POON YIU CHEUNG v. WORLD MASTERY TECHNOLOGY LTD

CACV 276/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 276 OF 2011

(ON APPEAL FROM DCCJ 632 OF 2005)

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BETWEEN

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Hon Cheung JA :

1.  The plaintiff was engaged by the defendant as its sales representative, principally, in North America to promote the sale of the defendant’s electronic products including printed circuit board (‘PCB’) and cables. The plaintiff claimed against the defendant for commissions payable to him for his service. The defendant sought to set off the commissions (the amount of which was agreed by the parties) by way of counterclaim in respect of damages caused by the plaintiff’s breach of contract and fiduciary duty. The allegation of breach included, among other things, that the plaintiff had solicited orders from the defendant’s customers and placed those orders with other manufacturers (‘diverting business’). The plaintiff was also said to have received secret rebates from the defendant’s customers (‘secret rebates’).

2.  Deputy District Judge Roy Yu (as he then was) found for the plaintiff on the commission and dismissed the defendant’s counterclaim.  The defendant now appeals.

The issues

3.  The issues in this appeal are whether the plaintiff owed a fiduciary duty towards the defendant and whether he was in breach of this duty.

The plaintiff’s pleaded case

4.  The plaintiff was first engaged by the defendant pursuant to an oral agreement made in August 2001.  The plaintiff’s pleaded case on his engagement is as follows :

‘ 2A. By an Oral Agreement made on or about mid August 2001 between the Plaintiff and the Defendant by its then General Manager/Sales and Marketing Mr Andrew Tsui (“the Oral Agreement”) whereby the Defendant agreed to appoint the Plaintiff as its Freelance Sales Representative with terms and conditions as follows:-

(i) to promote and to sell printed circuit boards manufactured and supplied by the Defendant on the terms and conditions therein stated;

(ii) the Defendant agreed to pay the Plaintiff 6% as commission of Sales generated by the Plaintiff;

(iii) to reimburse the Plaintiff long distance telephone expenses and other sales expenses incurred by the Plaintiff for and on behalf of the Defendant;

(iv) the Defendant will pay the Plaintiff CAN$2000 per month as payment in advance for the commission as stated in Para. (ii) above subject to adjustment as may be mutually agreed by the parties.

2B. Later the parties agreed to formalise the Oral Agreement in writing with details as per the following paragraphs.

3. By a written agreement bearing the title FREELANCE SALES AGREEMENT dated 25^th December 2003 (“the Agreement”) signed between the Plaintiff and the Defendant, the Defendant contracted the Plaintiff as its Freelance Sales Representative to inter alia promote and to sell the Defendant’s products to the Plaintiff’s clients or otherwise to develop the account(s)/customer(s) brought in / maintained by the Plaintiff for the Defendant for the terms and conditions therein stated.’

The Freelance Sales Agreement

5.  The Freelance Sales Agreement (‘the FSA’) was dated 25 December 2003 but it was signed by the parties later at the end of January 2004.  The defendant was described in the FSA as Party A and the plaintiff, Party B.  I will set out the relevant terms of the FSA :

‘ Whereas Party A has agreed to appoint the Party B as its Freelance Sales Representative to promote and sell to Party B’s customers, all the products manufactured, sourced, and/or supplied by Party A and Party B has agreed to accept the appointment upon the terms and subject to the conditions herein.

Article 1    Nature of Relationship:

For the avoidance of doubt, it is hereby mutually agreed that Party B is NOTan employee of Party A but an independent service contractor and Party B hereby agrees that he is not entitled to or has any claims against Party A for, whether under the Hong Kong laws or the laws of his/her place of residence or domicile, any employee compensations, pensions, welfares, and / or benefits which would otherwise have accorded to employees of Party A other than earnings or commissions under this Agreement.  (emphasis added)

Article 2    Sales Representative’s Scope of Authority:

As a Freelance Sales Representative, Party B has no power or authority to enter into or execute any agreements or instruments on behalf of Party A with any third parties or to otherwise obligate the Party A in any manner whatsoever save and except to act on behalf of Party A in promoting Party A’s products in the course of his sales or marketing activities.

Article 3    Principal’s Obligations:

Party A shall provide reasonably sufficient quantity of promotional materials to Party B to cover his market upon Party B’s request and to pay Party B on time for all earnings, fees, commissions or reimbursement of expenses agreed thereto between the two Parties as per Article 5(4).

Article 4    Sales Representative’s Obligations:

(1) use the company name card provided to Party B by Party A for the purpose of promoting marketing and sales activities on behalf of Party A subject to Party B’s decision in the capacity as an independent contractor;

(2) provide copies of relevant correspondences with customers to Party A upon request of Party A those incidental to successful sales activities and Party A is entitled to keep in its possession copies of all such correspondences;

(3) not in any way or manner modify the promotional materials provided to him by Party A without the written consent of Party A;

(4) at Party B’s own expenses promote Party A’s products to achieve optimum sales turnover;

(5) keep Party B’s own sales management according to the domestic market information, the current economic situation, potential customer requirements, order status, business conditions and monthly forecast;

(6) assist Party A in its market promotion works such as but not limited to participating in exhibitions in Party B’s area and occasional customers visit when and as required by Party A subject to Party B’s discretion;

(7) on his own expenses attend the overseas representative meetings held in Party A’s headquarter for business review, market information exchange, formulation of market strategy and also technical training in Party A’s China factory subject to discretion of Party B;

(8) endeavour to protect Party A’s business interests and shall exercise his best judgment not to involve Party A in any risky business.

Article 5    Commissions & Payments

1. During the period of this Agreement, Party B should develop the current account and expand the customer base for Party A in order to optimum sales volume when possible.  The monthly commission or earnings paid to Party B by Party A is based on Party B’s sales amount per customer, calculation and aggregated at the following rate:

……

Article 7    Confidentiality

Party B hereby expressly agrees and undertakes not to, except where it is provided for or required by laws or as authorized or required by his/her duties, discloses reveals to any third parties any of the confidential information concerning Party A, including but not limited to Party A’s price structure, market strategy, customers list, business finances and shall not use or attempt to use any such information in any manner which may injure or cause loss either directly or indirectly to Party A or its businesses or may be likely to do so.  This clause shall continue to apply after the termination of this agreement without limit to point of time but shall cease to apply to information or knowledge that may come into the public domain.  Party A is also entitled to the same rights and liability under this provision to Party B.

……

Article 10  Miscellaneous

……

2. Party A has nothing to do with any promise that Party B makes to its customers.

3. Party B may provide to Party A monthly sale forecast.  Its content may include, but not limited to, customer list, the product description and sales quantity. Party A may provide Party B its monthly production capacity bookings so as to assist Party B in working with the accounts production lead-time.

……’

The defendant’s pleaded case

6.  The pleaded case of the defendant is that by the oral agreement, the defendant employed the plaintiff as a co-ordinator for the defendant’s customers in North America and Canada at a monthly salary of CAN$2,000 without any commission.  The customers included the following three companies which were referred to as Kingstec, BoardTECH and Cambridge America.

7.  In respect of the FSA, the defendant pleaded that :

‘ C. Freelance Sales Agreement

8. In or around August 2003, Mr. Choy Wai Chow (also known as Francis Tsoi) of the Defendant orally agreed with the Plaintiff to enter into a Freelance Sales Agreement (“the Agreement”) under which the Plaintiff would earn commission based on paid invoices (the written agreement however inaccurately states that it would be on sales).  Further and/or alternatively, if the Agreement was on sales (which is denied); the parties had subsequently varied the same by mutual consent through conduct custom and/or practice : in that the Plaintiff’s commissions were calculated on paid invoices only.  The Defendant further avers that the Defendant had never paid the Plaintiff any commission calculated on sales.

8A. The Plaintiff’s aforesaid employment as coordinator was accordingly terminated on or around 31^st August 2003 and the Defendant ceased to pay any fixed sum salaries to the Plaintiff in or since September 2003.

8B. Instead, the Defendant thereafter started to pay the Plaintiff commissions were calculated on the basis of the issued and paid purchase orders of the 3 Customers placed with the Defendant from 1^st September 2003 and onwards.  The Agreement was finally signed by the parties in January 2004.’

8.  The defendant’s plea of fiduciary duty is simply this :

‘ 11. Further, there were also implied or express terms of the Oral Agreement and/or the Agreement (collectively “the Agreements”) that :

(i) the Plaintiff owed a fiduciary duty/duties to the Defendant, in particular, not to: (a) solicit PCB orders from the customers of the Defendant; nor (b) place those orders with other PCB manufacturers;

(ii) the Plaintiff should not obtain any secret profits and/or rebates from any other customer and/or competitor of the Defendant;

……’

9.  Choy Wai Chow, the director of the defendant set out in his witness statement filed on 12 January 2009, examples of secret rebates received by the plaintiff between 24 November 2003 and 15 July 2004.  He also referred to purchase orders diverted by the plaintiff from BoardTECH to other manufacturers between 3 March 2003 and 17 December 2003.    

10.  The defendant’s evidence on the plaintiff diverting business took place at the following periods of time :

1) Diverting business in respect of BoardTECH, March and April 2003.

2) Diverting business in respect of Cambridge America.  The matter was raised on 1 June 2003 and Cambridge America placed orders with another supplier on 2 August 2003.

3) Diverting business in respect of Andrew Pao of Qualtech International LLC, February, March and April 2003.

Fiduciary duty

1) The Judge’s finding

11.  The existence of fiduciary duty was addressed by the Judge briefly in the following paragraphs of his judgment :

‘ 61. The counterclaim against the Plaintiff is based on breach of fiduciary duties and receiving of rebates. The first issue to assist is whether the Plaintiff has been an employee of the Defendant before the Agreement is executed.

62. Before the Agreement has been executed, the arrangement is oral. The best evidence must be the tax return filed by the Defendant to the Inland Revenue Department, when the Defendant notifies the Government its relationship with the Plaintiff.  It clearly shows that the Plaintiff is not regarded as an employee.  DWl cannot offer any explanation to the documentary record.  Accordingly, I found that the Defendant fails to prove the Plaintiff has been its employee as at any stage.’

2)  The defendant’s argument

12.  Mr. K M Chong (together with Ms Emma Wong) for the defendant argued that the Judge had made an implied finding that the plaintiff owed a fiduciary duty to the defendant because notwithstanding the Judge’s view that the defendant had failed to prove the plaintiff was its employee, the Judge went on to consider specific incidences of breach of fiduciary duty by the plaintiff.

13.  They further argued for the existence of the fiduciary duty and relied on the plaintiff’s Notice of Appeal which pleaded that based on the following uncontroversial evidence before him, the Judge ought to have held that a relationship of principal and agent existed between the defendant and the plaintiff and that, arising from such relationship, the plaintiff owed a fiduciary and/or contractual and/or common law duty towards the defendant in that he would discharge his duty with good faith and fidelity and would not make a secret profit out of the discharge of his duty :

1) the plaintiff was, pursuant to the FSA, contractually obliged to source business for the sale of the defendant’s products with remuneration in the form of commission;

2) it was an express term of the agreement that the plaintiff was obliged to ‘... endeavor to protect [the Defendant’s] business interest ... ’;

3) during the period between 2003 and 2004, the plaintiff did act as the defendant’s agent and sourced purchase orders for the defendant and, for such service, he had been paid commission and remunerated according to terms of the said agreement;

4) since September 2001, the plaintiff had been given training when he was confided with confidential information concerning customer gerber, sales data and quotations and pricing strategies which were confidential information and trust property confided in the plaintiff.

3)  My view

14.  I disagree that the Judge had made any implied finding of fiduciary duty at all.  The existence of a fiduciary duty requires an analysis of the terms of the agreement reached by the parties and it is not proved simply by the fact that the Judge went on to consider the incidences of breach. 

15.  In order to address the issue it is necessary to consider the defendant’s own case on how the parties’ relationship was governed.  The Judge at paragraph 34 of his judgment held that :

‘ 34. According to DW1, the Plaintiff is an employee of the Defendant, up to August 2003. When cross-examined by Mr. Lam, counsel for the Plaintiff, the Defendant could only produced (sic) one tax return it filed for the year ending 31 March 2002. It is a form for reporting to the Inland Revenue Department of remuneration paid to persons other than employees, and the position of the Plaintiff is put down as agent. DW1 cannot explain why the form is used. But he insists that until August 2003, when they enter into negotiation on the further relationship, the Plaintiff is an employee. From August 2003 to when the Agreement has been signed, they have no relationship, as the Agreement is under negotiation. And when it has been signed by the Defendant in January 2004, the relationship is governed by the Agreement.’ (emphasis added)

16.  In my view, during the period from September 2001 to August 2003 when the parties’ relationship was based on the oral agreement, the terms were too vague and not fully analysed for this Court to come to a firm view that there was a principal and agent relationship between the parties and arising therefrom the existence of a fiduciary relationship. This is more so when the primary case of the defendant at the trial was that there was simply an employment relationship between them which was rejected by the Judge.  The additional matters relied upon by Mr. Chong, namely, the plaintiff was supplied with confidential information in respect of training, customer and other data suffered from a similar lack of factual detail and analysis.

17.  According to the defendant, the parties had no relationship at all from August 2003 to January 2004.  This is hardly conducive to a finding of a principal and agent relationship let alone the implication of a fiduciary duty on the part of the plaintiff.

18.  When it comes to the FSA it is important to bear in mind the nature of a fiduciary relationship.  As Mason J (as he then was) observed in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96-97 :

‘ The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman (25)), viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is 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 sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position ...’

19.  Hospital Products Ltd was cited with approval by the Court of Final Appeal in Active Profit Ltd v Nissho Iwai Hong Kong Corp Ltd (2006) 9 HKCFAR 653, 673 and by the Privy Council in Kelly v Cooper [1993] AC 205, 215.

20.  Looking at the terms of the FSA and the factual background of this case, it is difficult to see how it can be said that the plaintiff was placed in a position which gave him a special opportunity to exercise the power imposed on him to the detriment of the defendant.

21.  First, the title of the FSA and the description of the plaintiff in this agreement must bear some meaning to the relationship.  Why would an agency agreement be called a ‘Freelance Sales Agreement’ and the plaintiff a ‘Freelance Sales Representative’ if the parties had actually intended this to be the ‘usual’ principal and agent agreement?  The word ‘freelance’ connotes that the plaintiff was not an agent in the strict legal sense for the defendant but was acting independently in finding customers who were interested in buying products from the defendant.  Put in another way the plaintiff was not an exclusive agent of the defendant and the defendant was not the only customer he served in North America.  This is reinforced by Article 1 of the FSA which describes the plaintiff as an ‘independent service contractor’ and by its Recital which stated that the promotion and sale of the defendant’s products was to the plaintiff’s customers.

22.  Further as found by the Judge :

‘ 74. Further, it is not disputed that the Plaintiff cannot fix or agree the price with the customers. As I quoted from the evidence, he has to seek approval from the Defendant. If the suggested price is not profitable, the [Defendant] could simply refuse the deal. I agree that the Plaintiff could make suggestion, even to reduce the price. But the Defendant has the final say. The Defendant has failed to present any solid proof that the Plaintiff has given unauthorized discount to their customers.’

23.  The lack of authority of the plaintiff to agree a price with the customer is another strong indication that the plaintiff did not have the power to change the legal position of the defendant.  This being the case why should the plaintiff be imposed with the duties of a fiduciary nature?

24.  This view is further strengthened by the geographical location of the parties : the plaintiff was based in Toronto, Canada while the defendant was based in Hong Kong.  The plaintiff represented the defendant’s interest in North America and he was the conduit in achieving a sale between the customers and the defendant, from whom he would receive a commission.  But in the absence of an exclusive agency relationship why should the plaintiff not be allowed to source products from other suppliers for his own customers located in a geographical location thousands of miles away from the defendant’s base in Hong Kong?

25.  It is true that the plaintiff was to receive commission, but this factor alone is not determinative of a principal and agent relationship, let alone a fiduciary relationship. 

26.  It is also true that the confidentiality requirement imposed by Article 7 on the defendant may indicate a special relationship of trust and confidence, but contrary to the usual principal and agency relationship, the defendant (who was said to be the principal) was also required under this article to observe the same restriction on confidential information provided by the plaintiff.

27.  Mr. Chong argued that since the FSA was to formalize the relationship between the parties, if a fiduciary relationship existed between the parties under the FSA by reason of its terms, then the same relationship would exist under the Oral Agreement in the pre-FSA period.  I have already discussed the issue of fiduciary relationship under the FSA.  In any event, this argument cannot stand in the light of the defendant’s pleaded case that the Oral Agreement was an employment agreement, which was rejected by the Judge, and the absence of any plea as to what are the express or implied terms of the Oral Agreement that could give rise to a fiduciary relationship.  The fact that the FSA was to formalize the parties’ relationship does not invariably lead to the conclusion that their legal relationship and duties in the pre-FSA period are the same as those under the FSA.

28.  To conclude, I would rule against the defendant on the existence of a fiduciary relationship.  This being the case the defendant’s counterclaim must fail on this ground alone.

Incidences of breach

29.  In any event, I agree with the Judge that the quality of the evidence adduced by the defendant (which was admitted as evidence by the Judge) was not sufficient to establish the allegation of breach by the plaintiff in respect of diversion of business and secret rebates.

Diverting business

30.  The case on diversion of business was based entirely on the retrieved emails previously deleted from a notebook computer provided by the defendant for the use of Andrew Tsui.  The computer had been discarded by the defendant.  As the Judge held :

‘ 66. The burden rests on the Defendant to prove both that the Plaintiff has solicited business of the Defendant, and the loss the Defendant suffered. Since the Defendant is relying on the e-mails, it should refer me to the e-mails which suggest such misdeed. Anyway, Mr. Poon [former counsel for the defendant] could only point to one e-mail which could be said to suggest the Plaintiff solicited business of the Defendant. But the e-mail is not at all clear on the arrangement. It is not sufficient to show that the Plaintiff has diverted business of the Defendant and/or received rebates.’

Receiving rebate

31.  In respect of rebates, the evidence was based on emails provided by BoardTECH to the defendant.  The defendant had not obtained a witness statement or an affirmation from BoardTECH stating how the rebate was made.  Instead the Court was invited to find a case of rebate from various documents when only one example was being given at the hearing of the appeal on the correlation of the calculation of the rebate and the payment to the plaintiff.  The Judge had expressed doubts (supported by evidence) on the reliability of the operator of BoardTECH and he attached no weight to the documents.  The Judge further held that the documents were not clear on the rebates.  The Judge was entitled to come to such a view on the facts of the case.

32.  It was argued by the defendant that the plaintiff had filed a witness statement of Andrew Tsui but had chosen not to call him at the hearing below.  It was submitted that adverse inference should be drawn against the plaintiff because Andrew Tsui’s absence was due to the fear that if he was to be cross-examined on the deleted emails, the truth may be revealed : see Hong Kong and Shanghai Banking Corp v Chan Yiu Wah & Anrs [1988] 1 HKLR 457, at 467C-H, per Fuad JA (followed by CA in Tullett & Tokyo International Securities Ltd v APC Securities Co. Ltd [2001] 2 HKLRD 356, at 365C-J; Indian Oil Corporation Ltd v Greenstone Shipping S.A. [1988] QB 345, at 369.

33.  Further it was argued that the plaintiff had not complied with a Court order requiring him to disclose all bank accounts which had money held on his behalf.

34.  These arguments must be considered in the factual context of the case.  This Court was not referred to any evidence on whether the plaintiff was specifically asked about these matters and what his response was.  Further these arguments do not detract from the fact that the evidence adduced by the defendant in respect of its claim was not reliable in the first place.

35.  A further difficulty with the defendant’s case is that it simply failed to prove the extent of its loss and damage.  Mr. Chong argued that this can be overcome by taking an account on profit.  There is dispute between the parties as to whether the defendant had elected at the trial to proceed on damages only.  The Judge stated in his judgment :

‘ 18. It is the case of the Defendant that its counterclaim exceeds the Plaintiff’s claim. And they are happy to claim such amount to sufficiently set off the amount of commission I found they are liable to pay the Plaintiff.’

36.  The Judge in his decision dated 30 September 2011 in which he refused to grant leave to appeal held that :

‘ 38. The amount of commission payable as at the date of termination is agreed, and the Defendant has conceded through counsel that it is payable. I recall Mr. Poon, then counsel for the Defendant, saying that the Defendant only seeks to prove so much of the damages to set off against all the commission payable. At no stage has it been the case of the Defendant that it is not liable to pay the Plaintiff at all.’

37.  The transcript of the hearing on 25 January 2011 showed that the Judge had asked the defendant’s counsel whether he had abandoned his claim for an account for profit.  Mr. Poon did not abandon it and he specifically referred to his claim for damages and an account.  But the defendant cannot have the best of both worlds.  The taking of an account would require the Judge to defer his judgment on the counterclaim until the account has been taken.  There was no request for this to be done.  On the contrary, the defendant’s request to the Judge to adjudicate on the damages must be the strongest indication that the defendant intended to pursue the damage claim.  Hence an election must have been made.

38.  But in any event, it is not necessary to decide on this issue because of the defendant’s failure to establish fiduciary duty in the first place.

Conclusion

39.  Accordingly the appeal is dismissed with a provisional costs order for the plaintiff.

Hon Yuen JA :

40.  I agree with the judgment of Cheung JA.

Hon Chu JA :

41.  I agree.