GLORY WELL (HONG KONG) LTD t/a TOUR ENTERPRISE (HK) CO v. TAK CHEUNG-TOKUSHO TRAVEL SERVICE LTD

DCCJ 1618 & 3514/2011
(Heard Together)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1618 OF 2011

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(Heard Together)

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J U D G M E N T

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1.  In these two actions, the plaintiff (“Tour Enterprise”) claims against the defendant (“Tak Cheung”) for outstanding payment under two batches of debit notes. As both actions share the same factual background, dramatis personae as well as issues in dispute, they are heard together and in this judgment no distinction is being made between the two unless otherwise indicated. Reference to trial bundles in this judgment shall be to those of DCCJ 1618/2011.

Background

2.  The following facts are not in dispute.

3.  Both Tour Enterprise and Tak Cheung are travel agents in Hong Kong.  Tak Cheung has for decades been an appointed agent of one JTB Corporation (“JTB”), a renowned travel agent in Japan, who follows the practice of assigning its Japanese customers planning to travel to Hong Kong, Macau, Shenzhen, Zhongshan and Zhuhai, PRC (“Area”) to an appointed agent in Hong Kong (“JTB agent”), who would in turn undertake and provide tour services to such JTB customers during their trips to the Area (“JTB Engagement”).

4.  In or about 2004, an oral agreement was reached between Mr. Yu Kit Ying William (“Mr. Yu”) of Tour Enterprise and Miss Loretta Wong (“Miss Wong”) of Tak Cheung whereby Tour Enterprise was authorized to perform the JTB Engagement in the name of Tak Cheung (“Agreement”).  No contract period having been specified by the parties to the Agreement, it is common ground that the Agreement was terminable at will.

5.  In return, Tak Cheung would be entitled to receive a fee per each JTB customer handled by Tour Enterprise.  As the term “commission” was used in Tour Enterprise’s documentation, I shall deploy the same in the following paragraphs for convenience sake.

6.  It is to be noted from the outset that it constituted a breach of Tak Cheung’s agency contract with JTB for Tak Cheung to let someone else perform the JTB Engagement in its stead and JTB had all along been kept in the dark until around mid 2010.  At all material times, JTB customers would pay tour fees to JTB who would in turn pay Tak Cheung for services which were in fact rendered by Tour Enterprise in Tak Cheung’s name. 

7.  Between 2004 and 2011 and pursuant to the Agreement, Tour Enterprise had:

(a) provided tour services in the name of Tak Cheung to JBT customers travelling in the Area;

(b) communicated (purportedly as Tak Cheung) with JTB direct  in making all necessary arrangement for such JBT customers, including negotiating with JTB for pricing of tour services;

(c) appointed one Take Co. Ltd. (“TAKE”) as a representative in Japan (purportedly as Tak Cheung’s representative) for liaison with JTB;

(d) bored all costs and expenses incurred in the course of such undertakings;

(e) calculated (i) the amount payable by JTB for tour services rendered by Tour Enterprise; and (ii) the commissions due from Tour Enterprise to Tak Cheung under the Agreement;

(f) issued (i) invoices to Tak Cheung for the latter to adopt in issuing corresponding invoices to JTB; and (ii) debit notes addressed to Tak Cheung showing the calculation as per (e) above;

(g) received from Tak Cheung the balance of payment from JTB after deduction by Tak Cheung of commissions by reference to the said debit notes.

8.  By way of voluntary particulars filed on 10 August 2011 (“Voluntary Particulars”), Tour Enterprise has disclosed all commissions paid to Tak Cheung under the Agreement from 2005 to 2011.

9.  A dispute arose between Tour Enterprise and Tak Cheung as to whether Tour Enterprise had understated the commissions due to Tak Cheung totaling HK$254,554 (“Understated Profit”).  This in turn would depend on this court’s finding as to the amount of commission agreed to be payable per each JTB customer under the Agreement.

10.  A further dispute arose as to whether in late 2010, Tour Enterprise had through TAKE and without Tak Cheung’s authority provided tour services in the name of Tak Cheung to JTB customers bound for countries outside the Area and made secret profits (“Unaccounted Profit”) for which Tour Enterprise has failed to account to Tak Cheung.

11.  In November 2010, using TAKE’s unauthorized use of Tak Cheung’s name as aforesaid as a pretext, Tour Enterprise deducted a sum of HK$94,122 from commissions due to TAKE on other accounts (“Levy”).  Tak Cheung says the Levy should belong to Tak Cheung.

12.  The Agreement was terminated on 31 March 2011.  As from 1 April 2011, JTB appointed Tour Enterprise as an agent along with Tak Cheung and a third JTB agent (“New Engagement”).

13.  After a brief period of confusion after 1 April 2011 as to whether Tak Cheung’s status had been downgraded, Tak Cheung was restored to its former status as a full JTB agent in the Area.

14.  In this connection, yet another dispute arose as to whether Tour Enterprise had during the said period of confusion replaced Tak Cheung as a JTB agent in the Area, and then upon the latter regaining its status as a full JTB agent, became the latter’s competitor in breach of its fiduciary duties owed to Tak Cheung under the Agreement so that Tour Enterprise should be held liable to account to Tak Cheung for the profits it earned under the New Engagement.

15.  On 28 April 2011, Tour Enterprise issued the Writ of Summons in DCCJ 1618/2011 to claim against Tak Cheung for a sum of HK$645,742.00 which had fallen due under a batch of debit notes.

16.  On 8 September 2011, Tour Enterprise issued the Writ of Summons in DCCJ 3514/2011 to claim against Tak Cheung for a sum of HK$472,255.00 in respect of a later batch of debit notes.[1]

Issues in dispute

17.  The following issues, all brought about by Tak Cheung’s counterclaim, are in dispute:

(1)    Whether the commission per each JTB customer was agreed at 1,000 Japanese Yen (“JPY”) or at a rate to be determined solely by Tour Enterprise;

(2)    Whether Tour Enterprise was an agent of Tak Cheung in dealing with JTB;

(3)    Whether Tour Enterprise is liable to account to Tak Cheung for the Unaccounted Profit or alternatively the Levy; and

(4)    Whether Tour Enterprise is liable to account to Tak Cheung for the profit made under the New Engagement.

Issue (1) - Whether the commission per each JTB customer was agreed at 1,000 JYP or at a rate to be determined solely by Tour Enterprise

18.  In its pleaded case, Tour Enterprise avers that Mr. Yu and Miss Wong agreed, inter alia, that:

(a)         Tak Cheung would lend its name to Tour Enterprise who would borrow Tak Cheung’s name to trade and conduct business with JBT by providing tour services to JTB customers;

(b)         the only remuneration Tak Cheung was entitled to was commissions; and

(c)          Tak Cheung’s commissions were to be determined by Tour Enterprise, depending on the types of service rendered to each JTB customer, such as arrangement for hotel accommodation, transportation, meals or optional tours and in turn the profit margin in respect of each such customer.

19.  The parties agreed for commissions payable to Tak Cheung to be determined by Tour Enterprise because different JTB customers would have different requirements, ranging from mere hotel accommodation or transportation to any combination of tour services so that the profit margin would differ from one JTB customer to another.  The commissions so determined by Tour Enterprise ranged from a minimum of HK$25 to a maximum of HK$65.

20.  In his 2^nd supplemental witness statement, Mr. Yu deposed that Tak Cheung was not making good profit from JBT tours back in 2004 even though it was one the only two JTB agents in the Area.  Tak Cheung having been a JTB agent for several decades and it being a pity to terminate the relationship with JTB despite the low profit margin, Miss Wong asked Mr. Yu if he was interested to undertake the JTB Engagement in Tak Cheung’s name.  Miss Wong said she did not mind the amount of profit from such a business as she had other businesses in Shanghai and elsewhere.  She just did not want to waste the status as a JTB agent.

21.  Mr. Yu went on to say that around 2004 to 2005 when JTB customers were generous and willing to spend on shopping and dining, Tour Enterprise used to pay Tak Cheung at higher rates.  Subsequently, with JTB customers spending much less than before, Tour Enterprise would in general classify tours into three main types and determine the commissions payable to Tak Cheung on the following basis:

(1) Tours involving sightseeing and visits to shops arranged by Tour Enterprise, to which a maximum rate of HK$65 would apply.

(2) Tours with customers requiring only transportation to and from the airport or, with those having Macau as their main destination and requiring only ferry tickets, to which a rate of HK$25 to HK$35 would apply.

(3) Tours attended by JTB staff for inspection purposes or otherwise which would attract no commission.

22.  Tour Enterprise adduced in evidence several bundles of (i) invoices issued to Tak Cheung for the latter in turn to issue corresponding invoices to JTB; and (ii) debit notes issued to Tak Cheung by reference to which the latter deducted its commissions from JTB’s payment before remitting the balance to Tour Enterprise.

23.  In this connection, Miss Chau Yuk Ha (“Miss Chau”), an accounting clerk employed by Tour Enterprise since May 2007, gave a witness statement confirming Mr. Yu’s instruction to her regarding the aforesaid classification of JTB tours and exhibiting sample invoices for each of the three types of tours to which a different rate was applied for calculating Tak Cheung’s commissions.  She further cited an instance in mid January 2011 involving a tour of the third type in which Tak Cheung’s accounting clerk sought clarification from her as to why no fee was payable to Tak Cheung for the entire December 2010.

24.  In cross-examination, Mr. Yu told this court that between 2004 and 2006, progress of the JTB Engagement had been slow and Tour Enterprise only handled around 100 JTB customers each year.  It was not until 2006 when business picked up and Tour Enterprise appointed TAKE as its representative in Japan to liaise with JTB.  He maintained that commissions payable to Tak Cheung had all along been determined by Tour Enterprise since 2004.  He categorically denied having agreed to pay Tak Cheung a commission of 1,000 JYP per each JTB customer.

25.  He was further cross-examined on minor details of Tour Enterprise’s invoices and was, in my view quite understandably, unable to offer much help on the nitty-gritty of transactions. 

26.  An email from Mr. Kakizawa Yuji (“Mr. Kakizawa”), General Manager of Tour Enterprise stationed in Hong Kong, to Mr. Yoichi Takemoto of TAKE (“Mr. Takemoto”) dated 15 November 2010 (“15 November 2010 email”) ^[2] had featured prominently in these proceedings.  In relation to Issue (1), its significance lies in Mr. Kakizawa’s assertion that Tour Enterprise had to pay Tak Cheung a commission of HK$80 per each JTB customer (“Assertion”).  The subject matter of the 15 November 2010 email was certain outstanding commission due from Tour Enterprise to TAKE in relation to certain tours collectively named as FANCL tours.  It was not in dispute that the figure was largely equivalent to 1,000 JYP at the material time.

27.  Mr. Yu denied knowledge of the 15 November 2010 email, which he said Mr. Kakizawa sent without asking for his authorization beforehand other than indicating an intention to negotiate with Mr. Takemoto on the outstanding commission for the FANCL tours. 

28.  Both in his witness statement and in court, Mr. Kakizawa admitted that the Assertion was a lie and that he told the lie solely to make Mr. Takemoto agree to a reduced commission for the FANCL tours.   

29.  It was during cross-examination of Miss Chau when Tour Enterprise’s debit notes were examined in greater detail.

30.  In relation to two invoices^[3] involving what appeared to Mr. Chan, Counsel for Tak Cheung, to be tours of the second type but with no commission being paid to Tak Cheung, Miss Chau explained that unlike tours of the second type, the tours in question involved no transportation service whereby Tour Enterprise’s tour guides could make contact with JTB customers and gain an opportunity to promote sale of service options or merchandise.  

31.  With reference to another invoice^[4] relating to a tour which suggests that Tour Enterprise’s tour guides could have made contact with JTB customers but again no commission was marked as payable to Tak Cheung, Mr. Chan’s queried as to whether there ever was any classification of tours for determining the commissions payable to Tak Cheung.  While agreeing with Mr. Chan’s observation on the said invoice of which she had no memory, Miss Chau said the classification was just a guideline from Mr. Yu which could not possibly cater for all situations.  In the instant case, she reckoned that JTB might have asked for a price at which Tour Enterprise could make no profit but Mr. Yu nonetheless gave approval for taking up the tour.

32.  When Mr. Chan pointed out that in 2012 alone there were at least 20 to 30 invoices which apparently involved tours of the first type but only commissions for the second type were paid to Tak Cheung, Miss Chau fairly admitted that this did happen albeit not very often. 

33.  Miss Chau was then invited to take a careful look at an invoice which appears to relate to a tour of the first type but the rate for the second type of tours was applied^[5].  It turned out the invoice relates to one of the FANCL tours of which Miss Chau enjoyed a good memory. 

34.  Miss Chau explained that such tours in fact belonged to the second type at the time of formation of tours when members of such tours only indicated requirement for hotel accommodation.  It was only when they arrived in Hong Kong and through Tour Enterprise’s efforts did some of them opt for extra services so that Tour Enterprise could earn extra profits. 

35.  As to why in such circumstances such tours were not upgraded to the first type so that Tak Cheung would be entitled to commissions calculated at the maximum rate, Miss Chau revealed the fact that in quoting prices to JTB at the time of formation of tours, Tour Enterprise would mark up the quoted price by reference to the nature of the tours so that the quotations would cover the rates applicable to either the first or the second type of tours.  Tour Enterprise would not apply a higher rate even if members of tours of the second type had opted for extra services after arrival in Hong Kong.

36.  In relation to the FANCL tours, she added that since only some but not all customers had opted for extra services, she had sought instructions from Mr. Yu as to whether only those customers with options should be counted for the purpose of calculating commissions for Tak Cheung but Mr. Yu instructed that commissions should be calculated simply by reference to the total number of customers in each of such tours.

37.  Mr. Chan submitted that Tour Enterprise’s case made no commercial sense and there was no reason for Tak Cheung to accept an incredibly poor bargain by leaving it to a new business associate to decide how much profit to which Tak Cheung would be entitled and by allowing itself to be put in a risky position with Tour Enterprise being able to make Tak Cheung incur liabilities without Tak Cheung’s prior knowledge.

38.  He further attacked the evidence of Mr. Yu and Miss Chau as being recent invention and contradicted by documentary evidence, including the 15 November 2010 email which he described as a voluntary admission on the agreement to pay HK$80 per JTB customer.  But he otherwise submitted that Mr. Kakizawa’s evidence was incredible and unreliable insofar as his reference to the figure of HK$80 was said to be a lie with a view to boosting profits for his employer.  He also argued that Miss Wong could not have fabricated a case of fixed profit per JTB customer by reference to the 15 November 2010 email.

39.  I do not agree that Tour Enterprise’s case makes no commercial sense to Tak Cheung.  If there was no reason for Tak Cheung to leave it to Tour Enterprise to decide how much it could earn by letting the latter take up the JTB Engagement, it would equally make no commercial sense for Tour Enterprise to agree to pay a fixed commission to Tak Cheung without regard to the profit margin in relation to each JTB customers.  This is so even if Mr. Yu had presumably seen the potential profitability of the JTB Engagement in entering into the Agreement, as suggested by Mr. Chan.

40.  As to credibility, both Mr. Yu and Miss Chau impressed me as an honest witness.  Miss Chau, in particular, was willing to concede where appropriate.  She had hands-on knowledge of the subject matter and was able to deal with challenges against her evidence by offering explanations which in my view were largely unassailable. 

41.  In any event, I take the view that the many instances of deviation identified by Mr. Chan are consistent with the nature of tour business as a people business having to cater for individual needs of a wide spectrum.

42.  Quite contrary to Mr. Chan’s submission, I find the evidence of both Mr. Yu and Miss Chau to be largely corroborated by documentary evidence.  For ease of reference, I refer to Tour Enterprise’s Voluntary Particulars.  First, the figures there support Mr. Yu’s evidence that progress of the JTB Engagement was initially slow with only 100 to 200 JTB customers in 2004 to 2006 and that business only picked up from 2006 onward with the number of JTB customers reaching a high of 1,000 in 2007.  That number had tripled by the time the Agreement came to an end.  The figures also show that commissions up to (but not consistently at) HK$100 or above were paid to Tak Cheung in 2004 to 2005.  From 2006 to 2009, however, commissions were consistently paid at the range of HK$35 to HK$65 with no commissions being paid from time to time. Commissions at the lower rate of HK$25 only featured as from 2010.  My attention was not drawn to any instance of commissions having been calculated at the rate of HK$80.

43.  I also accept Mr. Kakizawa’s evidence that he was lying when he told Mr. Takemoto that Tour Enterprise had to pay Tak Cheung a commission of HK$80.  Mr. Kakizawa joined Tour Enterprise in October 2006 when business under the JTB Engagement had been picking up.  By then, if not earlier, Tour Enterprise had been paying commissions to Tak Cheung at rates well below HK$80.  Even if Mr. Yu did agree to pay Miss Wong at this higher rate, I find it highly unlikely for Mr. Yu to have told his newly appointed employee about Tour Enterprise’s non-compliance with the Agreement.  If Mr. Kakzawa somehow knew about his employer’s non-compliance with the Agreement, it would be illogical for him to divulge the confidential information to a sub-contractor when the whole purpose of the exercise was to promote his employer’s interest by reducing the commission payable to the sub-contractor.

44.  I accept Tour Enterprise’s evidence and find that Tour Enterprise had by and large calculated commissions payable to Tak Cheung by reference to the said classification as from 2007, if not earlier, subject to exceptions in individual cases.

45.  Even if this court finds otherwise, it does not necessarily resolve the dispute on Issue (1), the burden of proving which falls on Tak Cheung. 

46.  Miss Wong was the only key witness of Tak Cheung on all issues in dispute.

47.  The witness statement of Miss Wong contains only a simple statement that Tour Enterprise agreed to pay 1,000 JYP per person.  According to Miss Wong, she trusted Tour Enterprise all along and did not verify Tour Enterprise’s debit notes. Instead, she simply asked her employee Miss Cheng Kwai Lan (“Miss Cheng”) to effect payment in accordance with such debit notes.

48.  Under cross-examination as to how the figure 1,000 JYP came about, Miss Wong said she made reference to the commissions she used to pay to her former representative in Japan, which were in the range of 1,000 to 2,000 JYP.  Given the simple nature of the Agreement, said Miss Wong, she reposed trust in Mr. Yu and did not see fit to reduce the same into writing other than informing Miss Cheng of the contents of the Agreement for the latter to follow up.  Surprisingly, she could not recall if she had specifically told Miss Cheng about the agreed rate of commission at 1,000 JYP.  It was not until 2010 did she come to know that Tour Enterprise had been short on payment when Miss Cheng reported to her that Tour Enterprise had been paying no commission to Tak Cheung on many occasions. She denied having come up with the figure of HK$80 after learning about the contents of the 15 November 2010 email.

49.  On Issue (1), suffice it to say I am not the least impressed by Miss Wong’s evidence. 

50.  First, I find it hard to understand why the rate of commissions Tak Cheung used to pay to its former representative in Japan could serve as a useful reference when it represented remuneration for the latter’s effort in procuring JTB customers for Tak Cheung to follow up in Hong Kong whereas under the Agreement Tak Cheung could get paid at a similar rate with minimal effort.  Miss Wong did not elaborate.

51.  If Mr. Yu did agree to pay a fixed rate of commission at 1,000 JYP, I see no reason why Miss Wong would have omitted the same when relating the simple terms of the Agreement to Miss Cheng.  Had Miss Wong told Miss Cheng about the agreed rate of commission, I then find it difficult to understand why the latter could have failed to spot the obvious non-compliance over the years when she would have to at least go through Tour Enterprise’s invoices and debit notes to ascertain how much to deduct from JTB’s payment before remitting the balance to Tour Enterprise.  In any event, she saw fit to report to Miss Wong in 2010 only about non-payment but not short payment.  It is Miss Wong’s evidence that this was the first time she received a report from Miss Cheng.

52.  Miss Cheng originally gave a witness statement on the Understated Profit but was not called to testify in court on the grounds that she had left Tak Cheung’s employment and was suffering from inner ear fluid imbalance.  She is the best person to give evidence on the actual implementation of the Agreement from Tak Cheung’s perspective and could expect strenuous cross-examination on the topic.  The opportunity to get a better picture was gone with her absence.

53.  The five invoices exhibited to Miss Wong’s witness statement (all dating back to 2004-2005)^[6] shows rates of commission at HK$70, $100 and HK$200 respectively.  Had there been an agreement to pay 1,000 JYP or around HK$80, one can see no reason why Tour Enterprise would have paid way more than that. 

54.  When the parties finally came to agree to terminate the Agreement in March 2011, Tak Cheung sent to Tour Enterprise a letter dated 21 March 2011 (“21 March 2011 Letter”) ^[7] demanding from Tour Enterprise an undertaking to, inter alia, stop using Tak Cheung’s name to promote business anywhere in Japan as from 1 April 2011; pass to Tak Cheung all detailed information about JTB tours for which Tour Enterprise had sent out quotations before 31 March 2011 and tours which were confirmed after 31 March 2011; and fulfill all promises Mr. Yu made when he first approached Miss Wong for the JTB Engagement, including a “gentlemen’s agreement” to pay sums due to Tak Cheung and to hand over upon demand by Tak Cheung the contractual relationship between Tak Cheung and JTB without damage (“Gentlemen’s Agreement”)^[8].  No mention was made of any understated profit. 

55.  Miss Wong asserted that the Understated Profit was covered by the reference to Mr. Yu’s promise to pay sums due to Tak Cheung.  If so, it is difficult to understand why Tak Cheung had seen fit to spell out in specific terms its request for Tour Enterprise to pass to Tak Cheung detailed information about JTB tours (which would only yield a small profit for Tak Cheung) but not something as important as the payment of understated profits at almost a quarter of a million dollars.

56.  Under cross-examination, Miss Wong said she had been developing her business in Shanghai since year 2000 and was largely stationed there as from 2005 or 2006.  The profit from her business in Shanghai was at least 4 to 5 times that from the JTB Engagement. She was forthcoming in agreeing with the suggestion to the effect that, profit wise, the JTB Engagement was like “雞肋” (that is, something tasteless when eaten but a pity to throw away) to her in 2004 and she therefore did not mind receiving a meagre “per capita fee” (人頭費) from Tour Enterprise.  To Miss Wong, Tak Cheung’s status as a JTB agent was worth more in terms of sentimental value than in money terms as she frankly admitted that she cared more about Tak Cheung’s name than profits.

57.  On balance, I prefer the evidence of Tour Enterprise to that of Tak Cheung and rule against Tak Cheung on Issue (1). 

58.  The parties have agreed that should I find in favour of Tour Enterprise on Issue (1), Tour Enterprise should be entitled to the amount claimed in each of the two actions under this head, namely, HK$645,742 and HK$472,255.

Issue (2) - Whether Tour Enterprise was an agent of Tak Cheung in dealing with JTB

59.  This is by far the most contentious issue and is the key to success of Tak Cheung’s counterclaim.

60.  It is Tak Cheung’s case that under the Agreement Tour Enterprise was its agent and by reason thereof owed to Tak Cheung fiduciary duties and/or duty of fidelity and good faith including a duty to:

(a) act in good faith in the best interests of Tak Cheung;

(b) account to Tak Cheung for all sums payable to Tak Cheung under the agency;

(c) make full disclosure of all material facts and information regarding the agency, whether during or after termination, and a duty to surrender all materials and information to Tak Cheung upon termination;

(d) avoid any conflict of interests and not to compete with Tak Cheung;

(e) account for any profit made without the consent of Tak Cheung; and

(f) carry out the instructions of Tak Cheung.

61.  Tour Enterprise categorically denies being an agent of Tak Cheung under the Agreement.

62.  It being a case of commercial relationship, one should start by taking a closer look at what was actually agreed between Mr. Yu and Miss Wong apart from the rate of commission. 

63.  Under cross-examination as to why the Agreement was not reduced into writing, Miss Wong said this was because the contents of the Agreement were simple enough: Mr. Yu was to use Tak Cheung’s name to do business with JTB without disclosing Tour Enterprise’s identity and not to become Tak Cheung’s competitor in the future.

64.  This does not tally exactly with the wordings of the Gentlemen’s Agreement.  While not so pleaded in the defence, Miss Wong said she reckoned that the said promise of Mr. Yu should include an undertaking not to compete. 

65.  Given the loose terms in which the Agreement was couched, one would have to look at the objective features of the parties’ relationship in order to form a view as to the true nature of Tour Enterprise’s role under the Agreement.

66.  On the applicable legal principles, Mr. Chan relied on the classic definition set out at para.1-002 of Bowstead & Reynolds on Agency, 19^th ed:

“Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation…”

67.  Mr. Chan referred to the fact that Tour Enterprise had to act under Tak Cheung’s name in the performance of the latter’s contract with JTB and to employ staff or appoint representatives in Tak Cheung’s name as the core element of the cooperation between the parties.  He submitted that the relationship was a classic agency relationship in that Tour Enterprise’s conducts would directly affect Tak Cheung’s relationship, both legal and practical, with JTB and that Tak Cheung remained the party to the contract with JTB whilst Tour Enterprise was merely an agent employed by Tak Cheung to perform its obligations under the contract.

68.  Mr. Chan also relied heavily on the case of Kao Lee & Yip v Koo Hoi Yan & Ors[2003] 3 HKLRD 296where Ma J (as the Chief Justice then was) says:

“ 36. It is clear that the essence of a fiduciary relationship is one of trust and confidence (or, to use another common term, good faith) between the fiduciary and the person whom I shall hereinafter refer to as the beneficiary. In the present case, the ‘fiduciaries’ are the Defendants and KLY, the ‘beneficiary’. Traditionally, some relationships have always been regarded as giving rise to a fiduciary relationship: solicitor and client, trustee and cestui qui trustent, employer and employee, principal and agent, partners.

37. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, at 96-7, Mason J classified the critical feature of these fiduciary relationships as being that “the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical way”. In short, the person classified as a fiduciary is placed in a position of trust and confidence in relation to the beneficiary, who is in a position of ‘vulnerability’ (in the sense that he has to rely on and trust the fiduciary to look after his interests). The term ‘vulnerability’ was a term used by Mason J in the above case.”

(Emphasis added)

69.  At the outset, I should highlight a distinguishing feature of Kao Lee & Yip (supra) in that the court there had no difficulty in finding the existence of fiduciary relationships between the parties all of whom were partners/solicitors of the same firm.  As pointed out by Ma J at the beginning of his discussion on fiduciary duties:

“ 40. In the case of partners, this is one of the classic fiduciary relationships. The duty of good faith between partners can be traced to Roman law. The standard required of partners in this regard is high.”

70.  I also find it instructive to refer to the learned judge’s discussion on the duties peculiar to fiduciaries:

“45. It has first to be recognised that not every breach of duty by a person in a fiduciary position amounts to a breach of fiduciary duty. In other words, a fiduciary can owe fiduciary obligations in relation to a part of his duties but not other parts...

46. The distinguishing or core obligations of a fiduciary is that of loyalty (or fidelity) and good faith: see Mothew at 18. A number of aspects of these core obligations emerge:-

(1) 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”).

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

...

48.     Generalities aside, it is important to recognise that how these duties are applied to the facts in any given case can only be determined by reference to the nature and character of the particular relationship in question…How these fundamental fiduciary duties are to be applied in any given case will depend on factors such as the contents of the relevant partnership deed or contract of employment or the way in which the firm’s activities are carried out.”

71.  It is immediately clear that context assumes great importance in the present analysis.  As Gibb CJ said in his judgment in Hospital Products Ltd v United States Surgical Corporation[1984] HCA 64:

“ 37…it must be remembered that any test can only be stated in the most general terms and that all the facts and circumstances must be carefully examined to see whether a fiduciary relationship exists (cf. Phipps v. Boardman, at pp 123, 127).”

72.  Attention should also be drawn to the remainder of para.1-002 of Bowstead & Reynolds on Agency, 19^th ed where the learned author says:

“ …A major problem in the application of the law in this area is that questions are frequently asked of lawyers in forms such as “Is A an agent?”, “Is A B’s agent or C’s agent?”, as if a clear all-purpose answer could be given for the purposes of resolving a dispute. Any useful response must be couched in a much more restricted form, for agency is a relative notion and there are many acceptable uses of the term which do not always coincide with each other.

  It must be stressed at the outset therefore that the definition given above is intended to be read as a whole.  NO single sentence should be treated as encapsulating the whole notion of agency…”

73.  In his discussion on the critical features of fiduciary relationships in Hospital Products Ltd (supra), Mason J also had this to say:

“ 69. It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed...Thus a mere sub-contractor is not a fiduciary. Although his work may be described loosely as work which is to be carried out in the interests of the head contractor, the sub-contractor cannot in any meaningful sense be said to exercise a power or discretion which places the head contractor in a position of vulnerability.”

74.  Mr. Yuen submitted that in the circumstances of this case, Tak Cheung had reposed no trust and confidence on Tour Enterprise in entering into the Agreement which was terminable by Tak Cheung at will and which made no provisions for Tour Enterprise to claim against Tak Cheung for its costs and outlays in performing the Agreement upon termination thereof by Tak Cheung.  He went on to submit that the Agreement was a purely commercial cooperation agreement akin to that in relation to an independent contractor.

75.  In considering whether there was an agency relationship between the parties hereto, I ascribe particular importance to the following facts.

76.  When entering into the Agreement, both parties were engaged in a similar business in the travel industry.  While one might assume Tak Cheung was a more established player in the market (whose status as a JTB agent dated back to the 1960’s) but there is no evidence to suggest an inequality of bargaining powers between the two in entering into the Agreement.  Or else, Miss Wong could not have entrusted with Tour Enterprise the JTB Engagement, which carried a lot of sentimental value to Miss Wong.  Indeed, both Mr. Yu and Miss Wong impressed me as seasoned business persons.

77.  In entering into the Agreement, the parties should have no difficulty in reducing their oral agreement into writing.  Notwithstanding Miss Wong’s insistence that the simple nature of the agreement made it unnecessary to reduce the same into writing, it is equally, if not more likely that the parties (or at least Miss Wong) would wish to avoid something black and white as it was a clear breach on Tak Cheung’s part to allow someone else to undertake the JTB Engagement in its stead.

78.  Even if there was a need to keep a low profile, I see no reason why Miss Wong could not have required Mr. Yu to undertake in more specific terms to protect Tak Cheung’s goodwill or reputation or its contractual relationship with JTB or even imposed a restriction against competition by Tour Enterprise either during the currency or after the termination of the Agreement.  According to the 21 March 2011 Letter, however, Miss Wong appeared to have solicited from Mr. Yu a mere undertaking to hand over Tak Cheung’s contractual relationship with JTB without damage.

79.  As to the actual implementation of the Agreement, Tour Enterprise had to do and in fact did everything in the name of Tak Cheung for the simple reason that JTB only dealt with its appointed agents and no others.  As a result, Tour Enterprise and Tak Cheung had gone all the way to conceal Tour Enterprise’s identity from JTB. 

80.  A useful illustration is a formal letter dated 28 July 2009 purportedly issued by Tak Cheung to JTB^[9] to notify the latter of the appointment of Mr. Kakizawa and one Mr. Misaki Tadashi (“Mr. Misaki”) as Tak Cheung’s representatives in Tokyo in place of Mr. Takemoto.  Naturally, Tak Cheung’s letterhead was deployed.  Of the two sets of addresses and contact numbers shown at the bottom of the letter, the one on top belonged to Tak Cheung’s Hong Kong office but, according to Mr. Kakizawa, the telephone line was in fact forwarded to Tour Enterprise’s Hong Kong office.  Below that is the address and contact numbers of the office set up by Tour Enterprise in Tokyo. Given the important nature of the letter, Miss Wong was asked to sign the same.    

81.  When communicating with JTB, Tour Enterprise would use Tak Cheung’s email addresses when in fact it was Tour Enterprise’s staff who were communicating with JTB. Tak Cheung’s name would also feature in Tour Enterprise’s coaches assigned to JTB tours and in travel flags or badges used by Tour Enterprise’s tour guides.

82.  Albeit an employee of Tour Enterprise, Mr. Kakizawa would hand out name cards bearing Tak Cheung’s name so as to give the impression of his being a member of Tak Cheung’s staff.^[10]

83.  Other than concealment of Tour Enterprise’s identity from JTB, however, all transactions were in reality conducted between Tour Enterprise and JTB with hardly any involvement of Tak Cheung.

84.  It is beyond dispute that in procuring businesses from JTB and thereafter providing local tour services, Tour Enterprise did all the hard work and bore all costs and expenses arising from such undertakings.  By the same token, all losses and liabilities arising from such undertakings would have to be borne by Tour Enterprise, particularly if Tak Cheung’s case is to be believed, namely, there being a fixed rate of commission per each JTB customer. 

85.  In the course of providing tour services to thousands of JTB customers over the years, Tour Enterprise must have met with problems ranging from breaking down of coaches resulting in complaints to JTB to more serious incidents involving casualties. There is, however, no evidence that Tak Cheung had ever been troubled with any such problems or serious complaints from JTB regarding the tour services rendered by Tour Enterprise.  Indeed, evidence suggests JTB was all along happy with Tour Enterprise’s services.

86.  The only contribution from Tak Cheung that carried some significance was Miss Wong’s signature on documents like those for annual renewal of contract with JTB and notices to JTB on important events like appointment/change of representatives in Japan.  Other than that, all Tak Cheung had to do was to regularly issue invoices (by adopting the contents of those prepared by Tour Enterprise) to JTB to secure payment (for tour services wholly rendered by Tour Enterprise with no contribution whatsoever from Tak Cheung) and thereafter deducting from JTB’s payment its commissions by reference to Tour Enterprise’s debit notes before remitting the balance to Tour Enterprise.

87.  Tak Cheung claims to have maintained control over Tour Enterprise’s activities.  If there was any such control, it was all but nominal.  

88.  First, Tak Cheung practically had no say over (or simply did not bother itself with) the pricing of services to be rendered by Tour Enterprise, which must be the single most important factor in a viable business.  Miss Wong was, however, content with leaving the pricing of services to Mr. Yu, whom she barely knew back in 2004. 

89.  It is fanciful to suggest that Miss Wong could repose trust in a new acquaintance.  Her trust on Mr. Yu could only be explained by the fact that Tak Cheung stood to lose nothing in allowing Tour Enterprise to take up something like a tasteless food to Miss Wong when Tour Enterprise would bear all the costs of and risks associated with the JTB Engagement and that the worst scenario for Tak Cheung would be to receive less or even no commission while incurring minimal administrative costs. 

90.  On important matters like appointment of TAKE as a representative (purportedly of Tak Cheung) in Japan and the subsequent termination of such appointment, Miss Wong simply had no part to play when the relevant documents were signed by Mr. Kakizawa purportedly for and on behalf of Miss Wong (obviously because the documents were addressed to someone other than JTB) ^.[11]  Miss Wong did not come to know about the termination of the appointment of TAKE until she was asked to sign a letter to notify JTB of the change of representative.

91.  On how Tour Enterprise actually performed the Agreement, Miss Wong had no more than a brief idea.  Under cross-examination, Miss Wong admitted that Tour Enterprise never passed to Tak Cheung reports of JTB’s yearly evaluation of Tak Cheung’s (or rather, Tour Enterprise’s) performance.  She was content with having a word with Mr. Yu once or twice a year.  But even on such occasions, she would not bother to ask Mr. Yu about the JTB Engagement or the profit therefrom.  As she said, Mr. Yu would volunteer important information such as complaints.  This casual attitude of hers could only be explained by the fact that in reality it was Tour Enterprise who was contracting with JTB.

92.  In the circumstances, I am driven to the conclusion that in dealing with JTB, Tour Enterprise was acting on its own behalf and in its own interest rather than for or on behalf of or in the interests of Tak Cheung even though its activities could affect Tak Cheung’s interests in a loose sense in terms of the latter’s entitlement to commissions. 

93.  Nor am I satisfied that by allowing Tour Enterprise to undertake the JTB Engagement it its stead, Tak Cheung could be said to have placed itself in a position of vulnerability to an abuse of its name by Tour Enterprise when Tak Cheung was at liberty to put an end to the Agreement should there be any such abuse.  Indeed, Miss Wong appeared to have no difficulty in getting wind from among her business circle.  In 2009, she heard rumours about Tour Enterprise’s financial position and saw fit to give Tour Enterprise a notice on 16 December 2009 to terminate the Agreement (to which I shall return when dealing with Issue (4)).

94.  The only real risk to Tak Cheung would perhaps be Tour Enterprise’s failure to provide tour services to JTB’s satisfaction, thereby affecting Tak Cheung’s chance of maintaining its status as a JTB agent in the Area.  But again such a risk was well covered by Tak Cheung’s power to terminate the Agreement at will. 

95.  In Hospital Products Ltd (supra), Gibbs CJ highlighted the reluctance of the court in finding a fiduciary duty in an arrangement of a purely commercial kind between parties dealing with each other at arm's length and on an equal footing:

“31. In the decided cases, various circumstances have been relied on as indicating the presence of a fiduciary relationship. One such circumstance is the existence of a relation of confidence, which may be abused…However, an actual relation of confidence - the fact that one person subjectively trusted another - is neither necessary for nor conclusive of the existence of a fiduciary relationship; on the one hand a trustee will stand in a fiduciary relationship to a beneficiary notwithstanding that the latter at no time reposed confidence in him, and on the other hand an ordinary transaction for sale and purchase does not give rise to a fiduciary relationship simply because the purchaser trusted the vendor and the latter defrauded him.

32. Another circumstance which it is sometimes suggested indicates the existence of a fiduciary relationship is inequality of bargaining power, but it is clear that such inequality alone is not enough to create a fiduciary relationship in every case and for all purposes…

33. On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose…”

(Emphasis added)

96.  The same sentiment was shared by Dawson J, another member of the five-judge bench in Hospital Products Ltd (supra):

“ 66. The circumstances in which the contract…was made do not suggest any disadvantage or vulnerability on the part of USSC requiring the intervention of equity to protect its interests. Those negotiations were of a commercial nature and were at arm's length. They were conducted by persons on both sides who were experienced in the market place…Not only does the conscious choice to proceed in the absence of a formal agreement fail to provide any basis for the implication of a term affording the type of protection which the agreement might have provided, but it is also inconsistent with any need for the intervention of equity.

67.…A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one…

68. Moreover, a fiduciary relationship does not arise where one of the parties to a contract has failed to protect himself adequately by accepting terms which are insufficient to safeguard his interests. Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.

…

70. Too much should not, however, be made of any inequality in the position of USSC. The distributorship was, even in the absence of breach, determinable upon reasonable notice and although…activities took place unnoticed for some time in what USSC appears to have regarded as a remote corner of the globe, that company had at least the means of remedying the situation by ending its relationship…as soon as those activities could be seen to be harmful to it.”

97.  In my view, the observations of Dawson J above apply with full force to the relationship between the parties hereto. 

98.  One may say that the Agreement is not an ordinary commercial arrangement in that the identity of a party to the same had to be concealed from a third party (that is, JTB) who would be affected by the arrangement because the arrangement constituted a breach of a different contract with that third party.  If it is this feature that takes the Agreement out of the ordinary, I see no reason why equity should come to Tak Cheung’s assistance should problems arise from the implementation of the Agreement. 

99.  In short, I am not satisfied that, other than remaining a party to the agency contract with JTB, Tak Cheung was in any real sense a party to or had anything to do with the transactions between Tour Enterprise (in Tak Cheung’s name) and JTB.  In the circumstances, there existed no agency relationship between Tour Enterprise and Tak Cheung. 

100.  Quite on the contrary, if one has to find an agency relationship here, I would say Tak Cheung was Tour Enterprise’s agent to the extent that Tour Enterprise had to rely on Tak Cheung’s good faith and good deed to secure payment from JTB.  Tour Enterprise’s vulnerability was borne out by Tak Cheung’s refusal to pay its debit notes the subject matters of the present actions.  But since Tour Enterprise does not plead as such, I need say no more than this.

101.  Mr. Chan eloquently argued that the present case fell squarely within the definition of an agency because Tak Cheung was always in the picture and Tour Enterprise had the power to affect the interests of Tak Cheung in a legal or practical way in that Tak Cheung had retained primary liability for any breach of the contracts entered into by Tour Enterprise in the name of Tak Cheung.  For instance, Tak Cheung could ultimately be held liable for the consequence, legal or otherwise, of accidents during any tour resulting in casualties to JTB customers should Tour Enterprise be unable to indemnify Tak Cheung for damages payable to JTB customers. 

102.  As the learned author of Bowstead & Reynolds on Agency points out in the passage quoted by Mr. Yuen above, the definition on agency proffered there is intended to be read as a whole and no single sentence should be treated as encapsulating the whole notion of agency.

103.  In my view, Mr. Chan’s argument places too much emphasis on the fact that Tak Cheung’s name featured in every transaction entered into by Tour Enterprise with JTB.  As discussed above, with Tour Enterprise shouldering responsibility practically for everything incidental to or arising from the transactions with JTB, any potential liability on Tak Cheung’s part was more in appearance than in reality.  That Miss Wong did not even bother to require an indemnity, written or otherwise, from Tour Enterprise to hold Tak Cheung indemnified against any consequences, legal or otherwise, from the use of its name in conducting business with JTB speaks for itself.  Should this be a real concern on Tak Cheung’s part, the failure to protect its position would then be a matter of choice which does not call for “the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them”. 

104.  A finding against the existence of an agency relationship does not, however, necessarily bar a finding of fiduciary duty even in the context of a commercial arrangement.  As Riberio, PJ said in Libertarian Investments Ltd v Thomas Alexej Hall (FACV 14/2012), unreported, 6 November 2013:

“56. …Although the parties’ relationship may be generally non-fiduciary, particular obligations may import fiduciary duties and equitable remedies.

57. Thus, in the Hospital Products case, Mason J noted that in cases where a comprehensive fiduciary relationship does not exist:

“...it does not exclude the existence of a more limited fiduciary relationship for it is well settled that a person may be a fiduciary in some activities but not in others.” Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 98.

…

59. Hence, as Tipping J pointed out in BNZ v NZ Guardian Trust Co Ltd, [1999] 1 NZLR 664 at 686. the important focus is on the nature of the obligation in question:

“Historically the law has tended to place emphasis on the classification of the relationship giving rise to the obligation. But more recently, for certain purposes at least, there has been a shift of emphasis from the classification to the nature of the obligation, or duty, as it is usually called. Thus the nature of the duty which has been breached can often be more important, when considering issues of causation and remoteness, than the particular classification or historical source of that duty.”

…

70. …it is plain that fiduciary duties may well arise as aspects of a commercial relationship. Moreover, it is clear that legal and equitable rights and remedies are capable of co-existence, even in a single transaction…There are nonetheless many cases where, after scrutiny by the court, no fiduciary element is found to arise and no basis exists for equity to intervene in what is a purely commercial relationship.

71.  In such commercial relationships, the parties deal with each other as principals and at arm’s length, each looking after his own interests.  Disputes between such parties usually only give rise to common law causes of action and remedies.  Any part played by equity tends to be in its auxiliary jurisdiction in support of the common law.”

105.  In his judgment in Hospital Products Ltd (supra), Mason J described as understandable the court’s reluctance to subject commercial transactions to an equitable doctrine and acknowledged the existence of disadvantages in introducing equitable doctrine into the field of commerce.  On the facts of the case, however, the learned judge was able to find a fiduciary relationship, albeit a limited one, between the manufacturer and the distributor on the grounds that, having been entrusted with the responsibility of protecting and promoting the market for the manufacturer’s products, the distributor was a fiduciary in protecting and promoting the goodwill of the former’s product.^[12] 

106.  Drawing an analogy from the above, Mr. Chan argued that Tour Enterprise was a fiduciary in that it had a duty to protect the goodwill of Tak Cheung by reason of the Gentlemen’s Agreement.

107.  For one thing, this argument is stretching the wordings of the Gentlemen’s Agreement.  In view of the covert nature of the Agreement, they could mean nothing more than a promise on Mr. Yu’s part for Tour Enterprise to drop out of the picture and allow Tak Cheung to resume its original position as a JTB agent without any problem or difficulty upon termination of the Agreement.^[13]  Tak Cheung’s goodwill was hardly in issue.  This interpretation is supported by the fact that Miss Wong went on to say Tak Cheung would hold Tour Enterprise liable for all its loss should Tak Cheung lose its status as a JTB agent in 2011.^[14]

108.  More importantly, it should not be forgotten that, unlike the distributor in Hospital Products Ltd (supra), Tour Enterprise (in Tak Cheung’s name) was in fact selling to JTB its own services or products and not those of Tak Cheung.  There was therefore no question of Tour Enterprise having to protect and promote anything offered by Tak Cheung to JTB. 

109.  Needless to say, in dealing with JTB, Tour Enterprise must avoid causing any damage to the goodwill or reputation of Tak Cheung in terms of the standard of tour services.  But the purpose would be solely for protecting Tour Enterprise’s own interest because failure on Tour Enterprise’s part to perform adequately would likely be visited by complaints from JTB causing Tak Cheung to put an end to the Agreement resulting in financial loss to Tour Enterprise in terms of business profits as well as outlays (for setting up an office and engaging TAKE in Tokyo, for instance).

110.  Again, the perceived vulnerability on Tak Cheung’s part is more in appearance than in reality when Tak Cheung could terminate the Agreement as soon as Tour Enterprise could be seen to be causing harm to Tak Cheung’s goodwill or reputation.  Had the need for protecting its goodwill been a real concern to Tak Cheung, Miss Wong could have easily protected its position by including a suitable contractual provision for this purpose, written or otherwise.  If she had chosen not to do so or if the covert nature of the Agreement had made it inexpedient for her to properly protect Tak Cheung’s goodwill, I can see no good reason for equity to intervene by making Tour Enterprise a fiduciary of Tak Cheung’s goodwill.

111.  Should Tour Enterprise go outside the Agreement and, for instance, somehow manage to use Tak Cheung’s name to provide tour services to JTB customers in countries outside the Area (which might or might not cause any damage to Tak Cheung’s goodwill or reputation), Tak Cheung’s position should be well covered by common law remedies without the need for equitable ones.

112.  Mr. Chan also drew attention to the fact that on Mr. Yu’s admission, Tour Enterprise became aware of the pricing habits of JTB such as how JTB would negotiate for price and the price range that JTB would accept.  Such information, he submitted, was a trade secret that Tour Enterprise acquired as a result of the trust and confidence Tak Cheung reposed in Tour Enterprise.

113.  First, there is no evidence as to how Tour Enterprise had actually negotiated price with JTB and whether different branches of JTB in Japan behaved in similar ways under some kind of guiding policy on pricing or whether they worked on a case by case basis depending on how much each JTB customer would be willing to pay. 

114.  From the evidence of Miss Chau, I am inclined to think JTB staff worked on a case by case basis (so that Tour Enterprise would at times have to take up tours that would not yield any real profit for Tour Enterprise).  If that be the case, the negotiation process should be nothing more than a bargaining process involving interaction between the respective frontline staff of JTB and Tour Enterprise who would take into account usual factors for pricing, the most prominent of which being profit margins.  There is no question of any trade secrets passing to Tour Enterprise in the process. 

115.  Even if there existed certain pricing habits on JTB’s part and even if the same could be said to be trade secrets, Miss Wong saw no difficulty in allowing Tour Enterprise to acquire knowledge of the same by leaving negotiation for price entirely in Tour Enterprise’s hands.  This again could only be explained by the fact that it was Tour Enterprise who really was contracting with JTB.  That being so, Tak Cheung should not now be heard to say this was a result of Tak Cheung’s trust and confidence in Tour Enterprise or Tak Cheung had placed itself in a vulnerable position so that Tour Enterprise should on this account be made a fiduciary of Tak Cheung.

116.  For completeness, I should make a note of Miss Wong’s dispute as to the authenticity of two letters prepared in Japanese respectively addressed to Tour Enterprise and Tak Cheung’s former representative in Japan, both purportedly signed by Miss Wong.^[15]  As the authenticity of such letters would have no material bearing my determination on the issues in dispute, both parties agreed that I need not make a ruling on the same.

117.  In conclusion, Tour Enterprise was neither an agent nor a fiduciary of Tak Cheung.  I find against Tak Cheung on Issue (2).

Issue (3) - Whether Tour Enterprise is liable to account to Tak Cheung for the Unaccounted Profit or alternatively the Levy 

118.  Upon closing its case, Tak Cheung elected to pursue only its claim for the Levy but not the Unaccounted Profit.

119.  What must be noted at the outset is that evidence is scanty as to TAKE’s business activities allegedly done in Tak Cheung’s name in countries outside the Area such as Korea.^[16]  Nor is it clear as to how TAKE came to be assigned with JTB customers travelling to those other countries when Tak Cheung/Tour Enterprise had never handled JTB customers bound for countries outside the Area.  However, every key player herein seemed to have assumed as a matter of course that TAKE had committed a wrongdoing by way of unauthorized use of Tak Cheung’s name to conduct business in countries outside the Area (“alleged wrongdoing”).  It was on this flimsy basis that Tak Cheung had mounted its claim on both the Unaccounted Profit and/or the Levy.

120.  Mr. Chan’s argument is that Tour Enterprise was only appointed as an agent of Tak Cheung for the Area but not anywhere else.  All other benefits obtained through the use of Tak Cheung’s name by TAKE (as Tour Enterprise’s sub-agent) from undertakings outside the Area must belong to Tak Cheung absolutely. Furthermore, Mr. Kakizawa admittedly relied on the alleged wrongdoing to impose the Levy on TAKE.  Tour Enterprise was therefore making secret profits out of the use of Tak Cheung’s name without the latter’s consent and was therefore in breach of an agent’s duty not to make a profit from his position without the principal’s consent. 

121.  I have found that Tour Enterprise was not an agent of Tak Cheung under the Agreement so that it could not be held liable on that account. 

122.  Mr. Yuen submitted that the Levy was in substance a refund or reduction of Tour Enterprise operation costs and disbursements for which Tour Enterprise was solely responsible and of which Tak Cheung was not entitled to a share. 

123.  To the extent that Tak Cheung was only entitled to a commission per each JTB customer under the Agreement (on whatever basis of calculation) and need not bother itself with the profits and costs of Tour Enterprise or how the latter could maximize profits by minimizing costs as long as it was paying commissions due to Tak Cheung, Mr. Yuen must be right. 

124.  In the present case, it is not in dispute that Tour Enterprise had paid commissions to Tak Cheung in relation to the FANCL tours.  Other than the Levy, there is no evidence nor was it Tak Cheung’s case that Tour Enterprise had paid less than what was due to Tak Cheung in relation to such tours.  That being so, any agreement between Tour Enterprise and its sub-contractor on commissions was none of Tak Cheung’s concern.  

125.  Even if I am wrong on this and Tour Enterprise was an agent of Tak Cheung or otherwise owed fiduciary duties to Tak Cheung, for the following reasons, I would not hold Tour Enterprise liable to account for the Levy to Tak Cheung.

126.  For one thing, Tak Cheung did not dispute that the alleged wrongdoing was committed without Tour Enterprise’s knowledge or actual authority. 

127.  While its role was not canvassed in any depth in these proceedings, it is beyond dispute that TAKE was appointed by Tour Enterprise purportedly as a representative of Tak Cheung in Japan so that its mandate was limited to handling JTB customers bound for the Area.  What TAKE might have done outside the Area could not be said to have the apparently authority of Tour Enterprise/Tak Cheung.  Assuming the alleged wrongdoing would constitute a tort against Tak Cheung in the law of Japan or the other countries concerned, I can see no basis for Tak Cheung to hold Tour Enterprise accountable for any tort committed by TAKE without Tour Enterprise’s knowledge or authority.

128.  Furthermore, I have grave doubt as to whether the Levy would come within the definition of secret profits in the context of the “Not to Profit Duty”.  Even if Tour Enterprise was obliged as an agent or a fiduciary of Tak Cheung to look after the latter’s interest, it must not be forgotten that Tour Enterprise was at the same time entitled to look after its own interest in terms of maximizing profits and minimizing costs in performing the JTB Engagement in Tak Cheung’s name.  As long as Tour Enterprise was paying commissions due to Tak Cheung, any reduction in costs that Tour Enterprise managed to secure could not be secret profits in the sense of obtaining profits that should have gone to Tak Cheung.

129.  More importantly, in claiming for the Levy, Tak Cheung is necessarily relying on a pack of lies told by Mr. Kakizawa.  As indicated earlier, I accept that Mr. Kakizawa had lied to Mr. Takemoto and was using the alleged wrongdoing as a pretext to make the latter agree to accept less commission for the FANCL tours.  Even if there existed a principal-and-agent or fiduciary relationship between Tour Enterprise and Tak Cheung, I have grave doubt as to whether Tak Cheung should be entitled to make Tour Enterprise hand over something the latter obtained from a third party through a wrongful enterprise when it was not entitled to solicit the same from the third party in the first place, not at least in like manner.  As Ma J said in Kao Lee & Yip (supra):

“ 131. The essence of equitable relief is that it is primarily restorative and restitutionary rather than compensatory: see Mothew at 18A; Cia de Seguros Imperio v Heath (REBX) Ltd. [2001] 1 WLR 112, at 119D-E.”

130.  It may well be that if Tour Enterprise should hand over the Levy because it is the fruit of a wrongful enterprise, it should be to TAKE instead of Tak Cheung.

131.  Alternatively, since the Levy was procured from TAKE without Tak Cheung’s knowledge or authority, Tak Cheung was not associated with the wrongful enterprise and could not be made liable for the same.  By the same token, Tak Cheung can maintain no claim on the Levy.

132.  As a fallback argument, Mr. Chan submitted that even without referring to the Agreement and even if Tour Enterprise was not an agent, Tour Enterprise was still liable to disgorge the Levy for having used Tak Cheung’s right to sue TAKE, a chose in action, without the latter’s consent.

133.  The problem with this argument is the lack of evidence as to whether or not TAKE had actually committed a tort against Tak Cheung thereby giving rise to any chose in action on Tak Cheung’s part whether in Japan or any other countries.  Without concrete evidence as to both TAKE’s business activities outside the Area and the legal consequence arising therefrom, I am unable to say Tak Cheung does enjoy any chose in action of which Tour Enterprise has through Mr. Kakizawa taken advantage without Tak Cheung’s consent.

134.  Furthermore, it is clear from the 15 November 2010 email that Mr. Kakizawa had no idea as to how much TAKE had earned from the alleged wrongdoing.  In proposing a figure for the Levy, Mr. Kakizawa was merely referring to the commission due to TAKE for the FANCL tours instead of making any meaningful reference to TAKE’s profit out of the alleged wrongdoing.  It is unclear as to why Mr. Takemoto agreed to Mr. Kakizawa’s proposed reduction of his commission.  Nor is it clear as to whether there was any meaningful correlation between the Levy and any chose in action belonging to Tak Cheung.

135.  Should a chose in action arise from the present circumstances, it may well be that the same lies with TAKE against Tour Enterprise.  However, whether Tour Enterprise should be held liable to return the Levy to TAKE is not an issue before me.  On the other hand, if TAKE had committed any tort against Tak Cheung either under the law of Japan or the other countries concerned, it would be up to Tak Cheung to seek redress against TAKE in those other countries.  Indeed, Miss Wong told this court that she had asked Mr. Takemoto to provide information about the latter’s undertakings in those other countries but the same had not been forthcoming.

136.  Mr. Takemoto originally gave a witness statement for Tak Cheung (on what had happened during the Annual Overseas Operator Conference held on 4 March 2011 to which I shall return when dealing with Issue (4)) but gave an excuse for not coming to Hong Kong to give testimony at trial.  Presumably, Miss Wong had made peace with Mr. Takemoto despite any unauthorized use of Tak Cheung’s name by the latter.  He should be the best person to tell this court why he agreed to Mr. Kakizawa’s proposed reduction of his commission.  The opportunity was gone with his absence.

137.  It may be expedient for Tak Cheung to make a claim for the Levy to cover all or part of its loss, if any, arising from the alleged wrongdoing without having to file a claim against TAKE.  Expediency, however, does not make this a rightful claim in the circumstances hereof.

138.  In the light of the above, I rule against Tak Cheung on Issue (3), whether or not there existed an agency/fiduciary relationship between Tour Enterprise and Tak Cheung.

Issue (4) - Whether Tour Enterprise is liable to account to Tak Cheung for the profit made under the New Engagement.

139.  My ruling on Issue (2) has gone a long way towards disposal of this issue.  The importance of this issue to Tak Cheung’s case, however, warrants a more thorough discussion before a definitive ruling is made.

140.  To better understand Tak Cheung’s case, it is necessary to briefly look at the events leading up to Tour Enterprise’s appointment as a JTB agent which took effect immediately upon termination of the Agreement.

141.  It all began with the letter dated 16 December 2009 whereby Tak Cheung gave Tour Enterprise a notice to terminate the Agreement (without compensation) as from 30 September 2010.^[17]  The only important term mentioned in the letter was Tour Enterprise’s undertaking not to solicit or handle JTB customers in Tak Cheung’s name after 30 September 2010.  The letter also said Tak Cheung would be sending sales staff to Japan as from January 2010 to make preparation.

142.  Then came an announcement from Tak Cheung for appointment of one Mr. Shotaro Watanabe (“Mr. Watanabe”) as its Director and Chief General Manager of Sales Division for serving JTB.[18] Since then, Mr. Watanabe had apparently approached various branch offices of JTB in Japan causing some confusion to the latter as Mr. Misaki had remained Tak Cheung’s contact person in JTB’s internal record.

143.  On 28 April 2010, Mr. Koichiro Tanaka (“Mr. Tanaka”) of JTB Group Head Office in charge of contracts with contracting operators wrote a strongly worded email to demand an explanation from Mr. Watanabe.  It is noteworthy that Mr. Tanaka revealed his knowledge that Mr. Misaki was not really an employee of Tak Cheung without disclosing the source of his information. [19]

144.  Without hearing any substantive reply from Mr. Watanabe, Mr. Tanaka wrote another email to Mr. Watanabe on 12 May 2010 in which he disclosed having met with “Mr. Kakizawa of Tour Enterprise” and having come to know basically what had happened and demanded from Mr. Watanabe details of Tak Cheung’s operations and risk management system.  Clearly not satisfied with the state of affairs, Mr. Tanaka remarked that if Tour Enterprise was superior in the operational infrastructure, JTB might have to consider changing their contractor.[20]

145.  In his testimony, Mr. Kakizawa said Mr. Tanaka had come to know about the existence of Tour Enterprise even before meeting him.

146.  Mr. Watanabe having provided Mr. Tanaka with some information in Mid June 2010, Mr. Tanaka sent an email to Mr. Watanabe to express dissatisfaction with the information and indicated his intention to terminate the contract with Tak Cheung and contract instead with Tour Enterprise subject to confirmation with his superior.[21] In the absence of any constructive reply from Mr. Watanabe, Mr. Tanaka wrote again on 14 July 2010 and asked to meet Mr. Watanabe to “verify the facts and discuss the termination of the contract”.^[22] 

147.  This prompted Miss Wong to write to Mr. Tanaka on 19 July 2010 emphasizing the fact that Tak Cheung had been appointed as a JTB agent for over 40 years and proposing a meeting in early August so that she could present Tak Cheung’s proposal.^[23]  Clearly not happy with the way Tak Cheung had handled the matter, Mr. Tanaka sent yet another strongly worded email in reply on 21 July 2010^[24]:

“ You have broken the terms and conditions which stated in the contract that you cannot hire our (sic) the licence to other company…

If change from TEL (Tour Enterprise) to your new management company, what kind of new management system and crisis management can you provide? Please give reason why cannot give us such data over 3 months…

Now TEL who you currently appointment company (sic) to work on your behalf have achieved very good works and good comments from various branches, especially the big groups handled by them last year.  For your new management you do not have new office in Japan which is difficult for us to do business.  If not better than current TEL it is difficult for us to accept.  Please do not talk about the past but he current situation.”

148.  It is clear from the above that Mr. Tanaka had treated Tour Enterprise and Tak Cheung as two distinct service providers and was awaiting Tak Cheung to demonstrate if it could render the same, if not better, services as those of Tour Enterprise to whom Tak Cheung had hired out its JTB licence in breach of its contract with JTB.

149.  In reply, Miss Wong wrote on 22 July 2010 to ask if Mr. Tanaka was suggesting it was “better to continue the partnership with TEL” and if “TEL can still handle JTB tours through Tokusho’s contract with JTB”.^[25]  Without giving a direct answer, Mr. Tanaka wrote on 26 July 2010 to repeat his demand for information about what new management services Tak Cheung could provide and conclude with a warning that Tak Cheung’s licence would not be renewed if an answer was not forthcoming.^[26]

150.  Probably seeing no point in exchanging further emails, Miss Wong twice wrote to propose a meeting with Mr. Tanaka.  On 11 August 2010, however, Mr. Tanaka wrote back to decline a meeting without Tak Cheung first answering his questions.  He went on to say JTB would not accept “the organizational change on October 1” (which I took him to mean the termination of the Agreement) and asked Tak Cheung to “maintain the current tour arrangement system by Tour Enterprise at least till the end of March” or else JTB would “switch our contract over to Tour Enterprise.”^[27] 

151.  Mr. Tanaka wrote again on 15 August 2010 to repeat the same demand and express his worry that the impending change in the system in October “would have too much effect on the local operations”.  He concluded by saying that should Tak Cheung accept JTB’s request and maintain the current system, JTB would continue the contract (with Tak Cheung) and would “make the review at the time of contract renewal next year”.^[28]  It is unclear if Mr. Tanaka’s earlier emails were copied to Mr. Kakizawa but this email was marked as being copied to Mr. Kakizawa.

152.  On 17 August 2010, Miss Wong wrote to confirm acceptance of JTB’s request to maintain the present operation scheme until the end of March 2011 and, oddly enough, asked Mr. Tanaka to inform both Mr. Misaki and Mr. Kakizawa to contact her for necessary arrangement.^[29]

153.  On 18 August 2010, Mr. Tanaka sent an email first addressed to Miss Wong to confirm the continuation of the current contract.  It is of note that he repeated the need for a review of Tak Cheung’s contract at the time due for renewal of contract in the following year and remarked that in the next half year Tak Cheung was expected to provide JTB with detailed information about its new system. Clearly, Mr. Tanaka was awaiting Tak Cheung to demonstrate its ability to render the same, if not better, services as those of Tour Enterprise.

154.  The same email was also addressed to Mr. Kakizawa and Mr. Misaki asking them to confirm with Miss Wong regarding the continuation of the existing arrangement and to “make sure that there will be no issue.”  He concluded by a remark that “this is not the final solution of the issue”.^[30]

155.  In arguing for holding Tour Enterprise liable to account for the profits it earned under the New Engagement, Mr. Chan relied heavily on the “Non-Conflict Duty” and the “Not To Profit duty” canvassed in Kao Lee & Yip (supra).  He argued that the observations of Ma J at §§52 to 75 were applicable in the present case including, inter alia, that a fiduciary should pass on to the beneficiary information from a client that is relevant to the interest of the beneficiary; that a fiduciary must not solicit his beneficiary’s customers while still working for the beneficiary without the latter’s consent, irrespective of who initiates the approach; that a fiduciary must not make a profit out of his trust without the informed consent of his beneficiary; and that a fiduciary must not take advantage of an opportunity made available to him in the course of a fiduciary relationship to secure for himself a business opportunity.

156.  Mr. Chan submitted that Tour Enterprise was in breach of such duties by taking up the New Engagement in that, while still an agent of Tak Cheung, Tour Enterprise took advantage of not only a maturing but an actual business opportunity to replace Tak Cheung (or at least to become a direct competitor of Tak Cheung) as an agent of JTB; that Tour Enterprise never informed Tak Cheung of the fact that it would be appointed as a JTB agent as from 1 April 2011; that Tour Enterprise refused to hand over certain documents and information such as JTB contact information and tour lists; and that Tour Enterprise attended the Annual Overseas Operator Conference on Tak Cheung’s behalf in March 2011 without notifying Tak Cheung.

157.  In particular, Mr. Chan laid much emphasis on the appointment of Tour Enterprise as a JTB agent and argued strenuously that this amounted to a business opportunity (which, for the present purpose, has to be a maturing business opportunity as explained in Kao Lee & Yip (supra) at §§71 to 72) which Tour Enterprise secured while it was an agent of Tak Cheung.

158.  In this connection, one should note also the comment of Ma J at §76:

“76. Ultimately, whether one is dealing with maturing business opportunities is really a matter of labelling. It provides but one example of the Not To Profit Duty. The basic inquiry is always whether the fiduciary's interests have conflicted with a "specific" interest of the beneficiary…The specific interest may be a maturing business opportunity or some other interest…”

159.  I begin the analysis by looking again at the terms of the Agreement. Miss Wong was repeatedly questioned during cross examination as to why the Agreement was not reduced into writing.  It was not specifically put to her that this was because the Agreement was a breach of Tak Cheung’s contract with JTB.  But why did Miss Wong refer to Mr. Yu’s promise in the 21 March 2011 letter as a “gentlemen’s agreement” (君子協議) and why use vague expressions like “contractual relationship” (合約關係)?  In my view, the choice of language signified the covert nature of the Agreement under which Tour Enterprise’s existence was not supposed to come to light and Tour Enterprise was supposed to simply drop out of the picture as and when the Agreement came to an end.  That being so, the question as to whether Tour Enterprise could compete with Tak Cheung for business exclusive to JTB agents, whether during the currency of or after termination of the Agreement, simply did not arise.  For this reason, Tak Cheung’s case on Issue (4) can only get off the ground if either Tour Enterprise was its agent or otherwise owed it a fiduciary duty by virtue of the Gentlemen’s Agreement. 

160.  In my view, Tak Cheung’s case simply cannot get off the ground. 

161.  An examination of the communications among the various players from May to August 2010 would immediately cause one to wonder whether during that transitional period Tak Cheung was actively pursuing a business opportunity or merely trying to salvage a losing business opportunity.  But this is not a determining factor.  As Ma J said in Kao Lee & Yip (supra) at §72: “(I)t should nevertheless not be assumed that there can never be liability unless the business opportunity was one in which the beneficiary was “actively pursuing”.”

162.  During the same transitional period, however, I doubt if it was beginning to look even remotely possible for Tour Enterprise to become a JTB agent when Mr. Tanaka appeared to be more concerned with avoiding deterioration of service rather than showing any preference towards Tour Enterprise.  Mr. Tanaka was clearly reserving JTB’s position when he told Mr. Kakizawa in the last email that “this is not the final solution of the issue”.

163.  In any event, even if a business opportunity was emerging for Tour Enterprise to become a JTB agent by August 2011 such as by taking advantage of the weakening position of Tak Cheung, the whole landscape changed when Tak Cheung acceded to JTB's request (whether or not on threat of JTB terminating the agency contract with Tak Cheung and contracting direct with Tour Enterprise) for maintaining the past arrangement with Tour Enterprise.   Henceforth, Tour Enterprise had been openly providing service to JTB in its own right with JTB’s obvious waiver of the breach on Tak Cheung’s part so that Tour Enterprise could officially used Tak Cheung’s name till March 2011.

164.  Seen in this light, Tour Enterprise could only be regarded as having earned the subsequent opportunity to become a JTB agent other than by virtue of any position of trust and confidence.  In effect, Tour Enterprise was acting as an independent contractor and not Tak Cheung’s agent (at least in the eyes of JTB, if not those of Tak Cheung).  If Tour Enterprise ever was a fiduciary of Tak Cheung by reason of the Gentlemen’s Agreement, the Gentlemen’s Agreement should have become redundant by now and Tour Enterprise was free to act entirely for its own interest without regard to that of Tak Cheung. Tour Enterprise was supposed to continue to act in the name of Tak Cheung until March 2011 but only officially, which without more could not give rise to any more fiduciary duty.

165.  Even if in such circumstances Tour Enterprise could theoretically be adversely affecting Tak Cheung’s interest, Tour Enterprise’s transactions with JTB should in any event be seen as being conducted with Tak Cheung’s consent.

166.  I have earlier on held that Tour Enterprise was neither an agent nor a fiduciary of Tak Cheung under the Agreement.  In the light of the analysis above, even if I am wrong on Issue (2), I would nonetheless hold that Tour Enterprise was not an agent or fiduciary of Tak Cheung as from August/September 2010 until the termination of the Agreement on 31 March 2011 (during which the opportunity for Tour Enterprise to become a JTB agent began to mature) and should not be held liable to account for the profits earned as a JTB agent in its own right, whether in place of or along with Tak Cheung.

167.  Tour Enterprise might have learnt from Mr. Tanaka by early March 2011 at least that JTB was moving for a direct contract with Tour Enterprise but did not inform Tak Cheung of the same (when Tour Enterprise owed no duty to inform Tak Cheung).  It also appeared that for a short while immediately after termination of the Agreement, Tak Cheung’s status was downgraded to one of “spot agent” who could only secure business from JTB on a case-by-case basis before resuming its original status as a full JTB agent (which might well be a result of Tak Cheung’s failure to satisfy JTB of its ability to offer better services than those of Tour Enterprise, there being no evidence of Tak Cheung having constructively responded to Mr. Tanaka’s request for information about its new system between August 2010 and March 2011).  Mr. Kikazawa admittedly attended the Annual Overseas Operator Conference on Tak Cheung’s behalf in March 2011 without notifying Tak Cheung (when Tour Enterprise was still entitled to act in Tak Cheung’s name under the transitional arrangement to which Tak Cheung had agreed and there is no evidence to suggest that Tour Enterprise could secure an agency contract with JTB simply by attending the conference).  Tour Enterprise might also have refused to hand over certain documents and information such as JTB contact information and tour lists after termination of the Agreement (when such information and materials might well be Tour Enterprise’s property as a JTB agent in its own right). 

168.  All these complaints of Tak Cheung would not give rise to any cause of action as Tour Enterprise was not its agent or otherwise owed it any of the fiduciary duties mentioned above.  Nor is any alternative basis pleaded in the counterclaim for the same to give rise to any cause of action.

169.  In his closing submission, Mr. Chan also referred extensively to the contents of the email exchanges between Mr. Kakizawa and Mr. Tanaka and other instances before inviting this court to draw the inference that Tour Enterprise was acting disloyally to Tak Cheung in respect of the negotiation between Tour Enterprise and JTB on the former’s appointment as a JTB agent and Tour Enterprise’s failure to ensure a smooth transition in March and April 2011.  In the light of my finding above, it is unnecessary for me to deal with the same.

170.  In the circumstances, I rule against Tak Cheung on Issue (4)

Conclusion

171.  Having ruled against Tak Cheung on all four issues, I enter judgment in favour of Tour Enterprise against Tak Cheung and dismiss Tak Cheung’s counterclaim in each of the captioned actions.

172.  The parties having agreed on quantum, I order Tak Cheung to pay Tour Enterprise the sum of HK$645,742.00 in DCCJ 1618/2011 and the sum of HK$472,255.00 in DCCJ 3514/2011, each carrying interest at 1% above the best lending rate of HSBC from the date of writ until judgment and thereafter at judgment rate until payment.

Costs

173.  I make an order nisi that Tak Cheung do pay Tour Enterprise costs of both actions, to be taxed if not agreed.  The order nisi shall become absolute unless an application is made for variation of the same within 14 days from the handing down of this judgment.

174.  I thank Counsel for their assistance.