kind of work or service. That plainly cannot be right and just.

Other Objections

38. Having found in favour of the 1st to 3rd Defendants on the above 2 objections, it will not be necessary to consider the other objections raised in details. Suffice it to say that I consider that there is, on the balance, a serious question to be tried on whether the 2nd or 3rd Defendant is a proper party to the injunction, having regard to the active role the 2nd Defendant played in the joint venture between the Plaintiffs and Hung Fat and considering the timing of the incorporation of the 3rd Defendant, its activities and the involvement of the 1st and 2nd Defendants in it. I also take the view that the fact that the restrictive covenant in the General Conditions will be expiring in several months' time is per se not sufficient to prevent the grant of an interlocutory injunction, although it is one of the relevant factors to be taken into account.

Conclusions

39. For the reasons stated above, I am of the view that the present application should be dismissed with costs to the 1st to 3rd Defendants. And I order accordingly.

HCA16149/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16149 OF 1999

____________________

____________________

DECISION

____________________

Background

1. The plaintiffs by a summons filed on 26 November 1999 applied for an interlocutory injunction against all the defendants herein. The summons is returnable on 24 March 2000 By a letter dated 4 March 2000 which was faxed to the solicitors for the 4th defendant, the plaintiff's solicitors indicated that the plaintiffs would withdraw their application for interlocutory injunction against the 4th defendant and suggested that the costs be in the cause. The 4th defendant's solicitors replied on 6 March 2000 demanding that the plaintiffs pay the 4th defendant's costs of and occasioned by the summons.

2. The parties maintained their positions on costs at the hearing of the summons. After hearing submissions from counsel, I granted leave to the plaintiffs to withdraw the summons against the 4th defendant. I ordered that the plaintiffs pay the 4th defendant costs of the summons and the costs wasted by the withdrawal up to and including 4 March 2000 in any event to be taxed. I also ordered that the costs of the hearing be to the 4th defendant against the plaintiffs in any event. At the request of the plaintiffs, I now reduce my oral reasons into writing.

Reasons for the cost order

3. In determining the costs consequential upon the withdrawal or discontinuation of an action, a major consideration is that the other party has been brought into the litigation and made to incur costs and expenses which has become useless or academic as a result of the withdrawal or discontinuation.

4. In considering how the discretion of the court should be exercised in respect of costs upon a withdrawal of an interlocutory application, the question is whether the consideration mentioned above holds good or is applicable, having regard to the circumstances of the case before the court.

5. In my view, the same consideration does apply to the application of the plaintiffs to withdraw the summons against the 4th defendant. The plaintiffs having taken out the summons against all the defendants, the 4th defendant was obliged and had to defend the application. The work undertaken is now rendered academic as a result of the plaintiffs' decision not to proceed with the application against it. There is no reason why the 4th defendant should not be able to recover the costs in relation of the efforts taken and which now become wasted. There is also no good reason to make the 4th defendant's entitlement to the wasted costs dependent on the outcome of the trial.

6. Counsel for the plaintiffs had referred to the 2 affirmations made by a Mr Franklin Ma of the 4th defendant. It was observed that the content of Mr Ma's first affirmation is nearly identical to that of his witness statement. That being the case, it was submitted that the costs of the preparation of the affirmation had not been completely wasted. I agree with counsel on this point. The fact that the contents of the 2 documents bear such close similarity is a clear indication that the witness statement was built upon the work undertaken for the preparation of the first affirmation, such as the conferences held and attendance upon Mr Ma for obtaining information for the affirmation. To say the least, the preparation and drafting of the affirmation would have greatly facilitated the preparation of the witness statement.

7. Counsel for the plaintiff also pointed out that the second affirmation of Mr Ma was affirmed and filed after the plaintiffs' letter of 4 March 2000, that it was not necessary for Mr Ma to affirm and file this affirmation. I agree. Given the letter from the plaintiffs' solicitors dated 4 March, there is no need nor reason for Mr Ma, insofar as the position of the 4th defendant is concerned, to proceed with the making of this affirmation. This is particularly so having regard to the contents of the letter from the 4th defendant's solicitors dated 6 March. The plaintiffs should not be made to bear these costs incurred after the letter of 4 March reached the 4th defendant's solicitors.

8. The 4th defendant asked that costs should be ordered to be paid forthwith. Generally speaking, the costs of an interlocutory application should be in any event. The mere fact that the application is for an interlocutory injunction does not afford an exception : see The Supreme Court Practice 1999 para. 29/1A/30.

9. For the reasons above, the appropriate costs order is for the plaintiffs to pay the 4th defendant the costs of the summons filed on 26 November 1999 and the costs wasted by the withdrawal of the summons up to and including 4 March 2000, in any event to be taxed, if not agreed. The plaintiffs should also pay the 4th defendants the costs of the hearing on 24 March 2000 in any event to be taxed. And I order accordingly.