NOBLE SPIRIT LTD t/a LIFE SOLUTIONS v. WONG SHU YUEN AND ANOTHER

HCA842/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 842 OF 2011

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BETWEEN

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JUDGMENT

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Introduction

1.  This is an application made by inter partes summons dated 18 May 2011, whereby the plaintiff ("LS") seeks to restrain the 1st defendant ("Mr. Wong") and the 2nd defendant ("MBL") from publishing or further publishing or permitting or causing to be published certain alleged injurious falsehoods, from making use of alleged confidential information, and from procuring breaches of contract between LS and its customers.

2.  The matter came on short notice before Suffiad J on 20 May 2011, who refused to make any interim injunction but gave directions as to the filing of further evidence and listed the matter to be heard before any Judge of the High Court, with half a day reserved. Further evidence was filed, and the matter came before me for hearing.

3.  At the hearing, LS was represented by Mr. Hylas Chung of Counsel, and Mr. Wong and MBL were represented by Mr. Erik Shum and Ms. Jolie Chao of Counsel.

4.  In light of the nature of the application, I intend to give a ruling as soon as possible.

Background

5.  The basis of LS' claim and the application for the injunctive relief are to be found in the three affidavits of Mr. Blake Ireland, who describes himself as the founder, owner and managing director of LS. The response on behalf of both defendants is to be found in the two affirmations of Mr. Wong. Though there is clearly significant dispute between the parties in certain respects, some of the factual material is not substantially disputed.

6.  LS was established in late 2003, for the business of providing water purification equipment, together with annual maintenance and warranties, to domestic, corporate and hospitality markets. In effect, at that time, LS was a one-man business of Mr. Ireland. It does not seem to be in dispute that he did not then have any prior experience or knowledge in the business of water purification systems.

7.  By that time, MBL was already running that kind of business, and had been since its incorporation in 2001. It had established from its offices in Sheung Wan a sales team, customer services department, technicians, and information technology department. There was also a warehouse in the same building.

8.  It is common ground that in 2003 a cooperation began between LS and MBL. The precise nature of the relationship is the subject matter of dispute. The core of that dispute is that, although it is agreed that there was a relationship of principal and agent, each of LS and MBL asserts that it was the principal and the other was the agent.

9.  Mr. Ireland on behalf of LS says that he approached MBL to ask if it would like to help provide the equipment for LS' business, and to install and maintain it. He says that MBL jumped at the opportunity to provide the services.

10.  On the other hand, Mr. Wong on behalf of MBL says that MBL was keen to expand its business and so started to approach other companies to act as its dealers. After the introduction of Mr. Ireland, it was agreed that LS would act as a dealer for MBL. At least at first blush, where MBL was an established company and LS was a newcomer to the business, this version of events seems considerably more likely.

11.  Whatever is said now by the parties to be the nature of their relationship, they entered into a written agreement called a "Dealership Agreement" dated 26 April 2004. The terms of that agreement are obviously important, and I set them out at some length:

This Agreement is made on April, 2004 between:

1. Mind Body (Asia) Limited, hereinafter called the "Principal", on the one part, and

2. Noble Spirit Limited, hereinafter called the "Dealer" on the other part.

Now this agreement details are as follows:

1. That the Dealer is hereby appointed as dealer of the principal to sell the goods of the principal. The dealer enjoys the same commission if there is any repeat business from the customer during the first 12 months after installation of the RO [reverse osmosis] water purification system.

2. That this appointment is made for a period of three years from the date of execution of this deed.

3. That Dealer shall sell the goods or act as a referrer of the principal on the prices fixed by the principal. The Dealer shall have no right to make any representation in the trade.

4. That the Dealer shall get a commission of 25% on the net invoice amount (excluding third-party products and any on-loan or special promotion items).

That the Dealer shall get a commission of 30% on all net sales if the net monthly receivable is HK$180,000.00 or above (excluding third-party products and any non-loan or special promotion items).

5. That the Dealer shall make all sales cash down. Dealer is not entitled to make any credit sales, unless permission is obtained from the principal.

6. That either party may terminate this agreement after giving one month's prior notice of his intention to do so.

7. That in no case the benefit of the agreement can be assigned to any third person.

8. That the principal shall have the right to terminate this agreement without prejudice to any other remedy for any breach or non-performance of any part of this agreement namely:

(1) If the Dealer is found guilty of a breach of any provision of this agreement or is found guilty of misconduct or negligence of his duties;

(2) If the Dealer commits any act of bankruptcy.

12.  Obviously, that agreement formally expired in 2007, but (subject to the gloss on matters put forward by Mr. Ireland – see below) it is common ground that the parties continued their relationship on the same terms as are set out in the Dealership Agreement.

13.  In early 2004, MBL invited LS (at that time only Mr. Ireland) to share MBL's office in Sheung Wan, on a rent-free basis. The idea was to achieve economy of scale and to improve efficiencies. The office sharing continued until April or May 2011, though LS' staff numbers increased to a maximum of four persons.

14.  From as early as 2001, MBL had designed a computer program so that all its information and data relating to customers, including customers' orders and installation and maintenance records, were recorded and saved on the computer system. There is a ‘shared network’ (folder) to allow staff to have ready and convenient access to customer information.

15.  Although it has appointed more than one dealer, MBL says it has continued to try to sell water purification systems with its own staff. Even when sales were made through dealers, staff of MBL were often assisting. The customer information in the computer system identifies, amongst other things, the identity of the customer's "dealer".

16.  LS did not have its own computer system to keep track of sales and orders, customers and their accounts. Instead, access was provided to the MBL computer system. Once a new order from a customer procured by LS had been confirmed, someone (likely LS' staff) would input information concerning the customer into MBL's computer system. Thereafter, MBL staff would follow up with all pre-installation and post-installation services, and they would keep up-to-date records of the customer history, including maintenance records.

17.  It was MBL which employed all the technicians who installed and maintained the products, and all the customer service staff who took calls from clients and booked maintenance visits. These sales and maintenance telephone hotlines used by LS were at all times leased and paid for by MBL.

18.  On the other hand, from the point of view of the customer, the customer entered into any written supply and maintenance agreement with LS. It is common ground that customers would likely not have known of MBL, or that the installation and maintenance services were in fact provided by staff of MBL.

19.  Based on the Dealership Agreement, it seems that the whole invoiced amounts of sales would be paid by customers to LS, which would in turn pay the amounts to MBL after first deducting its commission. This was done on a monthly basis, and with the assistance of an accountant common to both LS and MBL who verified the sales of LS and the accounts of MBL.

20.  In the evidence there was produced various monthly accounting documentation, essentially spreadsheets identifying the accounting for the sales and commissions as payable between the parties. Those documents clearly identify that of the total amount invoiced and received by LS, and by reference to a percentage, there would then be a "payment" due from LS to MBL, and a "commission" kept by LS.

21.  (It seems that this prepayment arrangement was also adopted by MBL with its other dealer and agent.)

22.  Those spreadsheets also seem to identify customer numbers assigned to the customers by MBL, and I have not seen any evidence of any different customer number assigned by LS or the other dealer.

23.  In its statement of claim, filed on 8 June 2011, LS has pleaded an ‘original agreement’ said to have been made orally between the parties, essentially that LS would be the main conductor of business and MBL would only act on its behalf by providing installation and maintenance services. There is then pleaded the making of the Dealership Agreement, and its material terms are set out, including that LS was the "dealer" and that MBL was the "principal".

24.  But there is then pleaded LS' case that "in addition to the express terms and conditions of the Dealership Agreement", it was further agreed orally or by conduct that the terms of the original agreement would be maintained, and that certain express terms of the Dealership Agreement would not be adhered to, including the description of the parties as dealer and principal.

25.  I do not need to deal with the merits of these points in any great detail, but I can express the at least reasonably firm provisional view that this line of defence does not appear particularly convincing. To suggest that the parties entered into the express terms of an agreement, which, by conduct and a wholly unparticularised oral agreement, was immediately fundamentally varied is not a promising start.

26.  In the latter part of 2010, Mr. Ireland was obviously feeling and expressing certain dissatisfaction as to the profitability of his business. He also says that he was increasingly dissatisfied with the quality of the maintenance provided by the staff of MBL. There were at least some discussions between Mr. Ireland, Mr. Wong and others as to how to get past these problems, including the potential sale of MBL to LS and vice versa.

27.  On the basis that Mr. Ireland considered that he had been paying MBL "way over the market rate for the work they were providing" and as a result of the failed discussions, Mr. Ireland came to the view that the working relationship between LS and MBL was at its natural end. In order to ensure the name and reputation of LS and to grow its business, Mr. Ireland considered the only solution to be to separate from MBL by giving one month's notice as required in the Dealership Agreement, the terms and conditions which both parties had continued to follow.

28.  Mr. Ireland also began to put in place the necessary resources to ensure that LS would be able to continue its operation towards the existing customers on an uninterrupted basis, including as to supply, installation and maintenance.

29.  Between January and April 2011, Mr. Ireland set up a new office to prepare the cessation of the working relationship with MBL. It is common ground that he did so without telling MBL. However, through one of its own suppliers of equipment, MBL discovered in late April 2011 broadly what Mr. Ireland and LS intended to do.

30.  On 29 April 2011, Mr. Wong went with another colleague from MBL, Mr. Ray Chu, to the new office of Mr. Ireland in Quarry Bay. Though Mr. Ireland was not present, they saw his personal assistant Ms. Windy Au Yeung and asked her questions.  Mr. Wong says she told them LS had to do business itself to be more profitable. Although Mr. Ireland was then confronted over the telephone, there was no immediate discussion on any matter of substance.

31.  Subsequently MBL investigated the matter, through discussions with staff, suppliers and customers. I also checked the computers of LS which were in its office, and it seems to be common ground that the extent of the checking was not limited to the shared files, but extended to the C drive of the computers.

32.  The search of the computers reveals what MBL considered to be a long-term orchestrated plan by Mr. Ireland to divert MBL's business to LS, with the assistance of an ex-employee Mr. Ivan Chan. Certainly, the evidence includes a number of e-mails sent between Mr. Ireland and Mr. Chan, using a private (i.e. not work) e-mail address from Mr. Chan, in which Mr. Chan is researching and copying certain information for Mr. Ireland's benefit.

33.  Whilst Mr. Ireland says that he was merely asking Mr. Chan to obtain soft copy information, of which LS already had the hard copies and of information which belonged to LS anyway, that is not the flavour of the e-mail correspondence. Indeed, Mr. Chan appeared to consider himself to be a "spy", and was plainly making copies of information at night and "in caution". In one e-mail dated 16 March 2011 (when he was plainly still employed by MBL), Mr. Chan wrote:

"For the Maintenance Schedule, I already discuss with Windy, she say it is a good support to build up the database. I will stay behind the office about one or two hour every day to generate the Maintenance Schedule and store in my USB. I hope I can finish it all before I resign."

34.  In the same e-mail, Mr. Chan refers to the resignation of "Hung", a reference to one of the senior technicians at MBL who subsequently resigned from MBL to work for LS.

35.  Subsequently, MBL began to contact its customers by emails, notices and telephone calls, for the purpose (Mr. Wong says) of explaining to the customers the correct status of the relationships with them. It is this contact with the customers that LS now claims constitutes the malicious and injurious falsehoods.

36.  The e-mails were sent by MBL to customers, including to the names on a mailing list found on the C drive of one of the computers of LS. Mr. Ireland says that mailing list was (at least in part) a list of his private contacts, some of whom expressed some surprise confusion as to why they might have been sent an e-mail relating to a water purification product in which they had no knowledge.

37.  The particular complaints made by LS relate to both oral statements allegedly made to certain customers, as well as to the content of the written contact. As to the oral statements, and by reference to e-mails or statements from certain customers exhibited to Mr. Ireland's affidavits, the complaint is that the customers had been told: (a) LS had formally changed its name to MBL; (b) the existing contract between the client and LS was up for renewal, and to continue the services previously provided by LS, all new contracts would have to be signed with MBL; (c) LS is no longer able to fulfil the maintenance requirements under their contracts with clients.

38.  The summons seeks to restrain both Mr. Wong and MBL from publishing or further publishing those three things, because it is said that they are plainly false.

39.  On the evidence, there was some further discussion between LS and MBL as to a potential consensual basis upon which to deal with the disputes which had arisen between them. There is in the evidence notes said to be of particular meeting on 3 May 2011, and the draft of a deed of mutual release and cancellation. But those notes are not countersigned, and the draft was not concluded, and it seems to me that the matters contained are probably subject to contract, and without prejudice (as the draft deed is even headed).

40.  Mr. Ireland says that LS brought the contractual arrangements between the parties to an end on 3 May 2011. He therefore complains about the falsity of a notice sent by MBL to customers which says that MBL determined to terminate the dealership arrangement with LS with effect from 6 May 2011.

41.  There is also a complaint that MBL told customers it had commenced legal action against LS, when it had not done so, and had not yet filed its counterclaim as has been heralded in the evidence.

Applicable principles

42.  It seems that the principles applicable on this application are common ground between the parties. They can briefly be set out as follows.

43.  The jurisdiction to grant interim injunctions to restrain publication of defamatory statements is "of a delicate nature" which "ought only to be exercised in the clearest cases". The reluctance to grant peremptory injunctions is rooted in the importance attached to the right of free speech: see, for example, Gatley on Libel and Slander, 11^th Ed atparagraph 27.2, referring to Coulson v. Coulson (1887) TLR 846, and Bonnard v. Perryman [1891] 2 Ch 269.

44.  As it was put by Godfrey J in Ki Ming Po v. Yeung Wai Hong [1993] 1 HKC 595, at 596C-F:

It is obvious that the subject matter of an action for defamation is so special as to require exceptional caution in exercising the jurisdiction to interfere by injunction before the trial of an action to prevent an anticipated wrong. The right of free speech is one which is for the public interest that individuals should possess, and, indeed, that they should exercise it without impediment so long as no wrongful act is done and, unless an alleged libel is untrue, there is no wrong committed. On the contrary, often very wholesome act is performed in the publication and repetition of an alleged libel. Until it is clear that an alleged libel is untrue, it is not clear that any right to talk has been infringed. And the importance of leaving free-speech unfettered is a strong reason in cases of libel for dealing most cautiously and warily with the granting of interim injunctions.

45.  Thus, the court will only grant an interim injunction where: (1) the statement is unarguably defamatory; (2) there are no grounds for concluding that statement may be true; (3) there is no other defence which might succeed; (4) there is evidence of an intention to repeat or publish the defamatory statement.

46.  Therefore, where the defendant contends that the words complained of are true, and swears that he will plead and seek at trial to prove the defence of justification, the court will not grant an interlocutory injunction unless, exceptionally, the court is satisfied that such a defence is one that cannot succeed. The burden is on the plaintiff to show that the defence of justification will not succeed.

47.  As a result of the third and fourth points, it would seem it is also the test that an injunction would not be granted even where there is no intended plea that the statement is true.  If there is shown some other defence which might succeed (eg a defence that the statement was never made at all), or there is no evidence of any intention to repeat the statement, then the injunction would probably not be granted.

48.  The practice established in American Cyanamid Co v. Ethicon Ltd [1975] AC 396, of not considering the merits of the case once it had been shown there was a serious issue to be tried, but determining where the balance of convenience lay between the parties as regards the imposition of a restraining order, is inappropriate in defamation claims: see, for example, Khashoggi v. IPC Magazines Ltd [1986] 1 WLR 1412.

49.  Gatley, at paragraph 27.14 also notes that the difficulties in obtaining interlocutory injunctions in defamation have led litigants to base their claims on other causes of action, such as breach of confidence. Generally, judges have been cautious in granting the injunction in places not founded in defamation which have the effect of restraining publication of defamatory material, which the publisher maintains is true.

50.  However, it seems to me that there is scope for a claim to be based on alleged breach of confidence as a freestanding cause of action, put forward on the particular facts as an adjunct to (and not in an attempt to get around the problems arising from) another cause of action based on defamation.

51.  In such circumstances, it seems to me that the usual American Cyanamid principles would still apply.

Restraint of publication

52.  The precise terms of the order sought by LS have been set out in a draft order given to me by Mr. Chung. Those terms are wider than the terms of the order sought by the summons, but I will proceed on the basis as though the summons had been amended.

53.  I am not attracted to making any order in general terms, and would only be prepared to consider orders by reference to specific particulars of conduct to be restrained. This is because, as with any injunction or undertaking pending trial, it is desirable that the defendants should know with as much certainty as possible what he or they may or may not do. This is also in the plaintiff's interest, as any breach is easier to identify and enforce.

54.  The purpose of an interlocutory injunction in most cases is to regulate the position of the parties pending trial while avoiding a decision on issues which can only be resolved at trial. If an interlocutory order cannot be enforced without the plaintiff being required to prove the triable issue, this purpose will not have been achieved by the order. In a case such as the present, where the complaint is the making of malicious injurious falsehoods, to grant an injunction against other possible wrongs (in addition to certain specific acts) will not assist in regulating the position of the parties pending trial, and is actually more likely to give rise to further satellite litigation on the way to trial.

55.  Turning to each of the alleged falsehoods sought to be restrained from further publication, I can deal firstly with the suggestion that staff of MBL have told customers that LS has formally changed its name to MBL. Mr. Shum accepts that if that was said, it was plainly untrue and he could not raise a plea that it was true. But MBL's defence is that it was simply never said.

56.  LS has adduced evidence that it was said, and that this evidence is denied of course identifies an issue to be tried. But Mr. Shum says that by reference to the relevant test for this application he can at least point to a defence which might succeed. He also says that there is no evidence of any intention to say (whether as repetition or not) the same thing in future. On this basis, I accept that an injunction is not apt nor necessary.

57.  As to the statement that the existing contract between the client and LS was up for renewal, therefore to continue the services which were previously provided by LS all new contracts would have to be signed between them and MBL, it seems to me that this is a statement the thrust of which is capable of being held to be true. Of course, it is LS' case that it was the principal, but if MBL's case succeeds, the way in which a previous contract would be continued after the cessation of the dealership arrangement would be for MBL to become the direct contracting party with the customer.

58.  As to the statement that LS is no longer able to fulfil the maintenance requirements under the contracts with clients, this also seems to me to turn upon the resolution of the contest as to who was principal and who was agent. That can only be dealt with at trial, but Mr. Shum can say now that there are some grounds for concluding that the statement may be true (or, I suppose, but there is some other defence which might succeed).

59.  I do not think there is any great moment in the argument as to whether or not the Dealership Agreement was terminated on 3 or 6 May 2011, or as to who terminated that agreement. In any event, that itself may be an issue at trial on which either side may succeed. Similarly, it would seem to me to be largely pointless to restrain MBL from suggesting that it has taken legal action against LS, even if when it previously said so no such action had formally yet been taken, when such action is obviously about to be taken. In this context, I take into account that the time within which to file the counterclaim against LS is still running, together with the time for filing the defence against LS' claim.

60.  In the circumstances, I am not prepared to grant the injunction sought by paragraph 1a and 2a of the summons/draft order.

Misuse of confidential information

61.  I approach this on the basis that the American Cyanamid principles apply.  Again, I would not be attracted to make any order in general terms. I shall, however, consider making an order in respect of the specific confidential information comprised in the names, addresses and any other confidential information relating to the personal contacts of Mr. Ireland, which are not affiliated with LS, Mr. Wong or MBL.

62.  What seems to have happened in this regard is that the e-mail material was sent by MBL to a mailing list discovered on LS' computers. Mr. Ireland himself accepts that the mailing list is one built by him for the purpose of sending newsletters to LS' clients (which, on MBL's case, would actually be – at least also – MBL's clients).

63.  This is what is described by Mr. Shum as a mistake. But even if it identifies a breach of confidence, Mr. Shum says that there is no evidence that that breach will be repeated in future. Further, he says that the balance of convenience would not be in favour of the grant of any such injunction restraining any further breach of confidence, as no damage would be suffered by LS in any event if personal contacts of Mr. Ireland receive e-mails relating to the business.

64.  Mr. Shum is, in effect, forced to the position that he asks for no injunction to be granted, but recognises that if there has been a breach of confidence, and if that has caused damage to LS, that is a matter which can be dealt with at trial. He draws a distinction between the consideration of any damages that may already have occurred from any breach, and the consideration as to whether or not to restrain any threatened future breach.

65.  There is, at least in my provisional view, significant force in the criticism of MBL for its accessing this material on LS' computers. As Mr. Chung asked, if MBL had its own list of customers, why would it need to use the mailing list taken from the plaintiff's computers. In other words, on the face of things, there would appear to have been wholly unnecessary breach of confidence. Mr. Chung also makes the point that if the list is used, unless some comparison of the names is made as to the customer list of MBL, MBL would not ordinarily know who or where any particular person on the list is, and whether or not they are a customer. For example, a person with yahoo.com e-mail address could be anywhere in the world, and might or might not be a customer.

66.  At the end of the day, I am persuaded that an injunction in this regard should be granted. I take into account the statement that there is no intention to use the list again, but if I ask myself the question as to the balance of potential injustice on the grant or refusal of the injunction, it seems to me that the greater potential injustice lies in refusing to grant an injunction which it turns out ought to have been granted.

67.  I specifically have in mind Mr. Ireland's evidence that many of his customers come from his own personal contacts, so the use of his mailing list including his personal contacts is to correspond with both customers and potential customers, when those potential customers would not ordinarily be ones readily identified by MBL.

68.  I accept Mr. Shum's submission that the cross-undertaking in damages offered by LS as "the usual undertaking" in not a strong one, but I do not think that matters in the context of the particular claim for breach of confidence, in relation to the particular information with which this limited order is concerned.

Unlawful interference

69.  I can deal with this shortly. Effectively, the restraint sought in relation to alleged unlawful interference with LS’ business arises from any approach to and communication with current customers. Not only is there an argument as to whose customers they are, the real complaint turns upon the alleged falsehoods (which I have dealt with above).  I shall not, therefore, grant any injunction in the form of paragraphs 1c and 2c of the summons/draft order.

Conclusion

70.  In the circumstances, I will grant limited relief in the form of paragraph 1b of the summons, amended and trimmed to reflect just the specific information the use of which is to be restrained.

71.  I dismiss the applications made by the remainder of the summons.

[submissions on form of order and costs]

Costs

72.  Costs obviously are in the discretion of the court and as I have made clear during the hearing and, I hope, during my ruling, I do not think that either side of the matter comes out particularly smelling of roses.  I accept that the main thrust of the claim to injunctive relief is in relation to the business injury said to be suffered from the falsehoods and that the Plaintiff has failed in that respect.  On the other hand, the Plaintiff has succeeded in relation to a matter being, on the face of it, at least on a provisional view, a misuse of confidential information arising from the use of the computer information.

73.  It seems to me, overall, whilst I am attracted at first blush to simply say no order as to costs, there is some force in what Mr. Shum says about the way in which the expenses would have been built up as regards the costs of fighting this application and, therefore, taking the relatively broad brush that I think is open to me on the exercise of my discretion, taking all the various factors into account, I order that the Plaintiff should pay 50 per cent of the Defendant’s costs, to be taxed if not agreed in any event.