HOME ESSENTIALS (HK) LTD v. JOHN McLENNAN

DCCJ 7954/2002 & 943/2003
(consolidated)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7954 OF 2002 & 943 OF 2003

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DECISION

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BACKGROUND

1.  DCCJ 7954/2002 was a claim by an employer against a former employee for breach of fiduciary duties. After last minute amendments, the breach alleged was during his employment with the plaintiff, the defendant engaged in business that were in competition with the plaintiff and the defendant made secret profits there from. The plaintiff prayed for an account of the secret profits received by the defendant.

4. DCCJ 943/2003 was a claim by an employee against an employer for one month’s wages in lieu of notice, severance pay, unpaid agreed increases in wages from 16/1/2002 to 28/2/2002, unpaid wages from 16/1/2002 to 17/6/2002, Chinese New Year bonus for the period between 24/1/2001 to 11/2/2002, plus a 10% interest for accepting the Chinese New Year bonus in 6 installments and reimbursement of expenses.

5. After deducting 4 payments the defendant received between 15/3/2002 and 31/5/2002, the defendant counterclaimed against the plaintiff for the sum of HK$208,178.71.

6. Just prior to trial, the plaintiff added a counterclaim to the defendant’s counterclaim for: (1) one month’s wages in lieu of notice and (2) for excessive paid annual leave.

7. After a 4-day trial, I dismissed the claim; gave judgment for the defendant’s counterclaim for: Unpaid salaries, Chinese New Year Bonus, Days for Dollars and Expenses in the sum of HK$107,463.68 and gave judgment for the counterclaim on counterclaim for one month’s wages in lieu of notice in the sum of HK$56,000.00. Balance of the counterclaim and counterclaim to counterclaim were dismissed.

8. The plaintiff now seeks leave to appeal my decision.

THE LAW

9. The applicable test is set out in Smith v Cosworth Casting Processes Limited [1997] 1 WLR 1538. Lord Woolf, MR stated the relevant principles as follows:

“	i)	The court will only refuse leave if satisfied that applicant has no realistic prospect of succeeding on the appeal. The test is not meant to be any different from that which is sometimes used, which is that the applicant has no arguable case. Why however this court has decided to adopt the former phase is because the use of the word “realistic” makes it clear that a fanciful prospect or an unrealistic argument is not sufficient.
	ii)	The court can grant the application even if it is not satisfied. There can be many reasons for granting leave even if the court is not satisfied that the appeal has any prospect of success. For example, the issue may be one which the court considers should in the public interest be examined by this court or, to be more specific, this court may take the view that the case raises an issue where the law requires clarifying.”

10. Clearly the test has a low threshold, the defendant is only required to show an arguable case; however, after hearing counsel’s arguments, I am of the view that the applicant’s argument did not have a realistic prospect of succeeding on appeal. I therefore dismissed the application, ordered costs of this application, with certificate for counsel, against the applicant. I now state my reasons.

11. Three grounds of appeal were listed in Mr. Chang’s draft Notice of Appeal:

(1)	The learned Judge erred in finding that the terms of the Employment Contract did not form part of the terms of the Defendant’s employment with the Plaintiff (p.37 of Judgment). Such finding was contrary to the weight of the evidence and against inherent probabilities:-
	…
(2)	The Learned Judge erred in finding that as a matter of fact, the Defendant did obtain (Mr.)Exline’s consent to continue his side business after he started full-time employment with the Plaintiff, so long as such side business did not interfere with his work with the Plaintiff (p.47 of Judgment). Such finding was contrary to the weight of the evidence and against inherent probabilities:-
	…
(3)	The Learned Judge erred in finding that there was an ad hoc arrangement instead of an agreed fixed number of annual leave days per year between the Plaintiff and the Defendant (p.66 of the Judgment):-
	…

12. All three grounds of appeal targets specific finding of facts in my judgment. Mr. Chang argued that I made these finding of facts by a process of inference and Mr. Wong argued these were findings of primary facts based on credibility.

13. The proper approach, when an appeal is against a Court’s finding of primary facts is set out in Ting Kwok Keung v Tam Dick Yuen & Ors [2002] 3 HKLRD at para. 32 to 46. In his Skeleton Argument, Mr. Wong distilled the following guidance from Bokhary PJ’s judgment in Ting Kwok Keung:

(1)	Appeals against findings of facts of primary facts are approached very differently from appeals against findings of fact made by a process of inference;
(2)	Where findings of facts are made by a process of inference, no question of credibility arises;
(3)	An appellate court is universally reluctant to reject a finding of specific fact, particularly where the finding could be found on the credibility or bearing of a witness;
(4)	On the other hand, an appellate court is customarily willing to form an independent opinion about the proper inference of fact, subject only to the weight which should be given to the opinion of the court below;
(5)	Where the judgment turns on an issue of facts, the Court of Appeal must have regard to the nature of that issue of fact and to the advantage enjoyed by a trial judge who received evidence on such issue first-hand;
(6)	The question for the Court of Appeal is whether, even though it does not enjoy the advantages enjoyed by the trial judge who received evidence first-hand, it is nevertheless satisfied that the trial judge’s conclusion on the facts is plainly wrong.

THE ISSUE

14. I agree with Mr. Wong that these are the proper approach when an appeal is based on finding of primary facts. The central issue in this application is therefore whether the finding of facts being appealed were made by a process of inference or based on credibility. If my finding of facts were based on creditability or partly based on creditability, then there would be no realistic prospect of succeeding on appeal

THE FIRST GROUND OF APPEAL

15. As to the first ground of appeal, in paragraph 13 of my judgment, I stated the plaintiff’s allegation that terms of the unsigned employment contract dated 1/11/1999 were the agreed terms of employment between the parties. In paragraph 34 of my judgment, I wrote:

“In fact, the only evidence the plaintiff had was Mr. Exline’s testimony. However, on whether the defendant signed the Employment Contract, even Mr. Exline’s testimony was equivocal. He never stated he saw the defendant signing the Employment Contract, nor did he testify he saw a signed copy of the Employment Contract. When questioned by Mr. Wong, Mr. Exline only said the defendant signed it and turned it into the Immigration Department. The copy turned into the Immigration Department was of course not signed.

16. I clearly rejected Mr. Exline’s testimony, when I wrote he testified that the defendant signed the employment agreement and turned it into the Immigration Department, when the copy sent to the Immigration Department was in fact unsigned.

17. As I have stated in paragraph 29 of my judgment:

“…This question of fact must be decided by the veracity of the testimonies of the parties, their respective witnesses and the documentation submitted as evidence.”

My finding was clearly based on the credibility of Mr. Exline and the defendant’s testimonies.   

THE SECOND GROUND OF APPEAL

18. As to the second ground of appeal, I did not reject the defendant’s testimony in total. In paragraph 42 of my judgment I stated:

“…Particularly, when the second caveat was not pleaded in the original Defence and Counterclaim.  I find the defendant’s ability to add more and more details to this part of his evidence difficult to accept and I reject this part of his evidence.”

I clearly meant only that part of the defendant’s evidence dealing with the second caveats was rejected.

19. In paragraph 39 of my judgment, Mr. Exline’s testimony on this issue was summarized as follows:

“According to Mr. Exline, he agreed the defendant could complete only those projects he had already started prior to commencing full-time employment with the plaintiff. There was no further discussion on this matter until he discovered the Wynant invoice in April 2002. Mr. Exline also testified that in and around October 1999, he attended a drinks gathering with the defendant’s friends at the Conrad Hotel but they did not discuss the defendant’s terms of employment.”

20. In paragraph 40 of my judgment I listed out the defendant’s testimony and the other evidence in support of the defendant’s version of event. In subparagraph 40(1) I listed out a series of contemporaneous emails between the defendant and Ms. Carver, confirming the defendant’s version of events and in subparagraphs 40(3) I specifically stated Ms Lechner’s evidence was during a meeting at the Conrad Hotel in the month of September or October 1999, she heard Mr. Exline stating the defendant would be able to service his own clients while he was working with the plaintiff full-time.

21. In paragraph 43 of my judgment, I clearly stating that I found Ms. Lechner’s testimony honest and truthful and accepted her version of event. In view of the fact that Ms. Lechner’s testimony conflicted directly with Mr. Exline’s testimony, by necessarily implication, I had rejected Mr. Exline’s testimony.

22. In paragraph 47 of my judgment, I clearly stated I had considered all of the above, including: the defendant’s testimony, Ms. Craver’s testimony, Ms. Lechner’s testimony, Mr. Wyborn’s statement and the contemporaneous emails, before I rejected Mr. Exline’s testimony and found there was consent for the defendant to continue his side business after he commenced full-time employment with the plaintiff. Part of my consideration was of course the credibility of Mr. Exline’s testimony versus the credibility of the defendant and the other defendant witnesses’ testimony.

THE THIRD GROUND OF APPEAL

23. As to the third ground of appeal, in paragraph 65 of my judgment, I found the defendant’s allegation that there was an agreed 28 days paid annul leave nonsensical and rejected his evidence.

24. In paragraphs 73, 74 and 75, I found Mr. Exline’s testimony that the plaintiff did not have a record of the defendant’s annual leave unbelievable; Mr. Exline’s failure to complaint about the defendant’s excessive annual leave unreasonable; and his continuation to pay the defendant full salary when the defendant was allegedly taking excessive annual leaves, at a time when the plaintiff was experiencing financial difficulties unnatural. Clearly, I found Mr. Exline’s testimony not creditable.

25. Accordingly, I rejected both the defendant’s and Mr. Exline’s evidence based on the creditability of their testimonies. The only part of my finding that was based on a process of inference was that there was an ad hoc arrangement on annual leaves. But in view of the fact that with the plaintiff’s consent, the defendant took widely different paid annual leaves during the two annual leave periods he was employed by the plaintiff, left no other rational explanation except an ad hoc arrangement.

CONCLUSION

26. In conclusion, the first two grounds of appeal and the first part of the third ground of appeal were against my findings of primary facts based on credibility and the Court of Appeal will be reluctant to reject such findings. Although the second part of the third ground of appeal was an appeal against a finding of fact based on a process of inference, I can see no other rational inference based on the facts found and therefore I can see no realistic prospect for the plaintiff succeeding on appeal.

DCCJ 7954/2002 & 943/2003
(consolidated)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7954 OF 2002 & 943 OF 2003

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(consolidated pursuant to the order of Master K.W. Wong on
10^th March 2003)

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JUDGMENT

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BACKGROUND

1.  DCCJ 7954/2002 is a claim by an employer against a former employee for breach of fiduciary duties. The breaches alleged were: (1)After the termination of his employment, the defendant disclosed to his new employer pricing methods invented by the plaintiff and designs of furniture and collections of furniture the defendant developed while he was employed by the plaintiff (the “Post-Termination Breach Allegations”); and (2) During his employment with the plaintiff, the defendant engaged in business that were in competition with the plaintiff and made secret profits (the ‘Pre-Termination Breach Allegation”)

2. The plaintiff originally prayed for an injunction to restrain the defendant from disclosing confidential information of the plaintiff, damages for breach of confidence, damages for breach of trust and in the alternative, an account of the secret profits received by the defendant.

3. In his opening statement, Mr. Chang, counsel for the plaintiff, withdrew the Post-Termination Breach Allegations and the claim proceeded solely on the Pre-Termination Breach Allegation and the alternative prayer for an account of secrete profits.

4. DCCJ 943/2003 is a claim by the employee against the employer for the following:

(1) One month’s wages in lieu of notice HK$56,000.00, in accordance with s. 5 and 6 of the Employment Ordinance (the “Ordinance”);

(2) Severance pay in the sum of HK$39,450.00, in accordance with s. 31D and 31G of the Ordinance;

(3) Unpaid agreed increases in wages from 16/1/2002 to 28/2/2002, in the sum of HK$27,750.00;

(4) Unpaid wages from 16/1/2002 to 17/6/2002, in the sum of HK$59,483.03;

(5) Chinese New Year bonus for the period between 24/1/2001 to 11/2/2002, plus a 10% interest for accepting the Chinese New Year bonus in 6 installment, in the total sum of HK$57,915.00;

(6) Reimbursement of expenses in the sum of HK$50,135.18.

5. Between 15/3/2002 and 31/5/2002, the defendant received 4 payments from the plaintiff, the defendant therefore claimed against the plaintiff for the sum of HK$208,178.71.

6. Just prior to trial, the plaintiff filed a summons to amend the Statement of Claim, the Reply and Defence to Counterclaim and add a Counterclaim to Counterclaim. With the exception of the addition of the Counterclaim to Counterclaim, the amendments were not controversial and not opposed by Mr. Wong, counsel for the defendant.

7. The plaintiff’s Counterclaim to Counterclaim was on two specific items. First, the plaintiff alleged the defendant failed to provide any notice prior to termination of his employment and therefore counterclaimed the sum of HK$56,000.00, for one month’s wages in lieu of notice. Second, the plaintiff alleged during his employment period, the defendant took excessive paid annual leave and claimed the sum of HK$34,435.07 as repayment.

8. Mr. Wong initially objected to the addition of the Counterclaim to Counterclaim because additional evidence must be filed in support of the second item of the Counterclaim to Counterclaim. Although Mr. Chang did not immediately appreciate Mr. Wong’s concern, after my explanation, it was understood that the Counterclaim to Counterclaim required an additional statement from Mr. Christopher Allan Exline (“Mr. Exline”), the plaintiff’s founder, majority shareholder and director, that there had been no amendment to the alleged employment agreement between the parties.

9. I gave leave for the plaintiff to prepare the additional witness statement. Mr. Wong withdrew his objection to the filing of the Counterclaim to Counterclaim and the trial proceeded accordingly.

10. As the Claim and the Counterclaim (together with the Counterclaim to Counterclaim) are totally independent of each other, I will deal with them separately.

THE CLAIM

The plaintiff’s case:

11. The plaintiff is a company engaged in the business of, inter alia, renting furniture, appliances and other household items in Hong Kong.

12. The defendant was employed as managing director of the plaintiff from 1/11/1999, with responsibility for the general running of the plaintiff office in Hong Kong, supervising sales, marketing, pricing, inventory, personnel, delivering merchandizing, and interior design.

13. In accordance with a written employment contract dated 1/11/1999 (the “Employment Contract”), the defendant was required to "devote his whole time and attention and abilities", and to "do all in his power to promote, develop, and extend" the business of the plaintiff.

14. Before the defendant became managing director, he ran his own interior design business under the business name "J.W. McLennan Group" ("JML Group"). The parties entered into the Employment Contract on 1/11/1999.

15. Under Clauses 8(a) and (b) of the Employment Contract, after commencement of his employment with the plaintiff, the defendant must not, without the prior consent of the plaintiff:

          i. participate in any other business (of whatever nature); or

ii. have an interest in any other business which is similar to or competes with the business of the plaintiff.

16. Irrespective of the terms of the Employment Contract, the defendant admitted that he owes the plaintiff fiduciary duties to:

(a) act in good faith and in the best interest of the plaintiff; and

(b) not to place himself in a position that conflicts or may conflict with the interest of the plaintiff.

17. When the defendant first joined the plaintiff in November 1999, Mr. Exline allowed him to finish projects (whether under the defendant’s name or under the name of the JML Group) which were then currently in-progress but had not yet finished, after these in-progress projects were completed, the defendant must devote full-time to the business of the plaintiff and must not engage in any side business during his employment.

18. In breach of his contractual and fiduciary duties to the plaintiff, the defendant engaged in side businesses through the JML Group during his employment with the plaintiff and derived secret profits therefrom.

19. The exact extent of such side businesses could not be fully quantified at this stage pending full account and inquiry; however the defendant admitted providing services to, and receiving payments from four clients as follows:

(1) Rose Healy for the sum of HK$138,353.00;

(2) Amy Jacobson for the sum of HK$68,350.50;

(3) M. Blandon for the sum of HK$89,952.35; and

(4) J. Wynant for the sum of HK$3,330.00.

20. The plaintiff now seeks an order against the defendant to account for the secret profits.

The defendant’s case:

21. Prior to joining the plaintiff on a full-time basis in November 1999, the defendant carried out work for the plaintiff, as an independent contractor, on an hourly basis.

22. While working for the plaintiff as an independent contractor, Mr. Exline was fully aware of the fact that the defendant was developing his own business and had encouraged the defendant to continue.

23. When Mr. Exline asked the defendant to joint the plaintiff full-time, the defendant agreed to do so on condition that he be allowed to serve existing clients and to work with new ones, provided his work did not take time away from his work with the plaintiff.

24. The negotiation to move from hourly basis to full-time basis was a long drawn out process, because Mr. Exline was often not in Hong Kong. At the end, the parties had a verbal agreement, which included Mr. Exline’s consent that the defendant could, through JML Group, do interior design work with both existing and new individual clients. The defendant however could not do any rental business or interior design business for corporate clients.

25. Although the defendant attempted to get a written employment contract from the plaintiff, because Mr. Exline was very busy and was rarely in Hong Kong for more than a few days in a row, the parties never put their agreements into writing.

26. Originally, the defendant’s immigration status in Hong Kong was as a dependant of his wife’s work visa, in or around September 2000, the defendant’s wife changed jobs and the defendant asked Mr. Exline to sponsor his application for a work visa. One of the essential documents for the defendant’s work visa application was a written employment contract. Because the plaintiff could not afford a lawyer, the defendant drew up a written employment agreement from the plaintiff’s standard form employment agreements.

27. Both Mr. Exline and the defendant knew the terms in the Employment Contract submitted to the Immigration Department, did not reflect the true terms of agreement between the parties and therefore the defendant never signed the same.

28. After signing the Employment Contract, Mr. Exline never requested a copy and the defendant received two increases in salaries without any written documentations. Although the defendant asked about having their real terms of employment put into writing, these requests were brushed aside and the parties continued to rely on their verbal agreement.

The Law:

29. The first issue is whether the Employment Contract truly reflected the defendant’s terms of employment? If it did, then by admission, the defendant was in breach and must account for the profits he made. This issue is a question of fact that must be decided by the veracity of the testimonies of the parties, their respective witnesses and the documentation submitted as evidence. The parties are however in agreement that irrespective of whether there was a written employment agreement, as managing director, the defendant owes the plaintiff the following fiduciary duties:

(a) act in good faith and in the best interest of the employer;

(b) not to place himself in a position that conflicts or may conflict with the interest of the employer.

30. In Kao Lee & Yip v. Koo Hoi Yan & Ors [2003] 3 HKLRD 296, Ma J. (as he then was) canvassed relevant case laws and postulated two fiduciary duties owed by an employee to his employer. Mr. Chang succinctly summarized these duties as follows:

General

(1) The distinguishing or core obligation of a fiduciary is that of loyalty (or fidelity) and good faith.

(2) The duty not to place himself in a position where his or anyone else's interests would or may conflict with duties owed to the beneficiary (the Non-Conflict Duty).

(3) The duty not to make a profit from his position (the Not to Profit Duty).

Non-Conflict Duty

The test is an objective one, namely whether a reasonable man looking at the relevant facts would think there to be "a real sensible possibility of conflict".

Where an outside party engages or seeks to engage or involve the fiduciary in some venture or transaction in his personal capacity, the fiduciary must not act for the benefit of that outside party to the detriment or possible detriment of his beneficiary, unless the beneficiary's informed consent is given.

A fiduciary will not be able to use the time during which he was meant to be working for the beneficiary to be working for his own and anyone else's interests.

Generally, a fiduciary is entitled to use his spare time for whatever activities he chooses to indulge in, as long as these are not inconsistent with the fiduciary duties he owes to the beneficiary or in direct competition with the beneficiary's interests.

Not to Profit Duty

A fiduciary must not make a profit out of his trust. This means that a fiduciary must not, without the informed consent of the beneficiary, make a profit deriving from the position of trust and confidence in which he has been placed.

In general terms, a fiduciary who has taken advantage of an opportunity made available to him in the course of a fiduciary relationship to secure for himself a business opportunity, will be in breach of fiduciary duty, for which he will be liable to account for any profits he has made, even if this business was one which would not have been available to the beneficiary.

31. Therefore if the defendant failed to obtain Mr. Exline’s consent to continue his side business after he commenced full time employment with the plaintiff, there is little difficulty to find he took advantage for himself of business opportunities during the time he is still in a fiduciary relationship with the plaintiff and was clearly in breach of the Not to Profit Duty.

The Issues:

32. The two main issues in the claim are: (1)Whether the Employment Contract truly reflected the defendant’s term of employment? (2) If it did not, did the defendant obtained Mr. Exline’s consent to continue his side business, after he commenced full time employment with the plaintiff?

(1)Whether the Employment Contract truly reflected the defendant’s term of employment?

33. The burden of proving the Employment Contract reflected the defendant’s term of employment was clearly on the plaintiff and there is nothing better than a signed copy of the Employment Contract as evidence. Yet, the plaintiff did not even have a copy of the Employment Contract. The plaintiff had to obtain the copy filed from the Immigration Department’s file and that copy was not signed by the defendant.

34. In fact, the only evidence the plaintiff had was Mr. Exline’s testimony. However, on whether the defendant signed the Employment Contract, even Mr. Exline’s testimony was equivocal. He never stated he saw the defendant signing the Employment Contract, nor did he testify he saw a signed copy of the Employment Contract. When questioned by Mr. Wong, Mr. Exline only said the defendant signed it and turned it into the Immigration Department. The copy turned into the Immigration Department was of course not signed.

35. The defendant testified that the reason he did not sign the Employment Contract was because it did not truly reflect the terms of his employment. Mr. Chang argued since the defendant had drafted the Employment Contract from the plaintiff’ standard form employment contract, it would have been easy for the defendant to include the true terms of his employment into the same.

36. Whilst it was not difficult for anyone with reasonable command of the English language to amend a few details, like name, job title and monthly salary to change the plaintiff’s standard employment contract into the Employment Contract, it is a much more difficult task to come up with an employment contract that contains specialized and custom clauses to reflect terms agreed by the parties. It was totally reasonable for the defendant to avoid play acting as solicitor and not tried to draft an employment contract.

37. After careful consideration of all of the testimonies and the documents available, I find as a matter of fact that the defendant never signed the Employment Contract.  The only reasonable explanation he did not sign the Employment Contract was because it did not reflect his terms of employment with the plaintiff.

(2) Did the defendant obtained Mr. Exline’s consent to continue his side business after he commenced full time employment with the plaintiff?

38. The burden of proving Mr. Exline had consented to the continuation of his side business was on the defendant. This is again a matter of fact that must be decided based on the parties’ and their respective witnesses’ testimonies and all relevant documentary evidence.

39. According to Mr. Exline, he agreed the defendant could complete only those projects he had already started prior to commencing full-time employment with the plaintiff. There was no further discussion on this matter until he discovered the Wynant invoice in April 2002. Mr. Exline also testified that in and around October 1999, he attended a drinks gathering with the defendant’s friends at the Conrad Hotel but they did not discuss the defendant’s terms of employment. 

40. The defendant’s allegation was at the beginning of his negotiation with Mr. Exline before becoming a full-time employee, there was an agreement that he could continue to serve his existing clients and develop new interior design business. In addition to his own testimony, the defendant’s evidences are as follows:

(1) A series of emails dated 19/10/1999 and 21/10/1999, between Ms. Jennifer Carver, the defendant’s wife, and the defendant confirming Mr. Exline agreed that after joining the plaintiff full- time, the defendant could carry on with existing clients and to get new clients. The email dated 21/10/1999 stated: “He said that I could carry on with my existing clients and if I got new ones, I should try to get them to use H E, but if they were small jobs that didn’t interfere with my work I could do those too.”

(2) Ms. Carver’s witness’s statement confirmed (1) above and in a subsequent conversation on the same evening, the defendant told her Mr. Exline agreed he could work on new clients as long as they did not take him away from his work with the plaintiff.

(3) Witnesses’ statements of Ms. Carver, Ms. Baerbel Lechner and Mr. Gavin Wyborn that in or around the month of September or October 1999, the witnesses, the defendant and Mr. Exline had drinks at the Conrad Hotel. During this meeting, Mr. Exline stated the defendant would be able to service his own clients while he was working with the plaintiff full-time.

(4) Ms. Lechner’s testimony confirming the content of her witness statement.

41. In his final submission, Mr. Chang criticized the defendant’s evidence that Mr. Exline had agreed to let him take on new clients subject to two caveats:-

(a) The defendant’s work for these new clients must not take away his time from his work with the plaintiff; and

(b) The defendant must not engage in any rental business, or interior design business, or interior decoration business for large corporate landlords or developers.

42. I find Mr. Chang’s criticism valid. Particularly, when the second caveat was not pleaded in the original Defence and Counterclaim.  I find the defendant’s ability to added more and more details to this part of his evidence difficult to accept and I reject this part of his evidence.

43. The defendant’s evidence was however not the only evidence on this point. Of all of the other defendant’s evidence, I am most impressed by Ms. Lechner’s testimony. Ms. Lechner flew in from Germany specially to testify at this trial, there is no reason for her to fly all the way to Hong Kong to lie. In any event, I have carefully observed her demeanor during her testimony and I find her an honest and truthful witness.

44. Although she admitted having discussed the correct use of wording in her witness statement with Mr. Wyborn, this did not have any negative impact on the trustworthiness of her statement nor to her testimony. Ms. Lechner may not have confidence on her written English, but from her testimony, I find she has excellent command of spoken English and would have no problem understanding the conversation between Mr. Exline and the defendant in October 1999.

45. I was also impressed with the emails between the defendant and Ms. Carver. These were contemporaneous documents and showed clearly the defendant was concerned about his ability to continue working to develop his interior business and supported the defendant’s allegation that unless he was able to continue with his business, he would not have agreed to join the plaintiff on a full-time basis.

46. There was also the witness statement of Ms. Craver and Mr. Wyborn, but in view of the fact that neither testified at trial, I have applied an appropriate discount to their statements.

47. Having considered all of the above, I find as a matter of fact the defendant did obtain Mr. Exline’s consent to continue his side business after he commenced full-time employment with the plaintiff, so long as it did not interfere with his work with the plaintiff. There being no evidence that the defendant’s work with his own clients interfered with his work with the plaintiff, the defendant did not breach of his fiduciary duties to the plaintiff. The claim is dismissed.         

THE COUNTERCLAIM

48. In his final submission, Mr. Wong made certain concessions and quantified the counterclaim as follows:

Salary in lieu of notice	$56,000.00
Unpaid salary (January to February 2002)	27,750.00
Unpaid salary (June 2002)	31,733.03
Chinese New Year Bonus	45,000.00
Days for Dollars	7,650.00
Expenses	50,135.18
Accrued Leave	11,685.84
Less payment received	(54,804.50)
Total counterclaim	$175,149.55

Salary in lieu of notice

49. This head of counterclaim presupposed that the defendant gave one month’s notice of termination to the plaintiff; however, there is no evidence that such notice was ever given.

50. The notice of termination dated 15/6/2002 simply stated:

“ I hereby submit my written resignation from Home Essentials (HK) Ltd.”, then it went on to state the amount of money owed to the defendant and concluded: “ I wish you and your business the best of luck in the future and thank you for the opportunity of working with Home Essentials.”

          There was no written notice.

51. During cross-examination, the defendant admitted he never said anything to Mr. Exline about continuing working for the plaintiff after the date of resignation.  There was no verbal notice either.

52. If there was no written and no verbal notice to the plaintiff, I wonder what the defendant meant by having given notice to the plaintiff?

53. Finally, there was the vacation trip to Vietnam on the same date of the defendant’s resignation. I find the defendant’s argument that he anticipated Mr. Exline would not want him to serve out his notice period, therefore he arranged the Vietnam trip on the same day he submitted his resignation, contrived and totally unbelievable.

54. The fact that he planned to leave for an extended vacation trip on the same day of his resignation clearly demonstrated the lack of any intention to give notice of resignation. The words used in his resignation letter and the lack of any verbal notice, clearly showed the defendant never intended to continue working for the plaintiff beyond 18/6/2002. This part of the counterclaim is dismissed.

Unpaid salaries, Chinese New Year Bonus, Days for Dollars and Expenses

55. For convenience, I will deal with these four items together. The plaintiff admitted it owed the defendant the sums as claimed under these items, except it alleged, after HK$500.00 was deducted from the wages for the period 16/1/2002 to 28/2/2002 as defendant’s MPF contribution, cheque number 012859 dated 9/2/2002 in the sum of HK$22,000.00 (the “Cheque”) was issued to the defendant.

56. The defendant denied having received the Cheque. As the burden of proving wages were paid is on the plaintiff, the plaintiff also had the burden of proving the Cheque was delivered and cashed by the defendant. All of the evidence adduced by the plaintiff dealt with issuance of the Cheque but there was no evidence that it was ever delivered or cashed by the defendant.

57. The plaintiff only had to look at its monthly bank statements to find evidence that the Cheque was cashed. It was not difficult, time consuming nor involve great expenses. The plaintiff’s failure to adduce its banking record to show the Cheque had been cashed left me to the irresistible inference that the Cheque was never delivered and therefore never cashed by the defendant.

58. The defendant should have judgment for this part of his counterclaim, less the amount he has received.

Accrued Leave

59. The defendant’s case was prior to commencing full-time employment with the plaintiff, on or around September and October 1999, Mr. Exline agreed the defendant would be entitled to take 9 days for Christmas holidays in 1999 and for each year thereafter he would be entitled to 10 to 14 days of paid annua1 leave each summer and 10 to 14 days each Christmas. In accordance with this agreement and with the plaintiff’s knowledge and consent, the defendant took the following paid annual leaves:

(a)   18^th December 1999 to 8^th January 2000 (21 calendar days total);

(b)  24^th August 2000 to 9^th September 2000 (15 calendar days total);

(c)  22^nd December 2000 to 2^nd January 2001 (11 calendar days total);

(d)  16^th July 2001 to 4^th August 2001 (19 calendar days total); and

(e)   19^th December 2001 to 5^th January 2002 (17 calendar days total).

60. The defendant therefore stated he only took:

          (a)    9 paid annual leave days in 1999;

(b)   24 paid annual leave days in 2000;

(c)    23 paid annual leave days in 2001; and

(d)    3 paid annual leave days in 2002.

61. The defendant alleged he worked 169 out of 365 days and only took 3 days of annual leave in 2002. Based on the above listed annual leave dates taken and the agreement between him and Mr. Exline, the defendant argued he was entitled to 28 days of paid annual leave each year and was therefore entitled to be paid accrued untaken annual leave of HK$18,600.18 [i.e. HK$56,000 x (1/30) x (28 x (169/365) - 3)].

62. Mr. Wong, in his final submission, admitted that I am entitled to accept only the lower of the agreed range of paid annual leave, the defendant’s total entitlement for accrued annual leave should be HK$11,685.84 [i.e. HK$56,000 x (1/30) x (20 x (169/365) –3 )].

63. The plaintiff’s case was, in accordance with the Employment Contract, the defendant was only entitled to 14 days paid annual leaves.

64. I have already found as a matter of fact that the Employment Contract did not reflect the terms of employment between the parties, but the burden of proving the plaintiff agreed the defendant could have 9 days for Christmas holidays in 1999 and for each year thereafter 10 days of paid annual leave each summer and 10 days each Christmas, was on the defendant.

65. The defendant’s allegation was nonsensical because:

(1)   It is not common to have a range for paid annual leave, especially when the defendant testified that he was concerned about the holiday issue and had discussed a number of times over this matter with Mr. Exline. Even Mr. Wong admitted that fallacy and reduced the defendant’s claim for accrued annual leave claims from two 10 to 14 days periods to a claim of a fixed 20 days per year.

(2)   Unless the plaintiff has adopted a common leave year under section 41 AB of the Employment Ordinance, annual leave entitlement is measured in terms of leave years and not calendar years. The defendant’s calculation of accrued annual leave based in calendar year was clearly incorrect.

(3)   In the first year of his employment, the defendant failed to follow the annual leave agreement he allegedly had with Mr. Exline. Instead of the agreed 9 days, the defendant took 16 days of annual leave for Christmas 1999 and he took 13.5 days of annual leave in the summer of 2000.

(4)   In the second year of his employment, instead of the agreed 10 to 14 days during Christmas, the defendant actually took 6 days of annual leave; during the summer, the defendant took 16.5 days instead of the alleged 10 to 14 days annual leave.

(5)   In his letter dated 19/7/2002, the defendant only claimed payment for 7 accrued annual leave, when properly calculated, based on the defendant’s allegations, he should be entitled to [28 x (168/365)] or 12.88 days of annual leaves for 2002. After deducting the 3 annual leaves taken by the defendant, the claim should have been 9.88 days.

(6)    In his original Labour Tribunal Claim Form (Form 2), the defendant based his Annual Leave Pay claim on 14 days and not 20 to 28 days annual leave entitlement.

(7)     In his original Defence and Counterclaim, the defendant did not claim any accrued annual leave entitlements.

(8)     In his witness statement dated 17/6/2005, the defendant failed to mention the alleged arrangement of 9 days annual leave he had with Mr. Exline for Christmas 1999. Nor was there any mention about the specific agreement for 10 to 14 days annual leave for each Christmas and summer thereafter. In paragraph 15 of the defendant’s witness statement dated 17/6/2005, he simply stated:

“…During the course of working with Home Essentials, I went to the US and Canada every Christmas and every summer for 10 to 14 days with Mr. Exline’s full knowledge and always with his blessing. Mr. Exline was fully aware of all the time I took off, as I never left without informing him and getting his verbal approval….”

66. Adding all of the above, the evidence points indubitably to an ad hog arrangement instead of an agreed fixed number of annual leave days per year. I find as a matter of fact the parties did not agree on any fixed annual leave entitlement and the defendant was not entitled to any annual leave, beyond his minimum entitlement under the Employment Ordinance, unless agreed to by the plaintiff on a case by case basis.  This part of the counterclaim is dismissed.

THE COUNTERCLAIM TO COUNTERCLAIM

67. The plaintiff’s Counterclaim to Counterclaim was based on the following:

(1)    Wages in lieu of notice in the sum of HK$56,000.00; and

(2)    Overtaking 2.72 days of annual leave in the sum of HK$4,024.11.

Wages in lieu of notice:

68. I have already held that the defendant did not give any notice of termination to the plaintiff; however this does not automatically entitle the plaintiff to counterclaim for wages in lieu of such notice. Since the Counterclaim to the Counterclaim was filed in the last minute, without the defendant having an opportunity to consider and file a formal defence, I have to deduce the defence to the Counterclaim to Counterclaim from the defendant’s final submissions. Mr. Wong in his final submission, stated: “ It is unsurprising that (Mr.) Exline did not want (Mr.) McLennan to service out his notice period when McLennan was going to join a competitor. This is confirmed by the fact that Exline had told Mr. Clarence Chan of The Birdcage that he had fired McLennan on 18 June 2002 and the fact that HEL (the plaintiff) wrote to the Immigration Department the next day withdrawing sponsorship of McLennan’s work visa with immediate effect.”

69. Mr. Chang objected to the production of Mr. Clarence Chan’s letter as evidence, because Mr. Chan did not testify and hearsay notice of this letter was never given. In any event, taken to its highest, Mr. Wong’s defence to this part of the Counterclaim to Counterclaim was that of a waiver by election.

70. The principles of waiver by election was set out by Yuen JA in Large Land Investments v. Cheung Siu Kwai [2003] 1 HKLRD 313 (at paragraph 15) as follows :

“The principles to be applied in this area of law are as follows:

(1) A waiver by election occurs:

… in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so.  His decision, being a matter of choice for him, is called in law an election (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at p.398).

(2) It is a prerequisite of election that the party making the election must first be aware of the facts which have given rise to the existence of his right (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) at p.398).

(3) It may be that the party must also be aware of his legal right of affirming or rescinding the contract when there has been a repudiation by the other party (Peyman v Lanjani [1985] Ch 457 - although this aspect was not disputed and therefore not considered by the House of Lords in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga).

(4)        Further, since a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to have done so if he has so communicated his election to the other party in clear and unequivocal terms (Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) at p.398).”

71. Here, there was nothing that suggested Mr. Exline was aware of the plaintiff’s legal right to insist the defendant should serve a notice of termination or to pay wages in lieu thereof. There was no waiver by Mr. Exline and the plaintiff should recover this part of the Counterclaim to Counterclaim.

Overtaking 2.72 Days of Annual Leave

72. I have already found as a matter of fact the parties had an ad hoc arrangement on annual leave. The plaintiff’s argument that the defendant took excessive annual leaves without the approval and consent of Mr. Exline simply did not accord with the evidence.

73. First, the plaintiff knew how many annual leave days the defendant took. Mr. Exline’s evidence that he did not have record of the defendant’s annual leave is unbelievable, since he set out all of the defendant’s leave periods, including the purpose of each leave period in the plaintiff’s defence at the Labour Tribunal claim.

74. Second, Mr. Exline had never complained about the defendant’s alleged excessive annual leave.

75. Third, even when the plaintiff was having financial difficulties and had to implement the so-called Days-For-Dollars scheme, if the defendant took excessive and unauthorized annual leaves, it would be natural for the plaintiff to deduct the defendant’s wages, yet it continued to pay full salaries to the defendant. 

76. Having considered all of the evidence, I find as a matter of fact the plaintiff and the defendant had an ad hoc arrangement for annual leave and all of the defendant’s annual leaves were taken with the consent and approval of the plaintiff. This part of the Counterclaim to Counterclaim is dismissed.

Order:

Representation:

Mr. Jonathan Chang, instructed by Messrs. Haldanes, for the Plaintiff

Mr. Jonathan Wong, instructed by Messrs. Richards Butler, for the Defendant