LEE MOSES v. CHEUNG TAK MAN DESMOND

DCCJ 4787/2019

[2021] HKDC 945

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4787 OF 2019

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DECISION

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INTRODUCTION

1.  In this action, Mr Moses Lee (“Mr Lee”), sues the defendant, Mr Desmond Cheung (“Mr Cheung”), for an outstanding sum of HK$1 million, which Mr Cheung agreed to pay under an Agreement dated 7 July 2016 (“the Agreement”).

2.  By a summons dated 11 January 2021, Mr Cheung applies for a transfer of this action to the Court of First Instance to be heard together with the High Court Action 2413/2018 (“the HC Action”).  This summons was fixed to be heard before me on 27 July 2021. The main ground of this application is that the present action and the HC Action involve a common question of fact which is beneficial to be resolved in a single set of proceedings.

3.  In this application, Mr Cheung is represented by Ms Maggie Wong SC, leading Mr Dexter Leung. Mr Lee is represented by Mr Gavin Wan of counsel.

BACKGROUND

4.  The parties herein are former partners of a solicitor firm acronymised as LWLWIC[1]. The firm was formed in 2008 by the merger of two solicitor firms, acronymised as LWL and WIC respectively [2]. The composition of the firm’s partnership underwent several changes over the years[3].

5.  By a Partnership Deed dated 17 December 2010, a partnership (“the 2011 Partnership”) was formed.  The partnership consisted of 6 partners, including Mr Lee and Mr Cheung[4].

6.  Subsequently, various disputes arose among the partners of the 2011 Partnerships[5]. A Settlement Agreement was entered in May 2015[6]. In that agreement, there were terms of settlement of the dispute among the partners, as well as clauses relating to certain management issues.  It was further agreed that the 2011 Partnership would be dissolved by September 2016[7].

7.  Mr Cheung did not want LWLWIC to be dissolved.  According to him, LWLWIC was appointed as the solicitors for a developer in an estate development project and received a large sum of money as stakeholder from the purchasers.  If LWLWIC was to be dissolved, the money would have to be transferred to another law firm, and that would cause a considerable disruption to the project, resulting a substantial loss to the firm[8]. Mr Cheung also wished to keep the name of the firm as a going concern because it was established by his later father, Mr W I Cheung[9]. In such circumstances, he endeavored to persuade other partners (including the plaintiff) to continue the operation of the legal practice under the name of LWLWIC[10].

8.  While I will set out the events leading to the execution of the Agreement in the later part of this decision, suffice it to note at this juncture that, according to the Agreement, Mr Cheung agreed to pay a total sum of HK$3 million to Mr Lee in 6 instalments “in consideration of [Mr Lee’s] agreeing to execute the Retirement Deed”[11].

9.  Mr Cheung made two instalments in performance of the Agreement[12], but failed to make the third and fourth payments when they fell due.  Mr Lee commenced the present proceedings claiming against Mr Cheung for these two outstanding instalments of payment, in a total sum of HK$1 million[13]. This action does not concern the fifth and final instalments.

10.  In his Defence, Mr Cheung admits that the Agreement was entered between the parties.  He however avers that the Agreement was related to the 2011 Partnership[14], and that, according to a well-established legal principle, a partner does not have an action at law to recover monies due from his fellow partners otherwise than by the taking of an account of equity after the dissolution of the partnership[15]. Due to some dispute among the partners, the final account of the 2011 Partnership has yet to be settled[16]. Mr Cheung therefore says that unless and until the said final account is settled, no amount relating to the 2011 Partnership shall be due by the defendant to the plaintiff[17].

11.  In the Reply, Mr Lee denies that the Agreement was a matter arising from and out of the firm[18]. He avers that, since the Agreement was entered in the parties’ personal capacity, the legal principle stated in the Defence does not apply[19].

HCA 2413/2018

12.  As noted in the beginning of this decision, Mr Cheung says that there is common question of facts between this action and the HC Action. It is therefore necessary to consider that action in details.

13.  The plaintiffs in the HC Action are Mr Lee and a Mr Lam Siu Sun Dennis, another partner of LWLWIC.  Mr Lam was also a partner of the 2011 Partnership. The 1^st defendant therein is Mr Cheung, and other defendants include another partner of the 2016 Partnership, Mr Cheung’s assistant, an account manager, a clerk, and an associate solicitor (later a consultant) of the firm[20]. Accordingly, only the plaintiffs in the HC Action and Mr Cheung are partners of the 2011 Partnership, and other defendants therein (except a Mr Tam Man Chu (“Mr Tam”), the clerk, who is alleged to be a de facto partner[21]) are not related to the partnership.

14.  Insofar as the claim against Mr Cheung is concerned, it is averred that Mr Cheung had caused certain unauthorized transfer of money from various clients’ account of LWLWIC to office accounts of the firm[22]. It is alleged that Mr Cheung first caused LWLWIC to purportedly issue 172 bills to various clients of LWLWIC and the said bills were falsified, and not genuine.  The bills were signed by Mr Cheung personally[23]. Mr Cheung then caused some cheques to be issued from various client’s accounts of LWLWIC to purportedly settle the said 172 bills[24], and later caused a cheque of HK$3 million to be issued in his favour out of an office account of the firm[25]. The plaintiffs in the HC Action claim against Mr Cheung for account of all dealings by him in LWLWIC’s office accounts, as well as for damages and/or equitable compensation for loss and damage found to be caused to them[26].

15.  Essentially, Mr Cheung’s defence in the HC Action is that the relevant office accounts were operated as accounts containing monies that belong to the former partners of WIC before the merger, even though the accounts were held under the name of LWLWIC[27]. He admits that the said 172 bills contained incorrect dates with no bill numbers[28]. He denies that he had deliberately falsified the said bills[29], and claims that he had taken steps to rectify the errors and irregularities[30]. He denies that he owed any duty to the plaintiffs in the HC Action to account for the office account containing the pre-merger monies[31]. He also relies on the Settlement Agreement entered in May 2015 whereby the plaintiffs in the HC Action had waived, compromised, and settled all claims which they had against him[32].

TRANSFER OF PROCEEDINGS

16.  In the present application, Ms Wong SC first refers me to s 42 of the District Court Ordinance.  The section provides that the District Court is empowered to transfer to the Court of First Instance all or part of any action or proceedings before it which are within the jurisdiction of the Court of First Instance.  She also refers to the Wong Yu Cho Rolly case[33], where HH Judge Marlene Ng (as her Ladyship then was) held that the District Court will order a transfer if the Court considers it beneficial for all disputes to be ventilated and resolved in one set of proceedings.

17.  At the hearing, Ms Wong SC raised the following grounds in support of the present application for transfer:-

(1)  The Agreement clearly relates to the HC Action, as it was explicitly stated that the Agreement was made “in consideration to execute the Retirement Deed …”.

(2)  Mr Lee knew the intention of the Agreement was for him to execute the Retirement Deed to bring about the dissolution of the 2011 Partnership and with a view to continuing the legal practice in the name of LWLWIC by way of the 2016 Partnership.

(3)  It is untenable for Mr Lee to argue that he entered the Agreement in personal capacity, instead of his capacity as a co-partner of LWLWIC.

(4)  Nor is it tenable for Mr Lee to suggest that the Agreement is a stand-alone document.  In this respect, Mr Wong SC submits that there was indeed a series of transactions (including the Loan Facility Letter[34] offered by Mr Cheung and Mr Tam, and the memorandum[35] signed by both Mr Cheung and Mr Tam) that had taken place on the same day when the Agreement was executed.

(5)  The final account in respect of the 2011 Partnership has not yet settled.  In this respect, Ms Wong SC refers me to Mr Cheung’s affirmation to set aside statutory demand[36]. In that affirmation, Mr Cheung deposed that he had paid the tax on behalf of the firm for the year 2016/2017, for which other partners (including Mr Lee) should indemnify him.

(6)  The main defence of Mr Cheung to the present claim, as well as the main ground of the present application, is based on the principle that amount owing by a partner to another partner is not recoverable at law as if it is a simple claim for damages arising out of a single transaction, but only recoverable by the taking an account in equity.  For this proposition, Ms Wong SC refers me to the passages of Madam Justice Le Pichon JA and of Mr Justice Lam J (as Mr Justice Lam PJ then was) in the Heybridge Ltd case[37], the passages of Lord Millett in Hurst v Bryk[38], as well as the passages of Deputy High Court Judge Poon (as the Chief Judge then was) in the Christine Koo case[39]. I observe at this juncture that these authorities appear to have concerned the rights, entitlements, liabilities that arose upon the dissolution of a partnership[40], but were silent in respect rights, entitlements, liabilities, or obligation arises from other sources.

18.  Mr Wan raises the following two points in response:-

(1)  The determination of the HC Action is not a pre-requisite for taking of an account in equity of the 2011 Partnership.  The said equitable accounting has no bearing in the court’s decisions in either the present action or the HC Action.  He submits that Mr Lee has not in the present action pleaded matters in relation to the equitable accounting of the 2011 Partnership.  If the Court eventually finds in favour of Mr Cheung and holds that the Agreement is not enforceable unless and until the final account of the 2011 Partnership is settled, Mr Lee’s claim in this action may well be dismissed, as the Court did in the Ho Lai Ming case[41]. Accordingly, the principle regarding equitable accounting of partnership will not assist Mr Cheung’s case for the transfer of proceedings to the Court of First Instance.

(2)  Further, the Agreement does not relate to the partnership affairs and has no causal link with other transactions as mentioned by Ms Wong SC.  The sums owed by Mr Cheung to Mr Lee do not form parts of any assets or liability of the 2011 Partnership.

DISCUSSION

(1) Common questions of fact and/or law?

19.  Mr Cheung stated in his first affirmation that “a common question of fact arises in this action and [the HC Action].  Unless and until the dispute relating to the 172 Bills and [and the impugned transactions] is resolved, the final accounts of the 2011 Partnership cannot be taken.”[42]. The same was repeated in the skeleton submissions made on his behalf[43].

20.  At the hearing, when asked what the common question is exactly, Ms Wong SC refers me to the Statement of Claim of the HC Action.  It is submitted that the alleged unauthorized transfers were made at approximately the same time when the Agreement was entered.  It was also mentioned there that there was arrangement between Mr Cheung and Mr Tam for the purpose of financing the sum of HK$3 million payable under the Agreement.

21.  I am not persuaded by Ms Wong SC’s argument.  With all due respect, even if I accept that there are some factual matrices overlapping between the present action and the HC Action, it does not necessarily follow that there are common questions of facts between the two actions. Nor can I see any relevancy to the issue in this action as regards the way of financing relating to the sum which Mr Cheung promised to pay to Mr Lee.

22.  In my judgment, the fallacy of Mr Cheung’s statement (as quoted in [19] above) is that it confuses a necessary condition with a sufficient one.  While it may be true that the resolution of the dispute relating to the 172 Bills and the impugned transactions is a necessary condition of finalizing the equity account of the 2011 Partnership, it is clearly not a sufficient condition of the same.  This is simply because, as Ms Wong SC mentioned at the hearing, there are other liabilities (such as the firm’s tax liabilities[44]) that need to be taken into account in order to finalize the equity account of the 2011 Partnership. There is no guarantee that the final account of the 2011 Partnership will be settled once the the disputes in the HC Action are resolved.

(2) Beneficial to have all disputes resolved in one setting?

23.  Another ground raised by Ms Wong SC in support of this application is that it is beneficial to all parties that all disputes are to be resolved in a single setting, namely in the HC Action.  I also have difficulty in accepting this submission.  This is because, even if I accept that the dispute in this action cannot be resolved unless and until the final account of the 2011 Partnership is settled, I do not see it beneficial to have the dispute in this action resolved in the setting of the HC Action.  I will explain why that is so.

24.  First, it is observed previously that the parties in the HC Action and the partners of the 2011 Partnership do not overlap.  The parties in the HC Action are partners of the 2016 Partnership and staff of the firm.  In this circumstance, it is hard to see how the involvement of such unrelated parties of the 2011 Partnership would be beneficial for the resolution of dispute between Mr Lee and Mr Cheung, or for the settlement of the final account of the 2011 Partnership.  Ms Wong SC responds at the hearing that Mr Cheung had no control as to whom the plaintiffs in the HC Action were going to sue. Be that as it may, Mr Cheung remains to bear the burden to demonstrate that it is beneficial to have all disputes resolved in the setting of the HC Action. In my view, Mr Cheung fails to discharge such a burden in the present case. Clearly, unnecessary costs may be incurred by the parties who were unrelated to the 2011 Partnership if this action is to be transferred to the Court of First Instance and be heard together with the HC Action.  There is no basis for me to accept that the transfer would achieve any procedural economy in resolving the disputes in either the present action or the HC Action.

25.  Secondly, and more importantly, I repeat my previous observation that the resolution of disputes in the HC Action is only a necessary, but not a sufficient, condition for finalizing the equity account of the 2011 Partnership.  From this perspective, it is not entirely correct to say that all disputes between the parties will be resolved in one setting if the present action is to be transferred to the Court of First Instance.  Undoubtedly, even if the dispute in the HC Action is resolved, further steps need to be taken in order to finalize the account of the 2011 Partnership.

26.  Accordingly, I am not able to see any common question of fact between the present action and the HC Action that can be conveniently resolved in one-go.  I also reject the contention that the present action ought to be transferred because it would be beneficial to have all disputes resolved in the HC Action. I do not find that there is a valid ground for transferring the present action to the Court of First Instance.

(3) The nature of the Agreement

27.  For the above reasons, I would refuse Mr Cheung’s application for transferring this action to the Court of First Instance.  Given this ruling, it is unnecessary for me to consider the parties’ submissions relating to the nature of the Agreement.  However, since both Ms Wong SC and Mr Wan had spent significant amount of time during the hearing in arguing this point, I would offer my observations as follows.

28.  Essentially, Ms Wong SC contends that the Agreement relates to the 2011 Partnership, whereas Mr Wan says on the other hand that the Agreement does not relate to any assets or liabilities of the partnership.

29.  With all due respect to both Ms Wong SC and Mr Wan, I find that the phrase “relating to” is too imprecise to be useful in the present context.  In my view, it is necessary to ascertain the true nature of the Agreement; and, to do so, it is in turn necessary to dive into the contemporaneous evidence to see the true intention of the parties when the Agreement was entered.  The negotiation leading to the execution of the Agreement is particularly telling, and I summarize it as follows:-

(1)  As I mentioned earlier in this decision, in about 2015, various disputes arose among the partners in relation to the 2011 Partnership.  A Settlement Agreement was entered, whereby it was agreed that the partnership would be dissolved by September 2016.  For reasons I have referred to above, Mr Cheung did not want LWLWIC to be dissolved.  He therefore endeavored to persuade some partners of the 2011 Partnership to remain as partners in the new partnership.  Mr Lee was one of these partners.

(2)  On 24 June 2016, Mr Cheung sent a draft Agreement to Mr Lee, whereby Mr Cheung stated that he would pay Mr Lee a total sum of HK$3 million in 10 instalments in 5 years “in consideration of [Mr Lee’s] agreement to execute the Retirement Deed … and on condition that [Mr Lee] shall continue to act as partner of the partnership pursuant to the Partnership Deed.”[45]

(3)  Mr Lee responded by stating that Mr Cheung had “[made] the whole thing wrong!”.  According to Mr Lee, the payment had nothing to do with the new partnership and should only be the consideration for the cancellation of the dissolution clause in the Settlement Deed[46].

(4)  Mr Cheung replied that he could see no reason why he should make payment for the cancellation of the dissolution clause in the Settlement Deed.  On the other hand, Mr Cheung said he could rationalize the payments on the basis of Mr Lee’s agreement to continue to act as partners because of his financial risks resulting from the split of the 2011 Partnership[47]. Mr Lee responded by simply stating that there was no point to continue the conversation[48].

(5)  Mr Cheung and Mr Lee stopped communicating with each other directly after Mr Lee’s said reply.  Others had stepped in to act as moderators between the two, and the exchanges (through the moderators) in respect of the draft agreements ensued.

(6)  At one point, it was proposed that the agreement was made “in consideration of [Mr Lee’s] agreement to execute Retirement Deed … and the Partnership Deed”[49]. The payment sum was proposed to be reduced to HK$2.5 million payable in 5 installations and the last two installments would be payable on the condition that Mr Lee was to remain as partner of the new partnership.  Apparently, this was not accepted by Mr Lee.  Eventually, the reference to the Partnership Deed was deleted[50], the payment sum remained at HK$3 million payable in 6 installments, but the last two installments would be payable on the condition that Mr Lee was to remain as partner of the new partnership.

(7)  In reply, Mr Lee counter-proposed that the last two installments remained to be payable in case of his retirement from partnership as a result of death[51]. This counterproposal was incorporated in the final version of the Agreement.

(8)  On 7 July 2016, Mr Lee executed the Agreement, together with other documents, such as the Retirement Deed, and the Partnership Deed.  It is noted that, according to its Recital, the Retirement Deed was executed to “avoid the dissolution of LWLWIC…”[52].

30.  My observations in relation to the nature of the Agreement are thus:-

(1)  As indicated in the contemporaneous evidence mentioned above, Mr Lee had made it quite clear that the payments stipulated under the Agreement were made for his agreement to execute the Retirement Deed (thereby canceling the dissolution clause in the Settlement Deed) only and had nothing to do with his entering a new partnership with Mr Cheung.  Accordingly, Mr Lee’s intention to execute the Agreement with a view to enter a new partnership with Mr Cheung is not as clear as Ms Wong SC has suggested – at least, it appears that certain contemporaneous evidence had pointed to the opposite.

(2)  Furthermore, the negotiation between Mr Cheung and Mr Lee appears to support the view that the Agreement was intended to be a collateral contract for Mr Lee’s agreement to execute the Retirement Deed.  If this is correct, Mr Cheung’s liability to pay arises after Mr Lee performed his obligation in executing the Retirement Deed, and not from the ascertainment of the assets and liabilities upon the dissolution of the 2011 Partnership.  As Mr Wan submits, this view is supported by the fact that Mr Cheung had made two instalments to Mr Lee notwithstanding that the final account of the 2011 Partnership is not yet settled.

(3)  The gist of the issue is therefore whether a collateral contract for the execution of a retirement deed can only be enforceable unless and until the final account of the partnership was settled.

(4)  Accordingly, the legal authorities relied upon by Ms Wong SC do not appear to me to be squarely on point. The main point is rather the legal principle as identified by Ms Wong SC should be extended to a collateral contract pertaining to the partnership. However, because neither Ms Wong SC nor Mr Wan has made any submission on this point, I would suspend my judgment about it.  I would simply proceed the basis that the issue is worthy of debate.

(5)  However, even if the issue is decided in Mr Cheung’s favour, it does not follow that the present case should be transferred to the Court of First Instance and to be heard together with the HC Action.  Other options are clearly open to him.  He can, for example, apply to strike out Mr Lee’s claim based on immaturity.  Alternatively, as I have suggested during the hearing, it appears to be equally apposite for him to apply for a stay of the present action pending the settlement of the final account of the 2011 Partnership.   

31.  For these reasons, I am not satisfied that there is a justifiable ground to have the present action transferred to the Court of First Instance.  I would therefore dismiss Mr Cheung’s application for transfer accordingly.

COSTS

32.  At the conclusion of the hearing, both Ms Wong SC and Mr Wan agree that costs should follow the event.  I would therefore order that Mr Cheung should pay Mr Lee’s costs of this application.

33.  Mr Wan supplies me with two sets of Statement of Costs on behalf of Mr Lee.  It was stated that Mr Lee’s costs amounted to a total sum of $84,585.50, whereas $14,769 of which was incurred for dealing with the Reply Skeleton Submission of the defendant.

34.  Having considered the statements, I find that there are rooms for reduction.  Particularly, there would be reductions in items C1, C2, C3, D1, and D2 of the first statement, and items C1 and D2 of the second statement, as they appear to me to be a bit excessive.  With due respect to Mr Wan, I am not prepared to allow his fees for conference with client in respect of the Reply Submission of the defendant, as I cannot see any justification for its necessity. The costs for the preparation of the statement of costs are also not to be allowed[53].

35.  On a broad-brush approach, I fix Mr Lee’s costs at $65,000.

DISPOSITION

36.  For the reasons as aforesaid, I order that:-

(1)  The defendant’s Summons filed herein on 11 January 2021 be dismissed; and

(2)  The costs of the said Summons be paid by the defendant to the plaintiff, summarily assessed at $65,000, payable forthwith.

37.  Lastly, I would like to express my gratitude to Ms Wong SC, Mr Dexter Leung, and Mr Wan for their valuable assistance rendered to this court.