CLARKSON ASIA LTD v. TIMOTHY SCOTT HUXLEY AND ANOTHER

HCA 2074/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2074 OF 2006

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R U L I N G

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1.  The defendants applied by summons dated 14 May 2007 to strike out part of the Statement of Claim, for the 2^nd defendant to cease to be a party to the proceedings, and for variation of the undertaking given by the 1^st defendant and recorded in an order made by me dated 22 September 2006.  The plaintiff applied by summons dated 16 July 2007 to amend the Statement of Claim.  I allowed the plaintiff’s amendments, and now give reasons.  I reserved my ruling on the variation of the undertaking and will now deal with that also.

2.  The plaintiff, Clarkson Asia, is a shipbroking company and part of a larger group, the Clarkson Group.  The 1^st defendant, Mr Huxley, was employed by the Group for many years and was latterly the managing director of Clarkson Asia until he left on 3 June 2006.  He says that he intended to establish a shipping investment business and to this end he set up the 2^nd defendant, Mandarin of which he is one of two directors and beneficially owns 65% of the shares.

3.  Mr Huxley was contractually bound not to engage in shipbroking for a period of six months after his departure.  Nevertheless he, through Mandarin, engaged in shipbroking activities in respect of five vessels during the six-month period.

4.  The plaintiff issued proceedings for injunction and damages against Mr Huxley and for declaratory relief and an account of profits and ancillary orders against Mandarin and applied for an interim injunction.  The matter came before me at a call-over hearing on 22 September 2006 when Mr Huxley gave an undertaking that until 2 December 2006 or the date of the substantive hearing of the summons he would not compete with Clarkson, save that he was to be allowed to finalise the agreements in respect of the five vessels which were identified at Schedule A to the order.  In respect of this proviso, there was a condition that Mandarin pay all net brokerage commission received in relation to these vessels into an escrow account, not to be drawn on other than by agreement or order of the court, but subject to Mandarin’s right to withdraw up to $135,000 per month for its business expenses. 

5.  The summons was adjourned for substantive hearing before Chung J on 23 October 2006 but on 20 October the parties agreed to a consent order vacating the hearing and continuing the undertaking given by Mr Huxley.  The undertaking not to compete was continued up to 2 December 2006, but that in respect of the escrow account was continued until judgment in this action or further order of court.

6.  The vessels identified in the schedule to my order are the “Artena” (re-named “Majestic Unity”); the “Gateway Bulker”; the “Henza”; the “Nueva Union” and the “Shinyo Florentina”.  Mr Huxley in his second affidavit dated 11 May 2007 says that in respect of these vessels the net brokerage commission due to Mandarin is US$1,060,625.  However, payment of the US$432,500 payable in respect of the “Shinyo Florentina” has been delayed because of a dispute; Mandarin has to sue for it.  In his third affirmation dated 17 July 2007 he says that the balance in the escrow account is US$475,866.74.

Amendment of the pleadings

7.  The Statement of Claim was filed on 17 October 2006.  Apart from the injunction, the plaintiff claimed against Mr Huxley for damages for breach of contract.  Against Mandarin it claimed a declaration that Mandarin held and holds any commission, etc., arising from the breach as a constructive trustee on trust for Clarkson’s benefit and that it was liable to account for such commission etc.  It also claimed an account and tracing inquiry.

8.  In the proposed Amended Statement of Claim the claim against Mr Huxley for damages for breach remains.  However, against Mandarin the equitable claims go out.  Instead there is a claim for interfering with the contractual relationship between Clarkson and Mr Huxley, and averments of conspiracy between the defendants and unjust enrichment as a result of that and the breach, as well as a prayer for payment out by Mandarin of all commissions or payments made to it in consequence of the breach, the interference, the conspiracy and the unjust enrichment. 

9.  Apart from taking issue with particulars given “before administration of interrogatories and/or discovery” because discovery has now been completed, the defendants’ objection is to the averments of conspiracy which appear at the new paragraph 11A and to any pleadings consequential thereon.  The plaintiff avers that Mr Huxley and Mandarin “wrongfully conspired and combined together to injure the plaintiff and or to cause loss to it by unlawful means”.  The particulars given are:

“	Before administration of interrogatories and/or discovery the best particulars the plaintiff can provide at this stage are as follows:
	(1)	The 1st and 2nd defendants carried out the shipbroking activities pleaded in paragraph 8 above.
	(2)	The said activities were, to the knowledge of 1st and 2nd defendants, in breach of the 1st defendant’s Employment Agreement with the plaintiff.
	(3)	In consequence of the said shipbroking activities, commissions became payable or were paid to the 2nd defendant who in agreement with the 1st defendant paid or caused to be paid the same or part thereof to the 1st defendant and/or held or holds the same or part thereof on account of the 1st defendant.”

10.  The defendants’ objection to the averments of conspiracy is that no agreement to form a conspiracy or steps taken in furtherance thereof is identified as having taken place.  Any agreement or combination which forms the basis of the conspiracy would have to be made between Mr Huxley and Mandarin but he is the controlling mind of Mandarin and he cannot conspire with himself.  The defendants rely on R v McDonnell [1966] 1 QB 233 in which it was held that a criminal conspiracy between a one-man company and its sole controller is impossible because an agreement between two minds cannot be found.  It is argued that the position cannot be any different in a civil action.  They also rely on the following passage in the judgment of Bokhary JA in the Hong Kong case of Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co. Ltd & Ors [1994] 2 HKC 264 at 272:

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Only one defendant, the fifth, is alleged to have uttered the statements said to be misrepresentations.  The making of misrepresentations by one person does not require any agreement; and it does not show that any agreement has been made.  That being so, failure to correct them does not require any agreement; and it does not show that any agreement has been made.

There is no act save on the part of one alleged conspirator.  And one person alone cannot conspire.  It is not suggested that the fifth defendant could have conspired with Wheelock Marden if he did not conspire with the other individual defendants.  If none of them conspired, and then Wheelock Marden could not have conspired with him.  Its only mind would be his.  That would mean one mind only.  And it takes at least two minds to conspire.”

11.  The plaintiff however points to a comment in Clerk & Lindsell on Torts, 19^th Edition §25-119 that the same result reached in R v McDonnell might not be reached in a civil action where the controller had used the corporate machinery in what was alleged to be a conspiracy to injury.  Reference is made there to the New Zealand case of Lee v Lee’s Air Farming Ltd [1961] AC 12, PC, and the Irish case of Taylor v Smith [1991] IR 142, Ir. S. Ct. 

12.  Where it is sought to strike out pleadings the party applying has to show that they are unarguably bad; Ho Francesca v Tsai Kut Kan (No. 1) [1982 1 HKC 382, CA.  Unless they are unarguably bad — if the plaintiff has an arguable case on conspiracy — the amendment should be allowed.

13.  Mandarin was, of course, a separate entity from its directors, of which it had two, Mr Huxley and a Mr Fairclough.  It necessarily acted through its directors; a company can act in no other way.  Prima facie the controlling mind and will of Mandarin would be found in the two directors acting as the board.  If Mr Huxley says that his and no one else’s was the controlling mind, that must be a matter for trial.  I do not see how pleadings of a conspiracy between one director and the company, in circumstances where there are two directors can be said to be unarguably bad.

14.  I think the Aktieselskabet case can be distinguished, because it dealt with the situation where alleged misrepresentations were made by one conspirator.  No agreement was needed with others to make them.  But some agreement was needed here, for Mr Huxley to use Mandarin in the way he is alleged to have done and it cannot be said at this stage that there is no case that an agreement was made between Mr Huxley and Mandarin.

15.  For these reasons I allowed the amendments.

Variation of the Undertaking

16.  The defendants seek to vary the undertaking so as to release Mandarin from paying into the escrow account any further net brokerage commission received and to allow the entire current balance to be paid out to it, or alternatively that 10% of the net brokerage commission paid or payable be kept in the account and the balance, including interest, be paid out to Mandarin.  In argument, the second alternative was chosen.

17.  I do not think there is any dispute that where an undertaking is given purely to maintain the status quo pending a substantive hearing, it may be varied without much difficulty, but where it is given “until trial or further order”, the variation is not appealable and the party who has given the undertaking must apply to the court to vary it on a specific ground, usually changed circumstances making the continuation of the undertaking unnecessary, oppressive or unjust.  See Secretary of State for Trade and Industry v Bell Davies Trading Ltd & Anor [2005] 1 BCLC 516, in particular the judgment of Mummery LJ at paragraph 104.

18.  Here the undertaking was given subject to being reviewed at the substantive hearing of the application for interim injunction.  However, there was no substantive hearing.  The parties consented to vacate it and by consent the undertaking was continued until judgment in this action or further order.

19.  There was some argument on this point, but I do not see that there can be any doubt that the undertaking is now one which was intended to continue until the trial, so the defendant must show specific grounds making the continuation of the undertaking unnecessary, oppressive or unjust.

20.  The defendants rely on the change in the case against them as providing those grounds.  It is said that the plaintiff only relies on post-termination restraints against Mr Huxley in the employment agreement.  There is no claim for breach of fiduciary duty or duty of fidelity and so all it can recover is common law damages for the breach, the measure of damages being the loss to the plaintiff.  Now that the case has been amended, the plaintiff does not seek an account of profits from Mandarin either.  As Mr Scott QC SC put it, we have moved from the Chancery to the Queen’s Bench Division.  All that the plaintiff can recover from Mandarin is damages arising out of interference with the contract, conspiracy or unjust enrichment.  Again the measure of damages is the loss to the plaintiff.

21.  The defendants’ case is that the damages, if liability is proved, will have to be assessed on the basis of putting Clarkson into the position in which it would have been but for the breach.  In circumstances of competition by an ex-employee it is usually not possible to show that the work would definitely have been placed with the ex-employer so the court will evaluate the chance of which the ex-employer has been deprived.  This is normally expressed as a fixed percentage of the maximum profit.  Reference is made to Brearley and Bloch, Employment Covenants, p.15.7 and to a number of decided cases.

22.  Essentially the defendants say that even if the defendants had not been involved in the transactions involving the five vessels, Clarkson would not have been involved either.  It would therefore not have earned any commission at all.  In this sort of situation the best the plaintiff can hope for is a nominal amount such as 10% of the net profits; cf. IDC v Cooley [1972] 2 All ER 162.  On that basis they want the amount in the escrow account reduced to 10% of the net profits, i.e. US$106, 625 or its equivalent.  But in any event, they say, the plaintiff’s holding company has already received US$183,500 credit in respect of the transaction for the “Henza”; this was as a result of the defendants’ efforts and should be set off.  They also make reference to the exhibit referred to in the last paragraph of Mr Huxley’s third affirmation and in the light of these two matters they say that the plaintiff is already over-protected.

23.  Mr Scott also refers to the principle that in determining the limit for Mareva relief, the court will consider for how much the court has a good arguable case.  This is of course not a Mareva injunction; it was an application for restraint of competition which was forestalled by the undertaking.  The undertaking was made voluntarily and I do not see that the same duty rests on the court to police it as rests on the court where circumstances change after a Mareva order. 

24.  The defendants, during the six months in which Mr Huxley was contracted not to undertake brokerage work, made the undertaking in order, presumably, to avoid having the court grant an injunction, or at least in order to avoid having a hearing on the same.  That was the position when they came before me in September last year and it was the same when they were to have come before Chung J in October.  By then they knew what their case was and if they wanted to argue this point they could have done so.  Now, it seems to me, I have to exercise discretion and in doing so I have to ask myself whether the freezing of the money by the existing undertaking until trial is unnecessary, oppressive or unjust.

25.  The defendants argue that I should now assess the likely outcome of the trial.  It does not seem to be argued that the plaintiff is unlikely to succeed on liability; rather the emphasis is on quantum.  In fact the change in circumstances relied on is more technical than real.  Though quantum will be based on the loss to the plaintiff rather than the profits made by the defendant, either way the court will have to decide, after hearing evidence, on a percentage of the brokerage fees received or to be received by Mandarin.

26.  This is not a Mareva case, where, in circumstances of a draconian order against the defendants, the court must decide for how much the plaintiff has a good arguable case and should reduce it on appropriate evidence being given.  Rather it is an application by the defendants for discretionary reduction of an undertaking which they were ready enough to give when they thought it necessary. While Mr Huxley gives a lot of evidence as to why the plaintiff would not have got the brokerage in any event, all this is contested and there is contradictory evidence from the plaintiff’s side.  What damages the plaintiff will get is a matter for the trial court on consideration of that evidence.  It is not necessarily going to be a nominal amount.  In this connection I note that the various cases on assessment of damages for loss of chance to which I have been referred were all decided after trial.

27.  I do not see that the undertaking is any less necessary now than it was at 20 October 2006 when the defendants agreed to continue it until judgment or further order.  Nor do I see that the defendants will suffer any more oppression or injustice now as a result of the undertaking, than they did when the consented to its continuation. 

28.  The defendants’ application to vary the injunction is dismissed.

Costs

29.  I have heard counsel on costs and although this ruling is to be handed down I will make a final order now.  In respect of the summons to amend, the costs of occasioned by the amendments will be to the defendants in any event, but the plaintiff having succeeded in the contested application will have the costs of the hearing in any event.  See Hong Kong Civil Procedure, paragraph 20/8/51.  As to the application to vary the undertaking the costs will follow the event and be to the plaintiff in any event.  The plaintiff will have a certificate for two counsel.