CHEUNG KIN CHEUNG MICHAEL v. TAM KA LEUNG

1993 No.A8881

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Plaintiff and the Defendant were partners in a business called Team Communications System. The partnership capital was in the ratio of 60:40. Their respective monthly salaries were also in the same proportion. The partnership was formed in January 1993, subject to review six months later. By July 1993, the parties went their separate ways. The main issue in this case is whether an Agreement entered into by the Plaintiff and the Defendant on 19 July 1993 whereby "[in] consideration of receiving HK$170,000 in cash, [the Defendant] will transfer his share in Team Communication System and will resign from this company..." is binding and enforceable.

The evidence

(a) The Plaintiff

2. It is the Plaintiff's evidence that for some two weeks prior to 19 July 1993, the parties were discussing how to dissolve the partnership. On 19 July, the Plaintiff suggested to the Defendant that the Defendant should quote a figure which, if acceptable to the Plaintiff, would be the price at which the Defendant would withdraw from the partnership, leaving the Plaintiff the sole proprietor of the business. The partnership did not have any employees but a Miss Li did their books of account and handled incoming calls. The rental for the office premises included Miss Li's services.

3. The Plaintiff said that the Defendant took out the books and records of the company and did a lot of calculations. After about half an hour to 45 minutes, he quoted a figure which the Plaintiff could not remember, except that it was just over $180,000. As the Plaintiff was going to continue the business and would have to pay profits tax for the business and other accounts payable, he thought $170,000 a more reasonable figure and made a counter offer. After further discussion, the parties finally settled on $170,000. A cheque made payable to the Defendant was written out and signed by the Plaintiff. The Plaintiff also wrote out the Agreement in Chinese which is the subject matter of this action. Both parties signed the Agreement which was witnessed by one Yip Chi Wing, the owner of the office. After receiving the cheque, the Defendant handed back to the Plaintiff two cheque books of the company, a passbook and also the company's chop. The parties then went to the Standard Chartered Bank to cancel the Defendant's authority to sign cheques. After arriving at the bank, they were informed that a formal letter was required. They therefore returned to the office.

4. When they reached the lobby of the building, the Defendant said he had made a wrong calculation in that he had not taken into account the partnership's cash at the bank. Back at the office, the Defendant suggested that the Agreement be cancelled and that he be paid a further $80,000.

5. The Plaintiff said he could not explain how the Defendant arrived at the figure of $80,000 except that the basis was cash at the bank. The Plaintiff said he never took part or made any suggestions regarding the calculation of the value of the business. In cross-examination, the Plaintiff accepted that after returning from the bank, the Defendant did ask Miss Li to produce the most up-to-date information regarding disbursements and payments-in for that account. It was as a result of this request that an up-to-date computer printout was generated by Miss Li. This printout itemised all deposits into as well as cheques issued out of the partnership's current account at Standard Chartered from 1 July to 19 July including cheques issued in June but which had not been presented for payment. Two and a half hours of further discussions ensued after which the Defendant left, taking with him the partnership's cheque books, and passbook and the company's chop. The Plaintiff said he tried to stop the Defendant but was unsuccessful.

6. The following morning, the Defendant told the Plaintiff that he had already cashed the $170,000 cheque and had, in addition, cashed a further cheque for $80,000. He asked the Plaintiff to return the Agreement. The Plaintiff refused. Instead, he demanded that the Defendant pay back $250,000 into the partnership's account by 2:00 p.m. and if he did so, the Plaintiff would agree to discuss and recalculate the dissolution figures. When the sum was not repaid by 2 p.m., the Plaintiff said he went to consult his solicitors. He was advised that he should report the matter to the police. According to the Plaintiff, he made the report 2 or 3 days after 19 July. The police came to the office and suggested that all accounts be frozen because the Defendant still had the relevant cheque books, etc. These were not returned to the Plaintiff until 3 months later in October.

7. It is the Plaintiff's evidence that because the accounts were frozen, he had to pay creditors out of his personal resources. Payments received by the business could not be paid into the company's account and cheques had to be retained during the period the account was suspended. Cheques that had been issued but not cashed were dishonoured and bank charges were levied in respect of those cheques. As a result, there were complaints from creditors and some discontinued the business relationship.

8. The Plaintiff denied that when he and the Defendant were at the bank on 19 July 1993, they were ever told by bank staff that a cheque for $322,382 ("the Cheque") had been deposited into the partnership account on Saturday, 17 July but had not yet cleared. He accepted that the Cheque represented partnership income but he maintained that he had no knowledge of this payment in until 21 July, when he received a transaction statement upon the account being suspended. The Plaintiff had issued 3 cheques totalling approximately $129,000 for partnership expenses on 19 July. He agreed that the net amount of the Cheque after allowing for these expenses was roughly $190,000.

(b) The Defendant

9. The Defendant's account of events on 19 July is different in material respects. He said that he had been on leave for a week and returned to the office on 19 July. He raised with the Plaintiff again the question of salary increases for both of them and had proposed that each be paid a monthly sum of $30,000. When the Plaintiff refused, it became evident that they could not continue in partnership. The Defendant said that he did not think there was room for them to co-operate and to carry on. The Plaintiff apparently retorted that if anyone was to walk out, it would be the Defendant. Thereupon the Defendant asked how the partnership assets should be split. The Plaintiff said that it would be up to the Defendant to work out the value of his 40% share. When the Defendant suggested that they should get an accountant to do the calculations, the Plaintiff replied that he, the Defendant, would have to pay for the accountant out of his own pocket. The Plaintiff added that after the Defendant had done the calculations, he should leave it on the Plaintiff's desk and the Plaintiff would attend to it at his leisure. If he approved the amount, he would pay the Defendant off : otherwise everything would be on hold. The Plaintiff also said that it would be quicker for the Defendant to go through the figures and do his own calculations.

10. The Defendant's evidence is that he felt under some pressure from the Plaintiff to do the calculations there and then although he was not really equipped to do it. But he felt that if he did not do it immediately, there would be the possibility that the Plaintiff would go to China and he would not know when the Plaintiff would return or have the time to look at the accounts. He was afraid that he might not recover a single cent of his share of the partnership assets. It was in these circumstances that he asked Miss Li to give him the book of invoices and other documentation so as to calculate his 40% interest, although he had no experience in accounting matters and did not know how to look at accounts.

11. The Defendant made notes at the time he performed the calculations. This was adduced in evidence. According to the Defendant, the unpaid invoices was the focus of his attention. In addition, he also looked at the acquisition cost of the hardware of the business. The 40% was calculated on the basis of the two components. The Defendant explained that the first part of the sheet of calculations was a list of all unpaid invoices. Below that was a list of assets of the partnership at cost. He said that at the time he prepared the calculations, both he, the Plaintiff and Miss Li were in the office. The Plaintiff was at the next desk and after the calculations were done, which took approximately 8 to 10 minutes, he put the document in front of the Plaintiff. The total value of unpaid invoices and partnership assets came to $453,008 and, in round terms, $181,200 represented 40% of the amount. The Plaintiff wanted an allowance for profits tax and ongoing expenses which would be payable and counter offered $170,000 to which the Defendant agreed.

12. The Plaintiff then drafted the Agreement which was signed by both parties in the presence of Mr Yip. After that, the cheque was drawn by the Plaintiff and given to the Defendant. The visit to the bank then took place. The Plaintiff and the Defendant were told by bank staff, inter alia, that the Cheque (which was for $322,000 odd) had not yet cleared. When the Defendant heard this, he asked when the Cheque was deposited. The Plaintiff became embarrassed and said nothing. When they returned to the office, they had an argument. The Plaintiff insisted that the Defendant stick to the agreement reached but the Defendant told him that he entered into the Agreement in ignorance of the existence of the Cheque. It was in these circumstances that the Defendant asked Miss Li to show him the up-to-date accounts. It was only then that the computer printout was generated. The Defendant explained that the printout showed the deposit of the Cheque on 17 July and it also showed that 3 cheques were issued on 19 July.

13. Armed with this information, the Defendant proceeded to do further calculations. He deducted the expenses represented by the 3 cheques from the amount of the Cheque and worked out that in broad terms there was thus an additional net amount of about $200,000 belonging to the partnership. 40% of this was $80,000. The Defendant therefore informed the Plaintiff that he should be paid an additional $80,000. After the Plaintiff refused to issue a cheque for $80,000 to the Defendant and accused the Defendant of stealing the partnership cheque book, the Defendant wrote out the cheque in his own favour in front of the Plaintiff. As the Plaintiff refused to discuss the matter further, the Defendant locked the cheque book away and banked the cheque of $80,000. He also asked the Plaintiff to return the Agreement but the latter refused.

14. It is the Defendant's evidence that he saw the Plaintiff again the following morning. Mr Yip was also there. Mr Yip tried to mediate and asked each side to make a concession. He said that the Plaintiff told Mr Yip that the Defendant had made a mistake in his calculations the day before, that he (the Plaintiff) was willing to recalculate the figure but it was conditional on the Defendant repaying $250,000 in cash into the partnership account. The Defendant said that he did not have that amount in cash but could pay in a personal cheque. He also asked the Plaintiff to return the Agreement and to start negotiations anew. The Defendant said he gave his cheque for $250,000 to Mr Yip as stakeholder but the Plaintiff declined to return the Agreement. The Plaintiff insisted on a 2 p.m. deadline, threatening to report the matter to the police if the sum was not paid. The Defendant said that at 2 p.m., he tore up the cheque he had given Mr Yip and left.

15. The Defendant was taken to task as to why he did not check the amount in the current account of the business at the bank if he thought he was entitled to 40% of the partnership assets. As the cheque that was issued to the Defendant was drawn on the partnership bank account, it was put to the Defendant that he must have known that there was a lot of money in that account.

The Defendant frankly admitted that he was not smart enough to have thought of that at the time. It is quite clear that the Defendant is not well versed in financial matters. He left school at an early age and although he has been working for over 10 years, he has no experience in accounting matters. Whilst from time to time he did deposit cheques into the partnership's bank account, he was not the one who kept the books and had no real understanding of the procedures adopted by Miss Li. On such occasions, he would give the deposit slips to Miss Li. According to the Defendant, the Plaintiff and Miss Li were the only two people who understood the up-to-date financial situation of the business.

16. It is the Defendant's evidence that at the time he did his calculations he was not aware of any documentation that reflected a payment into the partnership's bank account of $320,000 odd. He said that had he been aware of the payment-in, he would have taken this into account in doing his calculations. When he reached the agreement with the Plaintiff for the sale of his interest at $170,000, it was based on premise that $181,200 represented 40% of the partnership assets. It did not occur to him that there would be an uncleared cheque or that there were balances in the bank accounts or that there may be outstanding creditors of the business.

(c) Miss Li

17. Miss Li gave evidence on the Defendant's behalf. She said that she was present at the office on 19 July 1993 and overheard the discussion between the Plaintiff and the Defendant regarding the Defendant's request that their salaries be increased to $30,000 per month. She heard the Plaintiff ask the Defendant to calculate the value of his 40% share and confirmed that she handed the file of invoices and other partnership documentation to the Defendant who then proceeded to do the calculation.

18. Miss Li also confirmed that after the parties returned from their visit to the bank, the Defendant asked her to give him an up-dated statement relating to the partnership's bank account at Standard Chartered.

19. Miss Li said that she did not update the account on a daily basis. So far as payments out were concerned, she based her entries according to the information recorded on the cheque stubs. Hence, the printout records the cheques that were issued in chronological order and sequentially gave an up-to-date picture of the cash-flow. So far as deposits were concerned, Miss Li's evidence was that the entries were made based on bank deposit slips. If she were the one making the deposit, she would obviously know about the payment-in. If the payments were made into the bank by either the Plaintiff or the Defendant, entries would be made if she was given the deposit slips. She also said that normally the person who made the payment-in would have applied the "payment received" stamp to the invoice.

20. Miss Li said that she could not remember from what date she had to update the account when she prepared the printout. Nor could she remember whether she was the one responsible for paying in the Cheque. In order for that entry to have been inputted into the computer, either Miss Li knew about it because she was the one who had paid it in, or, she was given a deposit slip and the entry was made on the basis of the information contained in the slip.

21. Miss Li's evidence, in general, corroborated the Defendant's account of events. In particular, she confirmed the Defendant's account of what occurred the following day when Mr Yip tried to mediate.

Credibility

22. Having seen and heard the Plaintiff and the Defendant give evidence, it is quite evident that they do not share a common level of education or business sophistication. The Defendant received a fairly basic level of education, having left school in his early teens. He is plainly not experienced in accounting matters or in the running of a business.

23. The Plaintiff's position is that the transaction was nothing more than the Defendant naming a price which the Plaintiff found acceptable for acquiring the Defendant's share of the partnership business rather than a 60:40 division of partnership assets. Whilst the Plaintiff's approach might be adopted by those well-versed in business, it is hardly an approach that would commend itself to someone like the Defendant who had put in 40% of the capital and who most naturally expected to be paid 40% of the value of the partnership business on dissolution. The Defendant's version is the more believable : the split that was to be calculated was to be based on their respective shares in the partnership. As he had a 40% share, the calculations he performed was to ascertain and reflect the value of that 40% interest.

24. The Plaintiff's evidence was problematic in a number of respects. First, I did not find it believable that the Plaintiff had no idea how the Defendant came up with his initial figure of $181,200. Second, if the Plaintiff was telling the truth and no mention whatsoever was made to the Cheque whilst the parties were at the bank, what could possibly have prompted the Defendant to say that he had made a wrong calculation? Third, the Plaintiff's insistence that he did not know of the existence of the Cheque until 21 July is inconsistent with his evidence that the parties spent 21/2 hours after returning from the bank to discuss the recalculation. Fourth, I do not believe that the Plaintiff was telling the truth when he said he did not know how the Defendant arrived at the figure of $80,000 given that he accepts that the Defendant asked Miss Li to generate a printout upon their return from the bank which confirmed the payment in of the Cheque and the 3 cheques of 19 July. Fifth, I do not find convincing the Plaintiff's explanation as to why he asked the Defendant to pay back into the partnership account the amount of $250,000 rather than the additional $80,000 only. The Plaintiff appeared to be saying that because the Defendant did not adhere to the Agreement, he should not be entitled to be paid anything. This of course is inconsistent with his apparent willingness to recalculate the figure if the money was repaid. Sixth, his evidence as to (a) the cause of the dispute between himself and the Defendant on 19 July (i.e. his denial that it arose from the Defendant's request for salary increases), (b) the writing out of the cheque for $80,000 by the Defendant and (c) the mediation role of Mr Yip on 20 July and in particular, the cheque for $250,000 drawn by the Defendant and held by Mr Yip as stakeholder is contradicted not only by the Defendant's evidence but the evidence of Miss Li.

25. For these reasons, insofar as the evidence of the parties conflict, I have little hesitation in preferring the evidence of the Defendant. I find the Defendant an honest witness and his evidence logical, coherent and straightforward.

Knowledge of the Cheque

26. Did the Plaintiff know of the existence of the Cheque at the time the Agreement was signed? It was accepted that the Defendant had been on leave and did not return to the office until 19 July 1993. In those circumstances, of the three persons who could have deposited the Cheque, the Defendant can be eliminated from the list. Miss Li could not recall whether or not she had paid the Cheque in. The Plaintiff on the other hand, denied knowledge of the Cheque until 21 July when he received a statement from the bank.

27. Whilst there is no positive evidence that the Plaintiff knew that the Cheque had been deposited on 19 July, there is evidence from which an inference of such knowledge could be drawn. The Plaintiff admitted that he was the one who was responsible for getting the business and that he issued most of the invoices. He acknowledged that the Defendant was entitled to a share in the amount of the Cheque which was partnership income. It is significant that prior to his discussions with the Defendant on 19 July, the Plaintiff had issued 3 cheques for the partnership business totalling almost $129,000. As this amount was not insubstantial, the Plaintiff must have had some idea of what was in the partnership account.

28. By writing out a further cheque for $170,000 after having shortly before then written a cheque for approximately $130,000, the Plaintiff must have known that those cheques could be met in full. That being the case, it seems highly improbable that he would not have known of the deposit of the Cheque. Were it necessary to draw such an inference, I would do so.

Findings of fact

29. The Plaintiff's position is that the Agreement was a once and for all payment for all the Defendant's interest in the partnership business and assets rather than a percentage calculation. I do not accept that that is the correct analysis. Having regard to the evidence concerning the circumstances in which the Agreement came about, I find that the Agreement was reached on the premise that the amount of $181,200 reflected the Defendant's 40% interest in the partnership assets. I further find that the Defendant was not aware that the Cheque was paid into the account on 17 July and that on the day, i.e. 19 July, the Plaintiff had drawn 3 cheques aggregating some $129,000 in respect of partnership expenses.

Conclusion

30. The premise upon which the parties entered into the Agreement, namely that, $181,200 represented the value of 40% of the assets of the partnership turned out to be erroneous. This mistake, if mutual, operated to nullify the parties' consent so as to render the Agreement unenforceable. The Plaintiff's awareness or otherwise of the Cheque at the time of the Agreement is irrelevant.

31. If the Plaintiff was aware not only of the Cheque but also of the Defendant's failure to take it into account in his calculations, the mistake would be unilateral rather than mutual. Nevertheless the Plaintiff may not take advantage of the Defendant's mistake. As a partner, the Plaintiff owed the Defendant the utmost good faith and was under an obligation to bring that fact to Defendant's attention.

32. Thus, on either scenario, the Plaintiff's claim as to the $80,000 and related expenses is misconceived.

33. As to the claims of the Plaintiff aggregating $123,044.69 (other than for the sum of $80,000 and related expenses), the Plaintiff acknowledged that he applied for and obtained a business registration as a sole proprietor trading under the same company name shortly after the dissolution of the partnership and that upon dissolution, the partnership account could not be operated and a new account had to be opened. The removal of the cheque books, passbook and company chop could not therefore have affected the business of the company as a sole proprietorship. In any event, as the Plaintiff did not adduce any evidence to prove any loss sustained, then irrespective of any entitlement to be compensated for such loss, his claim must fail.

34. Accordingly, the Plaintiff's claim is dismissed with costs. As the only issue the Court was asked to address was the enforceability of the Agreement, I make an order nisi that the Counterclaim be dismissed.

35. There is to be an order nisi for costs in favour of the Defendant.