HEYBRIDGE LTD AND OTHERS v. CHAN SZE SZE GABRIELLE AND ANOTHER

HCA 9563/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9563 OF 2000

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J U D G M E N T

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Introduction:

1.  These proceedings arise out of a partnership dispute.  As so often happens, the terms of the partnership agreement were never reduced to writing and subsequently disputes arose.  Now the plaintiffs sue the defendants for undistributed profits, and the defendants sue the plaintiffs by counterclaim for wrongful termination of the partnership.

Background:

2.  In mid-1999, Ms Chan was in a position to secure a contract with the BBC for the manufacture and supply of the characters of a BBC children’s television production by the name of Tweenies.  Ms Chan was relatively new to the toy industry, and had no real experience of toy manufacturing.  Ms Chan did not have manufacturing facilities to manufacture the toys and sought a manufacturer to undertake production with her.  Neither did Ms Chan have the capital available to enable her to follow the usual course in the toy industry of being able to give to the manufacturer a Letter of Credit upon placing an order.

3.  This lack of available capital was a significant barrier to Ms Chan’s ability to conclude the contract with the BBC.  Unless a manufacturer could be guaranteed payment by way of a Letter of Credit, no matter how strong the ultimate purchaser might be, manufacturers would be reluctant to enter into a contract to manufacture toys, without any security for payment.

4.  After some investigation of other potential manufacturers Ms Chan was eventually introduced to Sun Shine Toys, and ultimately its principal owner, Mr Chang.  Unfortunately, subsequent to the commencement of these proceedings, but long prior to trial, Mr Chang has died.  He died before he was able to make a witness statement commenting on any of the matters made or asserted by Ms Chan or Daniel Tse in their witness statements.

5.  In order to overcome the inability to give to the manufacturer a Letter of Credit, Ms Chan proposed a partnership, comprising three working partners, each of which contributed to the business of the partnership in a different way.  Sun Shine Toys was to be responsible for manufacturing the products.  Ms Chan was to be responsible for selling the products to the BBC.  Mr Cho, a friend of Ms Chan and her domestic partner, Daniel Tse, was to attend to partnership business generally by way of liaison between factory and distribution.

6.  The normal markup by a manufacturer in the toy industry is such that the profit that the manufacturer would receive, if he were to take 45% of the profits over the manufacturing cost, was considerably enhanced.  I am satisfied from the evidence of Mr Albert Wong, a solicitor and accountant, and close adviser to Mr Chang of Sun Shine Toys, that this was to be the attraction to Sun Shine Toys which would enable them to take the risk of manufacturing toys without the security of a Letter of Credit.

7.  The agreed division of profits was to be: Sun Shine Toys side, 45%; Ms Chan’s side, 45%: Mr Cho’s side, 10%.

8.  There was discussion between the parties about the formation of a BVI company to be known as Toyworld Inc, in which each of the three, Sun Shine Toys, Ms Chan, and Mr Cho, would be shareholders.  Mr Albert Wong, was instructed to prepare documents.  Certain documents were prepared but the company was never incorporated.  The documents are relevant to an extent however as they give an indication of the nature of the discussions between the parties prior to, and after, the commencement of the partnership.

9.  The partnership began in about May or June 1999, and the first toys were manufactured and supplied to the BBC in August 1999, pursuant to a quotation Sun Shine Toys to Ms Chan on 2 June 1999.  Production continued until mid March 2000, by which time orders totalling some HK$36,800,000 had been supplied to the BBC. 

10.  It was agreed between the parties that from the sum invoiced to the BBC, and paid for the toys, certain deductions would be made prior to the distribution between the partners pursuant to the agreed percentage, of what was described as the “gross profit”.  These were Sun Shine Toys’ cost of manufacturing, packaging costs, shipping costs, bank charges, Certificate of Origin fees, and Declaration Fees, (this being related to the Certificate of Origin).

11.  Although not originally discussed, but apparently agreed by acquiescence on the part of Sun Shine Toys, was a “commission” that was paid to a Hong Kong company that acted as agent of the BBC in Asia.  This commission, paid to the BBC’s agent with out the knowledge or approval of the BBC, was accordingly an illegal commission, but nothing turns on that fact.

12.  There have been various distributions of part of the gross profits arising from these sales; whether there is to be any further distribution is dependent upon the outcome of this litigation, because there is a dispute as to two of the items to be deducted prior to determining the gross profit.

13.  The partnership came to an end on 10 March 2000, when by a facsimile transmission Sun Shine Toys terminated the arrangement.  The writ was issued by the plaintiffs on 19 October 2000.

The issues in dispute:

14.  The parties are agreed, correctly in my view, that a partnership came into existence.  The dispute centres around six specific issues. 

15.  The first issue, the composition of the partnership, is an issue which arises in both the claim and the counterclaim.  Sun Shine Toys originally intended to nominate Heybridge as a partner in the transaction.  It is clear however that the true partner was Sun Shine Toys.  There is no dispute as to this and is nothing turns on the Heybridge/Sun Shine Toys difference.  There is no doubt that Mr Cho, in his personal capacity, was a partner.  The central and important issue is whether Ms Chan personally, or whether “Billion Oriental Limited, trading as G C & Co”, was the third partner.

16.  Ms Chan contends that her role in the establishment and operation of the partnership was solely as an agent of Billion Oriental, and that it was Billion Oriental, using its wholly owned firm, G C & Co, that was the partner.  In the event that Ms Chan is found to have been the partner she will be personally liable to the plaintiffs for any undistributed profits.  She will not have the protection of limited liability.

17.  The claim by the plaintiffs for undistributed profits will be determined by the resolution of two issues. 

18.  First, there is a dispute as to whether the manufacturing costs incurred by Sun Shine Toys were to be determined, and charged to the partnership, on the basis of material cost, plus 10% as asserted by the defendants, or on the basis of the cost as invoiced by Sun Shine Toys to the partnership.  To date, distributions have been made on the basis of the cost as invoiced.  A part of this issue is a question as to whether or not the costs incurred by Sun Shine Toys, and charged to the partnership were to be on an “open book” accounting basis, or on the basis of invoices as delivered.

19.  The next issue affecting undistributed profits is the entitlement of the defendants to a “handling cost”, charged by the defendants at 5% of the sum invoiced to the BBC, and deducted prior to the distribution between the partners.  The plaintiffs assert that there was no agreement for such a handling cost.  The defendants say the handling cost was agreed, and they are entitled to deduct that sum prior to the distribution.

20.  The fourth issue between the parties revolves around the termination of the partnership agreement.  The defendants say that the termination of the partnership agreement on 10 March 2000, was wrongful, in which case whichever of the defendants was the partner, is entitled to compensation in the sum of HK$547,704.40.

21.  The fifth issue concerns a claim by the defendants for an indemnity from Sun Shine Toys and Mr Cho, in relation to a tax demand made by the Inland Revenue Department upon the defendants, for tax due by Mr Cho.  The demand for the indemnity has been extended to include a demand for an indemnity in respect of any tax that might arise from a redistribution of profits.

22.  The sixth issue is a claim by Ms Chan for the refund of the sum of US$28,980 being the cost of a tooling mould made by Sun Shine Toys for the manufacture of the toys.  Notwithstanding having made payment of that sum to Sun Shine Toys, the tooling mould has not been returned to Ms Chan.

The composition of the partnership:

23.  The dispute between the parties is clear.  The plaintiffs say that they believed all along that they had entered into an oral partnership agreement with Ms Chan, in her personal capacity, using a sole proprietorship known as G C & Co.  Ms Chan says that G C & Co was a trading entity wholly owned by Billion Oriental, that the plaintiffs were aware of that right from the start, and that accordingly Billion Oriental was the partner.  Consequently, Ms Chan says, she should not suffer any personal liability in respect of the transaction.

Billion Oriental and G C & Co:

24.  The certificate of incorporation of Billion Oriental was not exhibited.  However documents photocopied from the Companies Office indicate that Billion Oriental was incorporated on about 22 March 1999. The first directors were Nancy Tse, (the brother of Daniel Tse), and a Mr David Lam.  At the time of incorporation it appears that the subscribers to the shareholding of Billion Oriental were Gateway Registrations Ltd and Fortune Corporate Services Ltd.  These two companies, I assume, had subscribed for one share each of the 1,000 one dollar shares, in the company.  Although the precise date upon which those two companies transferred their shares was not clear, it is plain from the annual return filed on 19 March 2000, that at some stage those two shares were transferred to Nancy Tse and David Lam, one each respectively.  I proceed upon the basis that those shares were transferred when Billion Oriental was acquired by Nancy Tse as a shelf company.

25.  On 3 June 1999, Ms Chan, and a company known as Beaux Monde Ltd, were appointed directors of Billion Oriental.  Beaux Monde was a company said to be owned by Ms Chan.  Ms Chan’s involvement in Billion Oriental began on that day, although it appears that it was only in an administrative capacity, as a director of Billion Oriental, and not as a proprietor of shares in Billion Oriental.

26.  The annual return filed on 19 March 2000, demonstrates that it was not until 29 December 1999, that David Lam transferred his one share to Ms Chan.  David Lam thereafter appears to have dropped out of the picture completely.  The documents filed also demonstrate also that on 29 December 1999, the remaining 998 shares in Billion Oriental were allotted to Kingsview Overseas Corporation, a BVI company.  There is no direct evidence as to the ownership of that Corporation, but I understand Ms Chan claims to be the owner.  It was therefore, only from and after 29 December 1999, that Ms Chan had a proprietary interest in Billion Oriental.

27.  On 14 April 1999, the Business Registration Office of the Inland Revenue Department received an application in Form 1(b) under the Business Registration Regulations, for the registration of Billion Oriental, having its registered office at Room 1401, 14th Floor, Tern Commercial Building 39-41 Granville Rd, Tsim Sha Tsui.  Although not exhibited, no doubt the appropriate certificate of registration was duly issued. 

28.  On the same day the Business Registration Office received an application in Form 1(d), for the registration of a branch business of Billion Oriental, the branch business to be carried on under the name G C & Co, at the same address, in the Tern Commercial Building, as that of Billion Oriental’s registered office.  Again, the appropriate certificate of registration was not exhibited.

29.  On 3 June 1999, the same day as Ms Chan became a director of Billion Oriental, the registered office of the Billion Oriental was changed to Room 803 & 804B, 8th floor, Empire Centre, 68 Mody Rd, Tsim Sha Tsui. 

30.  It was not until 27 October 1999, that the records of the Business Registration Office shows that the address of G C & Co, as a branch of Billion Oriental, was changed from Tern Commercial Building in  Granville Rd, to Room 803 & 804B, 8th floor, Empire Centre, 68 Mody Rd, Tsim Sha Tsui.

Sun Shine Toys and Ms Chan Meet:

31.  Ms Chan’s evidence was that development of the Tweenies project began originally in December 1998.  At that time Mr Daniel Tse operated a company called Victime International Ltd, (Victime).  Her evidence was that the development of the project was initially undertaken by Victime.  By March 1999, they were still looking for a toy manufacturer.  At about the end of March 1999, Ms Chan was introduced to Sun Shine Toys, initially meeting the person in charge of costing, Juan Cheng.  As is usual in such meetings, Ms Chan presented Juan Cheng with a business card.

32.  Although the nature or extent was not made entirely clear in the course of the evidence, prior to the Tweenies contract arising, Ms Chan had had some involvement with Walt Disney Productions.  She had a business card which described her as a “Marketing Director” and upon which was endorsed the words: “Licensee of Walt Disney Products”.  The words “Walt Disney” are in the familiar and easily recognised script used by that company. 

33.  That business card however showed her to be the marketing director of a company called Beaux Monde International Limited, (BMI).  There was no evidence to explain the relationship, if any, between BMI and Beaux Monde, the company that had been appointed a director of Billion Oriental.  There was no evidence to explain the ownership of BMI, and no evidence to show the relationship, if any, between BMI and Billion Oriental.  There was no evidence of the precise association between BMI and Walt Disney Productions.

34.  In the meeting Ms Chan gave a Juan Cheng a business card.  This was the BMI card described above identifying Ms Chan as the Marketing Director of BMI.  On it, either Ms Chan or Juan Cheng wrote the words: “G C & Co”, and a telephone and fax number.  It was the evidence of Juan Cheng, which I accept, that in that meeting Ms Chan did not tell her that she was representing Billion Oriental.  There was nothing on the business card to indicate that Juan Cheng was told about Billion Oriental.  There is no suggestion that any relationship, if there was any, between BMI and Billion Oriental was disclosed to Sun Shine Toys.  In the course of the meeting there were discussions concerning the production of the Tweenies toys by Sun Shine Toys.

35.  When asked to explain why she used the BMI card and not a Billion Oriental card in the meeting, Ms Chan said that she wanted Sun Shine Toys to know of her prior involvement with Walt Disney Productions, as she believed that would give her credibility.  While that explains her use of the BMI card, it does not explain why she should not also have produced a card identifying her as representing Billion Oriental and its wholly-owned trading entity, G C. & Co

36.  Ms Chan was not satisfied that she could reach a comprehensive agreement with Juan Cheng, and asked to meet with Mr Chang, the owner and manager of Sun Shine Toys.  That meeting took place, and it was Juan Cheng’s evidence that Mr Chang was interested in the project and asked to be provided with more details.  No agreement was reached at that time, however it is clear that Sun Shine Toys were interested in the proposal and from time to time further contact was made with a view to progress in the matter.

37.  The next meeting that was held was at the office of Victime.  This occurred on 11 May 1999.  Prior to this Daniel Tse had suggested that Mr Cho should be involved to ease the workload for Ms Chan.  Mr Cho agreed to be involved.  On 11 May 1999, Juan Cheng and Mr Andy Hung, (Sun Shine Toys production manager), met with Ms Chan, Daniel Tse and Mr Cho at Victime’s office, at Room 1103, East Ocean Centre, 98 Granville Rd, Tsim Sha Tsui.

38.  Confirmation of the arrangements for the meeting came in a fax sent by Ms Chan to Mr Albert Hung, on 10 May 1996, on the letterhead of Victime.  The message confirmed the conversation and that the meeting was to take place at 9 a.m. on Tuesday in 11 May 1999 the fax message set out the address of Victime describing it as: “Our address”.  There was no reference in the fax to the involvement of Billion Oriental.

39.  At that meeting Mr Cho gave Juan Cheng a business card which described him as the Managing Director of Eternal Dragon International Ltd.  On the card Juan Cheng endorsed the words “G C & Co” and the same telephone number as she had marked on Ms Chan’s BMI card in the meeting at the end of March 1999.  Daniel Tse gave Juan Cheng a Victime card describing him as the Managing Director of that company, upon which she endorsed the same telephone number.

40.  Ms Chan and Daniel Tse both say that they told the representatives of Sun Shine Toys that they represented Billion Oriental who would be the contracting party, trading as G C & Co.  There was no documentary evidence to substantiate this assertion.

41.  I am satisfied that in the course of that meeting the parties believed that they had reached agreement in principle as to how they might proceed, although plainly many matters still remained to be agreed.  The understanding that had been reached was that Sun Shine Toys would be the manufacturer of the toys, giving quotations to the partnership for the cost of manufacture.  Mr Cho would act as liaison with Sun Shine Toys’ china factory in generally assist in the production and logistics matters.  Ms Chan would liaise with the BBC’s Hong Kong agents, receiving orders from them and quoting to the BBC the price for the supply of the ordinance.

42.  The understanding between the parties was such as to enable Juan Cheng to begin supplying quotations to Ms Chan, and the first order was received from the BBC on 28 May 1999, and on that day placed with Sun Shine Toys.

43.  At some time early in May 1999, Daniel Tse met with Mr Chang to suggest to him that Mr Cho should become involved in the partnership.  Mr Chang agreed to the proposition.  In his witness statement Daniel Tse said that he attended that meeting with Mr Chang, in May 1999, at Sun Shine Toys office in Chai Wan.  Daniel Tse, adopting in his witness statement the same formulaic expressions as used by Ms Chan in her witness statement, said that he attended that meeting under “the authority of Ms Chan acting on behalf of Billion Oriental”.  That simply could not have been possible.  While he may have attended the meeting, he did not do so with any authority from Ms Chan on behalf of Billion Oriental.  At that time she was neither a director nor shareholder in Billion Oriental and so had no right at all to give instructions in behalf of Billion Oriental.

The Toyworld documents are prepared:

44.  The partnership had come into existence by 28 May 1999, when the first order had been received from the BBC, Ms Chan had received a quotation from Sun Shine Toys for that order, and had placed the order with Sun Shine Toys.  Discussions on the precise terms of the arrangement by which the partnership would conduct its business with the BBC were continuing, but apparently with agreement in principle having been reached, the parties were able to proceed to deal with the orders were received from the BBC.

45.  Mr Chang suggested that for taxation purposes, a company should be formed to undertake the arrangement, in which each of the three partners should the shareholders.  His proposal was that the company would be a BVI company to be called Toyworld Inc.  Instructions were given by Mr Chang to Mr Albert Wong to prepare the necessary documents.

46.  Mr Wong prepared a number of versions of the documents.  The Toyworld documents, as drafted by Mr Wong, with the exception of a document entitled “Shareholders Memorandum of Toyworld Inc”, were not actually signed by the parties.  However the nomenclature used throughout the documents is instructive.  Through out the whole of these documents a contracting party was described as “Gabrielle Sze-sze Chan”.  Early versions of the documents referred to a firm, “G C & Co”, and described it as being “a firm controlled and owned by Ms Chan and Mr Cho”.  There is no suggestion that any instruction was given to Mr Albert Wong to correct this definition to show that G C & Co was wholly owned by Billion Oriental.

47.  A “Shareholders Memorandum”, which was signed on 20 September 1999, described three parties, Heybridge, Ms Chan, and Mr Cho as being the shareholders in Toyworld Inc.

48.  At the end of the day the parties did not proceed with the incorporation of Toyworld, but conducted themselves by way of a partnership, there being no doubt that agreement had been reached on the profit sharing that I have indicated.  The precise reasons why the Toyworld proposal did not proceed are irrelevant.  What is highly relevant is that at no stage during the course of the preparation of the Toyworld documents did Ms Chan ever suggest that the name Billion Oriental should be introduced into the documentation for the formation of Toyworld, nor did she correct the definition of G C & Co.

G C & Co’s office premises:

49.  The evidence discloses that the only office that G C & Co actually operated from was that at the Empire Centre.  Although the original office was at Tern Commercial Building in Granville Road, it does not appear that the business had begun there, or had ever operated from those premises.  It is more likely than not that at the beginning of June 1999, by which time Sun Shine Toys were supplying the first quotations for the manufacture of the toys, Ms Chan and G C & Co were operating from the Empire Centre.

50.  A photograph of the ground floor signboard at the Empire Centre was produced, together with a photograph of the 8/F signboard.  Both of these signboards referred only to G C & Co.  Signs on the front door of the office referred only to G C & Co.  There is no obvious mention at either place of Billion Oriental. 

51.  Strictly speaking, Billion Oriental, by failing to fix its name on the outside of the office in a conspicuous position, was in breach of s 93 Companies Ordinance Cap 32.  While the fact of the breach of the law is of itself of little relevance, it is plainly relevant that nothing was openly disclosed in respect of Billion Oriental’s involvement in, or ownership of G C & Co.  Any person going to the Empire Centre office would have no idea that G C & Co was in fact a wholly owned subsidiary of Billion Oriental.

52.  A business card for Ms Chan, headed in the logo of G C & Co, referred to Ms Chan as being the Art Director.  There was no reference on the card to Billion Orient.  There is no suggestion that Ms Chan gave this card to anyone from Sun Shine Toys prior to the commencement of the manufacture of the toys.

The name Billion Oriental is used:

53.  I am satisfied that the first occasion upon which the expression: “G C & Co, (Wholly Owned By Billion Oriental Limited)”, could have become known to Sun Shine Toys, or Mr Chang, was on the signature to a cheque dated 6 October 1999, given by Ms Chan to Mr Chang, by way of a first distribution of profits, at a dinner on that day for the purpose of distribution of profits.

54.  In the usual way of a business in Hong Kong, G C & Co had various forms of company chop. The documents demonstrate that different forms of the chop we used, depending upon the recipient of the document.  Invoices to the BBC were, with a few exceptions, sent on an invoice form headed “ G C & Co”, and endorsed with a chop reading:

“For and on behalf of G C & Co, (Wholly Owned By Billion Oriental Limited)”.

Some were endorsed with the chop that read:

“For an on behalf of G C & Co”.

Numerous other documents were endorsed with this chop, including shipping documents which were sent to Sun Shine Toys.  The chop explaining that the firm was wholly owned by Billion Oriental was not used on documents which went to Sun Shine Toys.  The only documents which went to Sun Shine Toys which disclose the involvement of Billion Oriental with the cheques that were drawn for the distributions.

Discussion:

55.  I did not find either Ms Chan or Mr Daniel Tse to be believable witnesses.  In respect of the identity of the contracting party there were numerous inconsistencies in their evidence. 

56.  Ms Chan was quite unable to explain satisfactorily why there should be two different chops, and why they were used on different occasions.  She retreated into an assertion that Nancy Tse was responsible for the chops and the application of chops.  She did not, however, call Nancy Tse to give evidence.  Ms Chan’s retreat, into claiming Nancy Tse was responsible for matters, which occurred regularly, stood in marked contradistinction to Ms Chan’s own position as a director, and apparently the majority shareholder, through her ownership of Kingsview, in Billion Oriental.  It stood in marked contradistinction to a further and Daniel Tse’s assertions that Daniel Tse operated only on the authority of Ms Chan.

57.  Ms Chan asserted that she was unaware of the existence of the chop that read: “For and on behalf of G C & Co”.  Plainly however that was not true.  That chop was used when she signed a consultancy agreement with Mr Cho on 1 June 1999.  Her explanation that the agreement was prepared by Mr Cho, and that he later put the chop on it, apparently unknown to her, a matter not in her witness statement, or put to Mr Cho, was simply unbelievable.  That such an event should not have been fully explained in a witness statement, when the issue as to whether it was Ms Chan or Billion Oriental that was involved was at the forefront of everybody’s minds, places the explanation into the category of a recent invention in the course of the evidence.  In any event, it is hardly believable that a director of Billion Oriental would be unaware of the existence of such a chop in an office where she regularly attended.

58.  Equally unbelievable was the assertion that the letters “G C” in the title “G C & Co” referred not to Gabrielle Chan, but the words “Grand Concept”.  That expression was simply was never mentioned until Ms Chan was being cross-examined.  There is no single document which might be identified as leading to the conclusion, the fact any one dealing with G C & Co, through Ms Chan, would have thought that the letters, “G C”, might have referred to anybody else other than Ms Chan.  The letters “G C” were plainly chosen to raise the inference that they referred to Ms Chan.

59.  At no stage during the negotiations leading up to the agreement between the parties did either Ms Chan or Daniel Tse ever give to any of the opposite parties in the transaction a business card which purported to present either of them as representing Billion Oriental, or G C & Co as being a wholly-owned trading entity, owned by Billion Oriental.  Instead, business cards relating to other, quite unrelated entities, were distributed.  Ms Chan attempted to explain this by suggesting that she had not had time to have cards printed. 

60.  Business cards are an important part of the conduct of business relationships in Hong Kong.  Businessmen expect to give and receive a card which identifies the position of themselves and the other party.  Great weight is placed upon the identification of a person in this way.  That must have been known to both Ms Chan and Mr Tse.

61.  I do not need evidence to know that in Hong Kong business cards can be prepared within 48 hours, or probably even less.  Ms Chan began her discussions with Sun Shine Toys in March 1999.  She had had more than ample time by the meeting on 11 May 1999, to prepare appropriate cards, indicating that she was representing Billion Oriental trading as G C & Co.  She seemed perfectly able to find the time to have a business card prepared in the name of G C & Co, describing her as its Art Director.  If such a card can be prepared there is no reason why one should not be prepared showing the true owner of the firm.  That is especially so, when the name of the firm bears the same initials as Ms Chan.

62.  Mr Tse said that he was authorised by Ms Chan to represent Billion Oriental.  It may well have been that after Ms Chan became a director of Billion Oriental that situation was correct.  But by that time, if it was intended that Sun Shine Toys were to know of the involvement of Billion Oriental, I have no doubt that both would have ensured that he had an appropriate business card to identify him in that capacity and to ensure that there was no confusion between that and his Victime business.

63.  In none of the draft documents prepared for Toyworld, nor in the Shareholders Memorandum, is there any reference whatsoever to Billion Oriental.  Mr Wong plainly received his instructions from Mr Chang, and there is no reason at all, if Mr Chang had been informed by Ms Chan of the identity of the contracting party, as described by Ms Chan, that he would not have told Mr Wong to draw the documents in the name of Billion Oriental. 

64.  There were several meetings between those involved to discuss the Toyworld documents, at which all, including Ms Chan, were present.  I have not the slightest doubt whatsoever that if Ms Chan, as she now asserted, had insisted right from the start that the contracting party was Billion Oriental, trading as G C & Co, she would have said so in the course of those meetings, and the documents for Toyworld would have been drawn so as to reflect that situation. There is no logical reason at all why she should have allowed the Toyworld documents to have remained in the misleading form that they were, if her assertion is correct.

65.  It was asserted by Ms Chan that a business registration certificate was displayed in the offices of G C & Co., recording the fact that G C & Co was wholly-owned by Billion Oriental.  While the application for such a certificate was produced, the certificate itself was not produced.  A person who worked in the G C & Co’s Empire Centre premises, called by the defendants, was unable to identify any such document in the bundle as having been exhibited at the offices.  Other than the quite unsubstantiated assertion of the display of a business registration certificate, there was no other evidence as to the display of the name Billion Oriental at the office premises. 

66.  In any event, I would not be satisfied that the mere display of the modest certificate issued by the Inland Revenue Department at the premises indicating the registration of G C & Co as a wholly-owned entity of Billion Oriental would, by itself, be sufficient to give notice to those dealing with persons at those premises of the true identity of the legal entity with which they were dealing.  In this trial, at the end of the day, Ms Chan was reduced to having to rely upon the display of the certificate as being the only document which indicated to those staff members of Sun Shine Toys who attended at the Empire Centre premises the precise identity of the corporation with which they were dealing.

67.  It is right that s 12 of the Business Registration Ordinance Cap 310, requires the display of the certificate issued under the Ordinance at the place of business to which the certificate relates.  But it is plain that the purpose of the Ordinance is to establish the identity of the operator of a business for Inland Revenue purposes.  There is nothing in the Ordinance which establishes the fact of registration or the display of a certificate as constituting any form of notice to those dealing with the proprietors of the business, or to the public at large, of the identity of the owner of the business.  Rather, the purpose of the display of the certificate is to assist an Inland Revenue Department inspector in knowing who he is dealing with, for Inland Revenue Department purposes.

68.  Throughout her evidence, not only in respect of this issue, but in respect of other issues Ms Chan referred to a number of conversations that she asserted she had had with the late Mr Chang which had not been set out in her witness statement.  He, of course, could not be called to contradict any thing she said.  She referred also to conversations with Mr Andy Hung, who had not been called as a plaintiffs witness, again conversations which had not been set out in her witness statement.  When pressed on these inconsistencies she asserted that her original witness statement had been over 70 pages, that she had been advised by her then counsel to reduce it in size, and he had been responsible for the drafting.  Finally, she asserted that she believed at the time the statement was prepared that “you could refer to yourself only, and no one else”.

69.  Ms Chan has been legally represented throughout, and I have no doubt that her responsibilities, and the purpose of a witness statement were properly explained to her.  Her constant reference to conversations with the late Mr Chang and Mr Hung, that had not been previously detailed, bore all the hallmarks of recent invention.  Her final assertion, in an attempt to justify the terms of the witness statement, was that of a person cornered, grasping at straws.

70.  Mr Daniel Tse, in his witness statement, held himself out as having a subsidiary role in this matter.  He specifically recorded that he was “authorised” by Ms Chan to have meetings with Mr Chang of Sun Shine Toys.  When he gave evidence however he put himself forward as the mastermind of G C & Co.  The assertion was incredible.  He had no involvement at all, on the face of the documents, in Billion Oriental.  I am satisfied that his assertion of a prominent role in Billion Oriental was a late attempt on his part to attempt to save Ms Chan from personal liability by distancing her from the management of G C & Co.  I did not find him to be a believable witness.

71.  Finally, that Ms Chan herself considered that she was a partner, and not either Billion Oriental, or G C & Co, is demonstrated by the documents prepared to demonstrate the amount available for distribution in relation to the payments received from the BBC for the 3rd, 4th, and 5th letters of credit issued by the BBC, (Ex D2A & D2B).  In both of these documents 45% of the profit has been allocated to Ms Chan personally.  There is no suggestion in the documents that the share of the profit is to be allocated to G C & C, or Billion Oriental.  Ms Chan sought to avoid responsibility for the use of this nomenclature by saying that these documents were prepared by Nancy Tse.  But there is no doubt that they were used and distributed by Ms Chan and that she was involved in the discussions that followed them, resulting in a further distribution. 

72.  Further if, as Ms Chan asserts, Nancy Tse prepared the documents, one would have expected the allocation of profit to have been to either G C & Co, or to Billion Oriental, the entities with which Nancy Tse was said to be involved, and not Ms Chan personally.  There was no proper explanation as to why Nancy Tse would have drawn the documents in a particular manner in which they were drawn.

73.  An issue that arose during the trial was whether or not certain documents had been forged by either Ms Chan or Daniel Tse.  While I find the circumstances in which those documents came into existence to be highly suspicious, and such as to properly justify the allegation that was made, the evidence is not such that I can find, to the appropriate standard of proof by which an allegation of forgery in civil proceedings ought to be established, that either Ms Chan or Daniel Tse were responsible for those documents.  I have accordingly disregarded those documents in my assessment of the evidence.

Conclusion as to the introduction of Billion Oriental:

74.  I am satisfied that the first occasion on which Mr Chang, or Sun Shine Toys encountered the expression: “For and on behalf of G C & Co, (Wholly Owned By Billion Oriental Limited)”, was on the cheque drawn on 6 October 1999, for the first distribution, well after the partnership had been formed. 

75.  I am satisfied that up until that time, Ms Chan had represented herself to Sun Shine Toys as acting in her own personal capacity, trading through the medium of a sole proprietorship firm known as “G C & Co”.  It may well have been Ms Chan’s intention to represent Billion Oriental, as that company’s agent, but she did not disclose that agency. 

76.  I make it clear that I find that this is not a case of an unidentified principal, where Ms Chan, as agent, may have made it clear that she was acting as an agent, but did not identify her principal.  To the contrary, Ms Chan represented herself as trading through the medium of G C & Co.  In so doing she did not represent that she was acting as an agent, but that the capacity in which she acted was through that sole proprietorship, apparently owned by her.  She did not disabuse anyone of the natural inference that would arise, from the use of the initials, that those initials referred to her.  If she had a principal, she kept that fact completely concealed.

The law in relation to an undisclosed principal:

77.  The law is clear in circumstances where the principal is undisclosed, or the fact of agency, is not disclosed at the time of contract.  Where the fact of agency, or the principal is undisclosed at the time of contracting, the contract is made with the agent and he is personally liable and entitled to sue on it: see Bowstead & Reynolds on Agency 18^th Ed para 0-012.  In an appeal from Hong Kong in Siu v Eastern Insurance Co Ltd [1994] 2 AC 199 the Privy Council said that the main features of the law relating to an undisclosed principal had been settled since at least the end of the 18th century. At p 207D the court held that the agent of an undisclosed principal may sue and be sued on a contract.

Conclusion:

78.  Having failed to disclose either the fact that she was acting as an agent, or her principal, at the time of making the contract of partnership, Ms Chan, even if actually acting as an agent for Billion Oriental, is personally liable on the contract.  She was accordingly properly made a party to the proceedings by the plaintiffs, and must be personally liable for any judgment that may be achieved by the plaintiffs.

79.  In reaching this conclusion I have had careful regard to Mr Lam’s argument that there was confusion as to whether the contracting party was viewed by Sun Shine Toys as Ms Chan or G C & Co.  At the end of the day it simply does not matter.  What is relevant is that Ms Chan held herself out as the contracting party of who, for the purposes of the contract, would trade through a sole proprietorship called G C & Co. 

80.  Whatever name a person might use to trade by, where that trading name is constituted as a sole proprietorship for the purposes of the Inland Revenue legislation, the person involved is personally liable on the transaction.  Unlike the separate persona of an individual and a corporation, there is no separate persona in respect of an individual, or a sole proprietorship trading name used by that individual.  Registration of the trading name under the Business Registration Ordinance does not bestow upon the entity registered a separate legal persona, in the absence of incorporation under the Companies Ordinance.

81.  Having failed to disclose her true principal, Billion Oriental, even if that company owns G C & Co, Ms Chan is personally liable.

82.  Mr Lam sought to make a point from the fact that subsequent to the commencement of the arrangement, that is after the first BBC order had been received and Sun Shine Toys were supplying the first quotations, and the parties had been paid by the BBC for orders supplied, cheques for the payment of the distribution of profit were made, demonstrating that G C & Co was a wholly owned subsidiary of Billion Oriental. 

83.  This fact, and any other fact subsequent to the commencement of the partnership arrangement, that is 28 May 1999, when Ms Chan submitted the first BBC order to Sun Shine Toys, for manufacture, and the order was accepted by Sum Shine Toys, is simply irrelevant.  By that time the partnership had been formed between Sun Shine Toys, Mr Cho and Ms Chan.  The mere fact that cheques from another source were used after the partnership has been formed does not transform the party who has issued the cheques into a partner, so as to release Ms Chan from any liability.

84.  While Sun Shine Toys may, after 6 October 1999, when they received the distribution cheque, have had reason to doubt that Ms Chan was all she purported to be, that does not detract from their right to pursue her personally in respect of the contract of partnership.

85.  It having later been disclosed that Ms Chan claims that she was in fact acting as an agent for Billion Oriental, claim not denied by Billion Oriental, the plaintiffs were perfectly entitled to bring proceedings against both Ms Chan and that company, and any judgment they obtained these proceedings will accordingly be a judgment against both Ms Chan and Billion Oriental.

The basis of manufacturing costs:

86.  The second issue to be determined is the basis of the manufacturing costs.  Here again the dispute between the parties is clear.  Ms Chan says that Sun Shine Toys were to charge the partnership the cost of manufacturing the toys at the actual price of the raw materials, plus 10%, on an open book basis, that is the accounting information justifying the cost of raw materials was to be fully disclosed to the partnership.  Sun Shine Toys, for their part say that the manufacturing cost was to be determined by the amount quoted to Ms Chan on behalf of the partnership, accepted by her in that capacity, and subsequently invoiced to the partnership.

87.  Examples of the type of accounting information to which Ms Chan says she is entitled may be seen at Bundle 4 p1245(2)-(4).  These are a series of internal documents prepared by Sun Shine Toys at the time it made its various quotations to Ms Chan.  The documents show the breakdown of the cost of materials, labour cost and an overhead and profit markup, in each case of 10%.  On Ms Chan’s case, Sun Shine Toys would not have been entitled to charge the labour cost, or impose the overhead or profit markup.

88.  When Ms Chan first approached Sun Shine Toys, after her discussions with Juan Cheng, she was given a quotation, which she did not accept.  That quotation was based upon a unit price, and did not disclose the basis upon which the price had been determined.  Discussions followed and ultimately a quotation was given on 2 June 1999, that was accepted.  Ms Chan knew that the quotation was based on 20,000 pieces, and that the order that was placed in reliance upon the quotation well exceeded 20,000 pieces.  A central part of Ms Chan’s case was that as the size of the orders increased, the relative cost of the materials reduced, and that it was intended that the partnership should have the benefit of that cost reduction.  I accept that the economy of scale would mean that as the size of orders increased the cost of materials were likely to reduce.

89.  Notwithstanding that, Ms Chan did not ask to see the cost of materials, nor did she seek any adjustment in the quotation, having regard to the size of the order.  She was content to place the order based upon the quotation.  The order placed was for substantially more than the number of toys upon which the quotation had been given, yet the unit price for the manufacture of the toys was not reduced. 

90.  When Ms Chan undertook the first distribution, knowing that the numbers of goods in each of the orders had exceeded numbers upon which the quotations had been based no adjustment was made by her, nor did she request any information from Sun Shine Toys in order to make the appropriate adjustment.

91.  It is right that the Toyworld documents made provision for the supply of costing information by Sun Shine Toys to Toyworld for marketing and determination of purchase orders.  However I am satisfied that nothing turns on that, for the parties abandoned the Toyworld proposition, instead continuing as they had begun in June.  It is significant in this respect that the Toyworld documents were prepared well after the first quotations given.  The Toyworld documents continued to be amended and revised by Mr Albert Wong, and discussed with the parties, during the period of the fulfilment of the first two orders from the BBC.  Even after the Toyworld proposal was abandoned Ms Chan was content to continue to obtain quotations from Juan Cheng and rely upon them without question or challenge, irrespective of the size of the orders in relation to the quotations.  At no stage prior to the termination of the partnership did Ms Chan ever seek to inspect documents forming the foundation of quotations, as one might have expected her to do, if the accounting was, as she asserted, on an open book basis.

92.  It is important in the assessment of this issue to record that at no stage until after the so-called audit exercise by Mr Albert Wong in late February 2000, did Ms Chan raise any issue as to either the cost to the partnership being based upon materials plus 10%, or make an assertion as to open book accounting.

93.  Two documents were produced by Ms Chan, upon which she relied as an assertion that she had raised this issue earlier.  Both were internal Sun Shine Toys pricing estimates in the form seen at Bundle 4 p1245(2)-(4).  These were apparently sent to Ms Chan on 27 September 1999.  The reason why these documents were sent to her was never made clear in the evidence.

94.  On these documents Ms Chan has handwritten some extremely aggressive, if not offensive, remarks by way of complaint as to the cost of materials.  She asserted in evidence, but not in her witness statement, that these remarks had been faxed to Mr Chang personally.  In her witness statement she said that she “chased” Sun Shine Toys for detailed cost breakdowns.  She was unable to produce a single document demonstrating how she had “chased” Sun Shine Toys.  She did not specify precisely who it was at Sun Shine Toys she dealt with on this issue.

95.  When pressed about this matter she sought refuge in asserting, contrary to her prior assertion that it was she who chased Sun Shine Toys on the matter, that it was Mr Cho’s responsibility to deal with this issue.  Quite why he would have had to dealt with that matter was not properly explained.  Mr Cho’s primary role had previously been explained as liaison with the China factory, an area where he was said to have had a special expertise.  Mr Cho denied having been involved in the matter at all.

96.  If Ms Chan had been as outraged as the remarks on the documents indicate, I have not the slightest doubt that she would not have merely passed the matter on to Mr Cho and left it at that.  She would have not only recorded her concerns in the handwritten notes that she did, but would have formally written to Sun Shine Toys about the matter.  She would have followed that formal written complaint up with a demand for meetings and discussions about the issue.

97.  Instead Ms Chan apparently did nothing at all, making no formal request for material cost information, and proceeded to make further distributions without demure.  Her behaviour must be viewed in the light of the evidence of both Ms Chan and Daniel Tse that Daniel Tse had insisted that issues that arose between the parties should be dealt with in writing. 

98.  The way in which Ms Chan dealt with this matter, by doing nothing except asked Mr Cho to pursue it, is completely inconsistent with the aggressive tone of the remarks were written on the documents.  It is so inconsistent that I am driven to the conclusion that the aggressive handwritten remarks constituted a recent invention, endorsed on the documents by Ms Chan made after the dispute had arisen.  I expressly reject the suggestion that these documents with their remarks were faxed to Mr Chang personally.  I reject the proposition that Mr Cho was asked to pursue this matter.

99.  Both Ms Chan and Daniel Tse said that their suspicions as to the accuracy of costing were aroused when they had sight of what were known as “China invoices”; documents by which Sun Shine Toys China factory invoiced manufactured goods to the Hong Kong company.  I accept the evidence of the Sun Shine Toys witnesses that the dual purpose of these documents was to obtain Certificates of Origin, and to deal with taxation incidence between the Hong Kong company and the China company.

100.  Again, if as Ms Chan and Daniel Tse now assert, their suspicions were aroused by these documents, the first of which came to light as early as 11 August 1999, I am confident that some document would have come into existence by which Ms Chan raised her concern with Sun Shine Toys.  Again it is necessary to remember Daniel Tse’s insistence that matters should be reduced to writing.  There was no such document.  While that might be reasonably acceptable were there only one such China invoice, it is quite unacceptable when the so-called suspicious documents were received time after time, and no action was taken.

101.  Ms Chan received the quotations from Sun Shine Toys and thereafter gave her quote to the BBC’s Hong Kong agents for the sale of the toys to the BBC.  She knew what the cost was going to be from Sun Shine Toys, and did not challenge that cost.  She was able to work out the price markup between the cost of the toys to the partnership, and the sale price to the BBC, and achieved a sale price that resulted in significant profits to the partnership.  Had that profit been able to be increased by the reduction of the production cost, I have no doubt at all that Ms Chan would have raised the matter before making any distribution of the gross profits.

102.  The only occasion on which it can be properly demonstrated that Ms Chan raised this question with Sun Shine Toys, was by her letter of 8 March 2000, responding to the receipt of Mr Albert Wong’s audit report on the previous day.  There, for the first time, is the suggestion in writing, communicated to Sun Shine Toys, that Sun Shine Toys were to supply the goods at open costs plus 10%.  Although it is correct that this letter came immediately after the audit report, in the light of all that had gone on before, particularly the Sun Shine Toys quotations, the distributions, and the numerous opportunities Ms Chan had had to raise this matter, the complaint carries no weight at all.

103.  Mr Lam made a submission based upon the use of the word “costs” which appeared on a number of documents, particularly documents associated with the litigation, subsequent to the events.  His submission was that the use of that word made it clear that actual costs were to be considered, not a quotation by Sun Shine Toys that included labour and profit markups.  In my view no reliance can be placed on the use of that particular word.  It has been clear throughout that the position adopted by Sun Shine Toys is that they were entitled to charge the sum as quoted to Ms Chan, and it was that sum that they referred to as the “costs of production”.  To say that the use of the word “costs” in that expression takes the matter out of the limitations of the quotation is in my view untenable.

104.  Weighing the whole of the evidence I am satisfied that there was no agreement between the parties that Sun Shine Toys would charge the production of the toys to the partnership on the basis of materials plus 10%, and open their books fall for examination by the partnership. 

105.  I am satisfied that the arrangement was simply that Sun Shine Toys would quote to the partnership the cost of supplying the toys, and that if, after negotiation over that quotation, agreement was reached between Ms Chan, on behalf of the partnership, and Sun Shine Toys, that would be the price at which the goods would be produced.  It was then up to Ms Chan to achieve the best sale price she could to the BBC, the profits after the agreed deductions, being distributed between the partners at the agreed percentage.

106.  Ms Chan’s claim to have the profit reassessed on this basis fails.

The 5% “handling cost”:

107.  Ms Chan says that there was an agreement that the she would be entitled to deduct a “handling cost”, charged at the rate of 5% on the sums invoiced to the BBC, to be deducted prior to the distribution between the partners.  The plaintiffs say that there was no such agreement.

108.  The case for Ms Chan is that there was a discussion prior to the commencement of the partnership that some administrative costs would need to be charged by G C & Co, that the charge would be in the order of 3% to 6% of the BBC invoices, but that until they had some idea of the extent of manpower to be involved, no charge would be imposed.

109.  Ms Chan says that at the dinner on 6 October 1999, when the first distribution of profit was made, Mr Chang on behalf of Sun Shine Toys, and Mr Cho, agreed with her that from then on, G C & Co would be entitled to deduct 5% of the amount invoiced to the BBC by way of an administration charge.  No letter, memoranda, fax or other document was made by any party recording the alleged agreement.  Ms Chan did not confirm the arrangement by any subsequent document sent to Sun Shine Toys.  Mr Albert Wong and Mr Cho were both present at that dinner.  Both gave evidence that although Ms Chan raised the issue of the 5% handling cost neither Mr Chang nor Mr Cho agreed to the payment of the sum.

110.  The plaintiffs say simply that while there had been discussion, there was no such agreement, and that the first that they knew that the deduction had in fact been made, was when profit breakdown tables, Ex D2A & B, were delivered to Mr Albert Wong, the accountant, for an audit of the partnership income and distribution of profits, in late February or early March 2000.

111.  Ms Chan says that on each occasion when profit was distributed a breakdown in the form of the tables, Ex D2A & B, was given to Sun Shine Toys and Mr Cho.  Both denied having received such tables, and said that they had not seen any evidence of the deduction of the administration charge until the time of the audit by Mr Albert Wong in March 2000.

112.  The only occasion on which distributions were made to all three parties at the same time was that on 6 October 1999.  The sum distributed matched precisely the calculation prepared at that time.  A distribution form was probably handed out then, but it contained no reference to the 5% deduction.

113.  However distributions were not made to each party consistently thereafter.  Distributions were made to Mr Cho on 9 October 1999, 23 October 1999, 25 October 1999 and 13 December 1999, but to Sun Shine Toys only on 11 November 1999.  No distribution calculations were produced which matched the sums distributed on those various dates.  No explanation was offered by Ms Chan as to why distribution should not have been made consistently, on the same day, to each of the three partners, as one might expect.

114.  A distribution chart, Ex D2A, showed a distribution being made to Sun Shine Toys/Heybridge on 10 January 2000, in the sum of $1,034,156.14.  It is right that a distribution in that sum was made on that day.  But the chart that was produced upon which reliance was said to have been made by Mr Chang, it being alleged the chart was given to him at the time of that distribution, included three invoices for the period 25 October to 4 November 1999.  There had been a distribution on 11 November 1999 of $1,592,224.43, to Sun Shine Toys/Heybridge.  That had been the first distribution made to Sun Shine Toys since the 6 October 1999 distribution.  Three further distributions in that interim period had been made to Mr Cho. 

115.  It is entirely illogical that the distribution made on 11 November 1999 would not have included the sums due from the three earlier invoices.  No chart, or explanation, was produced showing how the sum of $1,592,224.43 had earlier been arrived at and distributed.

116.  There were numerous inconsistencies between the amounts of the distributions and the distribution calculation charts that were presented.  Neither Ms Chan nor Daniel Tse were able to clearly or properly explain the inconsistencies.  Nancy Tse, who it was said prepared the charts, was not called to give evidence.

117.  In this respect I accept the evidence of the plaintiffs.  I am satisfied that in respect of the distributions made following the first distribution on 6 October 1999, no documentation supporting the amount of the distribution was given to the plaintiffs.

118.  Mr Lam submitted that it was not credible that an experienced and skilful businessmen such as Mr Chang would have accepted the distributions without a proper accounting.  I think that is quite right.  And he did not accept them, as was submitted by Mr Lam, on blind faith, but insisted that Mr Albert Wong should undertake an audit of the accounting system.  That audit immediately disclosed the 5% administration fee deduction.   Both Mr Chang and Albert Wong immediately challenged the deduction in the strongest possible terms.  Ms Chan capitulated, under protest, and refunded the sums deducted by way of administrative charge, to Sun Shine Toys and Mr Cho on 9 March 2000, only two days after the audit was completed and the deduction revealed.

119.  Ms Chan says she capitulated only because that was the only way in which she could get toys to supply to the BBC.  But the documentation demonstrates that whether or not she had capitulated the toys were to be supplied.  It is clear that notwithstanding Sun Shine Toys serious concern over the 5% deduction, they still, then, intended to fulfil the order that was at that time outstanding. It was only subsequently, following the termination of the partnership by Mr Chang on 10 March 2000, that Sun Shine Toys failed to complete the one outstanding order.

120.  I am satisfied that the true reason Ms Chan capitulated on this issue, so quickly, was that she realised that she could not substantiate an agreement to pay the 5% administration charge.

121.  Mr Lam submitted that from the evidence it was clear that the administration charge was not unreasonable.  That may well be so.  But regrettably for Ms Chan a court does not determine contractual terms on the basis of what might be reasonable for a particular party.  In the absence of agreement there can be no right to deduct the sum.

122.  I am satisfied that no agreement was reached between the parties entitling either Ms Chan or Billion Oriental to deduct a 5% administration charge.  Where it has been deducted and not refunded it must be repaid to the plaintiffs.

The termination of the partnership:

123.  Ms Chan says that the termination of the partnership on 10 March 2000, by Mr Chang, was wrongful, and that she is entitled to compensation in the sum of $547,704.40 being profits she would have otherwise earned, but lost.

124.  The issue is resolved simply.  There is no suggestion at all by any party that there was any agreement as to the duration of the partnership.  None of the parties suggest that the partnership would have been confined to the BBC contract, and there were discussions about other contracts.  Consequently s 34 Partnership Ordinance Cap 38, applies to the circumstances :

“	(1)	Subject to any agreement between the partners, a partnership is dissolved-
		(a)	if entered into for a fixed term, by the expiration of that term; or
		(b)	if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or
		(c)	if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.
	(2)		In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.”

125.  Consequently, the partnership being neither for a fixed term, or for a single adventure or undertaking, was a partnership at will.  Pursuant to s 34(1)(c), notice of dissolution may be given by any partner at any time, and will effect immediate dissolution.  Ms Wu correctly cites Lindley & Banks on Partnership, 2002, para 24-19, where the learned authors say that it is a commonly held misconception that a reasonable period of notice is required to terminate a partnership at will.

126.  I am satisfied that Mr Chang, acting on behalf of Sun Shine Toys, was perfectly entitled to act as he did on 10 March 2000, in terminating the partnership.  He did not need to give any reason at all for that termination, which was effective whether or not there was any misconduct in partnership matters on the part of Ms Chan.

Does termination of the partnership absolve Sun Shine Toys from liability in respect of orders placed prior to 10 March 2000:

127.  Each time an order was received by Ms Chan from the BBC’s Hong Kong agents for Tweenies Ms Chan, acting on behalf of the partnership, requested Juan Cheng of Sun Shine Toys for a quotation for the manufacture of the particular toys that had been ordered.  A quotation was given, it was accepted by Ms Chan, acting on behalf of the partnership, who then quoted a price to the BBC for the supply of the toys.  Once accepted by the BBC, as the toys were thereafter manufactured by Sun Shine Toys, for the partnership, and ultimately delivered to the BBC, through the partnership. 

128.  It may be seen from that description of the circumstances that occurred, that in each individual transaction with the BBC, Sun Shine Toys were engaged in two different capacities.  On the one hand they were part of the partnership which had received the order Ms Chan had received from the BBC, and, through the medium of Ms Chan, ordered the manufacture of toys.  It was that partnership which would ultimately profit from the sale of the toys to the BBC. 

129.  On the other hand Sun Shine Toys were an independent manufacturer, contracted to the partnership in terms of the quotation that had been supplied and accepted by Ms Chan, on the partnership’s behalf.

130.  It must follow that the dissolution of the partnership would have no effect at all on any contract made between the partnership and Sun Shine Toys prior to the date of dissolution, 10 March 2000.  Notwithstanding the dissolution, an internal matter between partners, the partnership was still obliged in terms of its contract with the BBC, to fulfil the order that had been placed by the BBC and accepted by the partnership.  A necessary consequence of that obligation is that Sun Shine Toys were obliged, under its contract as a manufacturer with the partnership, to complete any order that had been placed by the partnership, and accepted by Sun Shine Toys, prior to 10 March 2000.

131.  At trial, Sun Shine Toys did not dispute the allegation in paragraph 41 of the amended defence and counterclaim, that it had refused to complete that one final order, and that Ms Chan had been obliged, acting on behalf of the partnership, to go to a different supplier to meet the order.  That refusal was a breach of the contract with the partnership.  No suggestion was made that there was no proper mitigation of loss by Ms Chan in behalf of the partnership. 

132.  I am satisfied that as a result of Sun Shine Toys failure to complete that order, the partnership incurred additional expenditure in the sum of $1,217,121.89, being the increased cost to manufacture the toys by another manufacturer.  The partnership, having already given its price to the BBC were obliged to sell at that price, the additional expenditure thereby reducing the profit to the partnership.  Ms Chan’s share of that reduced profit, 45%, is the sum of $547,704.40.  Sun Shine Toys must pay that sum to Ms Chan by way of damages for breach of contract. 

133.  Mr Cho has suffered a similar loss, because both he and Sun Shine Toys, together with Ms Chan, are entitled to share in the profits of the final order completed with the BBC.  However Mr Cho elected not to pursue Sun Shine Toys for his share of that loss, $121,712.18.  In the accounting that must follow this judgement he will not be able to claim that sum, which is now statute barred.

The taxation indemnity:

134.  Ms Chan and Billion Oriental demand an indemnity from Sun Shine Toys, and Mr Cho, in relation to any taxation liability arising from the partnership business.  The request for an indemnity arose from the fact that in 2000, the Inland Revenue Department, apparently being aware of Mr Cho’s involvement with Billion Oriental, had sent a demand to that company that it deduct from any money owed by Million Oriental to Mr Cho a sum of a little in excess of $700,000, allegedly being unpaid salaries tax due by Mr Cho.

135.  Sun Shine Toys and Heybridge contend that any profits made from the sale of toys through the partnership to the BBC had been booked into the accounts of Sun Shine Toys as management income, and profits tax has been paid on that income.

136.  Mr Cho says that he has paid all the tax that he owed to the Inland Revenue Department and nothing is outstanding. 

137.  I must confess that I find some real strength in these responses to the demand for an indemnity.  The only document produced was the original demand made to Billion Oriental in 2000.  Nothing has been produced that might indicate that the Inland Revenue Department still have any concern at all about outstanding taxation issues.  It was on this basis that Ms Wu submitted that there was simply no issue here, and that there was no need for any indemnity.

138.  But at the same time, other than Sun Shine Toys accounts indicating a payment of tax, no documents were produced by either Sun Shine Toys, or Mr Cho, to indicate that all of their taxation liabilities for the relevant period had been discharged.  I am confident that such a document would have been available from the Inland Revenue Department, if sought.  Further, I accept Mr Lam’s submission that the difficulty with Ms Wu’s approach is that in the light of the accounting exercise that will be required following this judgement there may be a redistribution of profits.  The concern that the Inland Revenue Department may look again at the partners in respect of any profit earned by the partnership, a matter that will be raised again as a result of the revision of the profits pursuant to this judgement with the consequent need to file amended tax returns, is not, in my view entirely unrealistic.

139.  The just result I think, is to order that each of the parties to the litigation must indemnify the others in relation to income-tax demands made by the Inland Revenue Department, to the intent that each partner shall pay his/her or its appropriate income tax on the profits ultimately shared, as between Sun Shine Toys as to 45%, to Mr Cho as to 10%, and Ms Chan and/or Billion Oriental as to 45%. 

140.  Leave is reserved to apply in relation to the precise terms of the order.

The Tooling Mould:

141.  A tooling mould for the manufacture of Tweenies was built by Sun Shine Toys for Ms Chan, at a cost of US$28,980.  Ms Chan has paid for the tooling mould, and Sun Shine Toys acknowledged that she was entitled to possession of the item.  Subsequent to the termination of the partnership Sun Shine Toys refused to return the mould.  Consequently Ms Chan says that she is entitled to withhold payment of that sum, that is to set off, that sum from any other amount due to the Sun Shine Toys or Heybridge by way of gross profits.

142.  On 30 May 2000, the solicitors for Sun Shine Toys said that the tooling mould could be collected by Ms Chan at any time.  However an about-face quickly occurred and on 2 June 2000, the solicitors for Sun Shine Toys were demanding to know whether or not Ms Chan had been reimbursed by the BBC’s Hong Kong agent in respect of the costs of the tooling mould.  It is plain from the correspondence that Sun Shine Toys were not prepared to return the tooling mould until this issue was resolved.  It was in fact entirely irrelevant to the entitlement to the mould.  The contract with the BBC was between Ms Chan and the BBC, not the partnership and the BBC.  Ms Chan having paid for the tooling mould was entitled to its possession.

143.  Further unnecessarily angry correspondence between the solicitors followed, with the result that by 25 July 2000, the item had not been returned, and Ms Chan’s solicitors informed Sun Shine Toys solicitors that she intended to set off the costs of the tooling mould against any sum due to Sun Shine Toys.  Plainly now, so long after the event, the tooling mould will have little value.  It should have been returned immediately and without the delay or the disputes about it, that were generated by Sun Shine Toys.  The conditions imposed upon its return were unreasonable, and I am satisfied that it is proper in the circumstances that Ms Chan may set off against any sum due to Sun Shine Toys, the sum of US$28,980.

Accounts:

144.  A number of conclusions have been reached in this judgment.  It will be necessary to apply those conclusions to the accounts between the parties.  On the evidence before me at the present time I am not able to conduct that exercise.  Both parties have, in the prayers for relief, sought an order for an accounting.  In my view that is the appropriate course.

145.  I will leave it to the parties to agree the terms upon which accounts are to be taken, having regard to the findings in this judgment.  In the event that they are unable to agree either party may, by summons, seek directions as to the terms for the accounts.  Leave is reserved to apply in respect of this or any other matter arising from the findings that I have made this judgment.

Costs:

146.  All questions of costs are reserved pending the outcome of the accounts.