XCHRX ESNAT AVON v. MARGARET SULLIVAN

1993, No.A2833

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is the worst form of litigation that any judge should have to decide. It essentially started off as an action for the redemption of some shares, which were held under a mortgage, relating to the sale of a very small business in Hong Kong - an employment agency - run by a Mrs Sullivan ("the defendant"). It has turned into a mammoth, and I am sure a very expensive type of litigation with a counterclaim by the defendant both for monies that have been paid and also for inducement to breach a contract with the company and a counterclaim to a counterclaim. It has taken four years to get to trial. There has never been any attempt, as far as I can see at the moment, although no doubt I would be told later, that the parties should have put their heads together.

2. On this particular issue, it is a sum of $100,000 odd. That would have gone probably on photocopying charges. Everything started off badly because the agreement is drafted like a very expensive commercial operation of several billions of dollars instead of a simple agreement. When I see things like the definition of Hong Kong dollars means the lawful currency of Hong Kong, I realise how lawyers can make simple matters difficult. There should have been a simple agreement between the parties instead of the very complex commercial type agreement extending over some 12 pages. It really is absurd for parties to contract in this method.

3. This was a very small business, in Hong Kong terms, that Mrs Sullivan wanted to sell to Mrs Avon. The sum of money was $1 million plus two dividends. One would have thought that is a very simple matter but what this has involved is three days of court hearing, a large number of documents and an accountant having to give evidence. This could have been decided in half an hour by an independently appointed accountant had the parties not been obdurate in their attitude.

4. As far as the parties are concerned, Mrs Avon has had some college experience of accountancy. I am sure she is a very good business lady, unfortunately she did not have enough money basically.

5. The agreement contemplated the payment of a capital sum of $1 million split into four instalments. The first was payable on the signing of the agreement, the second was due the next year and she did not have enough money to pay the balance because she had incurred certain matters on behalf of her company which was called D.E.U.X. (its original name) which was the employment agency company. What she did was to write a letter, which can be found in the bundle, instead of sending off $250,000, she sent off a lesser sum of money. The agreement contemplated payment of dividends in accordance with a formula and the important matter was that there should be a completion balance sheet. This is defined and it would have been prepared sometime after 31 March 1990, going back some seven years now and two months or so was given for the preparation. That was never prepared. So from the very outset, this financial provision that Mrs Avon was under has been in a complete mess. There was no completion balance sheet, she did not pay the sum when it was due and eventually the parties, Mrs Sullivan and Mrs Avon, have fallen out because Mrs Sullivan had been kept on as manager and Mrs Avon dismissed her. That is another part of this marathon litigation which is now going on.

6. I have decided and the parties agreed that it was much simpler and indeed hopefully would save some time - the matter has taken three days - to discover first of all what monies have been paid under the agreement and what monies should have been paid. As I said I would have thought that one could have done that in half an hour, but it has been caused essentially by the attitude of Mrs Avon who has a unusual view of accountancy practices. She has, in my judgment, very stubbornly maintained that she must be right. I have heard, seen and watched the parties giving evidence, and when I compare her evidence with the evidence of Mr Broadley who is an independent accountant called by the defendant to examine the accounts, I have no doubt at all that I much prefer the evidence of Mr Broadley. Mrs Avon's evidence is highly suspect in my judgment. Because there was no original completion balance sheet so the parties have had to, as it were, job backwards.

7. I accept the method and mathematics of Mr Broadley both in the calculation of the capital and dividend payments.

8. The figure they took to start off this mammoth exercise was a figure of $130,000 odd. I therefore wonder what on earth the object of this litigation is. On the defendants' counterclaim, in my judgment, she is entitled to $129,540. That should have been paid by 1 April 1993. The defendant is entitled to interest as from 1 April 1993 at 10% to today's date and until this amount is paid, she is entitled to interest at judgment rate.

(Further Submissions)

Date of judgment: 17 March 1997 (2^nd Part)

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J U D G M E N T

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9. This is the second part of this unfortunate litigation concerning the other part of the counterclaim where the defendant Mrs Sullivan alleges that she was wrongfully dismissed by the Company who are the defendant and also Mrs Avon. I am dealing solely with the Company at the moment which, on evidence that is uncontradicted, unlawfully terminated her agreement and she is entitled to damages.

10. The damages have been set out. However, on the damages, I disallow the items for expenses. In my judgment, the contract presupposed that there would be a refunding of expenses, in other words they had to be incurred. I therefore disallow the sum of $219,581.44 and the total on the summary of amount claimed in Schedule 1 is therefore $829,616.86. The bonus calculation has been set out. Although Mr Broadley has not been recalled to prove it, it saves expense and time, I am prepared to accept that that was the appropriate method of dealing with this. Therefore there will be bonuses of $163,702. So the damages would be the addition of these figures which comes to $993,318.86. I therefore enter judgment for the defendant against the Company, i.e. Tansea Services Company Limited, for that amount of money.

11. There is another claim and as I said this is a very unfortunate litigation. I appreciate the views of the parties. Mrs Avon considers that she had paid the correct amount, but I have found she has not. It is a great pity that she did not recognise at an earlier date that her accountancy was somewhat suspect. Equally Mrs Sullivan has pursued a claim against Mrs Avon personally which, in my judgment, was always bound to fail. It is a great pity it was not struck out a great deal earlier and substantial costs would have been saved. However the burden is on Mrs Sullivan to prove that in some way Mrs Avon could possibly be liable. The pleading is a generalised pleading. There is no doubt that the director of a company can be liable for the tortious act of the company : see Green Cartridge Co. (HK) Ltd. & Anr. v. Canon Kabushiki Kaisha [1996] 2 HKC 180 and the citations from the authorities there cited.

12. This however is different. This is said to be a breach of contract by the Company, not a tortious act at all. It is a contractual breach. In my judgment Miss Chow is correct when she sets out in a very well prepared skeleton submission that the director would not be liable, otherwise it would mean that a director was always liable for a contractual breach, e.g. on the sale or supply of goods, the director would always be liable. The general proposition is found in Palmer's Company Law Vol.2 8.601 which says :

"The directors who have duly acted on behalf of the company are not personally liable to the contracting party even if the company's failure to carry out the contract is due to the fault of the directors, ....."

I find no assistance in the authorities regarding the act of third parties or strangers who caused a breach of contract. That is not the position here. I can find nothing on the pleading, which is particularised, to show that this was not within the scope of the authority of Mrs Avon, it clearly was.

13. In my judgment, there was never a cause of action against Mrs Avon. I would strike it out under O.18, r.19A. I would also strike it out in my inherent jurisdiction at any rate. As I said this case has taken many many years to come to trial, it has been bedeviled by a substantial volume of unnecessary paper and I appreciate the parties have had legal advice, it seems to me that both parties have taken a rather stubborn attitude towards their particular causes. That, of course, is their right to have matters litigated but unfortunately the general rule is that losing parties to anything have to pay the costs. I should now hear argument as to costs.

[Argument on Costs]

14. As I have said on the first day, no doubt I have interrupted on a number of occasions in the hope that it would be helpful rather than hindering justice being done, it is a great pity that the parties have not recognised the weaknesses in their own cases. As I said, I think Mrs Avon should have recognised that her accountancy principles were in error. I am sure she probably genuinely thought that they were not, but unfortunately I have found they were. Similarly, Mrs Sullivan who obviously wished to protect and preserve her own integrity, I am sure has been very dismayed by being unlawfully dismissed as I have held, but that was by the Company. As Mr Wright pointed out the Company which is a successful trading company appears to have gone dormant.

15. The orders that I make in the exercise of my discretion are as follows. In the defendants' counterclaim against the plaintiff for $100,000 odd, the defendants have their costs against the plaintiff personally on a common fund basis but not to include the costs of today's hearing and the costs of and incidental to the preparation of all of the bundles save that of the pleadings bundle and the core bundle. I make it on a common fund basis because of the provision in the agreement itself which talks about indemnity and in my judgment there has been intransigence on the part of the 1st defendant in dragging this case out. Those costs to be taxed if not agreed and the Taxing Master will understand the order that I make.

16. As far as the defendant's claim against the Company for the sum of money I have awarded, that will be costs to be taxed if not agreed. The judgment will have interest at the rate of 10% from 1 April 1993. I appreciate some of the items were prior, but I think it is fairer to make it from that date. The defendant to have judgment against the Company for the amount I have assessed with interest at 10% from 1 April 1993 to today's date and thereafter at the judgment rate. Such costs to be taxed if not agreed against the Company.

17. As far as Mrs Avon is concerned, she has been successful in one sense in that the legal position is that she is not liable. However, it appears to me as Mr Wright has said that a bulk of the costs had been incurred on behalf of the Company and therefore I am going to limit the costs which Mrs Avon is entitled to against the defendant as follows : Mrs Avon to have her costs against Mrs Sullivan for today's hearing, i.e. the costs of today, including the costs of the summons to strike out which, in my judgment, was properly brought but will not have any other costs. Such costs to be taxed if not agreed and to be set off against the costs due from the plaintiff to the defendant, in other words, whatever costs on my order, she will be entitled to set them off.