IPL RESEARCH LTD AND ANOTHER v. LAM MAN WAH VINTON

HCA 2481/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2481 OF 2007

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REASONS  FOR  DECISION

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Introduction:

1.  These proceedings have been settled by agreement save for the question of costs. 

2.  On 8 June 2009, I heard argument on the costs issue.  I ordered that the defendant must pay both plaintiff’s costs, on a party and party basis, on the High Court scale, with a certificate for two counsel.  In respect of two matters in which costs were reserved, I ordered that the costs of those applications be to the plaintiffs on the foregoing terms.

3.  I reserved my reasons for my decision, which I now give.

The circumstances:

4.  IPL is a Hong Kong company which carries on business in Hong Kong and the PRC as a provider of human resource management related applications, software and related services.  Prior to 26 July 2001, IPL was a wholly-owned subsidiary of Accusmart Enterprises Ltd.  The shares in Accusmart were owned, as to 9,900, by Accuasset Investments Ltd, 52 by Pong Wai Chung, (Pong), 14 by Wong Wai Man, (Wong), and 35 by Mr Lam.

5.  Accuasset in turn was owned, as to 5,100 shares by Pong, 1,400 shares by Wong, and 3,500 shares by Mr Lam.  Effectively, Wong, Pong and Mr Lam owned IPL.

6.  By a Share Sale Agreement dated 20 June 2001, made between Pong, Wong and Mr Lan, and Computer and Technologies Investment Ltd, (C & T), the three men agreed to sell to C & T the shares they held in Accuasset.  C & T thereby became the owners of IPL.  Prior to the share sale Mr Lam was a director of IPL, Accusmart and Accuasset.  He resigned those posts upon completion of the Share Sale Agreement on 26 July 2001.

7.  Thereafter, Mr Lam became a key member of the senior management staff of C & T.

8.  As part of the sale of the shares in Accuasset, C & T acquired the benefit and goodwill of the business of Accuasset, and its subsidiary and associated companies, including IPL.  A central part of the business of IPL was the development, implementation, and marketing of a human resource information system known as HRIS.NET.

9.  As part of the consideration for the transaction, Mr Lam and his co-shareholders agreed to enter into new service agreements which contained the usual sort of restrictions imposed upon key employees.  The Share Sale Agreement also imposed certain restriction on Mr Lam and his co-shareholders.  These restrictions were the usual sort of restrictive covenants that are contained in a business sale.

10.  There were two distinct restraints imposed upon Mr Lam following the sale of IPL to C & T.  They were:

(i)  By the Share Sale Agreement, in favour of C & T, a provision restraining Mr Lam from being interested in or concerned with any business of providing computer applications or solutions a human resources management, (the personal non-compete provision), a provision restraining Mr Lam from soliciting or negotiating business with firms or companies who are customers of IPL, (the customer non-compete provision), and restriction on using or disclosing information concerning the business of the Accuasset Group, (the confidentiality provision).  The duration of these restraints were for a period of three years from any date upon which Mr Lam might cease to be employed by IPL.

(ii)  By the new service agreement, in favour of IPL, a similar personal non-compete provision, for a duration of one year, and also a customer non-compete provision, on the same basis.

The different durations of the restraints recognises the different circumstances of a restraint of trade in protection of the sale of a business and its goodwill, and a restraint of trade in a contract of personal service.

Mr Lam breaches the restraint provisions:

11.  In about June 2007, Mr Lam gave notice of his intention to resign from his position at C & T.  His resignation became effective on 30 September 2007.  The restraints then came into effect, to last 3 years, to 30 September 2010, by the Share Sale Agreement, in favour of C & T, and for one year, to 30 September 2008, by the employment agreement, in favour of IPL.

12.  On about 30 October 2007, a vice president of C & T learned that Mr Lam had begun to work for a competitor of IPL developing a product using technology similar to that of HRIS.NET.  Enquiries were made, and by 9 November 2007, senior officers of C & T had received copies of e-mails indicating that Mr Lam was likely to be in breach of the restrictive covenants that had been entered into at the time the business was sold to C & T.

13.  Further enquiries confirmed C & T’s suspicions as to the breach of the restraint provisions.

The writ is issued:

14.  On 26 November 2007, a writ was issued, and on ex parte application on that day, an interim injunction was granted restraining Mr Lam, first from soliciting or negotiating business with the Australian Consulate in Hong Kong or the Canadian Consulate in Hong Kong, and second restraining him from divulging, misusing and communicating to any third-party confidential business, technical proprietary information and/or trade secrets of the plaintiffs relating to HRIS.NET.  More comprehensive interim injunctions were granted to the plaintiffs, further restraining Mr Lam, following an inter partes hearing on 10 December 2007.

15.  As to C & T, the prayer for relief in the amended statement of claim sought, a final injunction for a duration of three years in terms of the personal non-compete provision, and a final injunction for a duration of three years of the customer non-compete provision.  Also sought by C & T was a final injunction, for a period of three years, until 30 September 2010, restraining Mr Lam from enticing employees of IPL away from that business, and a final injunction restraining Mr Lam from divulging IPL’s trade secrets.  The prayer for relief sought also “damages for breach of the express terms of the Share Sale Agreement”.

16.  As to IPL, final injunctions in relation to both the personal non-compete provision and the customer non-compete provision, for one year, until 30 September 2008, were sought, together with a final injunction restraining Mr Lam from divulging IPL’s trade secrets.  Also sought by IPL were damages for breach of the express terms of Mr Lam’s Service Agreement, and/or breach of fiduciary duty, damages for procuring or inducing facilitating breaches of contract, alternatively an account of profits and/or equitable compensation for breach of equitable obligations.

Progress of the proceedings:

17.  The case for the plaintiffs, now comprehensively established by e-mails from Mr Lam to others demonstrated that probably from August 2007, and certainly from September 2007, whilst still an employee of IPL, Mr Lam developed a plan to set himself up in competition with IPL.  This plan centred upon a project for the development, implementation, and marketing of a human resource information system, based upon, and to compete with, IPL’s HRIS.NET system.

18.  As part of a number of steps taken by Mr Lam to put this plan into effect, he instructed two subordinate employees at IPL to replicate the entire data on three hard drives of the computer which he was then, and had since 2001, consistently used in the course of his employment with IPL, on to a separate personal hard drive belonging to Mr Lam.  He removed this hard drive from IPL’s premises.

19.  In the course of the litigation discovery was undertaken, and Mr Lam was ordered to produce that personal hard drive in order that the plaintiffs might ascertain what information he had.  Instead of complying with the order for discovery, Mr Lam supplied a personal hard drive, which, upon forensic analysis, was shown not to have been used prior to October 2007.  Demonstrably therefore, he had failed to comply with the order for discovery.  The hard drive supplied simply could not have been the one to which the data had been copied prior to October 2007.

20.  The proceedings were listed for trial over a period of 11 days, to commence on 21 May 2009.

21.  On 21 April 2009, Mr Lam made a Sanctioned Payment of $200,000 pursuant to RHC O 22 r 8(1).  That payment was made in connection with the plaintiffs’ monetary claims, that is the claims for damages, an account of profits and/or equitable compensation and interest.  On 8 May 2009, the plaintiffs accepted that sanctioned payment. 

22.  On the same day, the plaintiffs made a Sanctioned Offer to settle the whole of the plaintiffs’ claims, (other than the monetary claim which have already been settled), broadly on the terms of the final injunctive relief sought in the action, and on the condition that Mr Lam should pay the costs of the action on a party and party basis, including costs reserved and costs in the cause. 

23.  By a letter dated 13 May 2009, through his solicitors, Mr Lam agreed to the proposed injunctions, subject to the amendment of the wording of one of the proposed injunctions, and it was subsequently agreed that the question of costs should be reserved to me as the trial judge.

The submissions on costs:

24.  Mr Burns seeks an order that Mr Lam should pay both plaintiffs costs, taxed on a party and party basis, and on the High Court scale.  He seeks also an order that costs reserved, (on the interim injunctions), should be to the plaintiffs, and that in respect of all costs, there should be a certificate for two counsel.

25.  Mr Hui makes two submissions in respect of the costs.  First, he says that the costs should be on the District Court scale, not the High Court scale.  Second, he says that as the plaintiffs have not achieved all that they sought by the writ, they should only have two thirds of their costs.

The proceedings not within the jurisdiction of the District Court:

26.  Mr Hui’s argument that costs should be on the District Court scale recognised that the issue turned on the interpretation of s 52(1)(d) of the District Court Ordinance Cap 336 (DCO). 

27.  In a pure damages claim, in which no other relief is sought, the appropriate venue is determined by the amount of the claim.  If the claim is under $1 million, it may be brought in the District Court: see s 36(1) DCO.  In such a case, the resolution of the cost issue is relatively straightforward.  If commenced in the High Court, and concluded by trial or settlement for less than $1 million, consideration will be given to the well-known principles in Lai Ki v B + B Construction Co Ltd & Ors [2003] 3 HKC 322, and to the plaintiff receiving costs on the District Court Scale.

28.  But where injunctions are sought the jurisdiction of the District Court is limited by the provisions of s 52(1) DCO.  That section provides:

“52(1)  The Court shall have jurisdiction to grant and to enforce injunctions of whatsoever nature and as the case may require and to make binding declarations of right-

(a)  (deals with movable property over $1 million; inapplicable)

(b)  (deals with apprehended distress; inapplicable)

(c)  (deals with immovable property where the annual rent or rateable value does not exceed $240,000; inapplicable)

(d)  in all matters of contract not falling within paragraph (a), (b), or (c) where the amount of the value of the subject matter of the contract does not exceed $1,000,000.”

29.  Thus, the test to determine whether a claim for an injunction may be brought in the District Court is the amount of the value of the subject matter of the contract giving rise to the right to seek the injunction.

30.  The case advanced by Mr Burns was that, plainly, the case was properly brought in the High Court.  The contract giving rise to the right to seek the injunctions was the Share Sale Agreement, which contained provisions which, as part of the consideration for the share sale, including the requirement for Mr Lam to enter into the various restraints.

31.  The monetary consideration for the Share Sale Agreement was, quite properly, not pleaded.  To establish the value of the subject matter of the contract, the Mr Burns pointed to the witness statement of Mr Lam which contained the following statement:

 “39.  We were approached by Raymond Choi of C & T on or about Choi Au Yeung in December 2000.  We were told that C & T wanted to buy out IPL and that they were offering us $25,476,750.  Myself, Pong and Wong then eventually agreed to the said value of $25,476 750 with it being part cash and part shares in C & T but in fact that amount, although reported in a newspaper, was not an accurate reflection of the actual sums given to us because there were various “options”, namely, net profit guarantee for the years 2001 and 2002 and other matters yet to be fully determined at that time.” (sic)

32.  I am satisfied that the subject matter of the contract from which the restraints arose, and for which injunctions were sought, was the sale of the shares constituting the business of IPL.  On the plain evidence of Mr Lam, that business had a value in excess of $25 million.  That the consideration might have been satisfied in other ways than cash is simply beside the point.  However the consideration might have been satisfied, its value was in excess of $25 million.

33.  Mr Hui did not, and indeed was quite unable to, argue that the value of the business sold was under $1 million.  Instead he was able only to say that there was no evidence in the pleadings as to the value of the subject matter of the contract.  Section 52(1)(d) does not require that the value be pleaded, and in this case, having regard to the true issues, the sale price of the business of IPL was merely evidence, and not a fact that was required to be pleaded.  In an appropriate case where there might be an issue as to the appropriate venue, it would be prudent to plead the value of the subject matter of the contract in order to establish the jurisdictional point.  But that is plainly not the situation in this case.

34.  Had Mr Lam himself not given evidence of the value of the subject matter of the contract in his witness statement, I would have had no hesitation at all in giving the leave to Mr Burns to support his application for costs with an appropriate affidavit containing the necessary evidence.  It was a fact known to all of the parties and there would have been no prejudice at all to Mr Lam.

35.  Mr Hui’s suggestion that s 52(1)(d) requires the assessment of the value of the damages due to the breach is simply wrong.  Just as the jurisdiction of the District Court in relation to immovable property is determined in relation to a fixed annual rent or rateable value sum, the jurisdiction in relation to matters of contract is determined by the value of the subject matter of the contract.  It is not determined by the damages sought for the breach of that contract, whatever form that breach might take.

36.  Mr Hui placed reliance upon the decision of Suffiad J. in Windix Industries Ltd v Telesonic Enterprises Ltd & Anor, (Unreported HCA 1274/2007, 28 November 2008), a case in which an injunction was sought in the High Court for breach of copyright, where upon the plaintiff accepting a payment of $100,000, and applying the principles in Lai Ki, the judge fixed costs on the District Court scale. 

37.  Mr Hui’s reliance on the authority was entirely misconceived.  There was no suggestion in Windix that the value of the subject matter of the contract at issue exceeded $1 million.  There was simply no suggestion that s 52(1)(d) might have been a bar to the proceedings been commenced in the District Court.  That issue did not even feature in the argument.  The decision is nothing more than an example of the application of the principles in Lai Ki which result in a plaintiff who succeeds in damages in a sum within the District Court jurisdiction of $1 million, being required to justify the commencement of the proceedings in the High Court.

38.  For these reasons I reject Mr Hui’s submission that these proceedings could have been commenced in the District Court.  As proceedings involved a contract where the amount of the value of the subject matter of the contract exceeded $1 million, they were plainly properly commenced in the High Court.

The Lai Ki principles:

39.  In case I am wrong in that respect, Mr Burns invited me to consider the principles in Lai Ki to determine whether or not, in the circumstances of the present case, I should award costs on the High Court scale.

40.  I am satisfied that the plaintiffs were entirely justified in commencing these proceedings in the High Court.  The fact that the proceedings have ultimately been settled, in so far as monetary claims are concerned, in the sum of only $200,000 does not satisfy me that when the proceedings were commenced there was a reasonable prospect of obtaining an award in excess of the District Court jurisdiction.  To the contrary,  having regard to the value of the Share Sale Agreement and the nature of the restraints that flowed from it, this was always a High Court case.

41.  The potential loss consequent upon the breach of the restraints for which injunctions were sought and the potential disclosure of confidential information plainly gave rise to a claim in excess of $1 million.  The case involved a deliberate and blatant attempt by Mr Lam to steal confidential information from his employers, and to use that information, and his employers property, the HRIS.NET software, in competition with his former employers.  That it was deliberate and blatant has been established by the e-mails, which are unanswerable, and by Mr Lam’s conduct in relation to copying of the hard drives.

42.  From the way in which Mr Lam conducted himself, both prior to the litigation arising, and through the course of litigation, the plaintiffs had every reason to believe that they may have a very substantial damages claim against Mr Lam.  The copying of data, and the refusal to reveal what had been copied, plainly entitled the plaintiffs to reasonable believe that there had been a significant breach of the restraints, and an extensive breach of Mr Lam’s fiduciary duties to his employers in respect of trade secrets.

43.  Apart from that, the very fact that the subject matter of the contract giving rise to the restraints breached, and the potential breaches of confidential information, had been valued in excess of $25 million, was enough by itself to justify the commencement of the proceedings in the High Court.

44.  It is nothing to the point that the matter was ultimately settled for $200,000.  Having regard to the continued refusal of Mr Lam to produce the hard drive to which the data was copied, and which would have been plainly damning evidence against him, the monetary resolution together with agreements in relation to the injunctions may be seen simply as a commercial decision on the part of the plaintiffs.  As is so often the case in breach of confidentiality cases, Mr Lam, as the defendant, took advantage of the obligation of the plaintiff to prove that confidential information had been taken.  By effectively thwarting the discovery order, and failing to produce the hard drive, it was difficult for the plaintiffs to establish just what had been taken from them.

45.  Even on the application of the principles in Lai Ki, it is not the end result determines the issue, but whether or not the plaintiff was justified in commencing, and continuing, the proceedings in the High Court.  I have no doubt in this case that that was an entirely justified decision on the part of the plaintiffs.

Should the award of costs be reduced:

46.  Mr Hui’s argument in this respect was that the plaintiffs did not achieve all that they had sought to achieve in respect of the restraints, and that accordingly they should not be awarded their full costs. 

47.  It is not necessary for a plaintiff to achieve precisely everything that he seeks from a defendant in order to be entitled to costs.  If he gains “substantially” everything he seeks, so that he has “in effect” gained what he came to get, he will be entitled to costs.  The words shown in quotes, are the words used by Rogers J. (as he then was), in Nice Gain Enterprises Ltd & Anor v Chinese United Establishments Ltd & Anor, (Unreported, HCCW 391/1994, 5 October 1995).

48.  First, Mr Hui said that in relation to the C & T injunctions the duration of relief sought was:

“… until 30^th September 2010 alternatively 30^th September 2008, or such further or other period as the court shall deem fit…”

The injunctions agreed in relation to C & T were to 30 September 2010.  C & T achieved all that it sought to achieve, and cannot be criticised for having proffered lesser alternatives in its pleading.  To suggest that somehow the lesser alternatives were not achieved is baseless.

49.  In respect of the IPL injunctions, the relief were sought until 30 September 2008.  In fact the customer non-compete injunction to which Mr Lam agreed, extends to 30 September 2010.  IPL achieved more than it originally sought.

50.  Next, Mr Hui relied upon what can only be described as agreed fine tuning by way of clarification in relation to the C & T customer non-compete injunction, which he argued resulted in less than that which was originally sought.  The argument is misconceived.  The clarified injunction is all that C & T ever needed or could have sought.  That the phraseology in the pleading was fine tuned and clarified does not make it substantially less than that which was claimed, so as to justify a denial of all of the plaintiffs costs.

51.  I am quite satisfied that, in so far as the injunctions are concerned, the plaintiffs have got substantially everything that they sought, and that there is no justification, as a result of the very minor changes from the prayers for relief, which resulted in the terms of settlement, that would justify a reduction in costs.

The Elgindata principles:

52.  Mr Hui finally contended that the Re Elgindata (No. 2) [1992] 1 WLR 1207, principle, that a plaintiff who unsuccessfully raises issues which lead to a significant increase in the length of cost of the proceedings should not have all of his costs, should apply in this case.

53.  There is no scope at all for this argument.  Mr Hui did not identify any particular issue which ought not to have been raised by the plaintiffs.  The nearest his argument came was to say that the plaintiffs have been uncooperative towards resolving matters ought to move towards any meaningful settlement until 18 May 2009.  In the light of Mr Lam’s continued refusal to make available the personal hard drive to which he had had data copied, the plaintiffs were perfectly entitled to view his conduct with the greatest suspicion, and to press the matter towards trial rather than to seek settlement.

Conclusion:

54.  For the foregoing reasons I was satisfied that the appropriate order to make the costs was an order that Mr Lam must pay the plaintiffs costs of the proceedings on the High Court scale, with no reduction, and with a certificate for two counsel.