UNION KNOPF (HK) LTD v. MARCEL SOSSNOWSKI AND ANOTHER

DCCJ 680/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 680 OF 2010

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DECISION

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Introduction

1. I had on 20 November 2013 handed down my judgment in this action (the “Judgment”). I ordered an account of profits against the defendants.  I also made an order nisi of no order as to costs (the “Costs Order Nisi”).  This hearing was to deal with directions for the taking of accounts and the plaintiff’s application to vary the Costs Order Nisi.

Case summary

2. The 1^st defendant was the former managing director of the plaintiff and was the sole registered shareholder and director of the 2^nd defendant when the 2^nd defendant was incorporated.

3. When the 1^st defendant was appointed as the managing director of the plaintiff, he had signed an employment agreement dated 1 July 2005 with the plaintiff (the “Employment Agreement”).  The 1^st defendant tendered his resignation on 28 November 2007 and left the plaintiff’s service on 31 May 2008.  The 2^nd defendant was incorporated on 6 May 2008 and was engaged in business similar to that of the plaintiff.

4. The plaintiff’s claims against the 1^st defendant could be categorized into two categories, namely (1) breach of duty of good faith or fidelity or fiduciary duties; and (2) breach of express and implied terms of the Employment Agreement including restrictive covenants and duty of confidence.

5. For breach of duty of good faith or fidelity or fiduciary duties, the plaintiff claimed that the 1^st defendant competed with the plaintiff during his employment with the plaintiff and used the plaintiff’s confidential information or trade secret for the defendants’ purposes.

6. For breach of express terms of the Employment Agreement, the plaintiff claimed that the 1^st defendant had breached the restrictive covenants of the Employment Agreement, namely clauses 13.2 (non-disclosure of trade secret and confidential information), 13.5 (non-competition) and 13.8 (non-solicitation). For breach of implied terms of the Employment Agreement, the plaintiff claimed that the 1^st defendant had used the plaintiff’s confidential information or trade secret for production of silicon snap-button and making plating colours for the defendants’ purposes.

7. The plaintiff’s claims against the 1^st defendant could be further divided into two parts.  The first part was claims in relation to matters occurred when the 1^st defendant was still under the plaintiff’s employment (ie prior to 1 June 2008) (the “Pre-Termination Claims”).  The second part was claims in relation to matters occurred after the 1^st defendant ceased to be employed by the plaintiff (ie from 1 June 2008 and onwards) (the “Post-Termination Claims”).

8. For the Pre-Termination Claims, the plaintiff claimed that the 1^st defendant had breached clauses 13.2, 13.5 and 13.8 of the Employment Agreement.  The plaintiff also claimed that the 1^st defendant had breached his duty of good faith or fidelity and fiduciary duties to the plaintiff.

9. For the Post-Termination Claims, the plaintiff claimed that the 1^st defendant had breached clauses 13.5 and 13.8 of the Employment Agreement.  The plaintiff also claimed that the 1^st defendant had breached his duty of confidentiality.

10. The plaintiff claimed against the 2^nd defendant for dishonestly and/or knowingly misappropriated the plaintiff’s confidential information and trade secrets by procuring the 1^st defendant to do so or being the vehicle used by the 1^st defendant for the purpose of misappropriating the plaintiff’s confidential information and trade secrets.  The plaintiff also claimed against the 2^nd defendant for knowingly employed and/or engaged the 1^st defendant who was bound by the restrictive covenants and implied terms of the Employment Agreement and the fiduciary duties owed to the plaintiff and/or dishonestly and/or knowingly assisted the 1^st defendant in his breach of the restrictive covenants, implied terms and fiduciary duties.

11. I made the following findings in respect of the Pre-Termination Claims:

(1) the 1^st defendant was in breach of his fiduciary duties owed to the plaintiff by setting up the 2^nd defendant with a view to compete with the plaintiff, preparing a list of the plaintiff’s customers’ contacting email addresses (the “List”) for use of the 2^nd defendant in competition with the plaintiff and enticing away the services of the plaintiff’s designer, Ms Janice Tong (“Ms Tong”);

(2) the 1^st defendant’s act of preparing the List for use of the 2^nd defendant was also in breach of clause 13.2 of the Employment Agreement;

(3) the 1^st defendant’s act of enticing away the services of Ms Tong was in breach of clause 13.8 of the Employment Agreement if such clause was enforceable in the form as stipulated in the Employment Agreement.  However, I also found that clause 13.8 of the Employment Agreement was enforceable only after applying the “blue pencil” and the solicitation of Ms Tong’s services was not caught by the “blue-pencilled” clause 13.8;

(4) the plaintiff failed to prove that the 1^st defendant had solicited and enticed away the plaintiff’s customers, suppliers or manufacturers during the continuance of his employment with the plaintiff.

12. I made the following findings in respect of the Post-Termination Claims:

(1) clause 13.5 of the Employment Agreement was unreasonable and thus unenforceable;

(2) clause 13.8 of the Employment Agreement was reasonable and enforceable after applying the “blue-pencil” to cross out the offending parts.  I also found that the 1^st defendant was in breach of the “blue-pencilled” clause 13.8 in soliciting business for the 2^nd defendant from the plaintiff’s customers from December 2008 to 31 May 2009; and

(3) the plaintiff failed in its claims against the 1^st defendant in respect of the silicon snap-button and its recipe for making some plating colours.

13. I found the 1^st defendant liable to the plaintiff for the following claims:

(1) breach of duty of fidelity or good faith and fiduciary duties in preparing to compete with the plaintiff while the 1^st defendant was still under the plaintiff’s employment;

(2) breach of duty of fidelity or good faith and fiduciary duties and clause 13.2 of the Employment Agreement in preparing the List, when he was still under the plaintiff’s employment for use of the 2^nd defendant;

(3) breach of duty of fidelity or good faith and fiduciary duties for enticing Ms Tong away from the plaintiff’s employment to join the 2^nd defendant when the 1^st defendant was still under the plaintiff’s employment; and

(4) breach of the “blue-pencilled” clause 13.8 of the Employment Agreement in soliciting business for the 2^nd defendant from the plaintiff’s customers from December 2008 to 31 May 2009 .

14. The plaintiff failed in its following claims against the 1^st defendant:

(1) breach of clause 13.5 of the Employment Agreement in the Pre-Termination Claims;

(2) breach of clause 13.5 of the Employment Agreement in the Post-Termination Claims;

(3) breach of the “pre-blue-pencilled” clause 13.8 of the Employment Agreement in soliciting Ms Tong’s services;

(4) breach of the “pre-blue-pencilled” clause 13.8 of the Employment Agreement in soliciting the plaintiff’s suppliers’ services;

(5) breach of duty of confidentiality in respect of the production method of the silicon snap-button; and

(6) breach of duty of confidentiality in respect of the recipe for making plating colours.

15. The plaintiff had elected for an account of profits for the pre-termination breach of fiduciary duties and duty of confidence.

16. The 1^st defendant took impermissible preparation steps for competition with the plaintiff when he was still under the plaintiff’s employment.  This enabled the 2^nd defendant to start-up its business quicker and easier.  The 1^st defendant had obtained benefits through such advantages to the 2^nd defendant in circumstances where there was a conflict of interest and duty. 

17. The 1^st defendant prepared the List for use of the 2^nd defendant and enticed Ms Tong away from the plaintiff to work for the 2^nd defendant.  These enabled the 2^nd defendant to gain access to purchasing staff of potential customers directly and to start the design of its collections quicker.

18. The 1^st defendant had obtained benefits through such advantages to the 2^nd defendant by reason of his position as director and managing director of the plaintiff and by reason of his taking the advantage of knowledge which he derived from his aforesaid positions held in the plaintiff.  There was causal link between the 1^st defendant’s breach of fiduciary duties and the profits made by him through the 2^nd defendant.  I found that the 1^st defendant and the 2^nd defendant were liable to account to the plaintiff for such profits.

19. I found that the plaintiff failed to prove that it had suffered any loss due to breach of the “blue-pencilled” clause 13.8 of the Employment Agreement by the 1^st defendant.  I ordered the 1^st defendant to pay nominal damages of $100.00 to the plaintiff for his breach of the “blue-pencilled” clause 13.8.

20. In such case, in its claims against the 1^st defendant, the plaintiff succeeded in four and failed in six.  Out of the four successful claims, the plaintiff was awarded nominal damages for one claim and obtained an order for account of profits for the other three claims.

21. I found that the 2^nd defendant had knowledge of the 1^st defendant’s breach of the Employment Agreement and fiduciary duties.  The 2^nd defendant was liable to the plaintiff for dishonestly assisting the 1^st defendant in his breach of duty of fidelity or good faith and fiduciary duties. However, I found that the 2^nd defendant had not induced or procured the 1^st defendant to breach the Employment Agreement.

22. The 2^nd defendant was required to compensate the plaintiff for losses following from its aforesaid assistance to the 1^st defendant or to account for profits which accrued to it as a result of its assistance to the 1^st defendant.  The plaintiff had elected for account of profits.  I found that the 2^nd defendant was only answerable to the plaintiff for profits came into the hands of the 2^nd defendant which the 1^st defendant was required to account to the plaintiff but not all its profits.

23. In its claims against the 2^nd defendant, the plaintiff succeeded in one and failed in the other.

24. I directed the parties to fix a short hearing before me to sort out the appropriate directions for the taking of accounts if the parties could not agree on the same between themselves.

25. In respect of the costs for this action, the plaintiff succeeded in some of its claims but failed in other.  I was of the view that each party should be entitled to part of its costs from the other side and at the same time liable to pay part of its opponent’s costs.  I made the Costs Order Nisi.

26. The plaintiff applied by way of a summons dated 4 December 2013 (the “Summons”) to vary the Costs Order Nisi.

27. The parties were unable to agree on the directions for the taking of accounts.

28. A hearing was fixed for 23 January 2014 for me to deal with the Summons and to give directions for the taking of accounts.  I set out below my decisions on these matters.

Application to vary the Costs Order Nisi

29. By the Summons, the plaintiff seeks to vary the Costs Order Nisi in the following ways:

(1) the defendants do pay 50% of the plaintiff’s costs (or such other percentage of the plaintiff’s costs as the court might deem fit), with counsel certificate to be taxed if not agreed; and

(2) the costs of and occasioned by the account of profits exercise be paid by the defendants to the plaintiff, to be taxed if not agreed.

30. I had clarified at the hearing on 23 January 2014 that the Costs Order Nisi did not cover costs for the taking of accounts which costs would be dealt with by the court at the end of the taking of accounts.  In such case, Mr Suen for the plaintiff confirmed that the plaintiff’s application would be seeking an order ordering the defendants to pay 50% or such other percentage of the plaintiff’s costs as the court might deem fit.

31. Mr Suen submitted that the plaintiff was the party who was successful overall in the litigation.  It had obtained orders against both the 1^st defendant and the 2^nd defendant for account of profits.  Mr Suen further submitted that the court had ruled in favour of the plaintiff on most factual and/or legal issues and the court disbelieved the testimony of the 1^st defendant, the only witness put forward by the defendants on almost all factual issues.  He submitted that the plaintiff should be entitled to the bulk (if not all) of its costs against the defendants in this action but the plaintiff was prepared to seek only 50% (or such other lower percentage as the court might consider appropriate) of the costs of this action against the defendants.

32. Mr McLeish for the defendants submitted that a proper analysis of the Judgment showed that the court found in favour of the defendants on the majority of the issues in this action.  The plaintiff had put forward various allegations with no supporting evidence.  These included alleging the 1^st defendant carried on business in competition with the plaintiff and solicited or enticed away the plaintiff’s customers during the continuance of the 1^st defendant’s employment with the plaintiff; used, divulged and/or copied the production method, formula and manufacturing process of the plaintiff’s silicon snap-button; and obtained copies of and/or used the plaintiff’s recipe for making some plating colours.  The plaintiff’s allegation that many of the parts or products among the collection boards of the 2^nd defendant were the same or substantially similar to the parts or products produced and/or supplied by the plaintiff was shown to be groundless after cross-examination of the plaintiff’s witness, Mr Eberhard Wilhelm Ganns.  Furthermore, the plaintiff’s claims for “profits based damages” and “hypothetical bargain damages” were not accepted by the court.

33. Mr McLeish submitted that the plaintiff’s approach to this litigation had been to make as many claims as conceivably possible regardless of whether or not there was any sound basis for, or evidence in support of, them.  He contended that the court was fully entitled to deprive the plaintiff of its costs for the action.

34. It is trite that costs are in the discretion of the court.  Order 62, rule 3(2) of the Rules of the District Court (the “RDC”) provides that:

“(2) If the Court in the exercise of its discretion sees fit to make any order as to costs of or incidental to any proceedings (other than interlocutory proceedings), the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.”

35. Order 62, rule 5 of the RDC further provides that:

“(1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account―

(aa) the underlying objectives set out in Order 1A, rule 1;

(a) …

(e) the conduct of all the parties;

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful;

(g) …..

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes―

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b)  the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d)  conduct before, as well as during, the proceedings.”

36. The principles which the court would apply in deciding costs prior to the implementation of the Civil Procedure Rules (the “CPR”) in England had been set out by Nourse LJ in Re Elgindata Ltd (No 2) [1993] 1 All ER 232 at 237f-g as follows:

“… The principles are these. (1) Costs are in the discretion of the court. (2) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (3) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or costs of the proceedings he may be deprived of the whole or a part of his costs. (4) Where the successful party raises issues or makes allegation improperly or unreasonably, the court may not only deprive him of his costs but order him to pay the whole or a part of the unsuccessful party’s costs.”

37. The above principles had been adopted by the Hong Kong Court of Appeal in La Chemise Lacoste SA v Crocodile Garments Ltd [2000] 4 HKC 317 at 327B-E prior to the civil justice reform in Hong Kong (the “CJR”).

38. Mr Suen referred me to Gwembe Valley Development Co Ltd (in Receivership) v Koshy and Ors [2000] 11 LS Gaz R 38, Ch D, when Rimmer J affirmed the principle that a successful party should not have to pay costs to an unsuccessful party unless the points taken by the successful party and/or the manner in which they were taken were unreasonable.  However, Rimmer J also pointed out that even prior to the entry into force of the CPR, the principle that costs should follow event had become merely a starting point from which the court could readily depart and that the entry into force of the CPR did not alter the nature of the court’s discretion, so much as indicate a change of emphasis, requiring courts to be more ready to make separate orders reflecting the outcome of different issues.

39. Hong Kong is now in the post-CJR era.  The court’s approach to costs after the CJR was discussed in Chan Mei Yiu, Paddy & Ors v Secretary for Justice & Ors (unrep., HCAL 16/2007, 9 December 2010) when Saunders J stated that:

“5. However, I accept Mr McCoy’s submission that the proper approach to costs, having regard to the changes brought about by civil justice reform, is that the proposition that costs follow the event is not a general rule, but only operates to shift to the unsuccessful party the burden of showing why some different approach should be adopted on the facts of a particular case. When regard is had to the provisions of O 62 R 5(1) [of the Rules of the High Court]:

“The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances take into account –

(aa) the underlying objectives set out in Order 1A, rule 1;

(e) the conduct of all parties;

(f)  whether a party has succeeded on part of his case, even if he has not been wholly successful,”

it becomes abundantly apparent that the dictum of Lord Lloyd of Berwick in Bolton MBC v Enc Sec (Practice Note) [1995] 1 WLR 1176 at 1178 more properly reflects the approach to costs:

“As in all questions to do with costs, the fundamental rule is that there are no rules. Costs are always in the discretion of the court, and a practice, however, widespread and long standing, must never be allowed to harden into a rule.”

6. The proper context in which Nourse LJ’s statement in Elgindata, should now be viewed, and the effect of the changes consequent upon civil justice reform, is demonstrated by the following passages from the decision of Lord Woolf MR in AEI Ltd v Photographic Performance Ltd [1999] 1 WLR 1507:

“I draw attention to the new Rules [the CPR] because, while they make clear that the general rule remains, that the successful party will normally be entitled to costs, they at the same time indicate the wide range of considerations which will result in the court making different orders as to costs. From 26 April 1999 the ‘follow the event principle’ will still play a significant role, but it will be a starting point from which a court can readily depart. This is also the position prior to the new Rules coming into force. The most significant change of emphasis of the new Rules is to require courts to be more ready to make separate orders which reflect the outcome of different issues. In doing this the new Rules are reflecting a change of practice which has already started. It is now clear that too robust and application of the ‘follow the event principle’ encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you are encouraged to leave no stone unturned in your efforts to do so.” (1522H-1523B)

The ‘well-established practice’ on which Nourse LJ based his third principle is, as I have already indicated, less generally followed than has been in the past and it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which it has failed.” (1523H)

7. Relying upon that decision, and two other decisions, Stoczina Gdanska SA v Latvian Shipping Co, Times Law Reports, 25 May 2001, and Summit Property Ltd v Pitmans [2001] EWCA Civ 2020 at §§ 16-17, Mr McCoy formulates the following propositions:

  (1) It is no longer necessary for a party to have acted unreasonably or improperly before he can be required to pay the costs of the other party on a particular issue on which he (the first party) has failed;

(2) The Court may make different orders for costs in relation to discrete issues - and, in particular, should consider doing so where a party has been successful on one issue but unsuccessful on another issue and, in that event, may make an order for costs against the party who has been generally successful in the litigation; and

(3) It may be appropriate, in a suitably exceptional case, to make an order which not only deprives the successful party of his costs of a particular issue but also an order which requires him to pay the otherwise unsuccessful party’s costs of that issue, without it being necessary for the court to decide that allegations have been made improperly or unreasonably; and

(4) The above propositions give effect to the particular purpose of encouraging litigants to be selective as to the points they took, thus decreasing the costs of litigation.

I am satisfied that the authorities, and the new Rules justify those propositions, which I apply.”

40. His Lordship cited and adopted the aforesaid principles in Kwok Chin Wing v 21 Holdings Ltd & Anor [2011] 3 HKC 542 at 547-549.

41. In Kastor Navigation Co Ltd v AGF MAT [2004] 2 Lloyd’s Rep 119, the English Court of Appeal pointed out the difference for costs consideration for a case where the issue on which the successful party lost was a separate head of claim and for a case where the issue concerned was a separate basis for putting the successful party’s only claim. (See para 151 of the judgment at p149)

42. The case before me is not an action for a single claim.  The plaintiff lodged various claims against the defendants in this action.  Each claim was quite distinct and discrete from the others although some of the factual disputes overlapped.  Each claim involved various issues and allegations.  Both Mr Suen and Mr McLeish had endeavoured to identify the individual issue or factual dispute which the court had held in favour of their respective clients.  I do not propose to repeat their detailed analysis here.  Suffice it to say that each party succeeded in some issues and factual disputes but failed in others and that some issues and factual disputes took up more court time than others.

43. After the CJR, a plaintiff who succeeds in a claim may not get his full costs or any costs at all in an extreme case if he fails in some issues raised or allegations made in relation to that claim after the court takes into consideration the matters referred to in Order 62, rule 5 of the RDC.  Furthermore, if a plaintiff fails in a claim made against the defendant, he should expect to pay costs for the lost claim to the defendant.

44. As analysed above, the plaintiff had ten claims against the 1^st defendant and two claims against the 2^nd defendant.  The plaintiff succeeded in four against the 1^st defendant and one against the 2^nd defendant.  In other words, the plaintiff failed in six claims against the 1^st defendant and failed in one claim against the 2^nd defendant.

45. Mr McLeish had rightly pointed out that some of the plaintiff’s claims were not supported by evidence and some of them were not pursued although without clear abandonment.

46. Furthermore, I found that although the 1^st defendant had breached clause 13.8 of the Employment Agreement, the plaintiff failed to prove that it had suffered any loss due to such breach.  I awarded nominal damages of $100.00 to the plaintiff.  As stated by Jacob J in Hyde Park Residence Ltd v Yelland [1999] All ER (D) 272 that:

“A plaintiff who recovers only nominal damages has in reality lost and in reality the defendant has established a complete defence to the entire claim.”

47. In Anglo-Cyprian Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 Devlin J stated at 874F-G that:

“No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct.  In applying this rule, however, it is necessary to decide whether the plaintiff really has been successful, and I do not think that a plaintiff who recovers nominal damages ought necessarily to be regarded in the ordinary sense of the word as a “successful” plaintiff.  In certain cases he may be, e.g., where part of the object of the action is to establish a legal right, wholly irrespective of whether any substantial remedy is obtained.  To that extent a plaintiff who recovers nominal damages may properly be regarded as a successful plaintiff, but it is necessary to examine the facts of each particular case.”

48. The view of Devlin J was endorsed by the English Court of Appeal in Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394.  In that case, the claimant claimed for £82,500.00.  The claimant succeeded in getting judgment on liability.  However, after hearing for assessment of damages, the claimant’s damages were assessed at £2.00.  The defendant was ordered to pay the claimant’s costs for the assessment of damages at the first instance.  The Court of Appeal allowed the defendant’s appeal and ordered the claimant to pay the defendant’s costs.  Stephenson LJ stated at 397A-B that:

“I think each member of this court, on seeing the order that the judge had made, thought that he had plainly got the matter wrong and that the right order in such case would be that the plaintiffs should pay the defendants’ costs, the defendants being the successful party and not, as the judge apparently thought, the plaintiffs.”

49. His Lordship endorsed the aforesaid passage of the judgment of Delvin J in the Anglo-Cyprian case as carefully considered observations, strictly obiter, but had the force of common sense. 

50. In the case before me, the restraint period under clause 13.8 of the Employment Agreement expired on 31 May 2009 but the plaintiff did not commence this action until 24 February 2010 ie more than eight months after the restraint period had expired.  This was not because the plaintiff was not aware of the breach.  I had pointed out in para 242 of the Judgment that the plaintiff was aware of the 1^st defendant’s breach of the Employment Agreement in late 2008 and early 2009.  The plaintiff chose not to take any legal action to assert its legal right to restrain the 1^st defendant from continuing the breach until after the restraint period had long expired.  As commented by the learned author of McGregor on Damages (18^th edition, 2009) in para 10-009 at pp417-418 that:

“… It is, of course, proper that costs should be awarded against the defendant where the purpose of the action is the creditable one of determining or protecting some right of the claimant, but in all the many other cases a rule that an award of nominal damages carries costs with it serves only to encourage unnecessary litigation.”

51. I do not consider that the plaintiff’s claims against the 1^st defendant for breach of the restrictive covenants of the Employment Agreement after the restraint period had long expired was for a creditable purpose of protecting the plaintiff’s right.  The underlying objectives of the CJR as set out in Order 1A, rule 1 of the RDC include to promote a sense of reasonable proportion and procedural economy in the conduct of proceeding and to ensure that the resources of the court are distributed fairly.  To encourage unnecessary litigation can hardly be considered as furthering the underlying objectives of the CJR. 

52. The learned editors of the Hong Kong Civil Procedure 2014 Vol 1 pointed out in para 62/3/4 at p1117 that:

“Where a plaintiff is successful on the issue of liability but recovers nominal damages only, the normal order for costs is in the defendant’s favour.”

53. In the post-CJR era, a plaintiff recovers nominal damages shall prepare to bear the defendant’s costs unless the verdict for nominal damages is a means to establish, determine or protect a legal right.  The plaintiff’s claim herein for breach of the restrictive covenants in the Employment Agreement was not such claim.  The costs order relating to such claim should be in favour of the defendants.

54. The plaintiff had also pressed for “profits based damages” and “hypothetical bargain damages” which were not accepted by the court.

55. I maintain the view that the plaintiff is entitled to costs for those claims which I had ordered the defendants to account for profits made by them but the plaintiff is liable to the defendants’ costs for those claims which the plaintiff failed to prove as well as costs for the claim on which only nominal damages were awarded.  This of course is also subjected to the general rule that a successful party might be deprived of part of his costs in recognition of his having failed on issues raised or allegations made in the successful claims which had taken up a substantial part of the trial.

56. One of course cannot put each claim on a scale to weigh its costs.  Time and costs incurred by the parties on each claim differ from one to another.  To make a costs order in this case is not to do an arithmetical calculation to divide the total costs by the number of claims and award each party its costs on proportion of the number of claims succeeded or failed.  It is also not possible to apportion the exact time and costs which the parties had incurred for each claim.  The English Court of Appeal faced similar difficulties in the Re Elgindata case (supra).  The way Nourse LJ proposed to deal with such difficulties at 239c-d was that:

“In my judgment the only fair basis for deciding the part of their costs of which the petitioners should be deprived is to ask how much time and expense was taken up in dealing only with the allegations on which they failed. I acknowledge the difficulties with which we are confronted in answering that question. An apportionment made by us is bound to be even more rough and ready than one made by the judge. But we must do the best we can.”

57. I am of the view that a practical and pragmatic approach is for me to assess the plaintiff’s costs entitlements and liabilities in a broadly rough and ready way. Having considered all the papers and evidence at the trial and doing my best, I am of the view that the plaintiff’s costs entitlements and liabilities in this action will be about the same and an order of “no order as to costs” is a fair costs order in the circumstances of this case.

58. In the premise, I dismiss the Summons and make absolute the Costs Order Nisi. 

Directions for account for profits

59. The parties did not have serious dispute on the purpose of an account of profits which was to strip the fiduciary of the profits made as a result of his breach of fiduciary duties.  The main disagreement between the parties on the directions for account of profits was the length of the period for which the defendants should account for their profits.  The plaintiff contended that the defendants should account for all the profits earned by them during an accounting period of at least three years (ie from 6 May 2008 to 31 May 2011).  The defendants argued that a period up to 31 March 2009 on profits generated from the customers named on the List was appropriate.

60. Mr Suen submitted that the defendants continued to benefit from the 1^st defendant’s breach of fiduciary duties on a cumulative basis and the principal business of the 2^nd defendant during the first 6 months was design only.  He was of the view that the accounting period proposed by the defendants was unduly short.  He further submitted that Ms Tong was engaged to design products for all potential customers.  There was no basis to confine the accounting exercise to the customers named on the List.

61. Mr Suen submitted that an accounting period of at least three years was more than reasonable.  He pointed out that the 2^nd defendant was in direct competition with the plaintiff and the breaches committed by the 1^st defendant were substantial.  The List contained contact details of the plaintiff’s customers which took the plaintiff nine years to build up and Ms Tong was the only person in the plaintiff to deal with design and sourcing.  Mr Suen submitted that the plaintiff should prima facie be entitled to claim profits of the entire competing business of the 2^nd defendant since the defendants continued to take advantage of the List and the services of Ms Tong.  The advantages enjoyed by the defendants were cumulative.  Mr Suen contended that the breach of fiduciary duties committed by the 1^st defendant would at least give advantages to the 2^nd defendant for a few years’ period and the plaintiff’s proposed accounting period of three years was more than reasonable.

62. Alternatively, Mr Suen suggested that if the court was not with the plaintiff on its proposal for the defendants to account for profits to the plaintiff for three years, the court might consider adopting an average approach, by calculating the average profit per annum of the defendants for the first three years and then order the defendants to account to the plaintiff for profits equal to such averaged-out profit per annum at a multiplier.

63. Mr Suen submitted that the 1^st defendant’s breaches did not confine to preparing and making use of the List.  The 1^st defendant had also overstepped the mark in preparing for competing business during his employment with the plaintiff and enticed away the services of Ms Tong who was engaged to design products for all potential customers.  He submitted that the defendants’ proposal to confine the account of profits exercise to the customers on the List was misconceived.

64. Mr McLeish submitted that the court found that the 2^nd defendant was only answerable to the plaintiff for profits that came into the hands of the 2^nd defendant which the 1^st defendant was required to account to the plaintiff for breach of duty of fidelity or good faith and fiduciary duties but not all its profits.  He referred to Kao, Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296 to submit that the duty to account for profits was not open-ended.  There had to be some reasonable limits to it.  The account of profits was not to penalize the fiduciary.  The fiduciary was only accountable for those profits properly and reasonably attributable to the breach of his fiduciary duties.

65. Mr McLeish submitted that the court found that the 1^st defendant’s breach of fiduciary duties gave the 2^nd defendant a wrongful head-start to enter into the market in competition with the plaintiff.  Accordingly, the defendants should be required to account only for those profits properly and reasonably attributable to the head-start so obtained.  He contended that the enduring foundation for the 2^nd defendant’s ability to operate successfully in the market in which it was engaged was the skill and knowledge of the 1^st defendant and his business partner, Mr Harald Alexander Bergel (“Mr Bergel”).  The wrongful advantages obtained by the 2^nd defendant from the 1^st defendant’s breach of fiduciary duties as found by the court would have dissipated in a matter of months at most.  He proposed a cut-off date of no later than 31 March 2009.

66. Mr McLeish further submitted that there was no tangible advantage or head-start of significance obtained by the early incorporation of the 2^nd defendant and the minimal advantage or head-start obtained by the early solicitation of Ms Tong to join the 2^nd defendant.  The focus of the account of profits exercise ought to be on sales to the customers named on the List.  He submitted that if the early incorporation of the 2^nd defendant and/or early solicitation of Ms Tong had contributed an advantage or head-start to the 2^nd defendant, this would have been catered for in the aforesaid proposed cut-off date at 31 March 2009 which he said was “in a rough and ready way by erring on the generous side”.

67. I found that the defendants were liable to account to the plaintiff for profits made by them as a consequence of the 1^st defendant’s breach of his fiduciary duties owed to the plaintiff.  However, I have to bear in mind that the imposition of any equitable remedy by the court is not penal in nature.  An account of profits is intended to disgorge the gain made by the defaulting fiduciary.  Care must be taken not to penalize the fiduciary when ordering an account of profits.  The fiduciary is only accountable for those profits properly and reasonably attributable to the breach.  As stated by Ma J (as he then was) in paras 141 and 142 of his judgment in Kao, Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296 at 338-339:

“141. The object in ordering an account of profits is to ascertain as accurately as possible the true measure of profit or gain made by the defaulting fiduciary as a consequence of his breach of fiduciary duty: see Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at p.110. …

142. … To put it another way, while the fiduciary who has been found to be in breach of his fiduciary duties here must disgorge the whole of his profits, he is only accountable for those profits properly and reasonably attributable to the breach: see CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at pp.733F-734A. …”

68. To deal with a case where the gain is not specific and identifiable, the court should adopt a flexible approach.  The court will have to determine the duration for which the account of profits is ordered.  As pointed out by Ma J (as he then was) in the aforesaid Kao, Lee & Yip case that “it is crucial to remember that the duty to account is not completely open-ended.  There must be some reasonable limits to it.” (See para 139 of the judgment at p338) What are the reasonable limits for the case before me?

69. Lord Denning stated in Potters-Ballotini Ltd v Weston-Baker & Others [1977] RPC 202 at 206 to 207that:

“Although a man must not use such information as a springboard to get a start over others, nevertheless that springboard does not last for ever. If he does use it, a time may come when so much has happened that he can no longer be restrained.”

70. In an account of profits exercise, the remedy must be fashioned to fit the nature of the case and the particular facts.  Ma J (as he then was) acknowledged in the aforesaid Kao Lee & Yip case that in a case where a business opportunity was involved, the exercise of ascertaining the profits concerned would often become a difficult one in practice.  His Lordship set out the court’s approach in tackling this difficult task in paras 143-145 of his judgment ([2003] 3 HKLRD 296 at 339-340) as follows: 

“143. In this situation, it is impossible to adopt an approach that borders on any mathematical exactness and the court must really work on what Slade J described in My Kinda Town Ltd (t/a Chicago Pizza Pie Factory) v Soll and Grunts Investments [1982] FSR 147 at p.159, as “a reasonable approximation”. Here, the approach must be to take into account various factors relevant to the critical inquiry (namely, what is the gain that the fiduciary has made as a result of his breach of fiduciary duty?). The following go to the Court’s approach in this context (obviously they are not exhaustive):

(1)  Perhaps the most important guide for the Court here is flexibility.  In some circumstances, the Court may order an account of limited aspects of the business accruing to the fiduciary flowing from the breach of duty rather than an account of the entire business.  In other cases, the Court may order an account of profits to reflect the whole of the business and merely give allowances to the fiduciary for the time, energy, skill and financial contribution he has made.  Whatever approach is appropriate would depend on the circumstances: see the approach of Upjohn J in Re Jarvis [1958] 1 WLR 815 at p.820.  There may be other approaches that will be appropriate.  As Upjohn J said at p.820, “I do not think it is possible to lay down any general rule in relation to businesses beyond the general principle already stated, that a trustee may not make a profit out of his trust.”

(2)  In some cases, where a fiduciary has mixed profits he has made from the breach of duty with his own property so as to render the identification of the gain impossible, the whole of the property may be treated as trust property (ie property belonging to the beneficiary) and he may therefore have to account for the whole: Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at pp.109-110.

(3)  In taking an account of profits, in most cases it will be right to make allowances for expenses, overheads and financial contribution (sometimes even a reasonable salary for the wrongdoer) so as to reflect the “cost” of the profit as it were.  This is consistent with the overall object of the remedy of an account of profits, namely, to give to the beneficiary the true extent of the profits made by the fiduciary, not to punish him.

(4) Consistent with this approach, it may sometimes be appropriate to put a cap on the duration for which the account of profits is ordered.  In the case of a one-off venture (such as the purchase of shares or a specific property for investment), the account of profits would be relatively well defined.  On the other hand, where one is trying to ascertain the profits attributable to a breach of fiduciary duty involving an ongoing business or business relationship, the limits are much less easy to define.  In some cases, there comes a point when the profits of the relevant business are so remote from the breach of fiduciary duty that it would simply be unfair to force the fiduciary to continue to account.  For example, in Warman v Dwyer (1995) 128 ALR 201, the approach of the High Court of Australia to this question involved looking at factors such as how long the relevant business could have remained with the beneficiary anyway and the input of the fiduciary into the business.  Mr Kwok recognises this in the present case and submits that any account of profits should be limited to a period of two years.

144. It can thus be seen that when dealing with an account of profits as regards business opportunities, the Court’s approach must necessarily be flexible.  The key is to remember at all times the critical inquiry referred to above which emphasises to need to focus on causation and remoteness when examining the link between the breach of duty and the gain.  It is in considering the terms of the order for an account of profits that the Court will ensure that the fiduciary is not punished and that his liability is “not transformed into a vehicle for the unjust enrichment of the plaintiff”: see Warman v Dwyer (1995) 128 ALR 201 at p.212.

145. It makes no difference to the ordering of an account that the wrongdoer has transferred the benefit of the business opportunity to another vehicle or, as in our case, to a partnership, in which he has an interest.  In these circumstances, the fiduciary in breach will still be liable for the whole of the profits even though within the company or the partnership, he may only share in a part of the profits.  In other words, he is accountable for the whole of the profits arising from the relevant business opportunity he has in breach of his fiduciary duty taken advantage of it.  It is immaterial that the fiduciary has chosen to share this with anyone.  See here: Imperial Mercantile Credit Association (in liquidation) v Coleman (1873) LR 6 HL 189 at pp.202, 208; CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at paras. 98-105.”

71. The breach of fiduciary duties committed by the 1^st defendant had helped to speed up the 2^nd defendant’s preparation and therefore enabling the 2^nd defendant to get its collections available earlier for approaching its customers.  It also enabled the 2^nd defendant to approach the purchasing staff of the customers named on the List directly and quickly. Without such breach, the 2^nd defendant might not be able to go to the market in December 2008 with as many collections as it had come up.  It might not get as much business as it had obtained for that season although I agree that the 2^nd defendant would still be able to come up with some collections and obtain some business.  However, I do not agree with Mr Suen that the defendants continued to benefit from the 1^st defendant’s breach  of fiduciary duties on a cumulative basis.  As time passed, such advantages would have become increasingly “remote” from the business opportunities presented to the 2^nd defendant.  I reject Mr Suen’s suggestion of “averaging approach” referred to in para 62 above.

72. As Mr McLeish had rightly pointed out, what the court found was that the 1^st defendant’s breach of fiduciary duties gave the 2^nd defendant a wrongful head-start to enter into the market in competition with the plaintiff.  The head-start advantage obtained by the defendants was not merely having the 2^nd defendant incorporated before the 1^st defendant left the plaintiff’s employment but getting the List ready for use by the 2^nd defendant and enticing away the services of Ms Tong from the plaintiff when the 1^st defendant was still employed by the plaintiff.  As I had found in paras 230 and 231 of the Judgment, the 1^st defendant’s breach of his fiduciary duties had enabled the 2^nd defendant to start-up its business quicker and easier in the sense that it enabled the 2^nd defendant to start the design of its collections quicker and to gain access to purchasing staff of potential customers easier.

73. If the 1^st defendant did not set up the 2^nd defendant and approach Ms Tong during the 1^st defendant’s employment with the plaintiff but after his employment with the plaintiff ceased, Ms Tong would still join the 2^nd defendant but at a later date.  Ms Tong tendered her resignation within two weeks after the 1^st defendant set up the 2^nd defendant.  Before the 1^st defendant took concrete steps to start his own business, ie setting up of the 2^nd defendant, it was unlikely that the 1^st defendant would start to recruit staff for his new business.  Incorporating a company in Hong Kong is a quick business.  It takes days only.  The 2^nd defendant was incorporated on 6 May 2008.  The 1^st defendant might have been in discussion with Mr Bergel on their business venture for some times but they kicked off their project only in early May 2008.  I am of the view that the 1^st defendant should have started to consider recruitment of staff at about the same time, ie early May 2008.

74. Judging from the fact that Ms Tong submitted her resignation to the plaintiff on 19 May 2008 and joined the 2^nd defendant immediately on 21 June 2008 after serving the notice period at the plaintiff, it was likely that the joining of Ms Tong would only be postponed for about one month if the 1^st defendant did not set up the 2^nd defendant and approach her until after 31 May 2008.  This delay would not prevent the 2^nd defendant from coming up with its collections to its customers in December 2008, only that the number of collection boards available for customers’ selection would be fewer.  With fewer designs available to its customers, the volume of business which the 2^nd defendant managed to secure for its first season in the market would be affected.

75. It took the 2^nd defendant about six months to come up with its first set of collections to go into the market.  If Ms Tong joined the 2^nd defendant one month later than 21 June 2008, the time available for her to work on her design before the first collections had to be presented to customers would be reduced by about 15%.  I am of the view that the 2^nd defendant would in any event present its available collections to its customer in December 2008 in order not to miss the business opportunities for that season.  The 2^nd defendant would no doubt supplement its first collections when Ms Tong came up with her further design after December 2008.  The 2^nd defendant’s business in the first few months of its first season in the market would be affected.  However, it would not be possible to identify which design of the 2^nd defendant would be affected if Ms Tong had joined the 2^nd defendant one month later.  As the profits attributable to the 1^st defendant’s breach of fiduciary duty had mingled with the profits attributable to those earned by the defendants’ efforts, the defendants have to account for the whole of the profits earned from business resulted from quotations made by the 2^nd defendant during the first few months of its first season in the market.  In view of the advantage of head-start obtained in respect of the early incorporation of the 2^nd defendant and the employment of Ms Tong was about one to two months and it was likely that the 2^nd defendant would complete supplementing its first collections within a few months after December 2009, I find that 31 March 2009 is the appropriate cutoff date for determining the profits which the defendants shall account to the plaintiff in respect of this head-start advantage.  This head-start advantage of having the 2^nd defendant being incorporated and Ms Tong joining the 2^nd defendant one month earlier would diminish thereafter and become too remote to link to the 2^nd defendant’s subsequent business.

76. Another head-start advantage obtained by the 2^nd defendant was the use of the List.  This enabled the 2^nd defendant to get to the right people handling purchase of buttons at its customers quickly and directly.  I agree with Mr McLeish that both the 1^st defendant and Mr Bergel had substantial working experience in the trade and they were fully entitled to make use of their knowledge (including knowledge on customers and suppliers) and experience gained while they were employed by the plaintiff’s group to compete with the plaintiff after ceased to be employed by the plaintiff’s group (subject to the enforceable restrictive covenants in their employment contracts and the trade secrets of their employers).  The 1^st defendant and Mr Bergel would still be able to access to the purchasing staff of the plaintiff’s customers even without the List, albeit at a less efficient way.  They would be able to build up their contact network in a time much shorter than the time taken for the plaintiff to build up its customers list.  In such case, I shall not exaggerate the advantage to the 2^nd defendant in having use of the List.  I estimate that it would take the defendants about one year to build up their contact network relating to customers of the plaintiff.  The 1^st defendant and Mr Bergel would no doubt embark on this assignment immediately after the 1^st defendant left the plaintiff’s employment.  If they started in June 2008, they would have built up their contact network with the plaintiff’s customers by May 2009.  Without such network, the 2^nd defendant might not be able to access the correct purchasing staff of all its potential customers during the first season when the 2^nd defendant was in the market.  I put the cutoff date for this head-start advantage at 30 June 2009, ie about six months after the 2^nd defendant presented its first collections to its customers.

77. In the premise, the period for which the defendants have to account for their profits is from 6 May 2008 (the date of incorporation of the 2^nd defendant) to 31 March 2009 in respect of all its customers (the “1^st Accounting Period”) and for a further period from 1 April 2009 to 30 June 2009 in respect of the customers named on the List (the “2^nd Accounting Period”).

78. In my judgment, it is appropriate to require the defendants to account for the profits made by the 2^nd defendant from orders received from all its customers pursuant to quotations made by the 2^nd defendant during the 1^st Accounting Period and to further account for the profits made from orders received from the customers named on the List pursuant to quotations made by the 2^nd defendant during the 2^nd Accounting Period which orders were received by the 2^nd defendant on or before 31 December 2009 irrespective of when execution of such orders was completed.

79. Quotations made by the 2^nd defendant during the two Accounting Periods might result in purchase orders placed beyond the two Accounting Periods.  However, not all quotations made by the 2^nd defendant would materialize into purchase orders.  Customers might not expressly turn down unaccepted quotations made by the 2^nd defendant during the two Accounting Periods.  It is theoretically possible for an outstanding quotation to be accepted at any time in the indefinite future.  Accordingly, it is necessary to have a cutoff date for receiving relevant orders to enable the accounts to be taken.  Otherwise, the accounts would be open-ended accounts.  I consider that purchase orders received by the 2^nd defendant after 31 December 2009 (ie more than one year after the 2^nd defendant presented its first design collections to its customers) were too remote to link to the head-start advantages obtained by the 2^nd defendant as a result of the 1^st defendant’s breach of his fiduciary duties to the plaintiff and to cutoff the accounting exercise by that date would be appropriate.

80. In arriving at the amount of profits, reasonable expenses and overheads incurred in relation to such orders (including reasonable salary of the 1^st defendant) shall be allowed as part of the costs on top of the direct costs charged by the suppliers or manufacturers for the goods concerned.  However, for reasons discussed below, deduction of profits tax paid by the 2^nd defendant would not be allowed.

Interest

81. Mr Suen submitted in his skeleton submissions that where money was misused by a person in a fiduciary position, he was normally asked to account for such money with compound interest.

82. Lord Woolf had pointed out in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] A.C. 669 at 722C-D that:

“The compound interest will not be payable as of right. The remedy of awarding interest, like other equitable remedies, will be discretionary. Interest will only be awarded when it accords with equitable principles to make the award.”

83. Mr Suen referred to Wallersteiner v Moir (no.2) [1975] 1 Q.B. 373 to support his contention to claim compound interest to be paid to the plaintiff on the amount found due from the defendants.  In this case, the English Court of Appeal awarded compound interest against Dr Wallersteiner (“Dr W”) who was adjudged liable to pay £234,773 to two companies to which Dr W was financier and director.  The court found that by acts of commission and omission as a director of those companies, Dr W procured the carrying out of certain circular cheque transaction.  By that transaction moneys of the companies were applied for Dr W’s benefit in connection with the purchase of the shares in one of those companies.  The court found that Dr W so conducted himself as a director that he benefited at the companies’ expense.

84. The case before me is different from the Wallersteiner case.  It is not a case where the wrongdoer deprived a company of money which the company needed for use in its business.  It is not a case of misuse of trust funds or the plaintiff’s moneys.  The defendants in this case earned profits as a result of the 1^st defendant’s breach of fiduciary duties to the plaintiff and they are required to account for such profits.  These profits had been used by the 2^nd defendant for its business to generate further profits. 

85. Buckley LJ explained the rationale for interest to be paid on profits accounted for in breach of fiduciary duties cases in the Wallersteiner case [1975] 1 Q.B. 373 at 397 as follows:

“This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound interest: see Burdick v Garrick, 5 Ch App 233, per Lord Hatherley L,C., at p.241, and Lewin, Trusts, 16^th ed. (1964), p.226 and the cases there noted. The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes: Burdick v Garrick.

The application of this rule is not confined to cases in which a trustee or agent has misapplied trust funds or a principal’s property, nor is it confined to trustees and agents. It was enunciated by Lord Herschell in Bray v Ford [1896] AC 44, 51, in these terms:

“It is an inflexible rule of a court of Equity that a person in a fiduciary position, … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.””

86. I found that the defendants had made profits as a result of the 1^st defendant’s breach of his fiduciary duties to the plaintiff.  The financial statements of the 2^nd defendant for the period from 6 May 2008 to 31 March 2010 suggested that the profits earned by the 2^nd defendant had been kept in the 2^nd defendant for its business to generate further profits.  In such circumstances, it will be right to require the defendant to account for such profits with compound interest annually.  Interest to be paid by the defendant shall be at the commercial rate of 1% above the best lending rates from time to time quoted by the Hongkong and Shanghai Banking Corporation Limited and for the period from 1 July 2009 to judgment.

Deduction of profits tax

87. Mr Suen referred to another decision in Kao, Lee & Yip (a firm) v Donald Koo Hoi Yan and ors (unrep., HCA 8847/1993, 7 June 2007, Reyes J) when the court was taking the accounts in that case to submit that profits tax paid by the 2^nd defendant on the profits accounted for should not be deducted.

88. Mr McLeish submitted that the profits to be accounted for should be net of any tax paid thereon.  He distinguished the case of Kao, Lee & Yip v Koo Hoi Yan & Ors (HCA 8847/1993, 7 June 2007, Reyes J) on the ground that the profits concerned in that case had been wrongfully diverted from the plaintiff’s firm to the defendant’s firm.  Whereas in the case before me, there was no evidence that but for the 1^st defendant’s breach of fiduciary duties as found by the court, the plaintiff would have earned the 2^nd defendant’s profits to be accounted for.

89. It is noted that the rule on account of profits is not based on compensation to the plaintiff.  The fact that the plaintiff might not have earned these profits is neither here nor there.  Ma J (as he then was) had succinctly set out the position in paragraph 134 of his judgment in the Kao Lee Yip case [2003] 3 HKLRD 296 at 337 as follows:-

“134. As I have mentioned, it is irrelevant that the profit made by the fiduciary was one that the beneficiary could not have made anyway or that the profit was not made at the expense of the beneficiary: see the rule in Keech v Sandford (1726) Sel Cas Ch 61; Kishimoto Sangyo Co Ltd v Akihiro Dba [1996] 2 HKC 260 at p.267C-D; Furs Ltd v Tomkies (1936) 54 CLR 583 at p.592 (High Court of Australia). As Laskin J said in Canadian Aero Service Ltd v O’Malley (1973) 40 DLR 371 at p.383, “Yet there may be situations where a profit must be disgorged, although not gained at the expense of the company, on the ground that a director must not be allowed to use his position as such to make a profit even if it was not open to the company”.  Gains made by defaulting fiduciary are to be disgorged irrespective of whether the beneficiary had suffered any financially measurable loss; in short, the remedy of an account of profits does not have to bear any resemblance (and often does not) to the disadvantage suffered by the beneficiary: see A-G v Blake [2001] 1 AC 268 at pp. 279E-280D per Lord Nicholls of Birkenhead.”

90. As Reyes J pointed out in the aforesaid Kao, Lee & Yip case, the defendant might claim back any profits tax which it would have overpaid to the Inland Revenue in respect of the period for the account of profits.  I am of the view that the same is also true for this case.  I agree that profits tax paid by the 2^nd defendant should not be deducted from the profits to be accounted for.  How the payment received by the plaintiff from the defendants herein will be taxed is a matter between the plaintiff and the Inland Revenue.

Directions

91. Having determined the above issues raised, I make the following directions in respect of the taking of accounts:

(1) the defendants do within 28 days from the date of this decision lodge with the court and serve to the Plaintiff the following accounts duly verified by affidavit identifying vouches and documents that are relied upon in producing the accounts:

(a) an account of all wages, income, salaries, fees, remunerations, benefits, privileges, bonus, dividends, other moneys and moneys’ worth received by the 1^st defendant from the 2^nd defendant at any time within the period from 6 May 2008 to 31 December 2009 (the “Period”) or otherwise received by the 1^st defendant at any time within the Period in connection with the business of the 2^nd defendant, and all receivables of the 1^st defendant accrued within the Period but not yet received by the 1^st defendant within the Period;

(b) an account of all turnovers (ie gross revenue) of and in all payments received by the 2^nd defendant at any time within the period from 6 May 2008 to 31 March 2009 (the “1^st Period”) (and with the names of customers and payers who made such payments and the brands involved) and also all turnovers of and payments received by the 2^nd defendant after the 1^st Period (and with the names of customers and prayers who made such payments and the brands involved) but relating to the orders placed by the customers on or before 31 December 2009 pursuant to quotations made by the 2^nd defendant within the 1^st Period (the “Orders made after the 1^st Period”);

(c) an account of all turnovers (ie gross revenue) of and in all payments received by the 2^nd defendant from the customers named in the List as defined in para 57 of the judgment dated 20 November 2013 (the “Named Customers”) at any time within the period from 1 April 2009 to 30 June 2009 (the “2^nd Period”) (and with the names of customers and payers who made such payments and the brands involved) and also all turnovers of and payments received by the 2^nd defendant after the 2^nd Period (and with the names of customers and prayers who made such payments and the brands involved) but relating to the orders placed by the Named Customers on or before 31 December 2009 pursuant to quotations made by the 2^nd defendant within the 2^nd Period (the “Orders made after the 2^nd Period”);

(d) an account of all accounts receivables of the 2^nd defendant accrued within the Period but not yet received by the 2^nd defendant within the Period (and with the names of customers and debtors and the brands involved);

(e) an account of all expenses incurred by the 2^nd defendant within the Period;

(f) an account of all invoices and receipts of payment issued by the 2^nd defendant at any time within the Period and also all invoices and receipts of payment issued by the 2^nd defendant after the Period in relation to the Orders made after the 1^st Period and the Orders made after the 2^nd Period;

(g) an account of all quotations made by the 2^nd defendant during the 1^st Period and all quotations made to the Named Customers during the 2^nd Period identifying all purchase orders received during the Period pursuant to the quotations made during the 1^st Period and all purchase orders received from the Named Customers during the Period pursuant to the quotations made during the 2^nd Period;

(h) an account of all purchase orders identified in the accounts referred to in sub-paragraph (g) above identifying the direct costs changed by the suppliers or manufacturers for the goods stated in the aforesaid purchase orders;

(2) the plaintiff shall be at liberty to serve notice on the 1^st defendant and/or the 2^nd defendant within 28 days after service of the aforesaid accounts to the plaintiff requiring the 1^st defendant and/or the 2^nd defendant to produce for the plaintiff’s inspection any documents or class of documents specified in and/or relating to the aforesaid accounts and any other documents produced and/or referred to by the 1^st defendant and/or the 2^nd defendant in their affidavit or affirmation, and to produce photocopies thereof to the plaintiff upon the plaintiff’s request and payment of reasonable photocopying charges;

(3) the 1^st defendant and/or the 2^nd defendant do, within 7 days after the service of any notice upon him/it pursuant to paragraph (2) above, serve notice on the plaintiff stating a time within 14 days after the service thereof at which the said documents may be inspected at a place specified in the notice;

(4) the plaintiff shall be at liberty to serve notice of objection to the said accounts produced and verified by the 1^st defendant and/or the 2^nd defendant within 63 days after service of the aforesaid accounts upon the plaintiff by the 1^st defendant and/or the 2^nd defendant;

(5) the plaintiff shall be at liberty to file and serve any affidavit or affirmation evidence in reply to the affidavit or affirmation of the 1^st defendant and/or the 2^nd defendant within 63 days after service of the aforesaid affidavit or affirmation;

(6) the parties do file and serve on each other a Scott Schedule summarizing their respective contentions at least 28 days before the date fixed for the pre-trial review for the taking of accounts;

(7) the hearing of the taking of the said accounts be fixed before a Judge in consultation with counsel diaries, with 2 days reserved and a pre-trial review shall be fixed for a date at least 10 weeks before the taking of accounts hearing, with half-day reserved;

(8) the plaintiff be at liberty to cross-examine:

(a)  the 1^st defendant on the affidavit affirmed by him verifying the said accounts;

(b)  the deponents of any other affidavits served by the 1^st defendant and/or the 2^nd defendant on their affidavits;

(9) the 1^st defendant and 2^nd defendant do pay to the plaintiff the sum (if any) found due on the taking of the said accounts together with interest thereon accrued from 1 July 2009 to judgment with yearly rest at 1% above the best lending rates from time to time quoted by the Hongkong and Shanghai Banking Corporation Limited; and

(10) there be liberty to apply for further directions.  

Costs

92. I have dismissed the Summons.  The plaintiff shall bear the defendants’ costs for the Summons.  The costs for giving directions for the taking of accounts shall be costs in the cause of the taking of accounts. 

93. I make a costs order nisi that the plaintiff shall pay to the defendants their costs for the Summons to be assessed by summary assessment and payable forthwith after the assessment.  I also make another costs order nisi that the costs for giving directions for the taking of accounts shall be costs in the cause of the taking of accounts.  I apportioned the time of the hearing on 23 January 2014 equally between the Summons and the directions hearing.  I grant counsel certificate to the parties for the hearing on 23 January 2014.

94. Unless application is received from either party to vary the above costs orders nisi, the same shall become absolute 14 days after the date of this decision.

95. I direct the defendants to submit to the court within 7 days after the costs orders nisi have become absolute their statement of costs in respect of their costs for the Summons with copy to the plaintiff.  The plaintiff shall submit to the court its comments to the defendants’ aforesaid statement of costs within 7 days thereafter with copy to the defendants.  The assessment of the costs for the Summons payable by the plaintiff to the defendants will be dealt with by way of paper disposal.